Tech Giants Embrace AI in Q3 2024 Earnings: Qualcomm, Arm, Lumen, and Twilio Lead the Charge

Qualcomm (QCOM) Q4 2024 Earnings Call Transcript | The Motley Fool

Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm fourth quarter and fiscal 2024 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator instructions] As a reminder, this conference is being recorded November 6, 2024. The playback number for today's call is 877-660-6853. International callers, please dial 201-612-7415. The playback reservation number is 13749366. I would now like to turn the call over to Mauricio Lopez-Hodoyan, vice president of investor relations. Mr. Lopez-Hodoyan, please go ahead. Mauricio Lopez-Hodoyan -- Vice President, Investor Relations Thank you, and good afternoon, everyone. Today's call will include prepared remarks by Cristiano Amon and Akash Palkhiwala. In addition, Alex Rogers will join the question-and-answer session. You can access our earnings release and a slide presentation that accompany this call on our Investor Relations website. In addition, this call is being webcast on qualcomm.com, and a replay will be available on our website later today. During the call today, we will use non-GAAP financial measures as defined in Regulation G, and you can find the related reconciliations to GAAP on our website. We will also make forward-looking statements, including projections and estimates of future events, business or industry trends, or business or financial results. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our SEC filings, including our most recent 10-K, which contain important factors that could cause actual results to differ materially from the forward-looking statements. And now, to comments from Qualcomm's president and chief executive officer, Cristiano Amon. Cristiano R. Amon -- President and Chief Executive Officer Thank you, Mauricio, and good afternoon, everyone. Thanks for joining us today. In fiscal Q4, we delivered non-GAAP revenues of $10.2 billion and non-GAAP earnings per share of $2.69. Chipset business revenues were $8.7 billion, and licensing business revenues were $1.5 billion. During Q4 in fiscal '24, we continue to make progress on our growth and diversification strategy, addressing new end markets for Qualcomm's technology. Our differentiated technology and product road maps lead in every industry in which we now participate, and we are very optimistic about the edge AI momentum across our business. As such, we will continue to transform Qualcomm from a wireless communications company into a connected computing company for the age of AI. In the current environment, more than ever, we remain extremely focused on executing our strategy and targets while maintaining operating discipline and creating value for our stockholders. I will now share some key highlights from across the business. As the strong pace of AI innovation continues, there is now broad recognition of the opportunity for on-device AI to enable new capabilities and transform the human-computer interface. On-device AI provides context, enhances immediacy and reliability, and enables personalization while providing privacy and security. Additionally, GenAI-enabled devices and applications are evolving to understand natural language, images, sound in the world around us, driving a new generation of AI-first experiences. This has the potential to create a new cycle of semiconductor innovation and content, and Qualcomm is well-positioned to capitalize on this opportunity across devices at the edge. We shared this vision at the recent Snapdragon Summit with the support of key industry leaders, including Microsoft, Meta, Amazon, OpenAI, Mister AI, IBM, and others. Together with our ecosystem partners, we're driving this transition to AI-enabled edge computing to empower consumers and enterprises by enhancing productivity, entertainment, creativity, convenience, and more. Notably, we're partnering with Meta to support Llama 3.2, including their multimodal 11 billion, 3 billion, and 1 billion parameter models on Snapdragon-powered devices. We're also working with Amazon to create a cloud-to-edge solution that allows developers to customize their models on SageMaker and deploy them to Qualcomm and Snapdragon platforms via the AI Hub. Model availability on the AI Hub has grown by more than 50% since last quarter with both open-source and proprietary models. In handsets, we recently unveiled the Snapdragon 8 Elite, our latest flagship mobile platform, which features our second-generation custom Oryon CPU. This CPU delivers up to 30% faster performance with 57% less power, a significant leap over the first generation in less than a year. Snapdragon 8 Elite is the world's fastest mobile processor, restoring performance leadership to the Android ecosystem. In addition, Snapdragon 8 Elite introduces a newly architected Hexagon NPU, delivering a 45% improvement in both performance and power efficiency over Snapdragon 8 Gen 3. Combined with the improved CPU and GPU, Snapdragon 8 Elite can dynamically manage AI workloads and handle the complexities of multimodal GenAI in real time. We are extremely pleased with the Snapdragon 8 Elite design traction with successful launches at Xiaomi, Honor, Oppo, and Vivo, and we look forward to additional launches at Samsung, ASUS, and more. In a short period of time, our Snapdragon X Series platforms have redefined personal computing. Building on the initial launch momentum, we have expanded our portfolio with the addition of the Snapdragon X Plus eight-core compute platform. The X Plus eight-core maintains leadership in performance and battery life, enabling OEMs to offer thin and light Copilot+ PCs with transformative, uncompromised on-device AI and more affordable price points. This makes next-gen AI PCs accessible to even more users, expanding our addressable market. We are very pleased that leading OEMs, including Dell, HP, Lenovo, Samsung, Acer, and ASUS will all have devices powered by our X Plus eight-core platform. We now have a total of 58 platforms launched or in development across the X Series portfolio. Snapdragon X Series power laptops will also be the first to get the new Copilot+ PC features announced on October 1, including Recall, Click To Do, improved search, super-resolution in photos, generative field, and arrays in Paint. In XR, together with Meta, we continue to enable the future of spatial computing. The recently announced Quest 3S powered by Snapdragon XR2 Gen 2 delivers a more affordable headset target for users new to mix reality and immersive experiences. This is an important milestone in increasing the scale of this opportunity. Additionally, the Snapdragon AR1 Gen 1 powered Ray-Ban Meta glasses are receiving new AI features, including location and navigation assistance, real-time speech translation, answering questions about their environment, and hands-free access to user digital lives. We're also pleased that Snap recently unveiled their next-generation Spectacles powered by dual Snapdragon processors, which are aimed at creators exploring advanced AR experiences. Industrial IoT is evolving with advanced edge computing and intelligence, driving demand for our technologies and providing a significant future opportunity for Qualcomm. To that end, we recently announced the Qualcomm IQ Series, a new family of industrial-grade solutions specifically designed to meet the needs of next-generation industrial edge applications. With on-device AI performance of up to 100 tops, the ability to operate in extreme conditions in a suite of building safety features, the Qualcomm IQ Series of chipsets are purpose-built to power a wide range of solutions, including inspection and automation, robotics, drones, advanced computer vision, edge AI boxes and gateways and more. Additionally, we introduced the Qualcomm IoT Solutions Framework, which helps enterprises build solutions that enable easy development of end-to-end applications, reduce time to implementation, and improve operational efficiencies. This all-encompassing framework features recommended chipsets and core software support for multiple operating systems, such as Android, Linux, and Windows, tailored reference designs, software libraries, SDKs, supplementary cloud-based services, microservices, and access to a growing network of channel partners. In edge networking, we announced the Networking Pro A7 Elite platform, the first commercial platform to revolutionize enterprise and home networking connectivity with edge AI. This platform includes WiFi 7, 5G, 10-gigabit PON, Ethernet, and an AI co-processor with 40 tops of NPU processing power. The transformative integration of connectivity and computing power into the network unlocks opportunities for operators and enterprises to deploy innovative applications and services in areas such as security and surveillance, energy management and automation, personalized virtual assistance, and health monitoring, among others. Edge AI also enhances privacy by processing sensitive information on the gateway while enabling personalization through contextualized understanding of the environment and immediacy to near real-time responses. Finally, in automotive, we recently announced our most powerful platforms to date, the Snapdragon Cockpit Elite and Snapdragon Ride Elite. Both feature our category-leading custom Oryon CPU, now optimized for automotive safety standards and design for three times faster CPU performance over previous generations. These platforms are also developed for current and future multimodal AI in assisted driving workloads, feature our dedicated Hexagon NPU with up to 12 times increased AI performance over previous generation, a substantial upgrade. The Snapdragon Cockpit Elite powers advanced digital experiences, including robust multimedia capabilities, such as gaming and advanced 3D graphics, on-device AI with fully integrated edge orchestrator, optimized safety and security, and long-term software support. The Snapdragon Ride Elite platform offers an end-to-end ADAS system with advanced features, such as vision perception, sensor fusion, path planning, localization, and complete vehicle control. Additionally, these platforms are built on a unique flexible architecture that gives automakers the option to combine both digital cockpit and automated driving functionalities on the same SoC. We are pleased that leading core manufacturers are adopting Snapdragon Elite automotive platforms for their future software-defined vehicles, including Li Auto and Mercedes-Benz. We are very pleased with the progress we have made this year with significant advancements on our product road map and customer engagement across multiple end markets. I look forward to sharing more about our strategy and progress at our upcoming growth and diversification focus Investor Day in New York on November 19. I will now turn the call to Akash. Akash Palkhiwala -- Chief Financial Officer and Chief Operating Officer Thank you, Cristiano, and good afternoon, everyone. I'll start with our fourth fiscal quarter earnings. We are pleased to announce strong non-GAAP results with revenues of $10.2 billion and EPS of $2.69, which was above the high end of our guidance. QTL revenues of $1.5 billion and EBITDA margin of 74% were at the high end of our guidance driven by slightly higher handset units in the quarter. QCT delivered revenues of $8.7 billion and EBITDA margin of 28% with revenues at the high end of our guidance range on strength in both IoT and automotive. QCT handset revenues of $6.1 billion were in line with our expectations for the quarter. QCT IoT revenues of $1.7 billion increased 24% from the prior quarter due to the benefit of new product launches and continued normalization of channel inventory. We delivered our fifth consecutive quarter of record QCT automotive revenues of $899 million with sequential growth of 11% and year-over-year growth of 68% on continued content increase in new vehicle launches. Lastly, we returned $2.2 billion to stockholders, including $1.3 billion in stock repurchases and $947 million in dividends. Before turning to guidance, I'll summarize our fiscal '24 results. We are very pleased with our execution and financial performance in fiscal '24. We delivered revenues of $39 billion and non-GAAP EPS of $10.22, a growth of 21% on a year-over-year basis. Our results are for the benefit of operating leverage as we maintain fiscal discipline and manage non-GAAP operating expenses relatively flat as compared to fiscal '23. In QTL, we made significant progress in our ability to maintain revenue and margin scale as a result of completing a number of licensing renewals during the year. In QCT handsets, we delivered greater than 20% year-over-year growth in Android revenues driven by technology leadership of our premium-tier Snapdragon products and normalization of channel inventory. Consistent with expectations outlined at the beginning of the fiscal year, QCT IoT revenues grew sequentially in each of the following quarters throughout the year. In a challenging industry environment, we delivered full-year revenue growth of 55% in QCT automotive, extending our leadership in automotive computing and connectivity platforms. Lastly, our business generated record free cash flow of $11.2 billion, and our balance sheet remains strong with $13.3 billion in cash and marketable securities. Turning to guidance. We now expect global 3G, 4G, 5G handset units to increase by low to mid-single-digit percentage on a year-over-year basis in calendar '24. For the first quarter of fiscal '25, we are forecasting revenues of $10.5 billion to $11.3 billion and non-GAAP EPS of $2.85 to $3.05. In QTL, we estimate revenues of $1.45 billion to $1.65 billion and EBITDA margins of 73% to 77%, reflecting normal seasonality for handset units when adjusted for the extra week in the fourth quarter of fiscal '24. In QCT, we expect revenues of $9 billion to $9.6 billion and EBITDA margins of 29% to 31%. We expect QCT handset revenues to grow by a mid-single-digit percentage on a year-over-year basis. This forecast includes greater than 40% sequential revenue growth from Chinese OEMs and the acceleration of flagship Android handset launches powered by our recently announced Snapdragon 8 Elite platform. We anticipate QCT IoT revenues to increase by more than 20% on a year-over-year basis with growth across consumer, industrial, and networking. Following our outperformance in the fourth quarter, this forecast reflects a seasonal sequential decline consistent with the last two fiscal years. We expect QCT automotive revenues to grow by 50% relative to last year and be approximately flat on a sequential basis. Lastly, we estimate non-GAAP operating expenses to be approximately $2.2 billion. In closing, I want to thank our employees for their hard work and dedication and remaining focused on execution while delivering industry-leading products. The last few weeks have marked a meaningful acceleration in our progress toward our diversification strategy, and I'd like to highlight some significant product announcements. First, we announced our Snapdragon X Plus platform at EFA Conference, which extends our performance leadership to the $700 price tier for personal computers. Second, at the embedded world North America, we introduced the most comprehensive chipset and software portfolio for AI-ready industrial IoT solutions. And third, at the Snapdragon Summit, we unveiled the Snapdragon 8 Elite handset platform, featuring the world's fastest mobile CPU; and the Snapdragon Cockpit Elite and Snapdagon Ride Elite automotive platforms, establishing us as a performance leader in digital cockpit and ADAS. Lastly, we look forward to seeing you in New York on November 19, where we will expand on these exciting product announcements with an update on our IoT and automotive diversification strategy. This concludes our prepared remarks. Thank you, Akash. Operator, we are now ready for questions. Operator Thank you. [Operator instructions] One moment, please, for the first question. The first question comes from Joe Moore with Morgan Stanley. Joe Moore -- Analyst Great. Thank you. I wonder if you could talk about the strength in autos. You've obviously put up great sequential numbers. There are headwinds in that business. I know you have a lot of pipeline momentum, but just kind of give us a picture of how the environment is affecting you and how much visibility you have into that trajectory. Cristiano R. Amon -- President and Chief Executive Officer Hey, Joe, thanks for the question. This is Cristiano. As we said before, I think you should look at our revenue in auto, less sensitive to what happens in the market much more related to new models that are being launched with Qualcomm technology, and it's reflecting a shift in share. So, as we gain share and new models get launched, you started to see that show up in our financials. So, that's the reason we continue to have growth both sequentially and year over year. Joe Moore -- Analyst Great. Thank you. And then I don't think you mentioned it. Anything you could say about the ARM dispute? Because that would help us understand what's the stake there. Akash Palkhiwala -- Chief Financial Officer and Chief Operating Officer Yeah. Joe, on the ARM side, from our perspective, we have a very broad, well-established license rights that cover our custom design CPUs. So, we are very confident that those rights will be affirmed. The trial is scheduled for December, and so we're looking forward to addressing ARM's claims at that point. The next question is from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee -- Analyst Hey, thanks for taking my questions. And really strong results, so congratulations on that. Maybe if I can start with IoT. For the first three quarters of the year, you had declines on a year-over-year basis. And you're seeing this sort of acceleration in IoT in the fourth quarter and going into first quarter on a year-over-year basis. Can you just sort of parse that out a bit? How much of this is a recovery in sort of the traditional IoT businesses you are in relative to contribution from the PC market and really an acceleration on account of that? Just anything you can parse out between industrial IoT, consumer IoT, and new products versus older sort of products you've been on. And I have a follow-up. Thank you. Akash Palkhiwala -- Chief Financial Officer and Chief Operating Officer Sure. So, Samik, it's Akash. If you look at our performance both in first -- fourth quarter and first quarter in IoT, we saw benefit across all the three areas, so consumer, industrial, and networking. And within fourth quarter, as some new products were launched in PC, in XR, in other areas as well, we saw the benefit of those launches come through in our numbers. There is a portion of channel inventory normalization as well, but it's really the new product launches kind of coming through for us both in the fourth and the first quarter. And that sets up -- sets us up well for the rest of the year. Samik Chatterjee -- Analyst OK. OK. Got it. And I mean, it's -- obviously, as you mentioned, it's been a tough backdrop in terms of the macro, and you're guiding to about a 10% revenue growth in the first quarter. Just trying to think about sustainability of that into the March quarter, particularly given that you did mention there's some acceleration of Android launches as well. How should we think about -- with the combination of smartphone and sort of the impressive performance you have on the non-smartphone areas now, how sustainable is this sort of double-digit growth into the March quarter? Akash Palkhiwala -- Chief Financial Officer and Chief Operating Officer Yeah. Samik, so we're pretty happy with the trajectory of the business both in terms of our fourth-quarter results and first-quarter guidance. We are not guiding beyond the first quarter at this point. But as you know, we have an Investor Day coming up in a couple of weeks, where we're going to talk through our diversification strategy and growth, and we'll provide a financial framework around it. So, we'll address some of these topics at that point. Samik Chatterjee -- Analyst OK. I'll pass it on. Thank you. Thanks for taking my questions. Operator The next question is from the line of Stacy Rasgon with Bernstein Research. Stacy Rasgon -- Analyst Hi, guys. Thanks for taking my questions. My first question, just on chipset gross margins. They seem to be guided down a bit, I don't know, 100 or 150 bps in Q1. Is that just like increased wafer cost, PSM? Is there something else going on with mix just given which products are shipping? Any color you can give us on gross margins? And I guess, like is the framework on how to think about them going forward around 48-ish, plus or minus? Is that still the right way to think about chip gross margins? Akash Palkhiwala -- Chief Financial Officer and Chief Operating Officer Yes. Sure, Stacy. It's Akash. So, in fourth quarter, we actually guided lower, and we came in slightly better because of stronger mix. And so, what we're guiding in first quarter is really largely in line with fourth quarter, and we think that's kind of a reasonable way to model the business going forward. And I think from a product mix perspective, we feel pretty good about where we are set up both across businesses and within handsets. So, that will obviously continue to play a factor as we look forward. Stacy Rasgon -- Analyst Got it. Thank you. For my follow-up, I just wanted to ask a little more about on PCs. You'd talked about new product launches in Q4. Can you help us size, like how big was the PC portion in Q4? And given you're guiding IoT down seasonally, sequentially in Q1, is PCs as well as some of the other stuff a function of that? Like how do we think about the contribution that we're seeing early in the launch of those products? Akash Palkhiwala -- Chief Financial Officer and Chief Operating Officer Yeah. So, Stacy, as you know, we're pretty excited about the PC road map. I think we've kind of established ourselves as a performance leader in Windows devices. And during the quarter, we also launched a new chip, Snapdragon X Plus eight-core chip, which allows us now to access the $700 price tier for the PC market as well. So, now we have performance leadership really without compromising on NPU performance across tiers in the PC market. And so, initial reaction has been great. We are pleased with it. We will talk about this in a lot more detail at Investor Day both from traction across OEMs and then targets for the longer term. Cristiano R. Amon -- President and Chief Executive Officer Hey, Stacy, this is Cristiano. I just wanted to add one thing. While I think we are going to make probably financial projections, how we think about the PC business in November 19, I wanted to point out one thing which is very visible. When we launched this, we launched this in May, we are -- so a period of time if you think about it, we are now in November. When we launched in May, we have about 20 platforms. One thing we disclosed on this call is now the platforms that we have designed in, they add to about 58. That is almost a 3x increase on the number of platforms that are being designed and under development. I think that is giving us a lot of confidence that our platform to resonate with the market and we're getting traction with the OEMs. Operator Thank you. Our next question is from Joshua Buchalter with TD Cowen. Joshua Buchalter -- Analyst Hey, guys, thank you for taking my question. I wanted to follow up on Joe's question from earlier about the auto upside. I mean, in particular, the auto space upside has been driven by China. I guess, maybe you could give us some data points on how much your exposure within the auto market is driven by the China market now. And then also maybe some -- any metrics you can give us on how much is infotainment versus ADAS? And in particular, as you ramp Snapdragon Ride Elite with capabilities of both infotainment and ADAS and one SoC, how is engagement for that? And how do you expect that to ramp over the next couple of years? Thank you. Akash Palkhiwala -- Chief Financial Officer and Chief Operating Officer Hi, Josh. It's Akash. From a geography diversity perspective, you should think of our portfolio as very diverse. We have a very strong set of design wins globally across OEMs. And so, you should not think of this as reliant on a specific geography. And we are planning to give some disclosures on that topic as we go forward. Cristiano R. Amon -- President and Chief Executive Officer Maybe just kind of add one thing. I think in addition to having design with virtually every single OEM and every region, one of the things we're very excited about it is what we did on both the Snapdragon Ride Elite and Cockpit Elite. One of the things I want to point out is it's one of the biggest upgrade setting to date in order of magnitude about 12x on AI. As we said before, I think GenAI use cases on a core and especially a little different approach is about future-proofing that design for software-defined vehicle is getting a lot of traction to a lot of OEMs. We announced two that made public, but I think design traction on that chipset is actually very high. Akash Palkhiwala -- Chief Financial Officer and Chief Operating Officer And Josh, on your second question on a combination of cockpit and ADAS, a lot of our traction this year is with launches with cars using our cockpit solution. And we see ADAS having some traction, some deployments right now, but it's going to ramp over the next couple of years. And that becomes kind of another inflection point in our revenue growth going forward. Joshua Buchalter -- Analyst Got it. Thank you for all the color. And then a follow-up, I wanted to ask about the handset market. If we sort of back out your top two customers, handsets are up, I think, around 50% year over year. Any metrics you can give us on units versus ASPs? I know there was an inventory dynamic last year. So, as we think about the sustainability of that growth vector into 2025, in particular, for the China market, would be curious if there's any incremental metrics you can give us outside your top two customers. Thank you. Akash Palkhiwala -- Chief Financial Officer and Chief Operating Officer Yeah. I think, Josh, the -- if you look at the total handset market, and this is sell-through, we are projecting in '24 that the market will be up low to mid-single digits. But the big story for us has been content increase. We've kind of seen the chipsets becoming a lot more capable, and you saw the X Elite -- 8 Elite announcement that we did last month, a lot more content going into the chip. And as those get -- solutions get adopted, we get to see the benefit on the ASP side. The second factor is the mix across tiers. We're seeing the mix across tiers continue to improve in the handset market as well. So, if you kind of look back over the last three or four years, devices greater than $400 has gone up from being 21% of the market to 30% of the market, and that is definitely beneficial to us. Maybe one last point is if you think about our guidance quarter, December quarter, we do not have any Huawei product revenue in our guidance. A year ago quarter, we did have Huawei product revenue. So, it's actually something that we overcome, and then we have growth on top of it. Operator Our next question is from Chris Caso with Wolfe Research. Chris Caso -- Analyst Yes. Thank you. Good evening. Just another follow-up question with regard to handset. And if you could kind of characterize because I think for Qualcomm, you saw a rebound or normalization in the premium part of the handset market in the first half of the year. Is what you're seeing now some follow-through on kind of the mid-tier or it's just kind of continuation of what you saw in the first half of the year? And then secondly on that, with regard to some of the accelerated China launches, do you think that's a reflection of the market, of some perhaps improvement in the market in China or at least the China OEMs? Or is it simply a matter of timing? Akash Palkhiwala -- Chief Financial Officer and Chief Operating Officer Yeah. I think, Chris, if you think about our handset business, we're definitely really strong at the top of the road map in premium tier. And as we mentioned earlier, we announced our new flagship chipset, and you're seeing OEMs launch with that chipset. So, those definitely factor into our numbers. And it's less about other tiers, more about the fact that we launched our new premium-tier chipset, and the OEMs are actively taking advantage of it by accelerating their launches and really increasing the scale of their launches. Chris Caso -- Analyst Got it. And just with regard to the licensing business, you see a shallow sequential increase in the December quarter. I imagine that's because of the absence of the extra week for that licensing business. Any changes for just kind of the structure of that market that we shouldn't anticipate going forward? Or is it about what you'd consider to be normal? Akash Palkhiwala -- Chief Financial Officer and Chief Operating Officer Yeah. It's very much normal. It's really the extra week coming out and the normal sequential quarter-over-quarter growth. Thank you. The next question is from Tal Liani with Bank of America. Tal Liani -- Analyst Hi, guys. Other companies reported kind of opposite trends of what you're talking about. Some of the companies reported weakness in China migration to lower tier, and then Apple had kind of weaker numbers than expected. How do you connect the comments we get from other vendors to your strengths? And are you concerned that maybe the strength is more inventory build-out or build-out by customers because of your new launches? So, can you comment about end-market demand and the composition of end-market demands in -- you know, globally? Thanks. Cristiano R. Amon -- President and Chief Executive Officer Look, thanks for the question. I can't really speak of other companies. The only thing I can say is I'm actually very happy with our results. But I'll give you a couple of data points, maybe help you triangulate that. When we look sequentially, we have now, quarter over quarter, greater than 40% handset revenue growth with Chinese OEMs in -- look in the 1Q fiscal '25, if you look at the guide. In fiscal '24, our Android revenues, we get 20% year-over-year growth, including the loss of Huawei revenues. And when we compare with our closest competitor, for example, in Android, our premium tier, we get greater than 5x the premium-tier revenue. So, I think it shows a couple of things. As Akash outlined, content is increasing. The premium tier is expanding in the market that it kind of normalized. And we don't see much of the inventory dynamics we used to see. So, I think it speaks a little bit to the strength of our product road map. I think the launch of new products from customers in China, but more important is this trend that the mix are really improving. Thank you. The next question is from Timothy Arcuri with UBS. Timothy Arcuri -- Analyst Thanks a lot. Akash, I'm just looking at the guidance, and for China Android to be up more than 40%, it implies that your two other big customers are both down in the double-digit range. I mean, both of them have to be down. So, can you speak to that? It's very sort of anti-seasonal for at least one of those guys to be down. And then can you speak to what's driving this? Do you think -- I mean, is any of this pull-forward because of tariffs? Are these customers concerned about potential tariffs with -- given the results of the election? So maybe they are pulling some things forward. Is that plausible? Thanks. Akash Palkhiwala -- Chief Financial Officer and Chief Operating Officer Yeah. Let me start with the second part of your question. That's not the case. This is not about tariffs or pull-forward because of those reasons. From a customer perspective on the quarterly trend, the way we think about it is what we're guiding is based on customer launch cadences and their demands. You should not think of this as a statement on sell-through. It's really kind of chipset purchases that are happening from us. So, I think that's -- those two may be connected in some cases. But you already know what our share position is across OEMs. And so, it's not a share question. It's just the timing of purchases from us. Thank you. Our final question will be from C.J. Muse with Cantor Fitzgerald. C.J. Muse -- Analyst Yeah. Good afternoon. Thank you for taking the question. I guess first question, was hoping to revisit IoT business growing nicely for you year on year, and pretty much every other company that I've come across is seeing challenges there, particularly parts of consumer and industrial. So, would love to hear perhaps on the consumer side, whether you're seeing kind of the uptake that we're hearing in China. And then moreover, I guess, on the industrial side, is that where you're seeing inventory correction? What's the timing of kind of recovery and your thoughts there? Akash Palkhiwala -- Chief Financial Officer and Chief Operating Officer Yeah. Sure. So, on the consumer side, as we said, new product launches, both in XR and NPC, definitely a factor in our performance. And then on the industrial side, at Embedded World, we announced a new product portfolio, updated product portfolio that addresses both not just chipsets but software readiness to drive through AI-ready use cases in industrial. We think that that market is turning. There's an inflection point and there's going to be a lot of demand for solutions that have processing, connectivity, AI readiness. And so, we're seeing these early stages of demand come through for our solutions. And this is one of the topics that we'll discuss in detail at our Investor Day. Very helpful. And as a follow-up, in your 10-K, you talked about a large customer potentially going internal as a next several-quarter risk. And obviously, this has been discussed for many years. But if it were to happen, how should we think about the moving parts to your overall QCT margins? Akash Palkhiwala -- Chief Financial Officer and Chief Operating Officer I think no real change, no new information here. I think you -- there's enough data out there for you to be able to size the risk that we've always outlined. As we've said, we have a three-year agreement, '24, '25, and '26 phone launches, and the framework of that agreement is consistent with the prior one. Our planning assumption has been that the share will ramp down to 20% for the '26 launch, and the agreement ends after that. So, no change really to anything we've said in the past, and I think that's how our planning assumption is. Anything better would be upside. Thank you. That concludes our question-and-answer session. Mr. Amon, do you have anything further to add before adjourning the call? Cristiano R. Amon -- President and Chief Executive Officer Yeah, just a few statements. Thank you. Thanks, everyone, for joining us on the call today. When we look at Qualcomm, I think we feel pretty good about our position. There are very few companies positioned in so many markets in the transformation of many industries. There's a lot of distraction out there, but we're not distracted. We're really focused on executing on our growth and diversification. And we're really looking forward, I think, to tell our story on November 19. I'd like to take a moment to thank all of our employees for incredible fiscal year -- fiscal '24. They're truly the best part of Qualcomm. And we're going to keep executing and focus on changing the company into a connected computing company for the age of AI. Thank you so much, and I look forward to speaking with you all next quarter.

Arm Holdings (ARM) Q2 2025 Earnings Call Transcript | The Motley Fool

Good day, and thank you for standing by. Welcome to the Arm second quarter fiscal year 2025 webcast and conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jeff Kvaal, head of investor relations. Please go ahead. Jeff Kvaal -- Vice President, Investor Relations Thank you very much. Welcome to our earnings conference call for the second quarter of fiscal '25 ending September 30, 2024. On the call today are Rene Haas, the chief executive officer of Arm; and Jason Child, Arm's chief financial officer. During the call, Arm will discuss forecasts, targets, and other forward-looking information regarding the company and its financial results. While these statements represent our best current judgment of future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially. In addition to these risks that we may highlight during the call, important risk factors that may affect our future results and performance are described in our registration statement on Form 20-F with the SEC. Arm assumes no obligation to update any forward-looking statements. We will refer to non-GAAP financial measures during the discussion. Reconciliations of certain of these non-GAAP financial measures to their most directly comparable GAAP financial measures as well as a discussion of certain projected non-GAAP financial measures that we are not able to reconcile without unreasonable efforts and supplemental information can be found in our shareholder letter. The shareholder letter and other earnings-related materials are now available on our website at investors.arm.com. And with that, I'll turn the call over to Rene. Rene? Rene Haas -- Chief Executive Officer Thank you, Jeff, and good afternoon, everyone. It's been now about one year since our IPO. And I'm very proud to tell you that in that year, we have exceeded all of our expectations on execution of our growth strategies. The demand for AI everywhere is increasing the demand for Arm's Compute platform. To date, now since our history, over 300 billion Arm chips have been shipped. Now, in the past quarter, we had a good set of results and exceeding the high end of the guidance. We had record royalty revenue, up 23% year on year as adoption of v9 increases. We had continued strong Licensing revenue, showing that our customers are continuing to invest in the future of AI in an AI everywhere world. The long-term growth drivers for our business remains consistent. Every modern digital chip being designed needs a CPU and the vast majority of these chips are being designed with Arm because of the unequaled software ecosystem. Now, more specifically on royalty revenue growth, really being driven now by more value per chip. In the quarter, Version 9 now represents 25% of royalty revenue compared to 10% a year ago. More importantly, in the past quarter, our Royalty Revenue for smartphones grew 40%. This is versus 4% unit growth in the past quarter, a significant delta. We had new announcements, one of them being Apple's new iPhone 16 and iPhone 16 Pro on Arm Version 9, and MediaTek announced their newest chipset, the Dimensity 9400 using Arm's v9 CSS for client, our first CSS shipping in the mobile sector. We've now doubled the number of CSS licenses in this past year. It goes without saying that AI is everywhere. Arm is the only compute platform that can run AI from the edge to the cloud. AI is driving demand for our performance and power-efficient compute platform everywhere. Some significant milestones. NVIDIA's Grace Blackwell shipments have started integrating the NVIDIA GPU Blackwell with Arm CPU in Grace. We've had new shipments now from Microsoft Azure Cobalt and Google GCP Axion, both Armv9-based data center now in general availability. Significant milestone. In the past quarter, Arm and Meta worked together on optimizing Llama 3.2 using Arm's libraries, enabling faster on-device AI processing. In the automotive market, we're seeing a very strong pipeline for CSS now for both ADAS and IVI applications. And in general, demand for Edge AI products for CPU acceleration of v9 is very strong. We have the largest software ecosystem ever invented. Hardware is nothing without the software, and we have over 20 million software developers, the largest in the world. We're working closely with important ecosystem partners like GitHub, who just recently announced the integration of Arm Tools in the GitHub Copilot, a significant milestone for developers. The future is very bright. AI will be everywhere, and it will run on Arm. And with that, I will hand over to Jason. Jason Child -- Chief Financial Officer Thank you, Rene. Q2 has continued our strong start for fiscal year '25. Total revenue was $844 million, which was above the top end of our guided range. Royalty revenue was $514 million, which grew 23% year over year and matched our highest royalty revenue quarter to date. Our Q2 royalty revenue growth was driven by continued Armv9 adoption and the start of CSS deployments. As with last quarter, royalty revenue from smartphone significantly outperformed smartphone shipments. Smartphone royalties increased approximately 40% year over year compared with mid-single-digit increase in the number of smartphones sold, mainly due to smartphone application processors being increasingly Armv9-based with a higher royalty rate. In addition, we continue to gain share in automotive applications and with cloud service providers. However, this growth is partially offset by continued weakness in industrial given the ongoing inventory correction in that part of the semiconductor industry, as indicated last quarter, and widely reported by many of our semiconductor customers. Licensing revenue declined 15% year over year to $330 million, which was better than our expectations, which was for a 25% decline. License revenue varies quarter to quarter due to the normal fluctuations in timing and the size of multiple high-value license agreements and contributions from backlog. Because of this, we recommend that you look at annualized contract value, or ACV, to best understand the underlying license growth rate. ACV in Q2 was up 13% year over year, which is consistent with recent quarters. Remaining performance obligations, or RPO, was up 10% sequentially as we had a very strong bookings quarter. Some of this RPO will be recognized as revenue later this year. Turning now to guidance. I will briefly touch on both third quarter and fiscal year ending March 31, 2025. This guidance reflects our current view of our end markets and our licensing pipeline. For Q3, we expect revenue between $920 million and $970 million, which at the midpoint, represents revenue growth of 15% year over year. Investment in our next generation of technologies are on track, and we expect our non-GAAP operating expense to be around $525 million. We expect our non-GAAP EPS to be between $0.32 and $0.36. Looking out to fiscal year '25, we are reiterating our guidance for revenue, cost, and profit. We expect revenue to be between $3.8 billion and $4.1 billion, which represents an 18% to 27% year-over-year increase. At the midpoint of our revenue guidance, this includes full-year royalty revenue growth in high teens. We expect that our revenue growth from smartphones will continue to be driven by Armv9-based chips becoming a greater proportion of the mix, with CSS ramping over the next couple of quarters. We also expect to continue to gain share in cloud and automotive. Feedback from our customers leads us to expect sequential growth in networking in both Q3 and Q4, while IoT is not expected to recover until next year. Strong demand for our latest technologies will continue to drive license revenue for the rest of the year. We have kept the range for full-year revenue guidance the same as last quarter at plus or minus $150 million as we have some large licensing deals in place. Although the timing of these deals and the shape of the revenue recognition is not yet clear, we do expect all these deals to close. We do expect non-GAAP operating expenses to be approximately $2.05 billion, which represents a 19% year-over-year increase and is unchanged from our prior guidance. As we continue to invest in R&D to support future growth initiatives, we expect operating expenses to ramp consistently through the year. We expect our full-year non-GAAP EPS guidance of between $1.45 and $1.65. With that, I'll turn the call back to the operator for the Q&A portion of the call. Operator Thank you. [Operator instructions] We will now go to your first question. One moment, please. And your first question comes from the line of Andrew Gardiner from Citi. Thanks very much. Good afternoon, good evening, Rene, Jason. I was hoping you could shed a little light on a topic that you didn't touch on in your prepared remarks. There have been myriad press reports regarding your working relationship and litigation with Qualcomm. I believe the case is still due in court next month, and you have reportedly canceled Qualcomm's architecture license recently both, I think, as they plan to ship a greater volume of product based on the Nuvia designs and also ahead of the court case. Can you comment on the veracity of these reports? And I suppose, specifically on numbers, are there any issue with your revenue recognition and operating expenses into the coming periods related to these actions? Do you have to reduce rev rec, will opex rise on increased legal costs? If you -- I know it's tricky to talk about legal things, but if you can shed any light on that, I'm sure it would be helpful. Rene Haas -- Chief Executive Officer Sure. Yeah. Happy to. So, I'll address what I can as it is an ongoing litigation. There isn't a great deal I can say on it. But at a base level, contractual consent was required by Qualcomm to sign a Nuvia license, and that consent was not obtained. As a result of not obtaining that consent, they are in breach. And what we did was sent a notification letter regarding cancellation of the architectural license. And to be clear to your question, we have not canceled the license, but we have sent a notification to them. Now, getting consent for an assignment is fundamental for our license agreements. And as a result, we need to ensure fairness and protecting Arm ecosystem who rely on these license agreements. On the financials, I'll let Jason maybe chat on the opex. But regarding the revenue, our forecast and guidance has always taken into consideration that we may not prevail in this case, so we have essentially taken that forward look. So, Jason, I don't know if there's any comment you want to make on the expense side. Jason Child -- Chief Financial Officer No, there isn't any change in, I think, some of the changes you pointed out, rev-rec expenses like that. No, there's no changes because at this point, as Rene said, and as I think we said actually back at IPO and consistent since then, is our forecast assumes that we're going to get paid existing ALA royalty rates. So, until something changes, there won't be any increase or change in those rates. Thank you. We will now take the next question. And your next question comes from the line of Harlan Sur from JPMorgan. Please go ahead. Harlan Sur -- Analyst Good afternoon. Thanks for taking my question. So, now that we're midway through your fiscal year, the upside in your business through the first half been coming from Licensing, right? This is, in my view, the best forward indicator of your pipeline, your growth prospects, and it looks like licensing for the full year will come in better versus your view even 90 days ago. So this quarter, backlog was up percent sequentially; book-to-bill, one-to-seven, so very strong. I assume you're driving more value uplift per renewal. It looks like you've seen some add-on licensing activity. As you mentioned, Rene, CSS engagements are strong. Bookings were originally expected to be lower this year versus last year. But just given the strong design activity by your customers, requirements for more compute capability per program, visibility on renewals for the remainder of the year, can the team grow its backlog for this fiscal year? Rene Haas -- Chief Executive Officer Yeah. I would say a couple of things that we're observing in the marketplace. We've talked about the demand for Arm technology being quite strong given the ecosystem and the overall increased demand for Arm technology. I think when we look at what's going on with AI and when you think about AI, it's not just training in the data center, but it's inference in the data center, it's inference across different parts of the overall value chain, the network, the automobile, the PC, the mobile phone, the wearable, which can be kind of what people would call the edge. We're seeing an increased demand for compute resources to run these agents and run these small language models or large language models on top of compute requirements that they already have. So, what that's driving is, I think, an increase for us that we're seeing across the board for R&D and innovation to capture this platform opportunity. So, we're seeing pretty broad licensing demand across candidly, all the markets and all the sectors. And you're right, it's stronger than we had, I think, originally communicated and anticipated. It's a very good forward indicator for the strength of the business and also for the strength of the royalties going forward. In addition, as mentioned, we've doubled the number of CSS licenses now over the year. That's also been, I think, stronger than we anticipated. We did, as I mentioned in the opening remarks, announced MediaTek's first chip design using CSS. So, I think it's a combination of increased compute demand, AI, and also the CSS. I don't know, Jason, if there's anything you want to add on to that. Jason Child -- Chief Financial Officer Yeah. In terms of the -- I think you asked, Harlan, if there's a way to increase our backlog. I would say, certainly, based on the strength that we've seen, yes. In fact, if you look at the license revenue kind of implied guidance, I think we're up about 40% -- 45% higher this year than what was our plan back at IPO. So, we have seen strength. Now, our forecast now is we -- I don't think there probably will be increased -- significant increase to backlog. But again, hard to say. The large deals that we have coming later this year, there's some impact there. But then, of course, that's going to be offset by some kind of the amortization or recognition of milestones that will be delivered in the next quarter or so. So, overall, I wouldn't count on that being the driver. I think the real focus is really the royalty growth and the 23% year-on-year growth that we saw in the quarter, which we're particularly excited about. Thank you. Your next question comes from the line of Ross Seymore from Deutsche Bank. Please go ahead. Ross Seymore -- Analyst Hi, guys, thanks for taking the question. I'm going to stick on the licensing side of things. Rene and Jason, you guys talked about, I think, signing six new ATAs and then I think, more than doubled the CSS side of things. Is there a TAM that is larger now? I think originally, you talked about ATAs having somewhere around 50 potential licensees. It seems like that number must be growing if you're upwards of 40 already. So, how do we think about the potential future growth there? And if that has to slow eventually before it hands over to being such a good precursor for the royalty side of things in the future? Rene Haas -- Chief Executive Officer Well, I think the way to maybe think about it is one of the opportunities we have with ATA is to expand the portfolio and size, if you will. ATA's grant access to Arm technology, in a broad sense, in other words, a broad portfolio of IP and also a broad set of rights in terms of how many chips to build and tape out in a year. We can scale that to different variations, i.e., smaller set of IP and/or reduce number of tape-outs, but still give additional value to end customers because they get a larger suite than they might on a single instance. In theory, I think the majority of our customer base can move to some version of ATA. And the reason for that is customers love the concept because it addresses a number of things. They know they're going to use the Arm technology. Number two, having their engineers have access to the broad set of IP allows them to do a lot of experimentation and evaluation in a very easy way. And thirdly, they can now essentially fix their costs on an R&D forward cycle since they know they're going to be purchasing the IP anyway. So, what that ends up meaning for Arm is it's pretty much broader upside because less churn on deals because they candidly are more repeatable. And also, by having a broader set of IP available, what we find is engineers end up using more. So to your question, I think the vast majority of our customer base can ultimately go to some version of ATA. And given the broad set of IP that's used in ATA, I think that's going to drive higher royalties in the future. Jason Child -- Chief Financial Officer Yeah. Maybe just a couple of things to add. I think in the past, we had said that we thought -- probably about 80% of our think of our license revenue and license fees as probably ATA working well for them. I think we said in this last quarter, we're now kind of in the over 50% range. The one thing I think -- I think we've said in the past, just to make sure it's clear is with ATA, the annual costs or price increase is roughly 7% per year. And then those contracts, on average, are somewhere around three-ish years. And so, even once everyone is an ATA, you're still going to have renewals and you're still going to have the annual increases. And then of course, as we deploy and release new technologies and expand the product offering, then of course, you can also upsize as well. So, I don't -- I think we're quite a ways from reaching the TAM, and there's multiple kind of points of growth to expand that TAM. Thank you. Your next question comes from the line of Vivek Arya from Bank of America Securities. Please go ahead. Vivek Arya -- Analyst Thanks for taking my question. A few questions on the royalty business. I think you have changed this year's contribution to, I think, high teens growth from low 20s and then mid-20s, and I imagine that's all the cycle, but if there's any other color, I would appreciate that. But the other kind of related question is v9 contribution to royalties kind of stalled at 25%. I thought the plan was to continue to expand that every quarter by five points. And since smartphone is kind of the biggest contributor of that and your smartphone business is growing very nicely, like over two times the pace, I would have thought the conversion would go on. So, I was just hoping you could give more color on why did v9 conversion kind of stall in this quarter. And then the overall royalty growth, what is the need to take it down? Rene Haas -- Chief Executive Officer Yeah. So, let me take the first part of that question, Vivek. I'll address both the v9 transition, and then I want to make an important point regarding how to think about pricing inside the v9 envelope and then let Jason talk about the specifics. But first off, the adoption of v9 is going very, very well. We're seeing very, very strong uptick of it in mobile. All of our NeoVerse products are v9 and we're now starting to see the transition of it in Automotive and IoT. And I mentioned in the opening comments that we've now seen the first shipments from Apple that are v9. So, we're very, very happy with the rate of adoption. And I think if you looked at the royalty -- the adoption rates on a quarter-to-quarter basis, it may not look linear, but it will definitely be increasing quarter over quarter over quarter when we start looking at it on a multi-quarter basis. That being said, I think there's a very important distinction that I want to make regarding how to think about royalties during the time that the v9 architecture is ramping. In contrast to Version 7 and Version 8 which, by the way, by way of reference, those architectures tend to have a life of approximately 10 years in terms of their peak run rate. During Version 7 and Version 8, once the royalty rates were fixed for that version, there was very little delta throughout the period, meaning that as those versions reached maturity in terms of saturation, the royalty growth would asymptote. That's not going to be the case with v9 and there's two primary reasons for that. Reason one is that generation on generation, we introduced multiyear improvements in the technology and multiyear improvements in terms of the product, meaning that when we deliver a product, let's say, for a phone that goes into production in 2025, and then we delivered the v9 version for a phone that goes into production in 2026 because the product is better, 15% better, let's say, on performance and power, we're able to drive better value-based pricing for that solution. So, during v9, even though the royalty rates are increasing from Version 8 to Version 9, we're going to see continued increases throughout the life of Version 9 even as Version 9 adoption increases. Secondly, in Version 9, we've also introduced CSS, which we've mentioned several times, carries a higher royalty rate, in some cases, double, if not more, of what a standard Version 9 core would be. So, as a result, as we see growth in Version 9 adoption, the royalty growth track higher than it has traditionally. And again, it's for those two factors. Number one, the value-based pricing that sees an increase because of the better economics delivered. And secondly, more of a transition to CSS. With that, I'll -- Jason, if you have any comments. I think maybe we answered the extent of that question. Thank you. As a reminder, in the interest of time, please limit yourself to one question only and rejoin the queue for any follow-up questions. Your next question comes from the line of Srini Pajjuri from Raymond James. Please go ahead. Srini Pajjuri -- Analyst OK. Thank you. My question is on the networking and data center business. Rene, I think that accounted for about 10% of your mix in the last 12 months. Obviously, a lot of momentum on the data center front, and then you have CSS products potentially ramping at some point in the next 12 months. So, I'm just trying to understand how important of a driver that could be for the next 12 months, both from, I guess, a royalty standpoint and also from a licensing standpoint. Thank you. Rene Haas -- Chief Executive Officer Yeah. So, let me talk about the macro, and I'll let Jason address the numbers piece. I think the adoption of NeoVerse in the network and data center is going to mean very, very strong trajectory for Arm, not just in the 12 months, but over the next number of years. Two components to that. For general-purpose compute, we now obviously have had Graviton in production for many years. And with Microsoft Azure on Cobalt and Google GCP with Axion, general-purpose compute, they are now general availability, which means now instances can be purchased by end users. And based upon the type of deployment we've seen with Graviton, we're very excited about the opportunity there, both with Azure and GCP on these chips. So, for general-purpose compute, we're expecting to see very, very good results, driven primarily by the fact that the power and efficiency is anywhere between 50% to 60% better than compared to x86. In addition, we are seeing, as I mentioned in the opening, demand for NVIDIA's advanced training and inference chip, Grace Blackwell, which uses the Arm CPU Grace as part of that overall solution. One of the benefits of that solution being introduced in the data center is that many of the base OS and workloads that are required for a general-purpose cluster are also used on this AI cluster, meaning there is a lot of leverage between using Arm in the data center for general purpose compute and using it for an AI training or inference center. There's a lot of software reuse. So, as a result, we believe that from an overall TCO standpoint, that will accelerate adoption of Arm to data center, which we're very excited about. So, I'll let Jason talk about the numbers and the mix. Jason Child -- Chief Financial Officer Yeah. In terms of the data infrastructure and data center market, we do expect networking to continue to be slow. But the data center side, and specifically the cloud compute market for all the reasons that Rene just mentioned, it has been strong. We do expect it to accelerate throughout the back half of the year as the deployments of both Cobalt and Axion continue to ramp as well as some of the other custom silicon chips from other makers that are also continuing to ramp. Thank you. Your next question comes from the line of Lee Simpson from Morgan Stanley. Please go ahead. Lee Simpson -- Analyst Great. Thanks for fitting me in here. I just wanted to go back to licensing again. And really just trying to understand what contributed in particular to that better-than-expected licensing here. And maybe how does this relate to the RPO number? It looks as though it's down a couple of percentage points year on year. So, how do we think about the growth going through the rest of this year? Do we still think we can track to a $1.7 billion number? And have we perhaps pulled forward some of the licensing deals into this quarter? Thanks. Rene Haas -- Chief Executive Officer Thanks, Lee. So, first, I would say, no, we don't foresee any sort of pull forwards. In terms of the upside, I think it was about $35 million higher than the guide, which I think we have guided to a 25% decrease. We actually had a 15% decrease. And again, a decrease is mostly because of a tough comp with a couple of really large deals that were lapped a year ago. In terms of the reduction year on year in RPO, well, we happen to have the all-time record a year ago, and we actually have the second highest quarter was this quarter because it actually stepped up sequentially 10%. So, it's actually a pretty nice increase. And as you know, earlier this year, we had a fairly large amount of RPO that effectively amortized into revenue from a large deal signed last year. So, overall, I think the RPO trend has been very, very healthy. But yes, I wouldn't expect that -- I think the range that you indicated for end of the year is still probably a reasonable range. And so, I think other than what we've included in the guidance on the deals that we expect to close in Q4. At this point, we don't have line of sight to any significant deals beyond those. Obviously, if something changes, we'll let you guys know. Thank you. Your next question Comes from the line of Yanko Venta from Arete Research. Please go ahead. Unknown speaker -- -- Analyst Thanks, guys, for giving me a question. I just want to get back to the announcement of MediaTek in smartphones. How do you see the adoption of CSS in smartphones and trending through this year into next year? Could we see 50% of the market in the next few years? Rene Haas -- Chief Executive Officer Yeah. Thank you for the question. I think so because when we think about what the value proposition of CSS, it's really about reducing time to market and increasing overall confidence in the design and performance. One of the hallmarks of the mobile phone market, as I'm sure you know, is the fact that the product cycle is rather relentless. They're on an annual cadence. It's not very forgiving in terms of when units need to be available, whether it's aligning with MWC or Single's Day in China. So, with a very relentless product cycle, combined with these new smartphone chips are becoming more and more complex, these application processors. And then they're also being built in the most advanced geometries at the fabs which have longer manufacturing cycle times. Anything you can do to improve the time it takes the design a chip is welcomed. So, when we introduced CSS, we had a bit of skepticism, whether it would be applicable for the mobile phone market, but what we've actually seen is very, very good adoption. So, in summary, yes, can we get to 50% of the market? I believe so because there's real value being delivered on a product that can move months off the development time in what typically is a very, very severe and relentless product cycle. Thank you. Your next question comes from the line of Krish Sankar from TD Cowen. Please go ahead. Krish Sankar -- Analyst Yeah. Hi. Thanks for taking my question. I had a quick question on China. It seems like the smartphone mix is shifting toward the entity there in the Android market. Are you seeing any meaningful impact to your China royalties? And also, what is the penetration of v9 in China today? Thank you. Rene Haas -- Chief Executive Officer Yeah. Thank you for the question. We are -- we've definitely seen strength in the overall handset numbers in China due to the reasons that you had just mentioned. I think the local brands there, Xiaomi, Oppo, Vivo are all seeing very, very good growth. Our team just participated in an Oppo product launch last month. So, number one, growth has been strong there. I think there is an allegiance toward the local brands. And in the premium flagship market, as we get into the next year or so, that's all Version 9, and that's also going to find its way into the midrange. So, China Android yes, strong. And also, the vast majority of the products now are going to be moving to Version 9. The high-end already is all there. Thank you. Your next question comes from the line of John DiFucci from Guggenheim Securities. Please go ahead. John Difucci -- Analyst Thank you for taking my question. Rene, thanks for that explanation you gave on the v9 mix and the related variables that are going to affect royalties going forward. That was really helpful to think about some of that. But shouldn't we expect to continue to see that v9 mix grow? And if not, what would cause it not to grow? Is it just, I don't know, a temporary macro issue? Or is this -- AI, you guys are obviously benefiting. There are -- NVIDIA, there's some others out there, the cloud vendors, but we really haven't seen it like in a lot of other places. And I'm just curious, could there be, at least, people just stepping back and let's just catch up in our minds like to see how this is going? Or I don't know, I'm just trying to figure out how to model this going forward. Like what's sort of implied in guidance? Rene Haas -- Chief Executive Officer Thank you for the question. No, it's actually going to be quite predictable. As we said, it was 10% a year ago, 25%. Now, I can guarantee you, it will not be 25% a year from now. It will be considerably higher than that. So, if you step in and say, OK, well, what is really driving that? I think you're going to see more Version 9 in PCs as more Windows and Arm products are introduced in the market, as more vendors introduce chips. That's a given, number one. Number two, what you will see in the mobile phone space is a very classic waterfall of what existed in the flagship will find its way in the midrange and what was in the midrange, will find its way in the low end. That's a very natural evolution of products. It happens every single time. It's going to happen this time. So, a year from now, I would expect now that the majority of the mobile phones will be Version 9. Everything we do in the data center, everything we do in the data center is Version 9. So, what will really be the slowest of the products to come to market will be the automotive sector, and that's really driven by just the time lag it takes for those products to be introduced, particularly around IVI and ADAS. But we know the pipeline. We've got CSS activity in particular there. So, when we have this call a year from now, hopefully, [Inaudible] again, and then we'll look at the numbers. But I'll guarantee you, we'll be way ahead of 25% for the reasons I gave. John, just to add on modeling complexity of v9 penetration. So, if you look specifically at the most recent quarter, where it was flat quarter on quarter, the primary reason why was because the mid-market had higher growth in the quarter in smartphones, the midmarket doesn't have v9 yet, it hasn't waterfall yet to be v9. And so, as a result, it looks like v9 installed and it really has more to do with the kind of where the growth in the market turned out to be in this most recent quarter. So, over time, that stuff all shakes out, as Rene said. But you will have some maybe trends like we saw in this most -- in this last quarter to this quarter that are somewhat unique, but I don't think our -- going to sustain. Rene Haas -- Chief Executive Officer We tend to have Arm's products anywhere between a three- to five-year visibility on when they how up. And that's because the licenses have been done years ago. And we have very good line of sight with the chip vendors in terms of when they're going to increase the products, and we have very good line of sight with the OEMs when they plan to take it. So, don't read too much in terms of the quarter-to-quarter thing. We have extremely good visibility in terms of where they're going to land and the trend is only going forward. Thank you. We will now take our final question for today. And your final question comes from the line of Toshiya Hari from Goldman Sachs. Please go ahead. Toshiya Hari -- Analyst Hi, guys. Thank you so much for squeezing me in. Rene, I was hoping to get your thoughts, your forward outlook on the PC and smartphone markets. AI PC so far have been relatively underwhelming relative to expectations at the beginning of the year or maybe at Computex. AI really hasn't catalyzed a replacement cycle in smartphones either. I know you guys are not so dependent on units because you've got things like v9 and CSS growing your royalty rate. But given your visibility that you just spoke to in terms of what your customers are working on, when do you expect volumes across pieces and smartphones to grow? Is it a '25 dynamic? Is it more of a '26 dynamic? And I think at one of the conferences, you spoke to a 50% market share goal in PCs over the long run. Is that still the aspirational goal for you guys? Thank you. Rene Haas -- Chief Executive Officer Yeah. Sure. Answering your last question first, absolutely, and I stand by that prediction. When we think about the Windows ecosystem, it's really all about filling out a broad lineup of SKUs. If you go into a retailer today, you'll see that there's thin-and-light machines, low-end machines, mid-price machines, gaming laptops, etc., etc. I think what you're -- what we're going to need to see, and we will see it because we have great line of sight in terms of people working on multiple chips in multiple areas, is a filling out of that SKUs. So, I think when you start to see thin and light devices at an entry price point based on Arm with a different chipset, you'll see growth. When you see a gaming laptop that has Arm inside, which by the way, will be compelling if and when that comes out, I think you'll see growth. So, we're pretty confident in terms of the next couple of years in terms of growth in the PC market. Now, whether that's related to "AI demand," I think what's important is that these PCs are equipped with the horsepower required to run the AI applications. I think it's early days in terms of the definition of an AI PC relative to the value prop. But I wouldn't get so hung up on that. What we typically see with these types of cycles is that you've got more technology in there, then you need to take advantage of the applications and then it flips the other way around. So, this is being largely future-proofed. But broadly speaking, yes, we're pretty bullish about the demand, and I definitely stick to my prediction on growth of Windows on Arm. Thank you. I will now hand the call back to Rene Haas, CEO, for closing remarks. Rene Haas -- Chief Executive Officer Thank you, and thank you, everyone, for the questions and the interest in what we're doing. Again, to summarize, now our fifth conference call since we've been a public company, and we've been consistently beating the expectations of what we have told you that we were going to do the prior quarter. I think more broadly, though, what you're seeing with Arm and our strategies, as I said in the opening, really coming to life. We've talked many, many times about the resiliency of our business, the growth of v9, the increased royalty rates. And when you see a royalty growth in a market where units, for example, in smartphones are up 4%, and we're up 40%, that's a great proof point that the strategy we've put in place are working. The future is incredibly bright. For all the questions that came up regarding automotive, the data center, AI, smartphones, PCs, we're very fortunate to be able to talk about exciting opportunities in all those verticals, all of them that are using Arm and all of them are going to grow in the future. So, thank you very much, and I appreciate all the questions and comments.

Lumen Technologies (LUMN) Q3 2024 Earnings Call Transcript | The Motley Fool

Greetings, and welcome to Lumen Technologies third quarter 2024 earnings call. After the speakers' remarks, there will be a question-and-answer session [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Jim Breen, senior vice president, investor relations. Jim, please go ahead. Jim Breen -- Senior Vice President, Investor Relations Good afternoon, everyone, and thank you for joining the Lumen Technologies third quarter 2024 earnings call. On the call today are Kate Johnson, president and chief executive officer; and Chris Stansbury, executive vice president and chief financial officer. Before we begin, I need to call your attention to our safe harbor statement on Slide 1 of our third quarter 2024 presentation, which notes that this conference call may include forward-looking statements subject to certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements and the risk factors in our SEC filings. We'll be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures, which can be found in our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials, which can be found on our Investor Relations section of our Lumen website. With that, I'll turn the call over to Kate. Good afternoon, everyone, and thanks for joining. Lumen's third-quarter headline is this. The transformation is happening. We're making progress in our journey to turn Lumen into a digital network services company with simple and modern product offerings, infrastructure, and operations. We're pursuing two major growth vectors, building the AI backbone and cloudifying telco, and have made material progress with each. And that said, and as expected, our financial performance still reflects the secular headwinds on our legacy revenues. We're also investing heavily in transformation programs while running the core business, which weighs heavily on our EBITDA results. We have fully recognized we have a long way to go on this journey, and we understand that our current financial results, coupled with the fact that telcos in the industry are not talking about a turnaround, make it difficult to imagine long-term success for Lumen. But our team sees a clear path to turn this company around. We have a plan to take cost out, deleverage our balance sheet, and drive growth by using our assets and intellectual property to give enterprise customers new value in a multi-cloud hybrid architecture environment. All of this will take time to execute, and it will take time to show up in our financials. But the path is real. And today, I want to share more on the opportunity ahead and what we've accomplished so far. I'll be covering three topics. One, how we are continuing to drive operational efficiency with sales growth and higher customer sat in our core business to ensure we maximize cash generation, customer lifetime value, and cost out. Number two, how Lumen is building the backbone for the AI economy, adding more than $3 billion in incremental private connectivity fabric sales in partnership with the biggest names in the technology industry. And number three, how Lumen Digital is cloudifying the industry, driving NaaS adoption to well over 400 customers and positioning the company for high-value digital revenue growth. Let's start with our operational turnaround. We continue to see solid sales performance in the third quarter with North American large enterprise and midmarket sales up nearly 14% year over year. We saw notable strength in IP sales up 18% year to date and 100- and 400-gig wave sales up 50% year to date through September. To complement these sales results, once again, we saw significant year-over-year improvement in customer sat scores for every one of our enterprise customer channels as measured by transactional Net Promoter Scores. 17 points for large enterprise, up 11 points for wholesale, 28 points for midmarket, and a whopping 98 points for public sector. We continue to improve our efforts to secure the base by focusing on five key levers of installs, renewals, migrations, usage, and disconnects. And while installs were down slightly in the quarter, we did see a 14% sequential improvement in disconnects with total disconnect being at their lowest level in over five quarters. In mass markets, the team continues to execute well and drive increased value for our consumer segment and once again, had a record quarter for fiber net adds. Finally, last quarter, we announced a $1 billion cost take-up by the end of 2027 by unifying our network from four architectures to one, allowing dramatic simplification of our product portfolio in IT estate. While this work is incredibly complicated, given our long history of mergers and accumulation of tech debt, we are on track to developing the plan to execute. And as we have said, these cost-out efforts will require upfront spending with a back-end-loaded cost-takeout curve. We'll provide further details on this important work as we progress. To summarize, we're pleased with how we're galvanizing Lumen's core network services business, how we're driving growth in Quantum Fiber, and how we're simplifying and modernizing the company. But I want to be clear here. We are not here to find revenue growth in legacy telco. All of our transformation work is in service to customers who need and want to leverage technology like GenAI to transform their business, and the legacy networks of yesterday just won't serve tomorrow's enterprise. They're not big enough. They're not fast enough, and they're not secure enough. And of course, the customer experience in legacy telco is neither quick nor effortless, especially in complex multi-cloud hybrid environments, which have become the norm for every business. Lumen is fixing all of that by reinventing digital networking, and that is what will fuel the company's long-term financial growth. We see several growth vectors in digital networking. And I'm going to share two that we're going after right now. The first is what's been receiving a lot of attention given the size of the deals we're signing. Lumen is building the backbone for the AI economy. The market now recognizes that AI needs data, data needs data centers, and those data centers need to be connected. And several of the biggest names in technology, including Microsoft, Meta, AWS, and Google have chosen Lumen as their trusted network for AI. We get asked all the time, what does the AI market mean for Lumen? How many of these deals are out there? How long will this growth spurt last? And as I've shared, we see a few phases playing out. In Phase 1, hyperscalers, social platforms, and cloud companies are massively expanding their networks to support data center buildup for their AI model training. As long as these companies keep building data centers, we will have the opportunity to connect them. These deals are deeply accretive to Lumen and well-timed for our transformation. And we shared that we booked more than $5 billion of PCF sales in last quarter's call providing ample liquidity to close near-term funding gaps. And since then, we have booked more than $3 billion in additional PCF sales, giving us the opportunity to use the extra cash to do some deleveraging. We remain in active discussions for more deals like this, and we're going to update you on our progress when they materially affect guidance. And finally, we've established a dedicated operations team to build these next GenAI networks, and they've already broken ground on this exciting work. So, if you're wondering why and how we're able to close more than $8 billion in PCF sales so quickly. I'll share this. Big Tech is choosing Lumen because our geographically diverse conduit-based intra and intercity fiber network was built for this moment, and Lumen's private connectivity fabric just awarded the Competitive Strategy Leadership Award by Frost & Sullivan is a best-in-class architecture that gives customers the control capacity, performance and security they need. And we believe the second phase of AI evolution is starting to emerge as enterprises are beginning to use those AI models at scale, and they recognize the need for major network upgrades. And these enterprises are calling Lumen because they know we connect all three public clouds, and they also see that we are investing in the future networking needs, unlike any other company in the networking marketplace. We believe Lumen has become the thought leader in the space, and it's showing up in our business results. We're seeing an increased demand for higher-performance Lumen services specifically for waves in IP and our large enterprise and midmarket segments with IP sales up 18% year to date and wave sales up over 25% year to date through September for these customers. And that's why we expanded our high-speed IP service to include 400-gig ports in 14 different markets with plans to expand several -- to several more markets this year. Additionally, we currently offer 400-gig waves in over 70 markets across nearly 80,000 route miles with plans to increase Wave's capex to further expand this footprint in 2025. In the third phase of AI evolution, we see AI talking to AI, driving another potential parabolic increase in data workload volume. It's too early to share proof points for the space. But given our network, our digital platform, and our portfolio of intellectual property, we believe that Lumen is well positioned to handle the volume, pace, and complexity of enterprise networking needs, and we are playing to win. Cloudifying telecom is going to disrupt the industry and provide Lumen with another major growth vector. Expanding the Internet and building out the required critical infrastructure, it's just step one. The customers expect to be able to quickly, securely, and effortlessly use that infrastructure. And that's why Lumen is building a digital platform natively integrating with our fiber network to enable enterprises to digitally design, price, order, and consume secured networking in a hybrid multi-cloud world. To our knowledge, no other telco that owns a fiber network is doing this, and we see it as a material differentiator in revenue generation opportunity for Lumen in the future. Now, a year ago, we established a Lumen digital team and launched our flagship Network-as-a-Service or NaaS offering. As of today, over 400 customers have adopted Lumen NaaS, a good start for sure. The NaaS overlay lets our customers get the network pieces they want, when they want it, how they want it in true consumption form. Recent wins for our NaaS product include Agilysys, the BlackStar Group, the Pac-12, and C3Aero, among others, and MEF, formerly known as the Metro Ethernet Forum, just named Lumen the best NaaS provider in North America. Our progress in a short period of time isn't just exciting or encouraging. It has fundamentally repositioned this company. NaaS is just the beginning. With our world-class fiber network, our PCF architecture, exit switch, and an ecosystem of big tech companies, all three clouds, committed to our network for the long haul. We have all the pieces to redefine networking and drive massive value in a multi-cloud hybrid world, which is exactly what our customers want and need. So, to finish up, we have the cash. We have the assets and intellectual property. We have a world-class leadership team and culture. We have a great strategy, and we had a lot of momentum. Lumen's future is very bright. And with that, I'll turn the call over to Chris. Christopher David Stansbury -- Executive Vice President and Chief Financial Officer Thanks, Kate. Lumen continues to move forward along its path to transforming the business. And in the third quarter, we've taken additional steps toward achieving that goal. We signed over $3 billion in incremental PCF deals as we continue to be the partner of choice in building the trusted networks for AI, and we successfully executed a debt exchange terming out over $800 million in 2026 through 2029 maturities to 2032. And we also, given our confidence in the free cash flow generation contributed $170 million to our pensions in the quarter, bringing us to nearly 90% funded. As Kate discussed, we are now at over $8 billion in new PCF sales since June. Our customers have validated Lumen's unique position to build the backbone of the AI economy. But we will not be reporting on specific PCF sales every quarter. We chose to highlight the over $3 billion today for three reasons. First, we're incredibly proud of our team for how quickly they've been able to capture what we believe is a once-in-a-generation market opportunity. We have the right assets and the right people to build the trusted networks for AI. Second, given the incremental size of this over $3 billion, it will positively impact our 2024 guidance for free cash flow, which I will update you on shortly. And lastly, the PCF sales we're announcing today look similar in scope to the previous $5 billion largely sold on existing routes. Future PCF sales will also include new routes with a diverse set of enterprise customers. Given the complexity of these builds, these discussions are ongoing and will take place over several quarters. In the future, we will provide updates to the extent PCF sales have a material impact on our financial guidance. We introduced PCF sales last quarter and updated them this quarter because there was a need for investors to understand our strategy, the market opportunity, and the structure of these PCF deals. We will continue to educate the market on those opportunities for Lumen and the AI economy, while also focusing on the core metrics of sales growth, margin improvement, and free cash flow generation. As we stated last quarter, we believe the progress we've made on driving PCF sales in 2024 is just the beginning of a large new TAM, which brings long-term sticky revenue offsetting higher churn legacy product declines. We're now in the planning stages of constructing these networks, securing the necessary equipment and labor, and we're confident in the cost and margin structure we've estimated for the AI network builds. We estimate the cash received from the first $5 billion in PCF sales provides free cash flow to fuel our business to the point where we expect to reach sustainable positive free cash flow growth. The incremental cash provided by the over $3 billion recently signed contracts provides increased flexibility to delever our balance sheet and continue to address our capital structure in a meaningful way. With respect to the balance sheet, another highlight of the quarter was our successful execution of a debt exchange, terming out over $800 million in 2026 through 2029 maturities to 2032. We now have approximately $1.8 billion of maturities, excluding leases, due through 2028, down from approximately $2.6 billion at the end of the second quarter, and we're not done yet. Now, transformations are messy and particularly in industries where it has never happened before. So, as we move through ours, we strive to bring you the transparency of both the good and less good. In Q1, we said demand for networking was heating up. In Q2, we delivered against that, substantially increased free cash flow guidance, and said there was an additional opportunity. This quarter, we announced progress against that opportunity and increased free cash flow guidance again. Importantly, in both Q2 and today, we're saying our legacy business is declining consistent with industry trends and needs investment to both build our digital future and unlock $1 billion of cost efficiency. The result of which will be lower 2025 EBITDA before improving in 2026. In short, we recognize credibility is critical, and we're taking great care in making sure our messaging is consistent with our delivery. We believe the value creation path for Lumen is clear through additional sales, balance sheet improvements, and cost structure optimization, all as we continue to execute on our core strategic goals of driving operational efficiency, building the backbone for AI, and cloudifying the industry. We recognize we're in the early stages of a significant transformation of Lumen and remain laser-focused on accomplishing the goals we set for themselves. Now, let's move on to the discussion of financial results for the third quarter. Our sales growth engines within our large and midmarket enterprise channels in our business segment, along with our mass market segment showed solid performance this quarter, with large enterprise and midmarket sales up nearly 14% year over year and quantum fiber broadband net additions once again setting an all-time record. While consolidated revenue and adjusted EBITDA still feels the impacts of legacy declines, we're encouraged by improvements we're making in the business as disconnects improved both sequentially and year over year. On a year-over-year basis, total reported revenue declined 11.5% to $3.221 billion. 32% of the decline was due to the impact of divestitures, commercial agreements, and the sale of the CDN business. Business segment revenue declined 12.7% to $2.536 billion and approximately 37% of that decline was due to the impact of divestitures commercial agreements and the sale of the CDN business. Mass Market segment revenue declined 6.9% to $685 million, adjusted EBITDA was $899 million with a 27.9% margin and free cash flow was positive $1.2 billion, benefiting from the cash contribution from recent PCF sales. Next, I'll review our detailed revenue results for the quarter on a year-over-year basis. Within our North America enterprise channel, which is our business segment, excluding wholesale, international, and other, revenue declined 6.9%. Overall, North America business declined 7.5%. Large enterprise revenue declined 8.2% in the third quarter. Our Grow revenue increased 1.6% year over year with continued pressure in Nurture and Harvest product revenue. We expect continued variability and trends as we drive toward overall stabilization. Midmarket revenue declined approximately 6.9% year over year with an improvement in Grow revenue to 5% year over year, offset by Nurture and Harvest. Public sector revenue declined 4% year over year. Public sector revenue can be lumpy quarter to quarter. However, we continue to see traction with large bookings in this space, which takes time to ramp to revenue. And these wins give us continued confidence that public sector will grow year over year in 2024. Wholesale revenue declined approximately 9% year over year. The Harvest portion of the wholesale portfolio, which is comprised of products like TDM voice and Private Line, saw revenue contract by 16.3% year over year in the third quarter. This is primarily driven by telco partners that are selling legacy services. Our Harvest product revenue will likely continue to decline over time and is an area that we will manage for cash. International and other revenue declined 64.8%, driven primarily by the divestiture of our EMEA business, and the sale of select CDN contracts in the fourth quarter of last year. Moving to our business product life cycle reporting, I'll reference the results based on our North America enterprise channels. Higher sales in our Grow product portfolio were led by enterprise broadband, dark fiber, and IP. These sales were offset by declines in Nurture and Harvest, resulting in an overall decline of 6.9% year over year. While results can vary in any quarter, we expect sustained growth in the Grow product revenue as we execute on our core turnaround. Within North America enterprise channels, Grow products revenue increased 4% year over year, up from 1.5% year over year last quarter. Grow represents approximately 45% of our North America enterprise revenue and for our total business segment carried an approximate 80% direct margin this quarter. Nurture products revenue decreased 15.2% year over year, largely impacted by declines in VPN and Ethernet. Nurture represents 29% of our North America enterprise revenue and for our total business segment carried an approximate 67% direct margin this quarter. Harvest products revenue decreased 14.1% year over year and continues to be negatively impacted by declines in TDM-based voice. Harvest represented approximately 16% of our North America enterprise revenue in the second quarter. For our total business segment, it carried an approximate 73% direct margin this quarter. Other product revenue declined 11.1% year over year. And as a reminder, other product revenue tends to experience fluctuations due to the variable nature of these products. Now, moving on to mass markets. Our fiber broadband revenue grew 16.6% year over year and represents approximately 40% of mass market broadband revenue. During the quarter, fiber broadband enabled location adds were 131,000, bringing our total to over $4 million as of September 30 and pacing toward our targeted annual 500,000 build target this year. We also added 43,000 Quantum Fiber customers, which is our best fiber net add quarter reported to date, and this brings our total to over 1 million. Fiber ARPU was $62, flat sequentially and up slightly year over year. This is just outstanding work by that team. At the end of the third quarter, our penetration of legacy copper broadband was approximately 9%, and our Quantum Fiber penetration stood at approximately 26%. As we look ahead, we'll continue our market-by-market assessment of the mass markets business as we explore a range of strategic options to maximize its value. Those options include potential joint ventures, wholesaling arrangements, or future divestitures to generate incremental cash. Now, turning to adjusted EBITDA. For the third quarter of 2024, adjusted EBITDA was $899 million compared to $1.049 billion a year ago. Third-quarter EBITDA was negatively impacted by legacy revenue declines, seasonally high operating expenses as well as some start-up costs associated with our custom networks group. For the third quarter of 2024, our adjusted EBITDA margin was 27.9%. EBITDA margins declined 90 basis points year over year compared to a 270-basis-point year-over-year decline in the second quarter. Special items impacting adjusted EBITDA totaled $56 million. The majority of special items this quarter were related to transaction and separation costs. Capital expenditures were $850 million and free cash flow, excluding special items, was positive $1.2 billion. As we previously stated, we're leaning into our network investments to support the rapid growth and demand our customers are facing while improving our overall cost structure. Now, moving on to our financial outlook. We continue to estimate FY '24 EBITDA to be in the range of $3.9 billion to $4 billion. However, given the overall trends in the business and initial cost impacts from the incremental PCF sales, we see FY '24 EBITDA at the low end of that range. As we said previously, we expect EBITDA to decline year over year in 2025 as a result of continued legacy declines, start-up costs for PCF contracts, and incremental transformation costs with a longer-term goal of improving the broader cost structure. 2024 capex is expected to be in the range of $3.1 billion to $3.3 billion and cash interest in the range of $1.15 billion to $1.25 billion. Lastly, we're raising our free -- our 2024 free cash flow guidance from $1 billion to $1.2 billion to $1.2 billion to $1.4 billion. This guidance includes some incremental opex, capex, and cash flows associated with our PCF sales growth as well as incremental spending to ultimately improve our cost structure and margins. And with that, I'll turn it back to Kate for closing remarks. Kate Johnson -- President and Chief Executive Officer Thanks, Chris. I know what we're saying is different than what everyone else in the industry is saying. It's going to take some time for the growth vectors I talked about to overcome the secular headwinds and show up in our financials, but we're confident that our plans will achieve exactly that. And we appreciate you taking the time to understand our story. Thank you. [Operator instructions] Thank you. Your first question comes from the line of Michael Rollins with Citi. Your line is open. Michael Rollins -- Analyst Thanks, and good afternoon. I wanted to just ask on some of the PCF disclosures. There were three new customer announcements over the last few weeks. Did those specifically relate to these new sales in this quarter, or did that relate to the prior initial $5 billion? And then Kate, you mentioned at the beginning of the call, some details where you're seeing improvements in the business sales. And just curious where that's coming from. Can you give us maybe an update on the marketing and distribution? And are these PCF sales also providing you with a magnet to get additional wins from these hyperscale customers? Thanks. Kate Johnson -- President and Chief Executive Officer Yeah, for sure. So, thanks, Mike. Basically, the four customer stories that we told come from the $8.5 billion in total, and we're not going to differentiate between buckets. But they are a magnet, very much so. When you get all three clouds in the bag, you've got yourself an ecosystem. You couple that with a digital platform to make it easy to consume the services that you're running on that infrastructure, and you've got something pretty special. It's different than what everybody else is doing. We've got the cash to do it. So, we're super excited about that. Regarding the uptick in IP and waves, particularly at the higher capacity levels, it's purely an indication that our customers are recognizing a need for expanded networks because of the workloads we're running. We don't have specific data to say it's all AI. That is a conversation and the signals we're getting from the conversations that we're having with our customers. And so, we think it fits perfectly in line with that trajectory we talked about. First, the big tech builds the networks and the AI models and train them. The second step is these customers are saying, I'm using these models to transform my business and I'm having a massive uptick in my own networking needs. I think we've realized that every AI strategy needs a network strategy, and customers are coming to Lumen because we become a thought leader. Your next question comes from the line of Sebastiano Petti with JPMorgan. Your line is open. Sebastiano Petti -- Analyst Hi. Thank you. A quick how keeping on the incremental PCF announcement. Should we think about that broadly as having a similar timeline to what was discussed last quarter as we're thinking about contribution and the IRU constructs that you kind of laid out last time? I know you kind of said they're similar to the last deal, but just trying to think about timing as they kind of come on because it does seem as though part of that cash was probably reflected in the free cash flow upgrade. I just want to -- just housekeeping there. Christopher David Stansbury -- Executive Vice President and Chief Financial Officer Christopher David Stansbury -- Executive Vice President and Chief Financial Officer Yeah. You're exactly right. If you just look at the shape of those deals, the incremental deals that were signed this quarter in terms of the margins, the cash flows, how all that will work, the timing, it looks very similar to what we did on the $5 billion. So, I think that's a good way to model it. Sebastiano Petti -- Analyst OK. That's helpful. And then thinking about -- I mean, just you did guide to the lower end of the 2024, your guidance range does imply a pretty decent acceleration sequentially even to kind of get to that point. Anything specifically that we should be thinking about there as it pertains to just maybe coming -- cost cuts kind of coming online or anything that we should be thinking about from a timing perspective? Thank you. Christopher David Stansbury -- Executive Vice President and Chief Financial Officer Yeah. It's really more, I would say, the seasonality like that we see in the summer months. We obviously have more construction, maintenance, higher energy costs, and that abate somewhat in the fourth quarter. We also made some intentional investments in the quarter to help accelerate the work that we need to do to go capture the $1 billion. And so, when you look at the timing of those things, that's what gives us confidence in delivering on the lower end of the guidance for the year. Operator Thank you. The next question comes from Batya Levi with UBS. Your line is open. Batya Levi -- Analyst Great. Thank you. In terms of the incremental PCF sales that you signed, should we assume that they're mostly big tech? Or are you starting to see a little bit of enterprise demand as well? And just to confirm, I think you mentioned that this new mix will be on the existing construct that you're building for the original PCF deal. Does that mean that capex requirements would be pretty much included in the original deal? And how should we think about the prepaid revenue mix of the incremental sales? Thank you. Kate Johnson -- President and Chief Executive Officer Well, I'll cover the first part. You cover the second part, Chris. Christopher David Stansbury -- Executive Vice President and Chief Financial Officer So, the customer mix, we shared last quarter that it's more than 15 customers. We're in these tranches. We had some repeat business. We have some new business. So, it's a mix. Predominantly, those customers are building AI models. And if you look at some of the logos that we shared that are standing side by side with us going long on our strategy, it's all three clouds and a large social platform. And what those companies are reporting or massive infrastructure investments to build out the infrastructure for AI, and they're coming to Lumen. That's the story. The second piece of the next wave is really enterprises. And they're not buying at the same size because they're not planning on commercializing their AI models for the most part. They're using to transform their own business and maybe some of their own products and services that they offer their customers. So, it's not the same size and build-out as the hyperscalers and the social platforms. Christopher David Stansbury -- Executive Vice President and Chief Financial Officer Yeah. And on the second piece of the question, Batya, I would say -- so of the total kind of $12 billion opportunity set, the $8.5 billion that we've talked about today that we've secured to date really does look the same. So, I would say that the same ratio of capex to sales value, the amount that's recurring versus the amount that's upfront, I would use those same parameters that we shared last quarter. What you see in terms of the impact for this year is just timing of cash flows where given the time of the year those were signed, we do have some inflows coming this year, but we'll incorporate a lot of that capex, obviously, in the next year's guidance when we give 2025 guidance. I think the important thing is, is that as we move forward from here, as we said at a number of investor conferences, the second half of that $7 billion opportunity or new networks, just like we built, the difference is they're on new routes rather than existing routes. Those economics will look different. We're in the middle of multiple conversations with customers around that. And as we get better cost estimation around that, we'll update guidance and give you guys more clarity. But that will probably be something that takes a few quarters until we have that locked down. The next question is from Jim Schneider with Goldman Sachs. Your line is open. Jim Schneider -- Analyst Good afternoon. Thank you for taking my question. I was wondering if you could maybe just clarify on the incremental $3 billion of the $7 billion you talked about. Does that mean that there's $4 billion of pipeline left to go, as you mentioned? Or is there an incremental pipeline above and beyond the first $7 billion that you had seen before to sort of extend that beyond the $12 billion total pipeline? And then maybe as a second question, can you maybe just kind of comment on your mass market business? And given the amount of deal activity there, maybe clarify whether you're seeing any kind of firm indications of interest and potential interest in acquiring that asset. Thank you. Christopher David Stansbury -- Executive Vice President and Chief Financial Officer Sure, Jim. So, really, just so we're all on the same page. In the $7 billion of opportunity, we said today that we had secured over $3 billion of that. So, let's just call that roughly half. Of the remainder, that's really new routes. As I just mentioned in my previous answer that's going to take multiple quarters. Now, there continues to be customer interest in not just new routes but existing routes. We're not going to continue to update pipeline because it really is now normal course of business. And we want to be in that motion. The entire point of talking about the $5 billion and the $7 billion was to alert the market with points of validation that what we've been saying earlier this year was, in fact, true. This is a significant opportunity. It remains a significant opportunity, and we'll report against it. So, you're going to see us get into a cadence of communicating updates really as it impacts guidance because of where we are in the process. Now, on the consumer side, I guess, just a few thoughts. First, I want to emphasize the great work by the team, and we're not the only ones that noticed that. The rest of the world is starting to notice what this team is doing on execution as it relates to enablement and penetration, and we couldn't be happier with the work they're doing. Now, we've also said a couple of things, right? We have said for years now that this was a space that should and would eventually consolidate. And I think we're starting to see that happen today. And we've also said that we've got two great businesses in our enterprise business and our consumer business, that we have a responsibility to invest in both, but that ultimately, they don't strategically belong together. They've got two different return profiles. And at the right time, we would make the decision to separate them. Now, we don't have any news to report today. What I will say is, at your conference and other conferences, we've been pretty clear about what the economics of the consumer business are. When you look at it between copper and fiber. So, I would leave it up to all of you to do the modeling and determine how significant an impact you think that would be on our ability to delever the company and focus as an enterprise company. Operator Thank you. The next question comes from Jonathan Chaplin with New Street. Your line is open. Jonathan Chaplin -- Analyst Thanks, guys. A quick follow-up on that, Chris, and then I've got just a network question as well. So, on the sort of thought process around the sale of mass markets. One thing I think you had been considering was separating out the fiber business from the rest of mass markets. And I'm wondering if you could give us just a little bit of context for how you would sort of accomplish that, the physical separation of those networks? And how that would work? And then maybe a little bit more of a difficult question, but it would be great to get some context for the network overall and how much of it has been consumed by these PCF contracts. So, from memory, I think Level 3 initially had 12 conduits, put fiber into -- and we've heard that some of the conduits have been sold or have been sort of given -- the rights to them have been given away in these new PCF contracts I'm wondering how many have gone, how many you've got left that would be -- yeah. Thank you. Kate Johnson -- President and Chief Executive Officer Yeah. So, I'll take the second question first. So, as we were so clear on the last earnings call, we have not sold any of these assets. These are long-term leases of conduit, sometimes just fiber, sometimes both. It's new networks on existing routes. It's building net new routes, putting new conduit in the ground, etc., and we strategically plan with our customers and with our own business modeling, when we should, in fact, put more conduit in the ground or less conduit on the ground. And I want to call your attention to a very, very strategic partnership that we did with Corning to utilize their new fiber solutions which as much as quadruples the capacity of our existing network. We have all the right network in all the right places. And we've got access to the best fiber in the world to continue to grow with and for our customers. Additionally, any of these long-term leases on those routes, these customers of ours, these are deep partnerships. They do not, by contract, have the right to compete with us in those spaces. So, just to demystify because I saw a few reports that had it very, very wrong, OK? So, these are great deals, huge cash infusion. We're super excited. They're giving us the jet fuel for this rocket. Now, Chris, do you want to talk about consumer? Christopher David Stansbury -- Executive Vice President and Chief Financial Officer Yeah. And on consumer, look, I don't want to get into a lot of details here because we don't know what we don't know. And we'll obviously tell you what we can, when we can. But I will reiterate what we have said publicly. And you need to think about the consumer business as two businesses. You have a copper business that generates most of the EBITDA and you have a fiber business that consumes most of the capex. So, they're in -- you can do the modeling. The reality is it's definitely possible to separate. Nothing is easy, obviously, but I would say we've done harder things. And I think we've proven to the market that we're not afraid of doing hard things. So, we'll see where that takes us, but that's all I can really comment on at this point. Jonathan Chaplin -- Analyst Chris, does the Ziply transaction change what you think that asset is worth? Christopher David Stansbury -- Executive Vice President and Chief Financial Officer I think the transactions that are taking place in the market more broadly, our validation of our thesis that consolidation needs to happen and there's tremendous value in these assets. And we have an asset that is sizable in this consolidation play. And so, I'll let you do the math on that. The next question comes from David Barden with Bank of America. Your line is open. David Barden -- Analyst Hey, guys, thank you so much for taking my questions. I appreciate it. So, two if I could. The first is on the $3 billion, Chris, you kind of elaborated that this is going to look a lot like the $5 billion deal that you did before. You gave us a lot of math that we could do around that. $5 billion and the net of it was that about 15% of that or $800 million of the $5 billion came in over a three- to four-year construction period and then another 5% came in over a further 20 years in terms of hiring maintenance and stuff. So, there's $3 billion, just like that. It would be about a $500 million cash contribution over the build period, which would be '26, '27, '28 or so. And then another amount that would come out over the next 20 years. And you suggest that there's a lot of wiggle room that's been created with that new deal to address balance sheet issues. And it doesn't sound like it from the numbers, if they're related to the $5 billion. But what is clear is that you did get a lot of upfront money before you have to spend it from these partners. And I'm wondering if that's what you're talking about. Are you using some of this upfront payment money to do things with the balance sheet before you then come back and spend it to go do their build-out projects? So, that would be my first question if I could. Christopher David Stansbury -- Executive Vice President and Chief Financial Officer Yeah. No, and I'm glad you asked it, David. And look, I've been here two and a half years. Kate's been here a couple of years. And I put it in my prepared remarks for a reason because there's a lot of stuff being written that I think is calling into question our credibility and our intentions with all of this. And I want to be exceedingly clear. We are not going to message anything to the market that is off base from what we can deliver. And so, the way I would characterize it, rather than getting into specific pieces of math, number one, no, we are not spending other people's money to delever the balance sheet and then come back and have to reraise debt to go build these networks. We're not doing that. I want to be exceedingly clear. But the $5 billion, when we model out our transformation objectives and the investments required, which includes the investments to turn around the business and invest in our future, investments in things like pension and the payment of debt as it matures, the $5 billion close that funding gap, as we said. The $3 billion, with that box checked, the deals that constitute the $3 billion give us now more flexibility to go and reduce debt. And remember, we started all of this with cash on the balance sheet. So, you have to take all three pieces. Cash on the balance sheet before the $5 billion -- the $5 billion to $3 billion. And when you look at all of those sources, we have ample cash to start to delever the company. And you'll hear more from us on that when we can tell you, but you will see us start to delever the company from these deals. David Barden -- Analyst Got it. Thank you. And then I guess my second question is maybe a little bit of a housekeeping question. As we think about your comments about the obvious need to step up the EBITDA in the fourth quarter at a minimum, it's got to be about $1 billion as a jumping-off point for 2025. You've talked to us about how 2025 is going to be down. I guess I'm trying to figure out how far is down. And then looking at the 4Q 2023 EBITDA, I know there's been a lot that was in there that was extracted, right, that came out because of all the deals. Could you give us a starting point for thinking about from a kind of apples and apples 4Q '23 to 4Q '24, what that might look like? And would that be an appropriate kind of trajectory to think about how the 2025 down year plays out? Thank you. Christopher David Stansbury -- Executive Vice President and Chief Financial Officer Yeah. So, I don't want to get too much into '25 guidance right now for obvious reasons because we are still quantifying what we see as the need to invest in both the deals. And -- because, by the way, we haven't said this yet, so I'll say it here, the customers that assign these contracts, particularly in that first set are calling us and asking us if we can go faster. And so, there's discussions around that. So, we're trying to finalize that, trying to finalize the investments required on the $1 billion takeout and what we need to do there. I would say that at this point, if I look at kind of street averages probably a little high versus expectations for next year. But at the same time, as I've said, we want to give you '26 when we give you '25 because I think '26 will be a fairly significant inflection point given our ability to take cost out. So, those are the things we said. And I think until we get a little further along, I don't want to go further than that because we've got work to do. Your next question comes from Nick Del Deo with MoffettNathanson. Your line is open. Nick Del Deo -- Analyst Hi. Thanks for taking my questions. First, you shared metrics that suggest much better sales in North America enterprise over the last several quarters. When do we start to see that flow through into the P&L in a more noticeable way? And then, Kate, you had also mentioned you had over 400 NaaS customers signed up, which was good to hear. I mean, obviously, it's early, but I guess to what degree is NaaS contributing incremental revenue either because those are new customers that came to you because of NaaS or their existing customers that are spending more because of the product? Thank you. Kate Johnson -- President and Chief Executive Officer Yeah. I'll take the second one, Chris, I'll pass the first one to you. So, starting with the NaaS customer. So, we're building a new digital platform, and the focus is about driving adoption, that's about customer obsession. It's about what capabilities do they need. We're super lucky to have the network that we do because everything we build on that digital platform is integrated into it natively. And so, we can achieve the right economics and massive delta of capabilities compared to other offerings in the marketplace from those companies that simply don't have a network. And they, frankly, come to us to fill the circuits underneath their portal. And so, it's very exciting, but we're going to stay focused on getting as many customers on there as possible. I think what we're seeing is customers testing it. I'll try one port. I'll try two ports. As they have a good experience, they start to add ports. And that's where we start to innovate and drive additional service innovation, like Lumen Defender, for example, is an opportunity for us on the horizon to sell into every NaaS customer, etc. That's the storyboard. How it impacts revenue, we're not going to give transparency to that for a while. We're simply not ready to. We have models that suggest that this is going to be very accretive over time, but it will take time to get to scale. That's true for every cloud business. Right? And we're using the cloud methodology to figure this thing out and plan it. So, Chris, do you want to talk Nick's first question? Christopher David Stansbury -- Executive Vice President and Chief Financial Officer Yeah. And so, typically, Nick, we would expect to see sales convert to revenue in about a three-month time window. Now, obviously, as we go forward and we're selling more digital services that narrows, which is one of the benefits, but we're a ways from that. I would say this. In the Grow bucket, as we said, last quarter, we only grew 1.5% year over year. This quarter, it's 4%. So, I think that's encouraging. We have to watch that closely. So, we don't -- there's not enough of a trend line there yet, but that's what we're watching. But I also want to be really realistic here, and it's a good problem to have. We have a legacy business that's enormous. It generates an enormous amount of cash, which is part of how we're able to invest in our future. That legacy business, given its size, will continue to offset the growth that we see in those Grow buckets. So, I don't -- I don't expect in the near term given what's going on in the industry, I've commented on what I think is some bad rerate behavior in some cases that's driving customer disconnects. I think those things will continue, and that will continue to weigh on total revenue. But I think if we look at things like the NPS scores, the sales, the fact that disconnects at least in the near term, appear to be stabilizing, I hope that that starts to show a slight improvement in the rate of decline as we move forward over the coming quarters. Operator The next question is from Greg Williams with TD Cowen. Your line is open. Greg Williams -- Analyst Great. Thanks for taking my questions. Just back on the potential mass market sales where you're splitting the fiber off from the copper, just wondering if you can provide an update on potential dissynergies. I remember when you guys sold off the assets to Brightspeed, you mentioned there were some dis-synergies there, but there wasn't a lot of enterprise overlap. In this situation, you'll have six or seven markets where you're heavily overlapped with enterprise. I'm just wondering if there's going to be a greater level of dissynergies as a result. Second question is on just -- yeah, go ahead. And I have a follow-up. Christopher David Stansbury -- Executive Vice President and Chief Financial Officer So, second question is actually separate. It's on the North American enterprise. I noticed that the Nurture bucket was actually declining faster than the Harvest bucket. You mentioned that VPN and Ethernet had some impacts, but I found that kind of interesting and just wondering if you can help us understand that dynamic. Christopher David Stansbury -- Executive Vice President and Chief Financial Officer Yeah. So, a few things. So, on the first one, one of the benefits of CenturyLink and Level 3 being put together is there are routes that came from CenturyLink that frankly, Lumen would never sell. They're going to be critical for our enterprise delivery going forward. So, I think there's -- without getting too specific, I think there's ways for us to make sure that we continue the synergies that existed before. The other thing is, look, just like on the enterprise business where we talk about the simplification and better customer experience we can bring by unifying four networks. There's work we can do on legacy copper in the consumer -- on the consumer side as well. So, I would say that's less of a concern at this point. But again, more to follow as we have more to share. As it relates to what happened in Q3. The reality is that that Nurture bucket really is VPN and Ethernet. Nothing specific really to point to. We do have migration plays in place, new migration plays to help move many of those VPN and Ethernet customers to newer services. That has not yet hit. So, that's an area of focus we have as well. But I would say there was nothing significant that you could point to that move the needle. The next question comes from Frank Louthan with Raymond James. Your line is open. Frank Louthan -- Analyst Great. Thank you. Can you give us an idea of the annual revenue on wavelengths and what the margins are on those relative to your other products? And then -- the contracts of this nature tend to see some expansion over time, they're already telling you to go faster. What do you think is the potential for some upside to this $8 billion? And over what time frame do you think you'll start to see some of that creep? Thanks. Christopher David Stansbury -- Executive Vice President and Chief Financial Officer Yeah. So, on the $8 billion, nothing really to share at this point because we're still in those conversations about how much faster we can go and what that means for us. I would simply say that, again, the reasons why customers are here is because of their confidence in our ability to build these networks for them. And they are calling us because they know of our capabilities, and I know it's possible that we could go faster. So, that's something that they're willing to participate in with us. And as we know more, we'll share it. And I'm sorry, what was the first question again? It's been a long day, Frank. Christopher David Stansbury -- Executive Vice President and Chief Financial Officer Yeah. We're not at the point yet where we're disclosing individual product details. As we go forward, it's something we're looking at. I think it's a little bit early. But in time, I think we'll probably come to a different way of looking at it that we'll ultimately share with you guys. But it's too early yet and we don't go below, Grow Nurture, Harvest at this point, and that's what we're going to stick with for now. Thank you. Your final question will come from Eric Luebchow with Wells Fargo. Your line is open. Eric Luebchow -- Analyst Great. I appreciate you squeezing me in. So, just a follow-up on the mass markets business. As this -- we've alluded to on the call, a lot of recent announcements and deal activity from a lot of private overbuilders. So, as you look at your footprint today, I think you have roughly 18 million homes, copper homes. How does some of those recent competitive activity or announcements plan to how attractive you think that future growth opportunity is either by you or a partner? And how you think about what could be built out with fiber at attractive economics? Christopher David Stansbury -- Executive Vice President and Chief Financial Officer Yeah. We've -- so what we've said publicly that of those 18 million, again, there's a fairly sizable piece that's rural. But there is the 8 million home potential, I think, is reasonable. Maybe it's a little more, maybe it's a little less. We're at 4 million right now. So, the reality is that the markets where fiber is being built are really attractive markets. And if you look at the size of our fiber footprint today and you look at the potential fiber footprint, we are the largest asset out there, that has yet to be consolidated. So, those are the facts, and we'll see where we go from here. Eric Luebchow -- Analyst Appreciate that. And just a follow-up. You touched on -- the funding gap is closed and now you have more flexibility. Is that another way of saying you think Lumen will be kind of consistently free cash flow positive from here? I'm just trying to think about, obviously, a lot of puts and takes into next year. You talked about EBITDA lower. Presumably, capex a bit higher from some of the PCF sales ramping and then obviously kind of a wildcard on PCF contributions next year. But just any kind of directional help you can provide on what free cash flow could look like? Christopher David Stansbury -- Executive Vice President and Chief Financial Officer Yeah. No, it's a great question. Thank you for asking it. The answer is yes. I mean, when we said that we were funding the gap and we talked about the additional things we could do with the cash that comes from the $3 billion, we will be generating positive free cash flow. Now, I want to be really clear on one thing. That's cumulative. Because of the impact of tax payments and the timing of capex, there could be, and I just don't have enough information yet to be able to share it. There could be a year where maybe we're free cash flow negative, but we will have received the cash in advance of that, and we'll plan accordingly. It's just that the size of the tax payments and the quantum of the capex that will get spent. It's going to be really lumpy, and it's going to be lumpy quarter to quarter. It's going to be lumpy year to year. But cumulatively, yes, free cash flow positive. And especially with the $1 billion cost takeout even with the pressures on revenue, we're confident in making that statement. Christopher David Stansbury -- Executive Vice President and Chief Financial Officer This concludes the question-and-answer session. I'll turn the call to Kate for closing remarks. Kate Johnson -- President and Chief Executive Officer Thanks, everybody, for digging in and taking the time to understand our unique story. We look forward to meeting you at the upcoming conferences and updating you on the significant progress we're making. See you soon.

Earnings call: Lumen Technologies reports growth amid transformation By Investing.com

Lumen Technologies (NYSE: LUMN), in its recent Third Quarter 2024 Earnings Call, outlined its ongoing transformation into a digital network services provider. CEO Kate Johnson and CFO Chris Stansbury shared updates on the company's growth trajectory, emphasizing a nearly 14% sales increase in North American enterprise and mid-market segments, and a notable rise in customer satisfaction. Despite an 11.5% revenue decline year-over-year, due to legacy product declines, the company reported significant new sales in private connectivity fabric (PCF (LON:PCF)), improvements in free cash flow projections, and a strategic focus on AI infrastructure development. In summary, Lumen Technologies is navigating a period of transformation, balancing legacy revenue declines with strategic growth in digital and AI network services. The company's leadership is focused on leveraging new sales opportunities and cost reduction strategies to improve free cash flow and position Lumen for long-term success. Lumen Technologies' (NYSE: LUMN) recent earnings call paints a picture of a company in transition, and InvestingPro data provides additional context to this narrative. Despite the reported 11.5% year-over-year revenue decline, Lumen's stock has shown remarkable resilience. InvestingPro data reveals a significant 476.52% price total return over the past year, indicating strong investor confidence in the company's transformation strategy. The company's focus on AI infrastructure development aligns with its high EBIT valuation multiple, suggesting that the market is pricing in future growth potential from these initiatives. This is further supported by an InvestingPro Tip noting that Lumen's valuation implies a strong free cash flow yield, which could be attractive to investors looking for value in the telecom sector. However, it's important to note that Lumen faces challenges. An InvestingPro Tip indicates that analysts anticipate a sales decline in the current year, which aligns with the company's reported revenue challenges. Additionally, the company is not currently profitable, with a negative P/E ratio of -10.05 for the last twelve months as of Q3 2024. For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips for Lumen Technologies, providing a deeper understanding of the company's financial health and market position. Operator: Greetings, and welcome to Lumen Technologies' Third Quarter 2024 Earnings Call. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to Jim Breen, Senior Vice President, Investor Relations. Jim, please go ahead. Jim Breen: Good afternoon, everyone, and thank you for joining Lumen Technologies' third quarter 2024 earnings call. On the call today are Kate Johnson, President and Chief Executive Officer; and Chris Stansbury, Executive Vice President and Chief Financial Officer. Before we begin, I need to call your attention to our Safe Harbor Statement on slide one of our third quarter 2024 presentation, which notes that this conference call may include forward-looking statements subject to certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements and the risk factors in our SEC filings. We will be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures, which can be found in our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials, which can be found in our Investor Relations section of our Lumen website. With that, I'll turn the call over to Kate. Kate Johnson: Good afternoon, everyone, and thanks for joining. Lumen's third quarter headline is this: the transformation is happening, we are making progress in our journey to turn Lumen into a digital network services company with simple and modern product offerings, infrastructure, and operations. We are pursuing two major growth factors: building the AI backbone and cloudifying telco, and has made material progress with each. With that said, and as expected, our financial performance still reflects the secular headwinds on our legacy revenues. We are also investing heavily in transformation programs, while running the core business, which weighs heavily on our EBITDA results. And we have fully recognized we have a long way to go on this journey, and we understand that our current financial results coupled with the fact that telcos and the industry are not talking about a turnaround, making it difficult to imagine long-term success for Lumen. But our team sees a clear path to turn this company around. We have a plan to take cost out, de-leverage our balance sheet, and drive growth by using our asset and intellectual property to give enterprise customers new value in a multi-cloud hybrid architecture environment. All of this will take time to execute, and it will take time to show up in our financials. But the path is real, and today I want to share more on the opportunity ahead, and what we have accomplished so far. I'll be covering three topics. One, how we are continuing to drive operational efficiency with sales growth and higher customer sat in our core business to ensure we maximize cash generation, customer life and value, and cost out. Number two, how Lumen is building the backbone to the AI economy, adding more than $3 billion in incremental private connectivity fabric sales in partnership with the biggest names in the technology industry. And number three, how Lumen digital is cloudifying the industry, driving NaaS adoption to well over 400 customers, and positioning the company for high-value digital revenue growth. With our operational turnaround, we continue to see solid sales performance in the third quarter with North American large enterprise and mid-market sales up nearly 14% year-over-year, with our notable strengths in IP sales, up 18% year-to-date, and 100 and 400-gig wave sales, up 50% year-to-date through September. To complement these sales results, once again, we saw significant year-over-year improvement in customer sat scores for every one of our enterprise customer channels, as measured by transactional net promoter scores, 17 points for large enterprise, up 11 points for wholesale, 28 points for mid-market, and a whopping 98 points for public sector. We continue to improve our efforts to secure the base by focusing on five key leverage of installs, renewals, migration, usage, and disconnects. And while installs were down slightly in the quarter, we did see a 14% sequential improvement in disconnects with total disconnects being at their lowest level in over five quarters. In NaaS markets, the team continues to execute well, and drive increased value for our consumer segment, and once again, had record quarter for fiber net adds. Finally, last quarter, we announced $1 billion cost take up by the end of 2027 by unifying our network from four architectures to one, allowing dramatic simplification of our product portfolio and IP estate. While this work is incredibly complicated, given our long history of mergers and accumulation of tech debts, we are on track to developing the plan to execute. And as we have said, these cost-out efforts will require upfront spending with a backend loaded cost takeout curve. We'll provide further details on this important work as we progress. To summarize, we're pleased with how we're galvanizing Lumen's core network services business, how we're driving growth in Quantum Fiber, and how we're simplifying and modernizing the company. But I want to be clear here. We are not here to find revenue growth in legacy telco. All of our transformation work is in service to customers who need and want to leverage technology like Gen AI to transform their business. And the legacy networks of yesterday just won't serve tomorrow's enterprise. They're not big enough, they're not fast enough, and they're not secure enough. And of course, the customer experience in legacy telco is neither quick nor effortless, especially in complex multi-cloud hybrid environments, which have become the norm for every business. Lumen is fixing all of that by reinventing digital networking, and that is what will fuel the company's long-term financial growth. We see several growth vectors in digital networking, and I'm going to share two that we're going after right now. The first is what's been receiving a lot of attention given the size of the deals we're signing. Lumen is building the backbone for the AI economy. The market now recognizes that AI needs data, data needs datacenters, and those datacenters need to be connected. And several of the biggest names in technology, including Microsoft (NASDAQ:MSFT), Meta (NASDAQ:META), AWS, and Google (NASDAQ:GOOGL) have chosen Lumen as their trusted network for AI. We get asked all the time, what does the AI market mean for Lumen? How many of these deals are out there? How long will this growth spurt last? As I've shared, we see a few phases playing out. In Phase 1, hyperscalers, social platforms, and cloud companies are massively expanding their networks to support data center buildups for their AI model training. As long as these companies keep building data centers, we will have the opportunity to connect them. These deals are deeply accretive to Lumen and well-timed for our transformation. And we shared that we booked more than 5 billion at PCF sales in last quarter's call, providing ample liquidity to close near-term funding gaps. And since then, we have booked more than 3 billion in additional PCF sales, giving us the opportunity to use the extra cash to do some deleveraging. We remain in active discussions for more deals like this, and we're going to update you on our progress when they materially affect guidance. And finally, we've established a dedicated operations team to build these next-Gen AI networks, and they've already broken ground on this exciting work. So, if you're wondering why and how we're able to close more than 8 billion in PCF sales so quickly, I'll share this. Big Tech is choosing Lumen because our geographically diverse conduit-based intra and intercity fiber network was built for this moment. And Lumen's private connectivity fiber just awarded the Competitive Strategy Leadership Award by Frost & Sullivan, is a best-in-class architecture that gives customers the control, capacity, performance, and security they need. And we believe the second phase of AI evolution is starting to emerge as enterprises are beginning to use those AI models at scale, and they recognize the need for major network upgrades. And these enterprises are calling Lumen because they know we connect all three public clouds, and they also see that we are investing in the future networking needs, unlike any other company in the networking marketplace. We believe Lumen has become the thought leader in the space, and it's showing up in our business results. We're seeing an increased demand for higher-performance Lumen services, specifically for Waves and IP in our large enterprise and mid-market segments, with IP sales of 18% year-to-date and Wave sales of over 25% year-to-date through September for these customers. And that's why we expanded our high-speed IP service to include 400-gig ports in 14 different markets, with plans to expand to several more markets this year. Additionally, we currently offer 400-gig Waves in over 70 markets across nearly 80,000 route miles, with plans to increase Waves CapEx to further expand this footprint in 2025. In the third phase of AI evolution, we see AI talking to AI, driving another potential parabolic increase in data workload volume. It's too early to share proof points for this phase, but given our network, our digital platform, and our portfolio of intellectual property, we believe that Lumen is well-positioned to handle the volume, pace, and complexity of enterprise networking needs, and we are playing to win. Cloudifying telecom is going to disrupt the industry and provide Lumen with another major growth sector. Expanding the Internet and building out the required critical infrastructure is just step one, but customers expect to be able to quickly, securely, and effortlessly use that infrastructure, and that's why Lumen is building a digital platform, natively integrating with our fiber network, to enable enterprises to digitally design, price, order, and consume secure networking in a hybrid multi-cloud world. To our knowledge, no other telco that owns a fiber network is doing this. And we see it as a material differentiator and revenue generation opportunity for Lumen in the future. A year ago, we established a Lumen digital team and launched our flagship Network-as-a-Service or NaaS offering. As of today, over 400 customers have adopted Lumen NaaS, a good start for sure. The NaaS overlay lets our customers get the network pieces they want, when they want it, how they want it, in true consumption form. Recent wins for our NaaS product include Agilisys, the Blackstar Group, the PAC-12, and C3Aero, among others. And MEF, formerly known as the Metro Ethernet Forum, just named Lumen the best NaaS provider in North America. Our progress in a short period of time isn't just exciting or encouraging. It has fundamentally repositioned this company. NaaS is just the beginning. With our world-class fiber network, our PCF architecture, ExaSwitch, and an ecosystem of Big Tech companies, all three clouds, committed to our network for the long haul, we have all the pieces to redefine networking and drives massive value in a multi-cloud hybrid world, which is exactly what our customers want and need. For the finish up, we have the cash, we have the assets and intellectual property, we have a world-class leadership team and culture, we have a great strategy, and we have a lot of momentum. Lumen's future is very bright. And with that, I'll turn the call over to Chris. Chris Stansbury: Thanks, Kate. Lumen continues to move forward along its path to transforming the business. And in the third quarter, we've taken additional steps towards achieving that goal. We signed over $3 billion in incremental PCF deals as we continue to be the partner of choice in building the trusted networks for AI. And we successfully executed a debt exchange, churning out over $800 million in 2026 through 2029 maturities to 2032. And we also, given our confidence in the free cash flow generation, contributed $170 million to our pensions in the quarter, bringing us to nearly 90% funded. As Kate discussed, we are now at over $8 billion in new PCF sales since June. Our customers have validated Lumen's unique position to build the backbone of the AI economy. While we will not be reporting on specific PCF sales every quarter, we chose to highlight the over $3 billion today for three reasons. First, we're incredibly proud of our team for how quickly they've been able to capture what we believe is a once-in-a-generation market opportunity. We have the right assets and the right people to build the trusted networks for AI. Second, given the incremental size of this over $3 billion, it will positively impact our 2024 guidance for free cash flow, which I will update you on shortly. And lastly, the PCF sales we're announcing today look similar in scope to the previous $5 billion largely sold on existing routes. Future PCF sales will also include new routes with a diverse set of enterprise customers. Given the complexity of these builds, these discussions are ongoing and will take place over several quarters. In the future, we will provide updates to the extent PCF sales have a material impact on our financial guidance. We introduced PCF sales last quarter and updated them this quarter because there was a need for investors to understand our strategy, the market opportunity, and the structure of these PCF deals. We will continue to educate the market on those opportunities for Lumen and the AI economy while also focusing on the core metrics of sales growth, margin improvement, and free cash flow generation. As we stated last quarter, we believe the progress we've made on driving PCF sales in 2024 is just the beginning of a large new tamp, which brings long-term sticky revenue, offsetting higher churn legacy product declines. We're now in the planning stages of constructing these networks, securing the necessary equipment and labor, and we're confident in the cost and margin structure we've estimated for the AI network builds. We estimate the cash received from the first $5 billion in PCF sales provides free cash flow to fuel our business to the point where we expect to reach sustainable, positive free cash flow growth. The incremental cash provided by the over $3 billion recently signed contracts provides increased flexibility to deliver our balance sheet and continue to address our capital structure in a meaningful way. With respect to the balance sheet, another highlight of the quarter was our successful execution of a debt exchange, terming out over $800 million in 2026 through 2029 maturities to 2032. We now have approximately $1.8 billion in maturities, excluding leases, due through 2028, down from approximately $2.6 billion at the end of the second quarter, and we're not done yet. Now, transformations are messy, and particularly in industries where it has never happened before. So, as we move through ours, we strive to bring you the transparency of both the good and the less good. In Q1, we said demand for networking was heating up. In Q2, we delivered against that, substantially increased free cash flow guidance, and said there was an additional opportunity. This quarter, we announced progress against that opportunity and increased free cash flow guidance again. Importantly, in both Q2 and today, we're saying our legacy business is declining, consistent with industry trends, and needs investment to both build our digital future and unlock a billion dollars of cost efficiency, the result of which will be lower 2025 EBITDA before improving in 2026. In short, we recognize credibility is critical, and we're taking great care in making sure our messaging is consistent with our delivery. We believe the value creation path for Lumen is clear. Through additional sales, balance sheet improvements, and cost structure optimization, all as we continue to execute on our core strategic goals of driving operational efficiency, building the backbone for AI, and cloudifying the industry. We recognize we're in the early stages of a significant transformation of Lumen, and remain laser focused on accomplishing the goals we set for ourselves. Now let's move on to the discussion of financial results for the third quarter. Our sales growth engines within our large and mid-market enterprise channels and our business segments, along with our Mass Market segment, showed solid performance this quarter, with large enterprise and mid-market sales up nearly 14% year-over-year, and Quantum Fiber broadband net additions, once again, setting an all-time record. While consolidated revenue and adjusted EBITDA still feel the impacts of legacy declines, we're encouraged by improvements we're making in the business, as disconnects improve both sequentially and year-over-year. On a year-over-year basis, total reported revenue declined 11.5% to $3.221 billion. 32% of the decline was due to the impact of divestitures, commercial agreements, and the sale of the CDN business. Business segment revenue declined 12.7% to $2.536 billion, and approximately 37% of that decline was due to the impact of divestitures, commercial agreements, and the sale of the CDN business. Mass market segment revenue declined 6.9% to $685 million. Adjusted EBITDA was $899 million, with a 27.9% margin, and free cash flow was positive $1.2 billion, benefiting from the cash contribution from recent TCF sales. Next (LON:NXT), I'll review our detailed revenue results for the quarter on a year-over-year basis. Within our North America enterprise channels, which is our business segment, excluding wholesale, international, and other, revenue declined 6.9%. Overall, North America business declined 7.5%. Large enterprise revenue declined 8.2% in the third quarter. Our grow revenue increased 1.6% year-over-year, with continued pressure in nurture and harvest product revenue. We expect continued variability in trends as we drive towards overall stabilization. Mid-market revenue declined approximately 6.9% year-over-year, with an improvement in growth revenue to 5% year-over-year, offset by nurture and harvest. Public sector revenue declined 4% year-over-year. Public sector revenue can be lumpy quarter-to-quarter. However, we continue to see traction with large bookings in this space, which takes time to ramp to revenue. And these wins give us continued confidence that public sector will grow year-over-year in 2024. Wholesale revenue declined approximately 9% year-over-year. The harvest portion of the wholesale portfolio, which is comprised of products like TDM, Voice, and Private Line, saw revenue contract by 16.3% year-over-year in the third quarter. This is primarily driven by telco partners that are selling legacy services. Our harvest product revenue will likely continue to decline over time, and is an area that we will manage for cash. International and other revenue declined 64.8%, driven primarily by the divestiture of our EMEA business and the sale of select CDN contracts in the fourth quarter of last year. Moving to our business product lifecycle reporting, I'll reference the results based on our North America enterprise channels. Higher sales in our growth product portfolio were led by enterprise broadband, dark fiber, and IP. These sales were offset by declines in nurture and harvest, resulting in an overall decline of 6.9% year-over-year. While results can vary in any quarter, we expect sustained growth in the growth product revenue as we execute on our core turnaround. Within North America enterprise channels, grow products revenue increased 4% year-over-year, up from 1.5% year-over-year last quarter. Grow represents approximately 45% of our North America enterprise revenue, and for our total business segment, carried an approximate 80% direct margin this quarter. Nurture products revenue decreased 15.2% year-over-year, largely impacted by declines in VPN and ethernet. Nurture represents 29% of our North America enterprise revenue, and for our total business segment, carried an approximate 67% direct margin this quarter. Harvest products revenue decreased 14.1% year-over-year, and continues to be negatively impacted by declines in TDM-based voice. Harvest represented approximately 16% of our North America enterprise revenue in the second quarter. For our total business segment, it carried an approximate 73% direct margin this quarter. Other product revenue declined 11.1% year-over-year, and as a reminder, other product revenue tends to experience fluctuations due to the variable nature of these products. Now, moving on to Mass Markets; our fiber broadband revenue grew 16.6% year-over-year, and represents approximately 40% of Mass Markets broadband revenue. During the quarter, fiber broadband enabled location ads were 131,000, bringing our total to over 4 million as of September 30th, and pacing towards our targeted annual 500,000 build target this year. We also added 43,000 Quantum Fiber customers, which is our best fiber net ad quarter reported to date, and this brings our total to over 1 million. Fiber ARPU was $62, flat sequentially and up slightly year-over-year. This is just outstanding work by a team. At the end of the third quarter, our penetration of legacy copper broadband was approximately 9%, and our Quantum Fiber penetration stood at approximately 26%. As we look ahead, we'll continue our market-by-market assessment of the Mass Markets business, as we explore a range of strategic options to maximize its value. Those options include potential joint ventures, wholesaling arrangements, or future divestitures to generate incremental cash. Now turning to adjusted EBITDA; for the third quarter of 2024, adjusted EBITDA was $899 million, compared to $1.049 billion in the year ago. Third quarter EBITDA was negatively impacted by legacy revenue declines, seasonally high operating expense, as well as some startup costs associated with our custom networks group. For the third quarter of 2024, our adjusted EBITDA margin was 27.9%. EBITDA margins declined 90 basis points year-over-year, compared to a 270 basis point year-over-year decline in the second quarter. Special items impacting adjusted EBITDA totaled $56 million. The majority of special items this quarter were related to transaction separation costs. Capital expenditures were $850 million, and free cash flow excluding special items was positive $1.2 billion. As we previously stated, we're leaning into our network investments to support the rapid growth and demand our customers are facing while improving our overall cost structure. Now moving on to our financial outlook; we continue to estimate FY '24 EBITDA to be in the range of $3.9 billion to $4 billion. However, given the overall trends in the business and initial cost impacts from the incremental PCF sales, we see FY '24 EBITDA at the low end of that range. As we've said previously, we expect EBITDA to decline year-over-year in 2025 as a result of continued legacy declines, startup costs for PCF contracts, and incremental transformation costs with a longer term goal of improving the broader cost structure. 2024 CapEx is expected to be in the range of $3.1 billion to $3.3 billion, and cash interest in the range of $1.15 billion to $1.25 billion. Lastly, we're raising our 2024 free cash flow guidance from $1 billion to $1.2 billion to $1.2 billion to $1.4 billion. This guidance includes some incremental OpEx, CapEx, and cash flows associated with our PCF sales growth, as well as incremental spending to ultimately improve our cost structure and margins. And with that, I'll turn it back to Kate for closing remarks. Kate Johnson: Thanks, Chris. I know what we're saying is different than what everyone else in the industry is saying. It's going to take some time for the growth vectors I talked about to overcome the secular headwinds and show up in our financials, but we're confident that our plans will achieve exactly that. And we appreciate you taking the time to understand our story. With that, operator, we're ready for questions. Operator: Thank you. [Operator Instructions] Your first question comes from the line of Michael Rollins (NYSE:ROL) with Citi. Your line is open. Michael Rollins: Thanks, and good afternoon. I wanted to just ask on some of the PCF disclosures. There were three new customer announcements over the last few weeks. Did those specifically relate to these new sales in this quarter, or did that relate to the prior initial $5 billion? And then, Kate, you mentioned at the beginning of the call some details, where you're seeing improvements in the business sales. I'm just curious where that's coming from. Can you give us maybe an update on the marketing and the distribution? And are these PCF sales also providing you with a magnet to get additional wins from the hyperscale customers? Thanks. Kate Johnson: Yes, for sure. So, thanks, Mike. Basically the four customer stories that we told come from the $8.5 billion in total, and we are not going to differentiate between buckets. But they are a magnet very much so. When you get all these clouds in the bag, you've got yourself in an ecosystem. You couple that with a digital platform to make it easy to consume the services that you're running on that infrastructure, and you got something pretty special. It's different than what everybody else is doing. We've got the cash to do it. So, we are super excited about that. Regarding the uptick in IP and waves, particularly at the higher capacity levels, it's purely an indication that our customers are recognizing a need for expanded networks, because of the [workloads] (ph) we are running. We don't have specific data to say it's all AI. That is a conversation and the signals we are getting from the conversations that we are having with our customers. And so, we think it fits perfectly in line with that trajectory we talked about. First, Big Tech builds the networks in the AI models and trains them. The second step is these customers are saying and using these models to transform our business, and I'm having a massive uptick in my own networking needs. I think we have realized that every AI strategy needs a network strategy, and customers are coming to Lumen, because we've become a thought leader. Jim Breen: Thanks. Next question, please. Operator: Your next question comes from the line of Sebastiano Petti with J.P. Morgan. Your line is open. Sebastiano Petti: Hi, thank you. Quick housekeeping on the incremental PCF announcements, should we think about that broadly as having a similar timeline to what was discussed last quarter as you're thinking about contribution in the IRU constructs that you laid out last time? I know you kind of said, they're similar to the last deal, but just trying to think about timing as they kind of come on. It does seem as though part of that cash was probably reflected in the free cash flow upgrade, just want to -- just housekeeping there -- Chris Stansbur: Yes. You are exactly right. If you just look at the shape of those deals, the incremental deals that we signed this quarter, in terms of the margins, the cash flows, how well that will work, the timing, it looks very similar to what we did on the $5 billion. So, I think that's a good way to model it. Sebastiano Petti: Okay, that's helpful. And then, thinking about, I mean, just you did guide to the lower end of the 2024, your guidance range, does it imply a pretty decent acceleration sequentially even to get to that point? Anything specifically that we should be thinking about there as it pertains to just maybe costs that's coming online, or yes, anything that we should be thinking about from a timing perspective? Thank you. Chris Stansbur: Yes. It's really more, I would say, the seasonality, like that we see in the summer months. We obviously have more construction, maintenance, higher energy costs, and that abates somewhat in the fourth quarter. We also made some intentional investments in the quarter to help accelerate the work that we need to do to go capture the $1 billion. And so, when you look at the timing of those swings, that's what gives us confidence in delivering on the lower end of the guidance for the year. Sebastiano Petti: Thank you. Operator: The next question comes from Batya Levi with UBS. Your line is open. Batya Levi: Great, thank you. In terms of the incremental PCF sales that you signed, should we assume that they're mostly big tech, or are you starting to see a little bit of enterprise demand as well? And just to confirm, I think you mentioned that this new mix will be on the existing constructs that you're building for the original PCF deal. Does that mean the CapEx requirements would be pretty much included in the original deal? And how should we think about the prepaid revenue mix of the incremental sales? Thank you. Kate Johnson: Well, I'll cover the first part. You cover the second part, Chris. Chris Stansbury: Yes. Kate Johnson: So, the customer mix, we shared last quarter that it's more than 15 customers were in these tranches. We had some repeat business. We had some new business. So, it's a mix. Predominantly, those customers are building AI models. And if you look at some of the logos that we shared that are standing side by side with us going long in our strategy, it's all three clouds and a large social platform. And what those companies are reporting are massive infrastructure investments to build out the infrastructure for AI. And they're coming to Lumen. That's the story. The second piece of the next wave is really enterprises. And they're not buying at the same size because they're not planning on commercializing their AI models for the most part. They're using to transform their own business, and may be, some of their own products and services that they offer their customers. So, it's not the same size and build-out as the hyperscalers and the social platforms. Chris Stansbury: Yes. And on the second piece of the question, Batya, I would say, so of the total kind of $12 billion opportunity set, the $8.5 billion that we've talked about today that we secured to-date really does look the same. So, I would say that the same ratio of CapEx to sales value, the amount that's recurring versus the amount that's upfront, I would use those same parameters that we shared last quarter. What you see in terms of the impact for this year is just timing of cash flows, where given the time of year those were signed, we do have some inflows coming this year. But we'll incorporate a lot of that CapEx, obviously, in the next year's guidance when we give 2025 guidance. I think the important thing is that as we move forward from here, as we've said at a number of investor conferences, the second-half of that $7 billion opportunity are new networks, just like we built the difference is they're on new routes rather than existing routes. Those economics will look different. We're in the middle of multiple conversations with customers around that. And as we get better cost estimation around that, we'll update guidance and give you guys more clarity. But that'll probably be something that takes a few quarters until we have that locked down. Jim Schneider: Good afternoon. Thanks for taking my question. I was wondering if you could maybe just clarify on the incremental $3 billion of the $7 billion you talked about. Does that mean that there's $4 billion of pipeline left to go, as you mentioned, or is there an incremental pipeline above and beyond the first $7 billion that you had seen before to sort of extend that beyond the $12 billion total pipeline? And then, maybe as a second question, can you maybe just kind of comment on your mass market business? And given the amount of deal activity there, maybe clarify whether you're seeing any kind of firm indications of interest and potential interest in acquiring that asset? Thank you. Chris Stansbury: Sure, Jim. So, really, just so we're all on the same page, in the $7 billion of opportunity, we said today that we had secured over $3 billion of that. So, let's just call that roughly half. Of the remainder, that's really new routes, as I just mentioned in my previous answer, that's going to take multiple quarters. Now, there continues to be customer interest in not just new routes, but existing routes. We're not going to continue to update pipeline, because it really is now normal course of business. And we want to be in that motion. The entire point of talking about the $5 billion and the $7 billion was to alert the market with points of validation that what we'd been saying earlier this year was, in fact, true. This is a significant opportunity. It remains a significant opportunity. And we'll report against it. So, you're going to see us get into a cadence of communicating updates really as it impacts guidance because of where we are in the process. Now on the consumer side, I guess it's just a few thoughts. First, I want to emphasize the great work by the team. And we're not the only ones that notice that. The rest of the world is starting to notice what this team is doing on execution as it relates to enablements and penetration. And we couldn't be happier with the work they're doing. Now, we've also said a couple of things, right? We have said for years now that this was a space that should and would eventually consolidate. And I think we're starting to see that happen today. And we've also said that we've got two great businesses in our enterprise business and our consumer business that we have a responsibility to invest in both. But that ultimately they don't strategically belong together. They've got two different return profiles. And at the right time, we would make the decision to separate them. Now, we don't have any news to report today. What I will say is, at your conference and other conferences, we've been pretty clear about what the economics of the consumer business are when you look at it between copper and fiber. So, I would leave it up to all of you to do the modeling and determine how significant an impact you think that would be on our ability to deliver to the company and focus as an enterprise company. Jim Schneider: Thank you. Operator: The next question comes from Jonathan Chaplin with New Street. Your line is open. Jonathan Chaplin: Thanks, guys. A quick follow-up on that, Chris, and then I've got just a network question as well. So, on the sort of thought process around the sale of mass markets, one thing I think you had been considering was separating out the fiber business from the rest of mass markets. And I'm wondering if you could give us just a little bit of context for how you would sort of accomplish that, the physical separation of those networks and how that would work? And then, maybe a little bit more of a difficult question, but it would be great to get some context for the network overall and how much of it has been consumed by these PCF contracts. So, from memory, I think level three initially had 12 conduits put fiber into. And we've heard that some of the conduits have been sold or had been sort of given the rights to them that have been given away in these new PCF contracts. I'm wondering how many have gone, how many you've got left. That would be -- yes, thank you. Kate Johnson: Yes. So, I'll take the second question first. So, as we were so clear on the last earnings call, we have not sold any of these assets. These are long-term leases of conduit; sometimes just fibers, sometimes both. It's new networks on existing routes. It's building net new routes, putting new conduit in the ground, et cetera. And we strategically plan with our customers and with our own business modeling when we should, in fact, put more conduit in the ground or less conduit in the ground. And I want to call your attention to a very, very strategic partnership that we did with Corning (NYSE:GLW) to utilize their new fiber solutions, which as much as quadruples the capacity of our existing network. We have all the right network in all the right places. And we've got access to the best fiber in the world to continue to grow with and for our customers. Additionally, any of these long-term leases on those routes, these customers of ours, these are deep partnerships. They do not, by contract, have the right to compete with us in those spaces. So, just to demystify, because I saw a few reports that had it very, very wrong. Okay? So, these are great deals, huge cash infusion. We're super excited. They're giving us the jet fuel for this rocket. Now, Chris, do you want to talk about consumer? Chris Stansbury: Yes. And on consumer, look, I don't want to get into a lot of details here, because we don't know what we don't know. We'll, obviously, tell you what we can when we can. But I will reiterate what we have said publicly. And you need to think about the consumer business as two businesses. You have a copper business that generates most of the EBITDA and you have a fiber business that consumes most of the CapEx. So, therein, you can do the modeling. The reality is it's definitely possible to separate. Nothing is easy, obviously, but I would say we've done harder things. And I think we've proven to the market that we're not afraid of doing hard things. So, we'll see where that takes us, but that's all I can really comment on at this point. Jonathan Chaplin: Chris, does the [Zipty] (ph) transaction changed what you think that asset is worth? Chris Stansbury: I think the transactions that are taking place in the market more broadly are validation of our thesis that consolidation needs to happen and there's tremendous value in these assets. And we have an asset that is sizable in this consolidation play. And so, I'll let you do the math on that. David Barden: Hey guys, thank you so much for taking my questions. I appreciate it. So, two, if I could. The first is on the $3 billion. Chris, you kind of elaborated that this is going to look a lot like the $5 billion deal that you did before. And you gave us a lot of math that we could do around that $5 billion. And the net of it was that about 15% of that or $800 million of the $5 billion came in over a three to four year construction period. And then, another 5% came in over a further 20 years in terms of IRU maintenance and stuff. So, this $3 billion that's just like that would be about a $500 million cash contribution over the build period, which would be 26, 78 or so. And then, another amount that would come out over the next 20 years, and you suggested that there's a lot of wiggle room that's been created with that new deal to address balance sheet issues. And it doesn't sound like it from the numbers if they're related to the $5 billion. But what is clear is that you did get a lot of upfront money before you have to spend it from your partners. And I'm wondering if that's what you're talking about. Are you using some of this upfront payment money to do things with the balance sheet before you then come back and then spend it to go do the build on projects? So, that'd be my first question if I could. Chris Stansbury: Yes, no, and I'm glad you asked it, David. And look, I've been here two-and-a-half years. Kate's been here a couple of years. And I put it in my prepared remarks for a reason because there's a lot of stuff being written that I think is calling into question our credibility and our intentions with all of this. And I want to be exceedingly clear. We are not going to message anything to the market that is off base from what we can deliver. And so, the way I would characterize it rather than getting into specific pieces of math, number one, no, we are not spending other people's money to deliver the balance sheet and then come back and have to re-raise debt to go build these networks. We're not doing that. I want to be exceedingly clear. But the $5 billion, when we model out our transformation objectives and the investments required, which includes the investments to turn around the business and invest in our future, investments in things like pension and the payment of debt as it matures, the $5 billion close that funding gap, as we said. The $3 billion, with that box checked, the deals that constitute the $3 billion give us now more flexibility to go and reduce debt. And remember, we started all of this with cash on the balance sheet. So, you have to take all three pieces, cash on the balance sheet before the $5 billion, the $5 billion, the $3 billion. And when you look at all of those sources, we have ample cash to start to deliver the company. And you'll hear more from us on that when we can tell you, but you will see us start to deliver the company from these deals. David Barden: Got it, thank you. And then, I guess my second question is maybe a little bit of a housekeeping question. As we think about your comments about the obvious need to step up the EBITDA in the fourth quarter, at a minimum, it's got to be about a $1 billion as a jumping off point for 2025. And you've talked to us about how 2025 is going to be down. I guess, I'm trying to figure out how far it's down and I'm looking at the 4Q 2023 EBITDA. I know that there's a lot that was in there that was extracted, right? That came out because of all the deals. Could you give us a starting point for thinking about from a kind of apples and apples 4Q '23 to 4Q '24, what that might look like? And would that be an appropriate kind of trajectory to think about how the 2025 down year plays out? Thank you. Chris Stansbury: Yes, so I don't want to get too much into '25 guidance right now for obvious reasons, because we are still quantifying what we see as the need to invest in both the deals. Because by the way, we haven't said this yet, so I'll say it here. The customers that have signed these contracts, particularly in that first set, are calling us and asking us if we can go faster. And so, there's discussions around that. So, we're trying to finalize that, trying to finalize the investments required on the billion dollar takeout and what we need to do there. I would say that at this point, if I look at kind of street averages, probably a little high versus expectations for next year. But at the same time, as I've said, we want to give you '26 when we give you '25, because I think '26 will be a fairly significant inflection point, given our ability to take costs out. So, those are the things we said, and I think until we get a little further along, I don't want to go further than that, because we've got work to do. Operator: Your next question comes from Nick Del Deo with MoffettNathanson. Your line is open. Nick Del Deo: Hi, thanks for taking my questions. First, you shared metrics that suggest much better sales in North American Enterprise over the last several quarters. When should we start to see that flow through into the P&L in a more noticeable way? And then, Kate, you had also mentioned that you had over 400 NaaS customers signed up, which was good to hear. I mean, obviously it's early, but I guess to what degree is NaaS contributing incremental revenue? Either because those are new customers that came to you because of NaaS or they're existing customers that are spending more because of the product? Thank you. Kate Johnson: Yes, I'll take the second one, Chris. I'll pass the first one to you. So, starting with the NaaS customers, so we're building a new digital platform and the focus is about driving adoption. That's about customer obsession. It's about what capabilities do they need? We're super lucky to have the network that we do because everything we build on that digital platform is integrated into it natively. And so, we can achieve the right economics and massive delta of capabilities compared to other offerings in the marketplace from those companies that simply don't have a network. And they frankly come to us to fill the circuits underneath their portal. And so, it's very exciting, but we're going to stay focused on getting as many customers on there as possible. I think what we're seeing is customers testing it. I'll try one port; I'll try two ports. They have a good experience. They start to add ports and that's where we start to innovate and drive additional service innovation like Lumen Defender, for example, is an opportunity for us on the horizon to sell into every NaaS customer, et cetera. That's the storyboard. How it impacts revenue? We're not going to give transparency to that for a while. We're simply not ready to. We have models that suggest that this is going to be very accretive over time, but it'll take time to get to scale. That's true for every cloud business, right? And we're using the cloud methodology to figure this thing out and plan it. So, Chris, you want to take the first question? Chris Stansbury: Yes, and so typically, Nick, we would expect to see sales convert to revenue in about a three month time window. Now, obviously, as we go forward and we're selling more digital services, that narrows, which is one of the benefits, but we're a ways from that. I would say this, in the grow bucket, as we said last quarter, we only grew 1.5% year-over-year. This quarter, it's four. So, I think that's encouraging. We have to watch that closely. So, there's not enough of a trend line there yet, but that's what we're watching. But I also want to be really realistic here. And it's a good problem to have. We have a legacy business that's enormous. It generates an enormous amount of cash, which is part of how we're able to invest in our future. That legacy business, given its size, will continue to offset the growth that we see in those grow buckets. So, I don't expect in the near term given what's going on in the industry, I've commented on what I think is some bad re-rate behavior in some cases that's driving customer disconnects. I think those things will continue and that'll continue to weigh on total revenue. But I think if we look at things like the TMPS scores, the sales, the fact that disconnects, at least in the near term, appear to be stabilizing, I hope that, that starts to show a slight improvement in the rate of decline. as we move forward over the coming quarters. Jim Breen: Next question, please. Operator: The next question is from Greg Williams with TD Cowen. Your line is open. Greg Williams: Great, thanks for taking my questions. Back on the potential Mass Market sale, where you're splitting the fiber off from the copper, just wondering if you can provide an update on potential dis-synergies. I remember when you guys sold off the assets to Brightspeed, you mentioned that there were some dis-synergies there, but there wasn't a lot of enterprise overlap. In this situation, you'll have six or seven markets where you're heavily overlapped with enterprise and just wondering if there's going to be a greater level of dis-synergies as a result. Second question is on, just -- yes, go ahead, I'll have a follow-up. Greg Williams: Oh, so the second question's actually separate. It's on the North American enterprise. I noticed that the nurture bucket was actually declining faster than the harvest bucket. You mentioned that VPN and ethernet had some impact, but I found that kind of interesting and just wondering if you can help us understand that dynamic. Chris Stansbury: Yes, so a few things. So, on the first one, one of the benefits of CenturyLink (NYSE:LUMN) and Level 3 being put together is there are routes that came from CenturyLink that, frankly, Lumen would never sell. They're going to be critical for our enterprise delivery going forward. So, I think there's -- without getting too specific, I think there's ways for us to make sure that we continue the synergies that existed before. The other thing is, is look, just like on the enterprise business where we talk about the simplification and better customer experience we can bring by unifying four networks, there's work we can do on legacy copper on the consumer side as well. So, I would say that's less of a concern at this point, but again, more to follow as we have more to share. As it relates to what happened in Q3, the reality is, is that that nurture bucket really is VPN and ethernet, nothing specific really to point to. We do have migration plays in place -- new migration plays to help move many of those VPN and ethernet customers to newer services. That has not yet hit. So, that's an area of focus we have as well. But I would say there was nothing significant that you could point to that moved the needle. I would say it's just more of a quarterly blip. Frank Louthan: Great, thank you. Can you give us an idea of the annual revenue on wavelengths and what the margins are on those relative to your other products? And then contracts of this nature tend to see some expansion over time. They're already telling you to go faster. What do you think is the potential for some upside to this 8 billion and over what timeframe do you think you'll start to see some of that creep? Thanks. Chris Stansbury: Yes. So, on the $8 billion, nothing really to share at this point because we're still in those conversations about how much faster we can go and what that means for us. I would simply say that, again, the reasons why customers are here is because of their confidence in our ability to build these networks for them. And they are calling us to do that. They're calling us because they know of our capabilities and they know it's possible that we could go faster. So, that's something that they're willing to participate in with us. And as we know more, we'll share it. And I'm sorry, what was the first question again? It's been a long day, Frank. Frank Louthan: Yes, the annual. Yes. Chris Stansbury: Yes, we're not at the point yet where we're disclosing individual product details. As we go forward, it's something we're looking at. I think it's a little bit early, but in time, I think we'll probably come to a different way of looking at it that we'll ultimately share with you guys. But it's too early yet. And we don't -- we don't go below, grow, nurture, harvest at this point. And that's what we're going to stick with for now. Eric Luebchow: Great. I appreciate you squeezing me in. So, just to follow up on the mass markets business, as this -- you've alluded to on the call, a lot of recent announcements and deal activity from a lot of private overbuilders. So, as you look at your footprint today, I think you have roughly 18 million homes -- copper homes, how does some of this recent competitive activity or announcements play into how attractive you think that future growth opportunity is either by you or a partner? And how do you think about what could be built out with fiber at attractive economics? Chris Stansbury: Yes, we've -- so what we've said publicly that of those 18 million, again there's a fairly sizable piece that's rural, but there is -- 8 million home potential, I think, is reasonable. Maybe it's a little more. Maybe it's a little less. We're at 4 right now. So, the reality is that the markets where fiber is being built are really attractive markets. And if you look at the size of our fiber footprint today, and you look at the potential fiber footprint, we are the largest asset out there that has yet to be consolidated. So, those are the -- those are the facts. And we'll see where we go from here. Eric Luebchow: Appreciate that. And just a follow-up, you touched on the funding gap has closed. And now, you have more flexibility. Is that then another way of saying, you think Lumen will be kind of consistently free cash flow positive from here? I'm just trying to think about -- obviously a lot of puts and takes in the next year. You talked about EBITDA-low, or presumably CapEx a bit higher from some of these PCF sales ramping. And then, obviously kind of a wild card on PCF contributions next year, but just any kind of directional help you can provide on what free cash flow could look like? Chris Stansbury: Yes. No, it's a great question. Thank you for asking it. The answer is yes. I mean when we said that we were funding the gap and we talked about the additional things we could do with the cash that comes from the 3 billion, we will be generating positive free cash flow. Now, I want to be really clear on one thing; that's cumulative. Because of the impact of tax payments and the timing of CapEx, there could be -- and I just don't have enough information yet to be able to share it. There could be a year where maybe we're free cash flow negative. But we will have received the cash in advance of that. And we'll plan accordingly. It's just that the size of the tax payments and the quantum of the CapEx that'll get spent. It's going to be really lumpy. And it's going to be lumpy quarter to quarter. It's going to be lumpy year-to-year. But cumulatively, yes, free cash flow positive. And especially with the billion dollar cost takeout, even with the pressures on revenue, we're confident in making that statement. Operator: This concludes the question-and-answer session. I'll turn the call to Kate for closing remarks. Kate Johnson: Thanks everybody for digging in and taking the time to understand our unique story. I look forward to meeting you at the upcoming conferences and updating you on the significant progress we're making. See you soon. Operator: This concludes today's conference call. We thank you for joining. You may now disconnect.

Twilio (TWLO) Q3 2024 Earnings Call Transcript | The Motley Fool

Good day, and thank you for standing by. Welcome to Twilio Inc. third-quarter 2024 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bryan Vaniman, SVP of investor relations. Please go ahead. Bryan Vaniman -- Senior Vice President, Investor Relations Good afternoon, everyone, and thank you for joining us for Twilio's third-quarter 2024 earnings conference call. Joining me today are Khozema Shipchandler, chief executive officer; and Aidan Viggiano, chief financial officer. As a reminder, we will disclose non-GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non-GAAP results can be found in our earnings release and our earnings presentation posted on our IR website at investors.twilio.com. We will also make forward-looking statements on this call, including statements about our future outlook and goals. Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described. Many of those risks and uncertainties are described in our SEC filings, including our most recent Form 10-K, in our forthcoming Form 10-Q. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We disclaim any obligation to update any forward-looking statements, except as required by law. And with that, I'll hand it over to Khozema and Aidan, who will discuss our Q3 results, and then we'll open the call for Q&A. Khozema Z. Shipchandler -- Chief Executive Officer Thank you, Bryan. Good afternoon, everyone, and thank you for joining us today. Twilio delivered a strong third quarter. We exceeded our Q3 guidance delivering $1.134 billion in revenue, up 10% year over year, and generated $182 million in non-GAAP income from operations. We also delivered another strong quarter of cash generation with $189 million of free cash flow. I'm encouraged to see the acceleration to double-digit revenue growth this quarter, alongside strong operating leverage and continued product innovation. Our commitment to financial discipline, operating rigor and innovation remain key guideposts for the team, and I'm proud of what we accomplished in Q3. Since becoming CEO at the start of the year, I've met with hundreds of customers in nearly every industry across the globe. In my conversations with customers, many of the problems they're encountering can be solved by greater personalization vis-a-vis communications plus contextual data plus AI. Our concerted focus on embedding AI and machine learning throughout the Twilio platform has resulted in a differentiated offering that strategically positions us to capture a massive opportunity as we leverage the strength of our platforms, the leading CPaaS and supported by unmatched data tools, including segment to minimize complexity and create better customer outcomes. More customers are turning to Twilio because we deliver a stronger ROI, driving demonstrable results that help customers increase their revenue and reduce their costs. By integrating AI with our core product suite, we're able to automate capabilities, boost productivity, and drive personalization at scale. As an example, a longtime customer that is a global business supplies retailer, has been using our AI recommendations product, which leverages machine learning to automatically determine a specific product, brand or category, a customer is most likely to purchase. The company recently ran an email campaign targeting customers most likely to purchase Apple products and saw a 592% increase in sales per email, this is just one of the many examples of the unique value that Twilio offers, helping brands create better engagement, deliver greater value and build more trusted customer experiences. AI presents a huge opportunity to improve and expand the impact of CPaaS solutions to truly enhance the customer experience. We are well positioned to win in the age of AI because unlike other CPaaS players, our true value comes from the integration of communications with data. Twilio uniquely combines communications and customer data to help brands drive deeper customer engagement. What sets Twilio apart is our ability to unify this valuable contextual data, whether it's real-time triggered by customer interactions or stored in a data warehouse or a system of record and help brands to activate it. With our platform, we're already powering these intelligent interactions at scale, whether it's personalized engagement via unified profiles on IVR and Flex or fraud prevention with our security products. We're powering over 8 trillion emails and billions of messages annually and ingesting hundreds of thousands of events per second. We recently announced our integration with OpenAI's new real-time API, making it easier for Twilio's customers and developers to build powerful conversational virtual agents. As the world of conversational AI evolves rapidly, this is an exciting milestone. It enables customers to take advantage of OpenAI's flagship multilingual and multimodal GPT 4.0 model to create solutions and build virtual agents for IVRs that feel more human making these advanced tools accessible for businesses of all sizes. Now, let's turn to our business highlights. Our Twilio communications business had a strong third quarter with revenue of $1.060 billion, up 10% year over year. Our quarter-over-quarter growth acceleration was driven predominantly by strength in both messaging and email. As we've referenced on previous calls, our near-term growth will be fueled by our ISV customers, self-service enhancements, and cross-sell opportunities. We're seeing good performance in each of these areas and a continued bright spot is our ability to deliver increased value through software capabilities built on top of Twilio's core channels. Verify, SMS pumping protection, engagement suite and voice intelligence, leverage AI and machine learning to drive better outcomes which include things like combating fraud and providing better data analytics in real time. These products are designed to deliver smarter and more trusted communications which is key to unlocking more value for our customers. Furthermore, as we focused on integrating our communications products with segments products and contextual data, I've been excited to see how products like personalized virtual agent leverage Twilio's unified profiles to help brands better understand their customers, and make incremental changes to improve the customer experience through every interaction. Another area driving improved messaging volumes is our platform feature updates that now give customers greater transparency into communications deliverability and engagement. Within our console, messaging customers now receive a deliverability score with personalized actionable instructions from our AI agent so that they can immediately take action to remediate messaging deliverability errors. By providing analytics we're radically simplifying the messaging experience for developers, leading to better engagement and ensuring that the message they intend to send are delivered error free. In addition to enhancing our current products, in Q3, we released new innovations to support branded communications. RCS Business Messaging went into public beta, which is key for brands who want to deliver a more custom personalized experience. In a recent Twilio survey, we found that 75% of consumers who received a branded text set to increase their trust in the communication. Our CS business messaging improves the branded experience through rich content and interactive messaging features, including carousels, high-quality media, content cards and location sharing. Customers like Fresia have deployed RCS capabilities to build brand trust and increase message open rates and one of our ISV partners, Hive, will leverage RCS to enhance marketing campaigns for their customers in the live events industry, driving greater fan engagement and boosting ticket sale conversion rates. We also saw exciting wins with branded calling, which allows brands to display their name, logo and call reason when placing calls to customers. Care Signal light beams deviceless remote patient monitoring company needed a cost-effective way to improve patient pickup rates and achieve health outcomes in the process. With Twilio branded calling, they've been able to improve call pickup rates by 6% to 7% in just three months. In the future, we expect this type of incremental value will accelerate as we continue to help brands use their contextual data to unlock smarter and more personalized experiences. Turning to our Twilio segment business. Segment delivered revenue of $73 million flat year over year as we continue to focus on and make progress against the priorities we outlined in the operational review earlier this year. We ended the quarter with an increase in our win rate both quarter over quarter and year over year and a reduction in churn and contraction. While there is more work to be done, we're encouraged by the progress that we're making and segment remains part of our long-term strategy, enabling us to differentiate our communications products by infusing contextual data while we continue to innovate for stand-alone CDP buyers. With respect to product innovation, we continue to enhance our data warehouse interoperability capabilities and improve customer time to value by graduating many features to GA. For example, with segment products like Data Graph and Linked Audiences, we are addressing key pain points that our customers are trying to solve such as removing data silos and disjointed customer profiles. We have advanced our data warehouse integrations with Databricks, Snowflake, Google BigQuery, and Amazon Redshift so that customers can activate their data in meaningful ways to drive more personalized touch points with consumers. This is an important step in our unified profiles offering as we're making it easier for customers to leverage through existing data from websites and mobile apps and combining it with data in their warehouse from systems of record like CRM, contact centers or ERP to deliver personalized emails and communications. We are seeing promising results, and we're excited to add additional integrations with other major data warehouses moving forward. Our new features and integrations for advertisers to create targeted campaigns began delivering promising results. First, our generative audiences feature that uses generative AI to create audiences with natural language prompts is significantly reducing the time and resources required to build targeted audiences for customer engagement campaigns. Over 25% of our segment CDP customers have already started taking advantage of this new capability in the few weeks it's been made globally available. Second, we've expanded and created new integrations with Amazon, Google, LinkedIn and Meta, giving marketers the ability to activate their data in campaigns across these platforms and reduce their customer acquisition costs. As an example, the Motley Fool needed an out-of-the-box integration to help build, manage and activate audiences. With Segment, the Motley Fool was able to increase its operational efficiencies by automating processes, accurately target paid ad campaigns to decrease its cost per acquisition, and make the experience more relevant for its premium members, helping with retention and lifetime value. I am incredibly energized about the opportunities ahead. The solid quarter that we delivered and significant progress we made against our financial goals is a testament to the hard work and focus of our team. As we look to create a world in which every digital interaction between businesses and consumers is amazing. I firmly believe that Twilio has the right strategy, leaders and innovative platform to unleash the full potential of communications plus contextual data plus AI. And with that, I'll turn it over to Aidan. Aidan Viggiano -- Chief Financial Officer Thank you, Khozema, and good afternoon, everyone. We're pleased with our performance in the third quarter, delivering record revenue, non-GAAP gross profit and non-GAAP income from operations. Revenue of $1.134 billion was up 10% year over year. Communications revenue was $1.06 billion, up 10% year over year, and segment revenue was $73 million, flat year over year. We saw encouraging volume trends in our communications business with growth acceleration and messaging and strong performance in email. Our efforts with ISVs and on self-serve and cross-sell initiatives continue to yield good results. We also implemented several new features, including the messaging deliverability dashboard that Khozema mentioned that helped drive volume and revenue in the quarter. In addition, our new AI-enabled products and features such as VERIFI and SMS pumping protection are helping to drive faster growth. While we had higher political revenue in the quarter, those contributions were fairly immaterial and contributed roughly 90 basis points to our reported revenue growth rate. This was offset by a 90-basis-point headwind associated with sunsetting the software component of our Zipwhip business. Our Q3 dollar-based net expansion rate was 105% and representing our best performance since Q1 of 2023 and reflecting the improved growth trends we've seen in our communications business over the last several quarters. Our dollar-based net expansion rate for communications was 106% and the dollar-based net expansion rate for segment was 91%. As Khozema mentioned, while we're encouraged by the early progress that we've made with segment since the operational review in March, there is more work to be done, and it will take time to improve dollar-based net expansion given it's a trailing metric. We delivered record non-GAAP gross profit of $600 million, up 9% year over year. This represented a non-GAAP gross margin of 52.9%, down 50 basis points year over year, and 40 basis points quarter over quarter, both driven by our segment infrastructure migration efforts. Non-GAAP gross margin for our communications business unit was 51.8%, flat both sequentially and year over year. As in previous years, we expect higher hosting costs in the fourth quarter associated with the holiday shopping season. And as a result, we would expect a modest sequential decline in communications and consolidated gross margins in Q4. Non-GAAP gross margin for our segment business unit was 69.8%, down 350 basis points sequentially. As we noted in Q1, we are migrating part of segment architecture to new infrastructure providers this year to recognize greater efficiencies. We are continuing to make progress on this project, and we expect to complete the migration during the fourth quarter, after which we expect segment gross margins will begin to improve. Non-GAAP income from operations came in ahead of expectations at a record $182 million, up 34% year over year, driven by strong revenue growth and ongoing cost discipline. Our non-GAAP operating margin of 16.1% was up 290 basis points year over year and down 10 basis points sequentially. Our Q3 results reflect an additional $18 million in expenses for our companywide performance-based cash bonus program, representing roughly $6 million of expense for each of the first three quarters of the year. This increase reflects a higher anticipated bonus payout as a result of our year-to-date outperformance on non-GAAP operating income and increased outlook for the year. We are proud of the operating margin improvement we've achieved over the last two years, and we continue to see opportunities for additional operating leverage over the next several years. Non-GAAP income from operations for our communications business was $268 million and non-GAAP loss from operations for our segment business was $60 million. Segment operating losses were flat sequentially, primarily as a result of the incremental bonus expenses I referenced. We remain committed to segment achieving breakeven on a non-GAAP operating income basis by Q2 of 2025. GAAP loss from operations was $5 million. We continue to make solid progress on our path toward GAAP operating profitability, and we are tracking ahead of our previous target to achieve GAAP operating profitability by Q4 of 2025. Stock-based compensation as a percentage of revenue was 13.6%, excluding restructuring costs, which was flat quarter over quarter and down 430 basis points year over year as we continue our efforts to reduce equity compensation. We generated free cash flow of $189 million in the quarter and over the last 12 months we generated free cash flow of $775 million. We remain focused on driving strong free cash flow margins going forward. Finally, we're continuing to execute on our $3 billion share repurchase program. Since initiating the programs, we've repurchased more than $2.7 billion of shares and we intend to complete the remaining balance of the authorized repurchases by year-end. Our total shares outstanding as of September 30 was $155 million, down 15% year-to-date. Moving to guidance. We're encouraged by the trends we're seeing across the business, and we're continuing to plan prudently given our usage-based revenue model and the dynamic market backdrop. For Q4, we're initiating a revenue target of $1.15 billion to $1.16 billion, representing year-over-year growth of 7% to 8% on both a reported and organic basis. Based on our year-to-date performance and Q4 outlook, we're increasing our full year organic growth guidance range to 7.5% to 8%. Turning to our profit outlook. For Q4, we expect non-GAAP income from operations of $185 million to $195 million, and we're raising our full year non-GAAP income from operations guidance to $700 million to $710 million. As it relates to free cash flow, year-to-date, we've generated $564 million, which has outpaced our non-GAAP income from operations. However, we are anticipating higher prepayments in the fourth quarter, which we expect will drive a sequential decline in free cash flow. As we said previously, we periodically pay certain vendors early to secure favorable terms and pricing. As a result, for the full year 2024, we expect free cash flow in the range of $650 million to $675 million. Before we open up the call for questions, given the various tailwinds and headwinds that have influenced the business over the past several quarters, we also want to provide a preliminary outlook on how we would expect a more normalized fiscal 2025 to play out. We are encouraged by the volume and growth stabilization we have seen in our communications business over the last several quarters, and we continue to make progress on the operational goals and segment. Based on the trends in the business and assuming a neutral macro environment, we would expect full year 2025 revenue growth in a range of 7% to 8%. We also expect to generate meaningful non-GAAP operating margin expansion over the course of the full year. Finally, we would expect to achieve GAAP operating profitability for the full year. We will provide more commentary on both our fiscal 2025 and longer-term outlook at our upcoming investor day, which we're currently targeting for late January. I'm very pleased with the accelerated revenue growth we delivered in the third quarter as well as our ongoing cost discipline that is driving strong profitability and free cash flow. I'm also encouraged by the innovation we are delivering and the impact new products and features are having both for our customers and on our revenue growth. We are tracking well ahead of our target to reach GAAP operating profitability and we are confident in our plans to drive durable growth, continued margin expansion and free cash flow growth over the next several years. I'm looking forward to finishing 2024 strong and seeing you all at our investor day in Q1. And with that, we'll now open it up to questions. Operator Thank you. [Operator instructions] Our first question comes from the line of Arjun Bhatia from William Blair. Arjun Bhatia -- Analyst Perfect. Thank you. Congrats on the nice quarter here. I wanted to maybe start with just the OpenAI partnership. Can you just touch a little bit on what exactly that entails and how that might play out across your customer base? Like are these agents going to be built largely on the voice side? Do you see this expanding into the messaging front as well. And then, I'd be curious to hear just about timing of how long this might take to play out across your customer base? Thank you. Khozema Z. Shipchandler -- Chief Executive Officer Yeah. Good question. Thanks, Arjun. So I would say maybe to start with, it's built off of the voice side of things, but I would anticipate whether it's with OpenAI or one of the other partners that we have out there that you should expect to see it across all channels over time. That's probably not a surprise to you. Like the way that we would want to approach it ultimately is in more of a multichannel way. I think that's the most optimal way to end up reaching consumers vis-a-vis the customers that we serve. As it relates specifically to the partnership, it is voice based, as I said, basically, what it allows for is for us to use OpenAI's capabilities as it relates to their large language models and then apply them using a Twilio API vis-a-vis our voice capabilities. And I think where it gets really interesting and as we kind of alluded to in our earlier remarks, if you compare that with some of the contextual data that we would have about our customers' consumers, like you end up with a really personalized lively and very easy to implement interaction between one of our customers and the consumer. In terms of time frame around revenue, I mean, obviously, AI is all happening very rapidly. Like I wouldn't anticipate that it shows up materially in our revenues for a little while still. That said, like we are very excited about the partnership. We're very excited about what's going on with AI. And in particular, I would really point to the combination of communications and contextual data when paired with AI is a really, really valuable combination. Arjun Bhatia -- Analyst Perfect. That's very helpful. And then, Aidan, if I can ask one, I'm sure we'll hear more about this at investor day. But since you gave the initial guidance on the initial outlook on fiscal '25, I think you mentioned you were assuming a neutral macro for the 7% to 8% growth target. Is that neutral compared to what we're in right now in 2024? Or is it like a headwind right now in '24 and that goes to neutral in 2025, implying slight improvement? Just would be curious how you're thinking about that. Aidan Viggiano -- Chief Financial Officer Yeah. I'd say, Arjun, it's kind of in line with what we're seeing right now. So I'd say neutral to kind of what we're experiencing today. Thank you. One moment for our next question. Our next question comes from the line of Jim Fish from Piper Sandler. Jim Fish -- Analyst Hey, guys. Great quarter. Just in terms of the go-to-market side, is there any color you guys can provide as to how big the ISV channel is for Twilio at this point and what that is growing relative to the overall business? Khozema Z. Shipchandler -- Chief Executive Officer We haven't -- Jim, this is Khozema. I can start and then Aidan can provide some additional commentary. So we've never broken out the kind of the quantum of how much business that we're doing with ISVs. Obviously, it's a meaningful contributor to us. But I will give you two data points. One is that it does grow faster than the consolidated revenue base, which is obviously very exciting for us. And it also carries higher gross margins than the consolidated revenue base. And so, that's actually pretty encouraging as well. And just given our ability to get leverage distribution in the way that we end up serving these fees, I think it's just a very important channel and ultimately, a very important partnership, and we want to be able to help these guys grow, and that will help us grow. Jim Fish -- Analyst Got it. And on the RCS side of that major airline win, is there a way to understand how this will potentially change volumes for that customer, be it on the SMS side versus RCS and what that sort of gross margin profile looks like for RCS relative to SMS at this point? Khozema Z. Shipchandler -- Chief Executive Officer I think it's really difficult on a unique customer basis or more broadly to really extrapolate like what's happening with a particular usage inside of a channel and obviously, in this channel being messaging, I think I would imagine that fundamentally you'll probably see something relatively consistent with where we are now. Like our expectation is not necessarily that RCS will end up supplanting a bunch of the other activities. I think it works really, really well for an airline use case. And so, with respect to airlines, I think my expectation would be that given that it's something where we each tend to have apps where it's something that we tend to use in sort of a repeat basis, I would imagine that that's a category more broadly that ends up using RCS. I would certainly hope they avail themselves of some of the features and capabilities there. But I don't necessarily expect that it's going to change the dynamics of our underlying business. And then, more broadly, we're not anticipating at least sitting here today that RCS really has an impact on either revenues or margins in terms of the dynamics in our business. Thank you. One moment for our next question. Our next question comes from the line of Ryan Koontz from Needham & Co. Ryan Koontz -- Analyst Great, thanks for the question, and great quarter there, certainly. Khozema can you outline kind of where you are in your self-service journey? I really -- it sounds like that's a nice growth driver. I'm sure it's an operating margin expansion with your lower sales and marketing expense. But can you maybe explain kind of where you are from kind of a milestone perspective and where you might be headed in the future? Khozema Z. Shipchandler -- Chief Executive Officer Yeah. I mean, look, not to be kind of cliche about it. I would say at some level, like it's always like sort of a day one style approach that we're trying to take to self-serve. I mean, I think, as you know, like being sort of a long-term follower of us, like the developer's attraction to the platform, to the tools and capabilities that we offer has always been sort of a hallmark of the company. And I think over the last several years, like to ensure that there's additional trust and compliance and things of that nature on the platform. We've almost on purpose had to introduce certain levels of friction in the sign-up process to be able to onboard new customers. And so, in sort of that landscape, what we want to be able to do is that for every new developer, for every new start-up, for a super established company that's just getting started, we want to make it fundamentally as easy as possible as can possibly be for a developer to attach themselves to the platform to be able to get up and running with a use case. And then, to start promulgating that inside of their consumer base. And so, I would say like we're never done. I mean, our milestone list is actually quite long. We're very, very happy with the progress that we've made to date. But I think we will constantly look for ways in which we can continue to improve the experience for developers. And in that spirit, I would say it's kind of still day one. Ryan Koontz -- Analyst When you talk about that friction, you're talking about malicious use. Do you want to make sure you want to qualify these folks? Or is that the reason for it? Khozema Z. Shipchandler -- Chief Executive Officer Yeah. I mean, that's definitely one reason. I think you're also familiar with like I think it was last summer, if memory serves me correctly, where we went through like the 10 DLC onboarding process where we had to kind of put customers through that, right? We obviously got through the other side of it without any real impact to the business. But ultimately, like you're a consumer of the stuff, right? Like you don't want to be receiving stuff. You certainly don't want your children to be receiving stuff that they shouldn't be. And trust has kind of always been one of the No. 1 things that we sell around here. And I think, creating a platform in which there's both trust as well as ease of use has always been a hallmark at Twilio. Thank you. Our next question comes from the line of Alex Zukin from Wolfe Research. Rich Magnus -- Wolfe Research -- Analyst Rich Magnus on for Alex. A question on free cash flow. Should we expect free cash flow margin expansion to outpace operating margin expansion next year given the prepayments affecting free cash flow in the fourth quarter, can you help sort of quantify that headwind in 4Q? Thanks. Aidan Viggiano -- Chief Financial Officer Hey, Rich. Thanks for the question. So we're not yet providing explicit free cash flow guidance or commentary for 2025. I'd say, in general, the way to think about it is it tracks fairly closely with our non-GAAP operating income over time. Like within quarters, there might be some variability, but over time, an annual cycle or something like that, they track fairly closely. And as we said in our prepared remarks, as it relates to Q4, as we've said previously, we do have this episodic kind of prepayments from time to time. We will experience some of them in Q4 but as we think about free cash flow going forward, I'd kind of think about them generally in line. And then, we'll talk about more as it relates to 2025 specifically at our investor day. Rich Magnus -- Wolfe Research -- Analyst And then one more on, is there anything you should think about regarding political traffic in 4Q from these final election pushes? And how does that sort of compare to the prior cycles? Aidan Viggiano -- Chief Financial Officer Yeah. So as we called out in the prepared remarks, in the third quarter, we did have some political traffic. It contributed about 90 basis points to our growth rate. It was offset by a product that we are sunsetting on the Zipwhip software business. So it really didn't contribute to the revenue growth. I'd expect Q4 to be similar immaterial. There will be some political traffic, but we don't expect it to contribute much. If you go back several years, we did have more political traffic on the platform, but we made a decision a couple of years ago to limit that just based on our acceptable use policy and what we're willing to carry on the platform. Thank you. Our next question comes from the line of Taylor McGinnis from UBS. Taylor McGinnis -- Analyst Hi. Congrats on the quarter, and thanks so much for taking my questions. The first one is just given like the acceleration that we saw in revenue in the quarter and it sounded like particularly the messaging business. Anything in particular, I guess, you would flag as really driving that? And then as we look into 4Q, it seems like you guys only raised the guide modestly. So anything that was maybe specific to 3Q with the messaging business? Or anything we should keep in mind seasonality as we look into 4Q? Aidan Viggiano -- Chief Financial Officer Yeah. Why don't I cover a little bit on Q3, then talk a little bit about the guide. So we're really pleased with the acceleration that we saw. So maybe first, just to be clear, reported and organic are now equal, just we lapped all the acquisitions. So the 10% is both our reported and organic growth number. And we saw really a combination of strength across the business. Messaging, as you highlighted, it accelerated in the quarter from a growth perspective, email continued to be strong from a growth perspective. We also saw strength in our ISV platform Khozema kind of talked about that on one of the previous questions as well as self-serve, and then when you think about it by industry, we saw pretty good healthy volumes, I'd say, revenue growth kind of in our largest industry, that's tech, healthcare, financial services, retail, e-commerce, I would say, social and messaging kind of continued to be softer for us, but that's a relatively smaller portion of our revenue nowadays. And then, from a geographic perspective, I'd say the US continued to be strong. And we did see international volumes and revenue trends improve for the second straight quarter. So I guess, pulling it up, not one thing, a number of different things that kind of drove the strength in the quarter. And then, as it relates to the guide, we guided 7% to 8%. That's actually two points higher than what we guided in Q3. So you are seeing some of that favorability flow through to our forecast. And then, I guess, last thing is that we are usage-based. That is a dynamic that we deal with. So we just continue to guide prudently just given that's our revenue model. Taylor McGinnis -- Analyst Perfect. And then, last one for me would just be on the margin outlook. So you guys have had pretty amazing upside to margins over the last several quarters, but it looks like the pace of that expansion on a year-over-year basis, I think we're starting to see that come down a bit. So as we think into next year, and I think you made a comment about continuing to expect expansion, anything you can share at a high level, like how to think about that maybe versus what we've seen? I know segment reaching breakeven is one of the drivers. But as we look across the model, any other areas of potential efficiency that you guys are looking at? Aidan Viggiano -- Chief Financial Officer Yeah. I'm not going to give a specific number for next year, but I do want to call out a couple of things. So in Q3 the reason you didn't see as much leverage quarter-over-quarter is we did have additional bonus accrual that we did in the quarter was $18 million. It was a catch-up for Q1, Q2, Q3, just based on where our forecast is now for profit for the year. So with that forecast being higher, we had to accrue some additional expenses. So that did impact the quarter, and you should factor that in, in terms of thinking about the underlying operating margin expansion. As it relates to leverage going forward, we're pretty confident in our ability to continue to get leverage. We've proved it now consistently. I'd say next year, some of the levers are, as you called out segment, right? We lost $16 million in the quarter on segment. So if you annualize that that's $64 million and then the other two areas where we're intently focused is, first, automation, and then second, what we're calling kind of workforce planning and just optimizing the org structures as well as the geographic locations of each of our teams. And those are the two, I'd say, big efforts we have underway to continue to drive margin expansion. Thank you. One moment for our next question. Our next question comes from the line of Ryan MacWilliams from Barclays. Ryan MacWilliams -- Analyst Hey, thanks for taking the question, and I appreciate the color on the 2025 numbers. Are there any trends in your business that's given you more visibility to provide this out year guidance at this point? Like are your customers feeling better about their own messaging volumes. I just love to hear more detail on your build up to that 2025 revenue guidance. Khozema Z. Shipchandler -- Chief Executive Officer Yeah. I don't -- I'll give you a couple of things. I think, first of all, I mean, we've been working on a number of efforts inside the business. We've kind of characterized those in three different buckets, right, disciplined, rigor, and focus. That kind of ranges from a series of financial things that we're doing as well as the number of investments that we're making on the innovation side. And what I would say is, is that what used to be kind of a stabilization in trends that's transpired really over the last several quarters has now kind of started to albeit modestly, started to kind of reaccelerate into slightly better growth, obviously, in Q3. You heard Aidan's color a moment ago in terms of Q4 and our ability to kind of consistently raise the guide over several quarters. So all of that feels pretty good. And as we kind of look out into 2025, it's not just an extrapolation of trends, obviously. It's also a lot of conversations that we're having with our customers as well. Again, in a kind of a neutral macro, what I would say is self-serve has been particularly strong, and that's been a bright spot. I think the volumes that we've seen from our ISV partners that certainly seems like it's quite sustainable. And then, that's kind of on a channel basis, if you kind of then break it down by product, the products have generally been performing well. Obviously, even beyond kind of messaging and email, we called out a number of products from which we have seen a certain amount of strength over the last couple of quarters. We've seen some new innovations take hold as well, like the kind of messaging deliverability dynamics that we talked about earlier. We obviously have a number of innovations that we're also planning on. And then, I guess, finally, I would add to kind of everything that I've said, like there's some things around AI, especially as it relates to contextual data and communications that we're also pretty excited about. One of those was referenced on the call today in terms of our partnership. We're clearly working on a number of other areas in which we believe that we're extraordinarily well positioned to deliver on personalization at scale. And so, I guess, Ryan, when you add all that up, yes, I mean, we have some level of visibility given that we are a usage-based business. It's always tough. But that totality of things feels like a pretty solid setup in terms of the guidance that -- preliminary guidance that we provided for 2025. Ryan MacWilliams -- Analyst Excellent, just on RCS, for Twilio, this has kind of always been the catalyst that's like two years away from being two years away. But now it does seem more realistic with Apple rolling it out on iPhones. So how do you think about just the time line for RCS adoption in the US? Like are the carriers ready for RCS at this point? And I know it's super early, but do you think it's possible Generative AI does move the needle here for RCS adoption as two-way messaging use cases at scale was like very hard to service like over hundreds of thousands of messages but could become easier with a more sophisticated bot or with AI? Khozema Z. Shipchandler -- Chief Executive Officer Those are all great questions. I think it's really unclear honestly, what exactly happens with RCS in the near term. I mean, we're obviously excited to support the technology. I think if you've used it yourself with certain use cases, it's really cool, and it really does deliver kind of the rich content that's always been promised. I'm not really sure how it's going to play out kind of longer term. And the reason that I say that is, is that I think it's really, really well suited for certain companies and certain use cases. So for example, the airline example that we cited, I think that's an industry that's perfect for it because these are frequent purchases. These are repeat buys in which you probably do want to be able to interact with the message in that way, and you want to have the content displayed in a certain fashion. I think when it's just a simple but traditional notification, it's not necessary, right? And so I think that would be kind of one maybe obvious example or certainly two-factor authentication would be another obvious example in which it's not necessary. But even beyond that, like when it gets into kind of more onetime purchases or when you want to do a lot of things inside of the application itself versus necessarily through the channel. But then on the other side, of course, you have to have an email and SMS confirm it. I think all of that makes the picture, to be honest, like fairly confusing. I think that from our perspective, all of that, no matter how it plays out, will ultimately be accretive to Twilio. And then, lastly, relating to kind of Gen AI and the way that you posed it, I think in all scenarios, whether it's two-way, whether it's RCS, whether it's some of the voice things that we talked about, we're quite bullish on Generative AI. I think it really works well when paired with contextual data, which is really where we're hanging our hat, especially as it relates to the combination of what we can do with segment and communications and that we're very bullish on. Thank you. One moment for our next question. Our next question comes from the line of Meta Marshall from Morgan Stanley. Meta Marshall -- Analyst Great. Thanks, and echoing my congrats. Maybe just on the DB&E pickup on the communications side of the business, understanding ISV's kind of helped bring in a lot of new customers. But just wondering do you think that part of the messaging gains or part of the DB&E improvement is kind of gaining share within your customers of their share of wallet with some of the Verify products and some of the other enhancements you've made to the portfolio or just kind of marketing budgets have gotten better and that overall led to more volumes? And then, just as a second question. Just where do you guys think you are on kind of go-to-market improvements within the segment business now kind of being 9 months into some of those changes? Khozema Z. Shipchandler -- Chief Executive Officer Yeah. Meta, this is Khozema. I'll start, and then if Aidan wants to add some additional color, she certainly can. I think, let me start with the second question actually first in terms of segment and go-to-market. So I would say we've actually made a number of improvements on the go-to-market side. We do feel better about kind of where we are relative to where we've been. I think improvements in churn and contraction, improvements in contract life cycle improvements and our ability to get customers faster time to value. That said, I mean, there's a lot of work left here, right? And obviously, it's not quite shown up in certainly the reported numbers and you still see it weighing on our net retention rates. And so, I think it's going to take some time, but I do feel like the milestones that we set out for ourselves we're meeting those, if not exceeding some of those. But for that to bleed into revenue, it's just going to take some time. I will say just one other thing related to segment before I get to the other part of your question, is the one thing that I think has gone quite well is the pairing of communications with segment. So there were some use cases that we talked about where we rolled out products earlier in the year, both with Flex as well as with voice. And those have proven to gain a certain amount of customer traction to the extent that now, especially as we kind of contemplate a future in which Generative AI is going to be present, it's on us now to really deliver what we're referring to as a unified profile that doesn't just serve those two products that actually serves every single one of our products right out of the box. So as the customer gets up and running, they can avail themselves of the inherent data capabilities that segment offers. And I think you've followed us, obviously, for a long time, that's always sort of been the promise of having segment with Twilio. And I think we're starting to make that a reality. And in a Generative AI world, having contextual data is really going to matter. And so, we think we're well positioned there. Back to DB&E for a second. You're right. Like there are some of these areas in which we are picking up new customers. But I wouldn't say it's per se macro related, like that's not the trend that we're necessarily seeing. I think what we've seen really for the balance of the year is kind of a neutral macro and Aidan kind of alluded to that in terms of the way that we're planning for the business next year. I don't think we're seeing share loss within the business or cannibalization maybe a different way of saying that. I think instead, what we're seeing is customers starting to implement additional products in conjunction with ones that they were already using. I mean, we made a modest improvement in DB&E from period to period. So I don't want to like read too much into it necessarily. But we're obviously encouraged by what we're seeing. It's not necessarily a metric that we guide to. But so far, so good, and we're going to continue our efforts in a number of these areas with probably a concentrated effort as we always do on self-serve. Thank you. One moment for our next question. Our next question comes from the line of Michael Turrin from Wells Fargo. Rich Poland -- Analyst Hey, this is Rich Poland on for Michael. So just one on the ISV side of things. So I think you had mentioned at one point that you walked away from Engage Premier and that kind of helped avoid directly competing with some of those ISV partners. I just wanted to, I guess, get some insight on, are there any areas where you could look to do that further? Or how is kind of that played out into the ISV strength that you're seeing? Any context there would be helpful. Khozema Z. Shipchandler -- Chief Executive Officer Yeah. You're -- to maybe start with your kind of correcting the assertion there. We did decide that we wanted to sunset Engage Premier. I think that was the right decision, that was kind of paired with two things. I'd say, we've talked about ongoing operating rigor and discipline. And I think part of that is just focusing on the right things. And so, it made sense through that lens. But I think the other side of it was the partnerships, in particular, as it relates to Premier at least that we have with other leading marketing automation companies it allowed us to really focus on those partnerships in a different way versus kind of ending up in competition with them, instead allowing us to grow and thrive together. And so, I'd say many of those companies have for a long time been great customers of ours. And we're engaging across the board, whether it's Airship, or Bloom Ridge, or Brakes, or Insider, or Clavio, like there's a number of these that we have lined up currently. We've got really strong technology integrations with each of them, and we're excited about not just the business that's kind of link to our platform but our ability to grow with those companies together, to partner together to be able to solve customers' needs. Rich Poland -- Analyst That's very helpful. And then, I guess just as a follow-up on the AI side of that. It's really interesting to hear about the real-time API integration and being kind of the feature partner there. When we think about, I guess, like other areas in the core comms or API side of things where Twilio can kind of serve as that building block. Are there any use cases out there that you're starting to see kind of really pick up or see meaningful traction aside from that partnership there? Khozema Z. Shipchandler -- Chief Executive Officer Yeah. I would position it slightly differently as it relates to AI. Like I don't think it's just about communications, and I don't think it's actually just about segment, but I think it's really the combination of contextual data with communications. And I think for the companies that we serve and the ones that we aspire to serve, it's that combination that really activates AI, the reason being that a lot of the most interesting interactions, like when we talk about personalization at scale, like it happens because we have contextual data about our customers' consumers. And that's an incredibly, incredibly important form of IP. They want -- our customers want that to not travel over into an LLM but instead, to be stored into data warehouse to be secure in a data warehouse, but then to be combined with the other things that we're doing. And so, I think the way that you'll hear us talk about it going forward, Rich, is really through the lens of like this unified profile which allows us to see exactly what it is that's most interesting about a consumer on behalf of our customers that we can then go and activate against. And I think whether it's in a voice contact with a virtual agent, whether it's in an IVR, whether it's in Flex, whether it's in a security product, whether it's in the fraud prevention things that we've done, and then ultimately, even email, like I think it's going to really run the gamut of every single one of our products. And I think we'll start to probably talk less about them through the lens of like just products, but really this combined interaction of communications with contextual data. Thank you. One moment for our next question. Our next question comes from the line of Nick Altmann from Scotiabank. Nick Altmann -- Analyst Hey. Awesome. Thank you. In your prepared remarks, you guys noted an 8-figure ISV deal that was consolidating some volume from three different vendors on Twilio on the SMS side. Can you maybe just talk about what the unlock there for that particular customer for them to consolidate? And then when you look at your installed base, whether it's large customers or ISVs who are multi-sourcing CPaaS or SMS, how much of an opportunity is that? And how much of a focus is it on a go-forward basis? Khozema Z. Shipchandler -- Chief Executive Officer Let's take the second question first maybe. So as it relates to consolidation or kind of multi-sourcing, I think that's the word you used. I think that -- it happens from time to time, and we certainly see customers experiment with it from time to time. But I think the reality is, is that the way that the platform is built and the way that we've kind of always prided ourselves is, is that we fundamentally offer a superior product relative to the other partners in the marketplace. And so, I think, in particular, like we're very, very strong in terms of upfront availing yourself of use on the platform in the first place, like getting up and running, getting activated, getting started using our tooling, using our documentation like that's a really, really easy go. And then, I think the other side of it is, is that we're also quite strong in terms of our ability to ensure that our customers are able to deliver what need to be delivered on the other side. And so, these are mission-critical workloads for a lot of our customers. And so, our ability to do that for them, especially in a way in a world in which most people don't realize this actually that supply is constrained to be able to moderate between messages that have to get across at one specific moment versus others that can wait just a handful of seconds even like that's a really important differentiator for us. We deliver that through our engagement suite, and that's pretty impactful. So that's kind of that part of the question, and I think that a lot of that volume ends up coming back to us. In terms of the ISV question that you asked specifically, the three-vendor consolidation. So I think all of what I said a moment ago remains true, right? Like we have stronger deliverability, we have better quality, we have high trust and getting up and running on Twilio in the first place is very attractive. In addition to all of those things, I think what's very exciting in this example, and I think what's exciting more generally is that this customer was struggling to scale internationally in particular, they found Twilio very easy as a means to do that. I think in addition to that, what a lot of our ISVs and I'd say customers are at large, this is not just limited find is that being able to engage their customers, especially through multiple channels and then using them kind of off and on to engage with customers on the other side has been really powerful. And I wouldn't be surprised if we see more of that over time. Thank you. One moment for our next question. Our next question comes from the line of Samad Samana from Jefferies. Billy Fitzsimmons -- Analyst Hi. This is Billy Fitzsimmons on for Samad. Khozema, in the prepared remarks, you highlighted the AI opportunity with Flex and highlighted the potential for customers to create intelligent IVRs and more broadly, AI agents, the contact center seems like an area of focus for the traditional comms vendors given turnover, high volumes, there's an opportunity to kind of layer in AI to make things easier for customers. But increasingly, it seems like vendors who maybe traditionally didn't address the contact center are kind of targeting the market, whether other large cap software vendors, hyperscalers, just be curious how Flex has performed in recent quarters, early customer feedback and the integration of AI solutions in Flex and then how you're thinking about pricing and differentiation as you add in those AI features to the solution? Khozema Z. Shipchandler -- Chief Executive Officer Yeah. That's a good question. So I guess, Billy, the way that I would kind of characterize it is, is that it's not per se about Flex as such. I mean, I think the way that this is going to play out is that whatever the channel and, in this case, since we're kind of talking about voice in a way, I think it's going to be driven on the one hand, it's going to be very outcome-oriented in terms of like what you're able to deliver for a customer on the other side. I think that probably ends up breaking some of the seat dynamics in terms of SaaS and licenses and stuff like that. I think the second thing is, is that a lot of the -- while I'm certainly aware of what you're talking about in terms of various entrants in the market, I think your ability to be able to drive differentiated value actually happens through having contextual data. So having a generic model that happens to use a virtual agent like without any underlying understanding of what's happening with that customer in the first place, like it's really, really difficult to end up solving their problem. Like it's easy for like kind of the basic stuff. But like as soon as you bore down into like an actual purchase or an actual promotion or a renewal or a customer care problem, like you've got to start knowing something about that customer. And certainly, something that we believe is that that contextual data is highly proprietary to the customers that we serve. I cannot imagine a scenario in which they start turning over that proprietary data to the large LLMs and helping them train up their models. And so, I think that advantage is crucial to use, our ability to use the communications capabilities that we already have, which includes Flex, obviously, but also pair that with contextual data that we deliver vis-a-vis segments and then use AI as a means to then solve customer problems, that's really how we see it playing out. Certainly could happen with Flex, could happen with an IVR, could happen through simple -- more simple interfaces depending on how complex the problem is through any one of the channels that we offer. And since we offer most of them, I think that positions us quite well.

Cognex (CGNX) Q3 2024 Earnings Call Transcript | The Motley Fool

Greetings, and welcome to the Cognex third quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] It is now my pleasure to introduce your host, Nathan McCurren. Thank you, operator. Good morning, everyone, and thank you for joining us. Our press release was published yesterday after market close, and our quarterly report on Form 10-Q for Q3 2024 was filed this morning. The press release, earnings presentation, and 10-Q are available on the Investor Relations section of our website. Both our published materials and the call today will reference non-GAAP measures. You can find a reconciliation of certain items from GAAP to non-GAAP in our press release and earnings presentation. Any forward-looking statements we made in the press release, the accompanying presentation posted to our website, or any that we may make during this call are based upon information that we believe to be true as of today. Our actual results may differ from our projections due to the risks and uncertainties that are described in our SEC filings, including our most recent Form 10-K and Form 10-Q. On today's call, Rob Willett, Cognex's president, and CEO, will discuss end-market trends and provide an update on our strategic initiatives. Dennis Fehr, Cognex's CFO, will discuss our third-quarter financial results, and we'll conclude with our outlook. With that, I'll turn the call over to Rob. Robert J. Willett -- President, Chief Executive Officer, and Director Thanks, Nathan. Hello, everyone, and thank you for joining us on Halloween, Cognex's favorite holiday. In the third quarter, we delivered revenue and adjusted EBITDA margin in line with our guidance. Revenue grew 19% year on year or 7%, excluding the contribution of our Moritex acquisition, led by continued momentum in Logistics and Semiconductor and comparing against a low base in Q3 of 2023. Conditions across our broader factory automation business remained challenging. While most of our factory automation business has been stable for several quarters, we've seen a further step down in Automotive. We continue to manage costs tightly in the third quarter and reduced operating expenses sequentially despite increased costs from the emerging customer initiative and an extra month of Moritex financials. I now want to provide you with an update on our strategic initiatives. We continue to make excellent progress in bringing world-class AI to our machine vision products. In the third quarter, we launched AI-assisted labeling to reduce the time required to train deep-learning vision models. We've incorporated a new AI model into our VisionPro deep learning products that can cut out any object in any image with a single click. This makes the labeling process much faster. Training AI vision models can sometimes require labeling of over 1,000 images, and this latest model cuts the labeling time by approximately 90%, allowing more customers to adopt our most powerful deep learning products. Another example of how we're making our products more accessible to a broader audience can be seen in our AI-driven Optical Character Recognition tool that we launched in Q3. Our prior OCR offering requires significant training, which limited its use to more sophisticated customers. Now, with virtually no setup required, customers can leverage this out-of-the-box technology to obtain industry-leading read rates and performance. As AI enables machine vision to solve more human-like tasks, we have conviction that a larger portion of future market growth will be driven by a more diversified set of small- and medium-sized businesses who need products that are easy to implement and which deliver powerful results. I now want to go a bit deeper into our strategic rationale for the emerging customer initiatives and give you more color on how it is going, what we've learned, and what we expect from here. Historically, Cognex has excelled at providing the most powerful vision technology to the world's most advanced manufacturers. There are thousands of such customers, and our share with them is high, but there's also a much larger segment of customers with less complex applications and less automation engineering capacity who are looking for more standardized products that are easy to apply and easy to use. The technology we have developed over the last five years, including our edge learning, sensor, and newest ID products, are ideal for these customers. And as we launch more of these types of products, we expect to achieve our long-term growth by reaching more of what we estimate to be hundreds of thousands of potential customers. We're doing so by adding a new Salesnoid profile to our team: ambitious recent college graduates who are less experienced, less expensive to employ, and less technical. They are enabling us to broaden our sales coverage, make many more shorter sales calls, and reach more customers. Our first cohort of these Salesnoids entered the field at the beginning of 2024 against a challenging macro backdrop, but we're happy to see their bookings continue to ramp. Q3 of 2024 was our largest quarter, and September was our largest month of emerging customer bookings. This is helping to offset slow bookings in many of our end markets in 2024, and even resulting in bookings in end markets where we have previously had minimal coverage, such as aerospace and agriculture. While we will not report the following metric on a regular basis, I want to help you understand the scope of what this program is delivering. In the third quarter, the first cohort of emerging customer Salesnoids sold almost $1 million per week and referred millions of dollars of vision business that was closed by our more experienced sales teams. I will note that this includes bookings by these Salesnoids to some existing accounts, so it's not necessarily all incremental. Our second cohort is now in training and will enter the field over the next four months. Our emerging customer initiative is a long-term program, still in its early stages and driven with a mindset of continuous improvement. We're learning which products are most compelling to these target customers. We've responded by evolving the product portfolio to the sales team and equipping them to sell additional vision products. Just like prospective customers, our established accounts also have use cases for our entry-level, easy-to-use technology and benefit from more frequent engagement and broader sales coverage from Cognex. Emerging customer Salesnoids can also identify more applications for our advanced vision products and refer this business to our more experienced Salesnoids. To better serve these accounts and optimize sales coverage, we are combining sales forces under a unified management structure in each geography. While we are long-term focused, we acknowledge that we are investing in a challenging market environment. In the near term, this initiative is generating more customer visits, increasing our customer base, and generating gross margin accretive business. Emerging customer Salesnoids are on track to make over 80,000 additional in-person customer visits and to add around 3,000 new accounts this year. In the medium and long term, we expect the sales transformation to support strong growth and profitability. As our Salesnoids are now serving a mix of new and existing accounts, incremental revenue delivered by this group is no longer a measure we are evaluating to determine success. However, we believe this sales transformation supports our long-term target of over 30% adjusted operating margins and positions Cognex for future success. We are excited to continue this initiative and to introduce a new cohort of Salesnoids each year. As we plan for future years, we will, however, be flexible about cohort sizes and be responsive to market conditions and resulting growth. Turning now to what we are seeing across our end markets, which you will find on Page 6 of the earnings presentation. I will discuss the end market results, excluding the contribution of Moritex. End markets have been mixed, as we have seen both continued softness as well as pockets of growth. Starting with Automotive, revenue was down both year on year and sequentially. We continue to see delays, reductions, and cancellations of EV battery projects, and we saw a further step down in our broader Automotive business. I spent time this past quarter with Automotive customers in many geographies. This is probably the weakest and most tentative I have seen the automotive market in my 16 years at Cognex. The industry is suffering from an overinvestment in electric vehicles, macro uncertainty, increased competition from new entrants, and unclear future end-user demand. This has all led to minimal capital investment across the value chain, which we expect to continue until these customers have more certainty. Moving on to Logistics. Revenue in Logistics has grown strong double digits year to date. We continue to see growth across this business from large e-commerce to parcel and post to base logistics customers globally. This is fueled by both market growth and recent product innovations, including the success of the DataMan 380 that we launched in 2023. One recent example of Logistics success is our partnership with the e-commerce leader in South Korea. We're seeing regional e-commerce leaders like this automate more of their warehouses and adopt more vision solutions. We partnered with this customer to increase its throughput and enable better tracking and tracing of packages by providing a hands-free ID reading solution for its inbound freight processes across its network. We won this business with better read rates at higher speeds than our competition can support. This customer is also investing in robotic automated bagging across their existing facilities. With unmatched read rates and value, our DataMan code readers were able to unlock this opportunity for us, where we both replaced competitors on existing equipment and one business on investment in new automation. We believe Logistics is well positioned to continue to be our fastest-growing end market. As automation penetration increases e-commerce investment returns, we win share in the parcel and post segment, and more customers move beyond purely reading barcodes and start to implement a broader range of vision tools and technology. Consumer Electronics revenue was up year on year and down sequentially, both driven by project timing. Q2 of 2023 included $15 million of revenue that shifted forward from Q3. This year was also more weighted to Q2 but to a lesser extent than in 2023. Consumer Electronics has positive long-term trends. Currently, our expectation for a near-term investment in Consumer Electronics are tempered. But we tend to have a better line of sight to this by early Q2 each year. Lastly, SEMI is continuing to build with significant year-on-year growth, albeit off a low 2023 base. We're seeing increased investment from major machine builders across geographies and are optimistic that these trends can continue. Let me now hand it over to Dennis to walk you through the financial results and the outlook for the fourth quarter. Dennis Fehr -- Chief Financial Officer Thank you, Rob. Turning to the financial highlights, which you can see on Page 8 of our earnings presentation posted to the website. Third quarter results include four months of Moritex financials as we aligned accounting close schedules in the quarter. Third-quarter revenue of $235 million came in slightly above the midpoint of our guidance range and increased 19% year on year. Excluding Moritex, revenue grew by 7%. As a reminder, in 2023, we had approximately $50 million of Consumer Electronics revenue shift into the second quarter from Q3, providing us with an easier comparison. Adjusting for this timing effect, revenue excluding Moritex was roughly flat year on year. From a geographic viewpoint, excluding Moritex, revenue grew year on year in all four of our major regions for the first time in over two and a half years. Europe grew nearly double digits in the quarter, while Americas and other Asia were both up slightly. Strong Logistics results pushed these three regions into year-on-year growth. China was up significantly in the quarter, snapping a streak of seven consecutive declines, however, entirely due to the timing of Consumer Electronics revenue in the comparable period. Turning to margins. Adjusted gross margin was 68.7% in Q3, down four points from 72.7% a year ago. Gross margin included a three-percentage-point dilution effect from Moritex, which is higher than the typical two-percentage-point impact due to the additional month of Moritex financials. Sequentially, adjusted gross margin declined 1.6 percentage points, driven mostly by extra Moritex revenue and mix effect. Furthermore, gross margin in Q3 was impacted by competitive pricing pressure. Many manufacturers are being more discerning on cost in the current market environment. And considering the current scarcity of projects, we have prioritized maintaining share. This has been most pronounced within China. Adjusted operating expenses increased 10% year on year and were slightly down sequentially despite the additional month of Moritex expense. The year-on-year increase was driven by Moritex, increased investment in our emerging customer initiative, and the headwind in incentive compensation from a lower bonus achievement accrual in 2023. We continue our focus on cost management and the current business environment. Excluding Moritex and the emerging customer initiatives, adjusted operating expense was down 2% on a year-to-date basis despite incentive compensation headwinds. Just in the third quarter, we able to reduce opex sequentially by $3 million, excluding these two initiatives. Adjusted EBITDA margin was 17.6% in Q3, in line with the midpoint of our guidance range and up slightly from 17.4% a year ago. Operating leverage from higher year-on-year revenue was mostly offset by lower adjusted gross margin and strategic investment in the emerging customer initiative. Adjusted EBITDA margin declined by 2.3 percentage points sequentially, driven by the step-down in adjusted gross margin, as well as slight operating deleverage. Diluted earnings per share on a GAAP basis was $0.17, up from $0.11 in the year-ago period. The year-on-year increase was mainly due to an $8.5 million foreign currency loss recognized in Q3 of 2023 on a forward contract to hedge the purchase price of Moritex. Adjusted diluted EPS was $0.20, up 19% or $0.03 year on year due to the contribution from Moritex. The adjusted effective tax rate was 18% in both Q3 of 2024 and Q3 of 2023. Free cash flow in Q3 was $52 million, our highest quarterly total since Q4 of 2022. This compared to $35 million the previous year. While we are early in the journey and Q3 was supported by seasonal effects, our focus on working capital efficiency is paying off, as shown by a sequential improvement in our cash conversion cycle. The strong free cash flow in the quarter flowed to the balance sheet, where Cognex strengthened its position with $607 million in cash and investments and no debt. Cognex returned $17 million to shareholders in the form of stock buybacks and dividends in the quarter. I will now turn to our outlook for the fourth quarter. In the fourth quarter, we expect revenue between $210 million and $230 million. This range reflects the challenging but stable backdrop we are operating against. The sequential step down is driven by seasonal Consumer Electronic trends and one month less of Moritex results. At the midpoint, excluding Moritex, this represents a high single-digit increase year on year, driven by continued growth in logistics and SEMI. We expect the Moritex business to return to its typical range of 6% to 8% of revenue in Q4. As a reminder, the fourth quarter of 2023 included six weeks of Moritex results or $7 million in revenue. For the fourth quarter, we expect adjusted gross margin in the high 60% range. Sequentially, mix and competitive pricing are expected to be a slight headwind, partially offset by the favorable impact of one month less of Moritex financials. The total gross margin impact of Moritex is expected to be approximately two percentage points in the quarter or an approximately one-point headwind year on year. We expect adjusted EBITDA margin between 14% and 17%. The midpoint of this range represents a three-percentage-point increase year on year, driven by continued tight management of operating expenses and positive operating leverage, slightly offset by lower gross margin and investment in the emerging customer initiatives. Lastly, I would like to call to your attention that we expect to hold our Investor Day on June 9th and June 10th of next year. So, please mark your calendars and consider joining us in person at our Boston area headquarters for this exciting event. Now, we will open the call for questions. Operator, please go ahead. Operator Thank you. We will now be conducting a question-and-answer session. [Operator instructions] One moment please while we poll for questions. Our first question comes from the line of Jamie Cook with Truist. Hi. Good morning, and thank you for the questions. I guess, first, on the emerging customer initiative, how do we think about the 3,000 new customers that you're targeting -- that you talked about this quarter relative to your targets in the beginning of the year and how that compares to the $50 million of incremental revenue you once talked about? And given the combined sales force that you're doing, does that represent a cost savings opportunity potentially in 2025? And then my second question, just on the gross margins for the fourth quarter. Can you just elaborate how much mix and pricing is a headwind to margins sequentially? And just sort of what's going on in the pricing environment? That sort of seems like a new nuance. Just wondering, again, how much of a headwind this could be as we look further out. Thank you. So, I'll talk to your first question, and then I'll give it to Dennis, who give you a little color on gross margin. So, I think some context overall, I think as we all understand, Cognex has very strong share among the most sophisticated manufacturers. And we're looking to make our new technology more available to many more customers. And we think there are hundreds of thousands of customers like that. So, we expect to sign up 3,000 new customers through the current program in its very first year. So, it might sound like a small number, but it's big step, I think, that this first cohort is making. They're ramping. They're getting better every day. The rate of signing up new customers is increasing. And as we move into next year, we would expect more from them. Then we have the second cohort coming online, we'd expect the same or better from them as we get better and better at this initiative. So, you can see, we can give it as turning a flywheel, and it's starting to get momentum, and it's broadening our customer base over time. And then in context, we've sort of said in the past, we have about 30,000 customers. So, that 3,000 and hopefully, more from that cohort next year, the second cohort coming on and adding as we turn the flywheel faster and faster. You can see over a long period, we're pretty optimistic about how that can broaden our customer base overall. Second part of your question, you asked a little bit about the cost of serving customers. For sure, we're bringing in a different profile of Salesnoid and much more activity. They need make more sales calls as they're selling easier-to-sell products, and they are less expensive to employ. So, as our sales force grows and develops and turns over over time, we're seeing the potential for higher productivity per salesperson both from a sales amount and from a cost point of view. So, that's how we certainly think about that, and we have a lot of metrics that we use to track that. In terms of our expectations on entering the year, we were learning as we went along. I would say we're pretty happy with where this is getting in terms of the expectations we had originally. Dennis Fehr -- Chief Financial Officer All right. Let me take the second question. So, when we look at the gross margin, gross margin stepped down about 160 basis points sequentially. About one basis point -- sorry, one full percentage point of that is driven by Moritex, right, an addition of an extra month of Moritex financials. So, in the quarter, that dilutive impact was three points instead of the normal two points. And then the remainder of that is driven by mix and pricing. So, that means we talk about the mix side, then we have less of Consumer Electronics and more of Logistics. And then on the pricing specifically, we have been talking about specifically about China. Thank you. Our next question comes from the line of Tommy Moll with Stephens Inc. Please proceed with your question. Tommy Moll -- Analyst Good morning, and thank you for taking my questions. Rob, I wanted to start on Logistics, the progression there we're seeing again in the third quarter, presumably also in the fourth. And if we look around that end market, there are some fairly positive anecdotes just in terms of the pacing of warehouse leasing activity. Others in the market talking about some of the end users having absorbed a lot of the overcapacity that was built in years past. And so, I'm just curious, given that a lot of these large projects can be -- can have a lead time for you, where you have -- I don't know how early you take orders or how early the conversations start. But are you seeing any signs that there could be another inflection higher in the coming quarters? Robert J. Willett -- President, Chief Executive Officer, and Director So, we're certainly very positive about what we're seeing in Logistics currently. Revenue grew materially on a year-on-year basis for the third straight quarter in the third quarter. And we expect to finish this year in strong double-digit range. And it's pretty broad across our business, both in terms of the end markets that we're serving and in terms of geographies. And I think we all know that we're coming off two years of significantly lower investment. So, I think we're starting from a much lower position, basically where there was overcapacity built during the pandemic that had to be worked through. And it has worked through now. And we're getting back on to the nice growth path we had envisioned, and I think it's coming together very nicely. In your question, you asked about visibility. Yes, for sure, longer lead times, bigger projects. So, we do have, I think, good visibility for a business that we see in our pipeline, and we see it booking. When it comes in, how quickly or not can vary. The projects that on things coming in this quarter that come next and vice versa. But overall, yes, I think we have a pretty good sense of what's going on in that market. Some other things that we're seeing and that we expect to go on seeing, new customer activity is strong with many new customers signing up. We're seeing the industry embrace our edge intelligence platform, which really is adding a lot more capability to our customers in terms of understanding what's going on within the tunnels and read points they have in a warehouse, and those could be thousands of read points, so it's a very data-rich resource we're giving to customers. We're seeing more penetration of vision products, which is exciting to us beyond our traditional ID where we excel, but we want to go further. Nice momentum building in the parcel and post sector for our business. Although new capex and investment in that market isn't necessarily great. Our business is really -- we're starting to penetrate that sector and more exciting. And then emerging markets, especially in India, have a lot of potential for us overall. So, that's a little color on what we see overall. Tommy Moll -- Analyst Thank you. And then for a follow-up, I wanted to ask about something you mentioned on the emerging customer initiative. I think I heard you say the first cohort hit the $1 million-a-week run rate in the third quarter. And if I heard that correctly, I'm just curious, what does that number need to be to hit the targeted 30% operating margin for this initiative? Thank you. Robert J. Willett -- President, Chief Executive Officer, and Director Yes. I said almost $1 million per week, and that's correct. They did that. And then they're also referring significant business over to our account sales engineers who are closing vision business, etc. As we look at our models, it's some quarters before they break even and then start to add -- to reach that 30%. It's gross margin accretive to our target. So, the gross margin is great. The fall-through is great, as we see that. We've given you a sense in general and what we've invested in the program. Overall, there's a bit of attrition, obviously, as one would expect overall. So, I think we can all do the math together on kind of how that plays out. Dennis, I don't know if you'd like to weigh in. Dennis Fehr -- Chief Financial Officer Yeah. Maybe first, I think we wanted to give you this number, right, that you have a bit of a sense where is, right? You also mentioned it's not a number which we want to provide on an ongoing basis. So, I think in a big picture, what we have typically said is that like in the first year's investment year, right, we hired them last year, we trained them this year. This year is the year for breakeven and next year is basically the year where we really want to see it to be accretive to our numbers. So, it's perhaps how you can think about the progression. Thank you. Our next question comes from the line of Andrew Buscaglia with BNP Paribas. Please proceed with your question. Andrew Buscaglia -- Analyst Hey, good morning, everyone. So, for the guidance for Q4 for gross margin, are you able to say -- is that similar to Q3 and more tech would be above 70%? Or is there any other color you can provide to help us out with that? Robert J. Willett -- President, Chief Executive Officer, and Director Yeah, sure. I wouldn't give you a number on excluding Moritex, but I can talk you through a bit on the puts and takes here, right? So, if you take our Q3 '24 as a starting point, right, and we have benefits on the one side, right, we have one month less of Moritex? So, that's the percentage point on the positive side. But then on the other side, it's -- clearly, we also talked about where the growth is coming from. It's coming from Logistics. And then certainly, Q4 is typically the weakest quarter on Consumer Electronics. So, that means we have a headwind on mix. And then we have been talking also about the headwind on pricing, particularly in China. So, these are kind of the puts and takes from Q3 moving into Q4. Andrew Buscaglia -- Analyst OK. So -- OK. And with the emerging customer initiative, are you assuming contribution in Q4? And then should we expect a number or another target for 2025 as $1 million a week would imply a pretty material number? So just wondering what your thoughts are in terms of the guiding that. Dennis Fehr -- Chief Financial Officer Right. So, two things on that, right? First, we have been saying this $50 million run rate, not all of that is incremental, but we have been seeing have been continuous increase of bookings. In that regard, yes, absolutely, there a contribution baked into our Q4 guidance in terms of increased bookings coming out of the emerging customer initiative. And then second, when we talk about 2025, I think we think it's too early to talk about '25, right? So, we can talk about broader -- the market trends that we are seeing there. Thank you. Our next question comes from the line of Damian Karas with UBS. Please proceed with your question. Damian Karas -- Analyst Hey, good morning, everyone. I was wondering if you might be able to just speak to us about the specific trends you're seeing at the regional level. I know you said kind of all regions were up in the quarter, but maybe you could just take us a walk around the globe and where you're seeing things looking potentially any better or any worse than previously? Robert J. Willett -- President, Chief Executive Officer, and Director Yeah, I'm happy to do that. And I have circled the globe since we last spoke. So, I think I have some perspective on this. I think the Americas market is -- so overall, I mean, markets are tough, right? You look at the PMIs that we see overall. Generally, they're pretty weak on a global basis. And I think that's a good metric of what we see in markets and current feelings across really all the markets that we're serving. And that doesn't so much apply to other sort of growth areas like logistics and semiconductors that are really helping us. But everywhere else, it's weak. Very weak, I would say, overall. Americas, it's -- that certainly applies. You can see that, particularly negative sentiment in automotive, I would say, overall, other markets as sort of low but stable. I would characterize. In Europe, similar story, even more concern, I think, around automotive. We put up some pretty good results in Europe in the last quarter, and I think we probably gained some share there but helped a lot by our Logistics, the performance of our Logistics business. But the factory automation situation continues to be pretty weak there. China, we can go into that in a lot more detail if we're interested if others if you want to talk about it. But I think the market there has been weak for a long time. We've seen seven consecutive quarters of decline in our business, but we actually grew there last quarter and mostly as a result of the timing of electronics, but our Automotive business in China did grow last quarter. And I think we'll hear and see, and my experience having visited China this month is the automotive industry in China is strong, strengthening, and they have overcapacity, which means their vision investments aren't perhaps strong, but the overall market sentiment there in automotive is perhaps a little better than anywhere else. Japan might be a slightly better market overall, I think, helped by SEMI, helped by a weak yen. Certainly, we're we see some more positive sentiment there. And then probably the rest of Asia definitely is more of a growing market, but still a lot of tentativeness around what's going on in the world about the geopolitical situation. So, I think that would be a little bit of a color on how I would call the markets overall around the world. Damian Karas -- Analyst That's really helpful. And Rob, you talked about some of the AI tools that you're building into your solution set. I'm curious if that's changing your pricing dynamics at all. Or maybe the best way to think about that is just as a means to get new customers on board or existing customers to refresh. And also, I'm just kind of curious to what extent AI might be driving an investment cycle for your customers, right? Like if I just think about Consumer Electronics, I presume a lot of those customer products are going to be evolving to become AI-enabled. So, kind of getting beyond the near-term CE pressures, how are you thinking about that? Robert J. Willett -- President, Chief Executive Officer, and Director Great. Yeah. Thank you. So, what's going on in the world of AI, as we all hear about, is it's moving at a great pace. It's very exciting, the capabilities. I alluded to some in the -- in my opening remarks that really are taking very complicated problems that really weren't solvable by machine vision before or not economically solvable. And making them much easier to deploy, right? This is a very sophisticated technology overall, but what -- it is allowing us to serve more customers who can now apply our technology in a more robust way. And it's the beginning. There's a lot of very powerful technology coming to market. We're investing in it. We think we're ahead in that space based on the acquisitions and the investments that we've made and the caliber of our engineers. And it's something we have very, very clearly in our sights. I've met with some of the most sophisticated manufacturers in consumer electronics and other spaces over the last few months. And I think they're very excited about as we are about what we see the potential of this technology is. It does have the potential for us to broaden what we do and serve many, many more applications and to do so more cost-effectively with less engineering time spent by us or by our customers overall. And then as we've alluded to and continues to be true, this technology, it gets applied in a very powerful complex way. And I think of NVIDIA chips banging out huge data masses of data to accomplish tasks. And then we're very good at taking that technology and deploying it in a much more energy and processor-intensive way into embedded systems. And that's what we see more in lower price point products, selling what we call edge learning technology that can be trained on just a very few samples. And it doesn't have the power, but has, in some cases, quite close to the power of the products that we sell at the high end. So, that's something that we then will allow -- is allowing us to broaden our customer base. And that links very closely to our aspirations with the emerging customer segment, where we can take powerful technology that then over time, we learn how to make easy to deploy, to put on low-cost hardware and sell very broadly and broaden those customers away beyond the 30,000 toward the hundreds of thousands we aspire to. So, that's kind of the journey that we're on, and we're excited. But we also know the whole industry is moving fast in that direction, so we need to make sure we're innovating and staying ahead. Our next question comes from the line of Joe Giordano with Cowen and Company. Please proceed with your question. Unknown speaker -- Cowen and Company -- Analyst Good morning. This is Michael on for Joe. So, earlier, you mentioned about $1 million per week sale cadence from that first cohort for the emerging customer -- excuse me, customer initiatives. And then like a certain degree of referral business. So, all this was hit despite, clearly, factory automation being weak, and that's like the primary end market for those types of customers. So, can you just give us a sense of what the revenue uplift would be in a more normalized market environment? Thank you. Robert J. Willett -- President, Chief Executive Officer, and Director Yes. I wouldn't say it's a $1 million cadence. I'd say it's growing all the time, right? So, we've hired a team. We're getting them out and they're growing. And in the third quarter, they were selling almost $1 million per week. Our aspirations are for them to sell more and more as we move forward. And they are referring business, you're quite right. In terms of where that ends up, in terms of where we can get to and the potential of that, that's something that we're going to discover. But right now, we -- as we're looking at that hill and we're seeing our progress, we're pretty happy with what it is, but I can't give you more detail on that at this point. Dennis Fehr -- Chief Financial Officer Right. Maybe to add -- I mean, what we also said is that in this quarter, we made changes that now these emerging customer Salesnoids also selling to existing customers. And therefore, not all of this revenue coming out of that is incremental, right? So, in that regard, keep that in mind when you think about that $1 million. Robert J. Willett -- President, Chief Executive Officer, and Director Yeah. Yeah. And actually, to that point, I think it might be interesting. We gave you a concrete example of why we're doing that. We definitely have seen within our existing customers that we're just not making enough calls within them at deeper levels within and broadly enough within those existing customers. So, I was at one of the world's largest automotive companies in recent weeks. And I think it's kind of instructive as to who Cognex is. I was in there with the head of automation engineering in a three-hour meeting, discussing the application of advanced machine vision to robot guidance. Right? And just imagine those kind of videos you see on YouTube, right? OK. And a great meeting, I walk out of the meeting, and I noticed there's a cubicle outside with one of our competitors demoing vision sensors and ID products. And that's the place generally we haven't been at Cognex, and there's a lot of business in that space. And with the emerging customers calling at existing accounts, that's where we see we can get a big bang from the buck in addition to signing up these thousands of new customers were targeted. So, I hope you see that and perhaps you can also see why it's a little difficult for us then to pass and quantify what's incremental versus just pure sales of dollars. Thank you. Our next question comes from the line of Jim Ricchiuti with Needham and Company. Please proceed with your question. James Ricchiuti -- Analyst Hi. Thank you. I wanted to focus on the -- in the other category that you guys sometimes talk about, it's in your deck. SEMI, strength in semi, I wonder if you can talk to where you're seeing the strongest demand, particularly in light of concerns some people have about maybe a more modest recovery in the WFE market in the early part of 2025? And then also, I noticed you highlighted strength in the medical market, Rob. Yeah. Hi, Jim. Happy to do that. Thanks for the question. So, yes, I mean, it is hard to call a long-term trajectory of semiconductor capex have been -- having been in that a long time as have you -- we know how that market is. I think there's a debate about are we in -- are we at the start of a super cycle or are we really -- are we in more of a cyclical position? We talk to machine builders. I'm not sure I have great visibility on that either, to tell you the truth. But we are seeing strong investment definitely and a lot around high-bandwidth memory, relating to a lot of chips for data centers overall. And I think just the quality of Cognex's technology in that space for precise alignment and inspection for traceability, for wafer probing for those type of applications, is very well recognized and good. So, we see that. And then our business with Moritex really -- and Moritex was a significant part of its revenue is in SEMI is giving us nice additional exposure to that market and cross-selling opportunities to sell optics or software where we were previously only selling one in, respectively, Cognex or Moritex. So, we like what we see. We're confident about what we're seeing at the moment in the near term. But next year, perhaps more difficult to call, as you note. The second part of your question asked about medical-related industries, which are about 10% of our revenue. They grew nicely in the third quarter. And although year to date has been down, I think what we're seeing is pretty consistent with what other players supplying into this industry are seeing, was -- there was just an overinvestment in -- by big machine builders around COVID, around kind of supply chain disruption that we've seen. It was kind of massive, I would say. And I think we've now seen that unwind. And I think we're probably going to be returning over the next few quarters to a much more normal cadence of spending and investment in collaboration with those kind of companies. We have great technology for them, and particularly our new edge learning tools and deep learning tools, I think, really are resonating very well with those customers who want to do a lot more inspection of medical samples and inspection of medical products to make sure quality is there to see color changes in test tubes and layers of fluid in test tubes and applications like that. We all know it's a very long sales cycle also. So, while they may have over-ordered for some of the existing customers, we expect new customers to come online, who we would think would be long-term customers in that space. And I do think probably as we look at the vision industry and we think kind of longer term, that the investment we're making in AI and the capabilities we're having, not everybody is going to be able to do that, right? So, certainly, as I meet with customers, particularly in the life science segment, there's potential reduction of players who can really meet the needs for what they want to do, and we're excited to be there. James Ricchiuti -- Analyst Got it. Just a quick follow-up. Rob, it sounds like you were in China and spent a lot of time with customers. Just curious, I know it's early, but are you seeing -- are the customers that you talked to at all hopeful of stronger business just given some of the government initiatives to try to stimulate growth? Robert J. Willett -- President, Chief Executive Officer, and Director Yeah. It's not obvious to me, Jim, that that stimulus impacts manufacturing per se. I think it's about -- probably more about the real estate market. But if it feeds back into consumer demand, then that obviously drives domestic consumption and manufacturing. And I don't think it's there yet overall. But as I mentioned, if you look at our overall business in China, it's been declining sequentially for seven quarters, but we did buck that trend in this quarter. Too early to say whether that is a turning point or really just year over year. I'm not talking about sequentially year over year. Yes. Anyway, so I think too soon to say is the answer to that question. But the market itself is weak, very weak compared to where it was. And there's a lot of excess manufacturing capacity, which is meaning not a lot of desire to invest in new automation or applications at the moment. And then in our own space, there are more local Chinese competitors who are getting stronger. They're gaining share, I would say, particularly versus European companies and some of the smaller Japanese players in that space. And as we think about our position in that market, we believe very strongly, it's important that we maintain share. So, particularly at the lower end of the market, simpler applications like simpler barcode reading. We're pricing just more aggressively in that market to make sure that we're maintaining share while we get our new products ready, which will be higher gross margin, and then we can be there with very, very competitive technology as we have as the market recovers. And then we tend to sell older generations of products at those lower price points to make sure that we're still maintaining share. But that is a little dilutive to our gross margin. And you'll see a little of that in the Q3 results if you look closely. Thank you. Our next question comes from the line of Jacob Levinson with Melius Research. Please proceed with your question. Jake Levinson -- Analyst Hi. Good morning, everyone. Rob, just on the Logistics business. I think we've heard some mixed signals from some of the players in that space, and it feels a little bottomed-out at this point after the post-COVID overhang. I know a few years ago, you had a pretty large concentration with an e-commerce customer that we all know well. You mentioned that you're making progress in post and parcel. And I mentioned a Korean e-commerce company. So, can you just give us a sense of how that business has changed over the last couple of years and maybe just the breadth of the customers that you have today versus a few years ago? Robert J. Willett -- President, Chief Executive Officer, and Director Yes. So, I think -- I'm not sure I heard you correctly. If you said bottomed out, I would agree with that. I think that's kind of where we are, and we're now seeing a nice growth trajectory. And probably we have now for a few quarters. And that's building. That is really happening across all of our Logistics business, though, I would say, maybe for different reasons. I think the big e-commerce players are coming back and spending strongly and rolling out new generations of automation, and you can see that and what they're saying publicly. And we're right there with them, and it's very exciting. And then you see that even in the customers I mentioned out in Korea or in others overall. But then, yes, our more second tier of customers, smaller players, what we sometimes call our base logistics business. That definitely is signing up many new customers, and we're seeing a lot of nice business there. I think of a large -- a sort of an e-commerce company, not huge in terms of revenue, but playing in a niche, actually, a few companies like that, whether it's pet food or food delivery type businesses. Certainly, we're seeing a pickup in the number of customers we have in those spaces and the growth and investment that we're seeing. So, I think it's still quite early, I think, in the recovery. But what we're seeing in terms of activity, what we're seeing in terms of their response to our new products, which we've really spent a lot of time and investment in and are really now hitting their strides nicely is something we're encouraged by. And likewise, our parcel and post, a segment where we've been underrepresented. Well, I don't think the segment itself is exactly investing heavily. I don't. I think the -- if you look at the capex numbers from the big parcel players are kind of down is what they're saying. But we, ourselves, because our share was low and we have great technology now, we're seeing growth in that business for us, too. So, that's an overall picture for you. Jake Levinson -- Analyst OK. That's helpful. Just pivoting quickly on semiconductor. I feel like that's -- that was the original machine vision market, I suppose, way back when, but as I understand it, a lot of those customers brought those capabilities in-house a long time ago. It's not a market that I think we've heard a lot about from you folks in the last couple of years. But what's changed? I mean, have you just had success? And you mentioned the machine builders, have there been other portions of that market where you've been able to make inroads over time? Robert J. Willett -- President, Chief Executive Officer, and Director Yeah. I think -- gosh, we just stopped our history books. At Cognex, we go about 30 years, for sure. I think directionally, I think I'm right in saying that in the late '90s, 70% of our business was in Japan, and it was almost all semiconductor. So, things have changed a lot. And you're right, a lot of those capabilities were brought in-house in the late '90s. But the Cognex technology is great, and we have -- they rely on us to do very difficult tasks that no one else can do, and they have spec-ed into their machines in a market that generally doesn't change providers of technology very easily and more of a copy exact kind of mentality. So, we benefit from that in a lot of areas have been inspection and code reading through the wafers and other difficult material for high-speed pick and place and align-type things that just we do better than anybody in the world and work really closely with those big machine builders. So, generally, our business with them is going to kind of move with their own sales. It's kind of -- it's a market-driven thing where we are spec-ed in. And then we see --and we are seeing opportunities to sell newer technology, particularly around the application of deep learning. Some of the factors I talked about when I talked about AI and what it can do, which can, in many cases, be incremental business into similar applications that can be done more effectively, require less engineering or so. So, overall, it's a relatively small number of customers compared to what we see in the rest of our business. Our share is long-term and good with them. And we're seeing just the quality of our technology and the demand for their products really leading to some nice growth for us. Thank you. Our next question comes from the line of Rob Mason with Baird. Please proceed with your question. Rob Mason -- Analyst Yes. Good morning. Hopping between calls here, so apologies if this has already been addressed. But Rob, I heard your commentary opening up around Automotive. Taking an incremental step lower, it sounded like. I'm just curious where you think that is in terms of the market bottoming. And what potentially could be a catalyst there to see investment flow back? Does it just need to be redirected back toward more traditional? Or are you still going to be relying on EV to drive that? Robert J. Willett -- President, Chief Executive Officer, and Director Yeah, Rob. I think it's -- I think the market is -- looks very weak, and sentiment in the market is very weak. So, we're not -- certainly not expecting a recovery in that market anytime soon. It will recover, right, but not that soon, I think. I think as we might segment by region and applications. So, I think the companies I've spoken to in America and Europe are really feeling quite burned by their investments in EV that they haven't really come through for them, right? And I think we probably all know that. I think they built infrastructure to supply perhaps hundreds of thousands of EV. I'm thinking of a Tier 1 supplier I met with recently who I've made very big investments to supply one of the biggest automotive companies in the world with hundreds of thousands of a particular area, and it's really just tens of thousands, and they put capital into that, and it's painful for them. And I think sometimes with different pricing where you want to play in the EV space, you've got to price lower because it's the future, right? So, I think I heard quite a lot of that in Europe and America. And so, I think rebuilding around that when the EV supply -- EV demand isn't there, right? And we will read a lot about that, the lack of charging infrastructure, the lack of range, the reasons Western cost -- the reason that Western consumers aren't buying EVs. That will change at some point, but I don't think in the near term, right? Because I do think in the long run, the technology will be superior, and I think it will be driven and adopted. But it's going to take time. And where will it happen then becomes the next question, right? So, I think as I'm in China, in short, you hear those people who go to China and see it's a very different picture there. It's really great movement in EV. EVs are being adopted and embraced by consumers and driven by the government there. And if you look at our own business, we did actually see some growth in the EV business in the last quarter while we saw the rest of the sort of the non-EV business slow down. So, that's -- those are the dynamics that I think are in China and are going to continue. But there is an overcapacity in automotive in China. So, I think that has to be consumed first. And then I think the other sort of other countries that are big in automotive, one thinks of Japan and Korea. I think they're more -- they've been faster or perhaps they've just been maybe fast cross lower, in some cases, and they're more in the hybrid mode. And I think that's really paying off well for them now. So, I think where you might see some better results out of -- particularly out of Japanese companies, it's because they've been a little more thoughtful and cautious. And they have great use for our technology, but it's early days in terms of how they're applying it more to inspection or other aspects of batteries and other newer energy technologies that they have under development. So, I've said a lot. But overall, it's a pretty mixed picture, but we're not optimistic next year or at least for the next few quarters in terms of Automotive. Rob Mason -- Analyst Understood. OK. And just real quickly, just -- I know it's, again, a challenging market backdrop, as you noted, but you introduced some newer 3D vision products this year. I'm just curious, what the sense of uptake has been there? Robert J. Willett -- President, Chief Executive Officer, and Director Yeah. We launched an excellent product, the first product ever to bring AI to 3D, an industrial 3D system. We launched it in April. We're happy to see the growth that's going on in that, and we think very much, it has very significant opportunity from here. So, it's something we're pleased about. It's a good example, I think, of us launching new products, high gross margin products, high growth potential. We hope to do a lot of that next year and sell them through what is a larger sales force to many more customers. And I think we're a little low on time. Maybe that's a good note to end on. Thank you. So, I'll -- operator, I'm going to wrap up. I'm just going to say to everybody, I really, really appreciate you joining us this morning and your questions, and we look forward to seeing you again on the next quarter's call.

Earnings call: Intapp reports robust growth with focus on cloud and AI By Investing.com

In the Fiscal First Quarter 2025 Earnings Call, Intapp (INTA), a leading provider of business applications for professional and financial services, reported a solid financial performance. CEO John Hall and Senior Vice President David Trone announced a 27% year-over-year increase in cloud Annual Recurring Revenue (ARR) to $309 million, accounting for 74% of the total ARR of $417 million. The company's emphasis on cloud solutions and advanced AI capabilities, including its partnership with Microsoft (NASDAQ:MSFT), has contributed to its strong results. Intapp ended the quarter with a non-GAAP diluted EPS of $0.21 and free cash flow of $24.1 million. Intapp has demonstrated a strong performance in the first quarter of fiscal 2025, driven by its strategic focus on cloud solutions and AI capabilities. The company's partnership with Microsoft and its growing ecosystem of partners have positioned it well to capitalize on the increasing demand for cloud-based services in the professional and financial sectors. Despite a slight deceleration in cloud ARR growth and a decrease in net new ARR, Intapp remains optimistic about its growth prospects and is actively working to enhance its offerings and client engagement. With a healthy market and a solid execution strategy, Intapp is poised to maintain its momentum throughout the fiscal year. Intapp's strong financial performance in Q1 2025 is reflected in several key metrics from InvestingPro. The company's revenue growth of 22.7% over the last twelve months aligns with the reported 17% total revenue growth in the earnings call. This sustained growth trajectory is further supported by an InvestingPro Tip indicating that net income is expected to grow this year. Despite the current non-profitability over the last twelve months, another InvestingPro Tip suggests that analysts predict the company will be profitable this year. This optimism is consistent with Intapp's positive non-GAAP diluted EPS of $0.21 reported for Q1 and the company's guidance for continued profitability in Q2. The market appears to be recognizing Intapp's potential, as evidenced by the stock trading near its 52-week high, with a strong return of 59.43% over the last three months. This performance underscores investor confidence in Intapp's cloud-focused strategy and growing AI capabilities. It's worth noting that Intapp holds more cash than debt on its balance sheet, which provides financial flexibility to invest in growth initiatives and weather potential economic uncertainties. This solid financial position is particularly important given the company's focus on expanding its cloud offerings and AI capabilities. For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and insights. Currently, there are 11 additional InvestingPro Tips available for Intapp, providing a deeper understanding of the company's financial health and market position. Operator: Good day, and thank you for standing by. Welcome to Intapp's Fiscal First Quarter 2025 Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Trone, Senior Vice President, Investor Relations. David, please go ahead. David Trone: Thank you. Welcome to Intapp's fiscal first quarter 2025 financial results. On the call with me today are John Hall, Chairman and CEO of Intapp; and David Morton, Chief Financial Officer. During the course of this conference call, we may make forward-looking statements regarding trends, strategies and the anticipated performance of our business, including guidance provided for our fiscal second quarter and full year of 2025. These forward-looking statements are based on management's current views and expectations, entail certain assumptions made as of today's date and are subject to various risks and uncertainties, including those described in our SEC filings and other publicly available documents that are difficult to predict and could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Intapp disclaims any obligation to update or revise any forward-looking statements except as required by law. Further on today's call, we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results, including non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP diluted net income per share and free cash flow. As a reminder, all of our financial figures we will discuss today are non-GAAP, except for revenue and revenue growth and total remaining performance obligations. Our financial results, along with reconciliations of GAAP to non-GAAP financial measures, can be found in today's earnings release and its supplemental financial tables, which is available on our Web site and as an exhibit to the Form 8-K furnished with the SEC prior to this call or a supplemental financial presentation, which is available on our Web site. With that, I'll hand the conversation over to John. John Hall: Thank you, David. Good afternoon, everyone. Thank you for joining us today as we share the results of our fiscal first quarter. Commencing our fourth fiscal year as a public company, I'm pleased to share that once again we've achieved strong quarterly results supported by cloud ARR growth, new products, new partnerships, new logos and expanded client accounts around the world. We also added new applied AI capabilities to our platform and furthered our strategic partnership with Microsoft. I'll share details on these select growth drivers throughout this call. In Q1, our cloud ARR grew to $309 million, up 27% year-over-year. Cloud now represents 74% of our total ARR of $417 million. In the quarter, we earned SaaS revenue of $77 million, up 30% year-over-year and total revenue of $119 million, up 17% year-over-year. Now, I'd like to share some highlights from our fiscal first quarter. I'll start with how we're executing on our vertical AI roadmap, specifically our continued applied AI innovation, its practical applications and our increasing client adoption. First, we introduced two new AI powered features for Intapp Assist for DealCloud. As you may remember, Intapp Assist brings generative AI to the daily work of professionals, helping them better apply their intelligence while driving speed and accuracy. Intapp Assist now helps professionals make sourcing recommendations to help professionals quickly identify ideal target companies aligned with firm strategy, such as ideal investment candidates. And Intapp Assist now provides smart tagging to help professionals analyze and organize communications and meeting notes, making complex data easier to search and apply. We are excited that rising client adoption of Intapp Assist for DealCloud is validating our applied AI strategy and its capability to drive tangible results and positive outcomes for our clients. For example, Serena Clay, Director of International Marketing and Communications at International Investment Bank, DC Advisory said, I think a lot of the time what other companies are saying their AI tools can do can be quite performative. But I think the depth to which DealCloud has demonstrated commitment to it and also their thought process and roadmap for it has been really impressive. Second, we expanded the Intapp Assist product brand by announcing the general availability of Intap Assist for terms. This new generative AI feature makes it easier for legal professionals to comply with client terms by giving them immediate answers to their questions about contractual terms right in Microsoft Teams. This significantly reduces the time and research needed to comply with outside counsel guidelines and the firm's client and engagement letter commitments. And it's another example of how we reach professionals in the Microsoft apps they're already using every day, easing adoption and furthering their success. As Carly Numrich, risk counsel at Fredrikson & Byron said, our staff no longer have to go into Intapp terms and search for the right document or contact me with a question. Now they're able to pull up Microsoft Teams and ask it terms questions, such as, what are my payment terms with this client, and Intapp Assist provides the answer. It's a much more streamlined process. And we are excited to share that Intapp Walls for Copilot is gaining traction in the market as more firms look to apply trusted AI. The solution helps professionals use Microsoft Copilot AI in a secure compliant manner, while avoiding revealing protected information. We continue to see opportunity to expand our compliance footprint and help firms benefit from AI while adhering to their regulatory ethical and client commitments. As Torie Carrillo, the application manager from law firm Nelson Mullins told us, because we use Intapp Walls to enforce access rules across our networks and applications, I can confidently point Microsoft Copilot wherever we want and CoPilot will pull only from matters that the user has permission to access. These new AI features and capabilities are great examples of how our co-innovation with Microsoft is helping to propel our applied vertical AI strategy forward. Speaking of Microsoft, I'll now turn to partnerships and share how we're expanding our robust partner ecosystem to drive growth. Microsoft continues to be one of our most prominent partners. We're proud to have launched fiscal 2025 with renewed top tier and global ISP partner status with Microsoft based on strong joint go-to-market activity and co-sell success. We continued to grow the number and volume of transactions through the Azure Marketplace in Q1 applying to clients in all our verticals and for both land and expand deals. For example, this quarter one of the world's largest multinational investment banks significantly increased its number of DealCloud seats for its capital formation team as it made the use of DealCloud mandatory for specific roles and approval processes. Next, Cassels Brock & Blackwell, one of the largest business law firms in Canada, purchased Intapp Conflicts from the Azure Marketplace to manage its conflicts clearance process, reputational risk and adopt a solution that can scale with the firm's rapid growth. Additionally, our updated partner program launched a year ago continues to attract new partners in our target markets. We now have 135 data, technology and services partners in the program. We're also excited about another six partners who joined the program last quarter, five of which are DealCloud integration partners that bring additional data sets to our already robust platform. I'll turn now to Q1 wins and cloud migrations and share some examples of how we're continuing to grow our client base, expand with existing clients, migrate clients to the cloud and gain traction in new markets. First, I'm pleased to share that we're continuing to grow through the addition of new clients, including Crete PA, a private equity backed network of accounting and professional services firms, which selected Intapp Conflicts to centralize, systematize and simplify the conflicts clearance process for its member firms. Next, a nationally recognized restructuring and financial advisory firm, which chose Intapp Conflicts and Intapp Intake to support its growth through acquisition. We chose these as illustrations of the growing need for compliance checking by accounting firms as growth through private equity investment and acquisitions increase in that vertical. We see this trend as a significant growth area for Intapp. And as we continue to win new clients across all our verticals, both domestically and internationally, here are some examples. In the US, a top ranked venture capital firm focused on revolutionary technologies chose DealCloud for its robust CRM capabilities for investor tracking, investor reporting and pipeline management. Next, internationally, TGS Baltic, a leading commercial law firm operating across the Baltic states chose DealCloud to improve its client account program structure and effectiveness to drive cross selling and improve identification of new sales opportunities. Additionally, cross selling and upselling success in our existing accounts continue to drive strong net revenue retention. A few notable examples include national CPA and consulting firm Forvis Mazars, which uses Intapp Employee Compliance to manage personal independence and recently expanded its relationship within Intapp. The firm added DealCloud to now support its capital advisors team by leveraging AI to manage complex deals more efficiently. Next, a multinational law firm and long time user of our risk and compliance solutions chose DealCloud to support its private equity team. Next, a fast growing business advisory interim management and investment banking firm increased its number of DealCloud seats by almost 400%. And moving on to cloud migrations, we had steady progress here as well this quarter, including Am Law 200 firm, Honigman, which chose to migrate its four Intapp compliance solutions to the cloud so it can gain access to the latest applied AI and streamline its internal processes. And finally, a New York based Am Law 100 firm chose to migrate its instance of Intapp Time to the cloud, supporting its goals of achieving more compliant time and billing, more efficient and profitable matter management and increased client satisfaction. In conclusion, we're proud of our strong performance in the first quarter and we're optimistic about our continued growth opportunities. As our Q1 performance has shown, we continue to grow by adding new capabilities to our platform and increasing our global and enterprise go-to-market reach. We see continued opportunity, both to add new clients across a broad TAM and to deliver greater value by expanding within our existing client base. We're serving a durable end market with our subscription revenue model, industry specific cloud platform and applied AI and compliance capabilities. We have a great growth opportunity to drive AI, cloud adoption and modernization across all the industries we serve. As always, I'd like to thank our clients, our partners, our investors, our Board and our global Intapp team for their teamwork and dedication. Thank you all very much. Okay, David, over to you. David Morton: Thanks, John. And thank you everyone for joining us today. I'm pleased to report a strong first quarter performance, driven by solid SaaS revenue growth and expanding client base and enhanced operational efficiency. Together, these achievements position us to extend our leadership as we pursue an exciting market opportunity in fiscal Q2 2025 and beyond. As we began our fourth fiscal year as a public company, we announced a strategic shift in February focusing on our cloud business over on premise and service offerings. Accordingly, our disclosures will now highlight SaaS revenue and cloud metrics. Starting this quarter, our income statement separates SaaS revenue from on-premise support to better highlight the growth trajectory in our cloud business. For fiscal Q1, SaaS revenue was $76.9 million, up 30% year-over-year, driven by new client acquisitions, contract expansions and the migration of on-premise products to the cloud. As of fiscal Q1, 92% of our clients have adopted at least one cloud module. As a reminder, our previous disclosure of subscription license included the upfront portion of our on-premise contracts. We now report this as license revenue, which also includes the on-premise support portion that previously appeared in SaaS and support. License revenue was $28.5 million in fiscal Q1, up 2% year-over-year where price increase and contract expansions were offset by migrations to the cloud. To help bridge the previous SaaS and support taxonomy, revenue totaled in FQ1 to $91.5 million, up 25% year-over-year, driven by sales to new clients and expansion of existing clients through cross selling and upselling initiatives. Professional services revenue totaled $13.4 million, down 8% year-over-year, reflecting our strategy to deemphasize services revenue. This approach aligns with our focus on deferring more of these functions to our partners, allowing us to concentrate on overall client satisfaction. Total revenue was $118 million, up 17% year-over-year, driven primarily by sales of our cloud solutions. Our international business continues to present growth opportunities for expansion and greater platform utilization beyond the US. Revenue from our international operations remained strong, comprising approximately 34% of total revenue in fiscal Q1, up from 31% a year ago. As discussed in recent quarters, we continue to invest in and expand our alliances and partner ecosystem around Intapp. Since elevating our partner program a year ago, we have attracted new partners across our target markets, now totaling 135 data, technology and service partners, a 20% year-over-year increase. With additional accreditations and enablement, these investments enhance our capabilities and deal generation, technology, data and implementation, and we remain optimistic about their ongoing impact. Intapp's new vertical SaaS AI offerings, Assist and Walls for CoPilot, contributed once again this quarter. While it is still early in our product rollout, pipeline development and client provisioning, we are excited about the growth prospects ahead in fiscal 2025 and beyond. Q1 non-GAAP gross margin was 76.3%, up from 71.8% in the prior year period. This margin improvement was driven by our services mix and cloud optimization efforts. Non-GAAP operating expenses totaled $75.6 million compared to $66.5 million in the prior year period, reflecting our continued investment in product led growth. As we continue to focus on our operational efficiency, non-GAAP operating income was $15.1 million as compared to $6.4 million in the prior year period. Non-GAAP diluted EPS was $0.21 in the first quarter of fiscal 2025 as compared to $0.06 in the prior year period. Free cash flow, which is defined as our cash flow from operations less capital expenditures, was $24.1 million for the first quarter or 20% of total revenue. We exited the quarter with $253.8 million of cash and cash equivalents. Turning to our key metrics. Cloud ARR was up 27% year-over-year and total ARR was up 19% year-over-year. Total remaining performance obligations were $549.4 million, up 32% year-over-year. Overall, we remain committed to executing our land and expand model, ending the quarter with over 2,600 clients. Of these, 707 had an annual recurring revenue of at least $100,000, up from 626 in the previous year. Our cloud net revenue retention rate highlights our ability to retain and steadily grow business with existing cloud clients, reaching 119% in Q1 FY25. Now turning to our outlook. For the second quarter of fiscal 2025, we expect SaaS revenue of between $79.5 million and $80.5 million. As these are newly provided revenue outlook metrics, we are also providing the implied year-over-year growth outlook of between 26% and 28%. Total revenue in the range of $120.5 million and $121.5 million, mon-GAAP operating income in the range of $14 million and $15 million and non-GAAP EPS results of $0.15 to $0.17 using a diluted share count weighted for the quarter of approximately 83 million common shares outstanding. For the full year fiscal 2025, we expect SaaS revenue between $327.6 million and $331.6 million. As these are newly provided revenue outlook metrics, we also are providing the implied year-over-year growth outlook of between 26% and 28%. Total revenue in the range of $495.5 million and $499.5 million. We also expect non-GAAP operating income in the range of $61.5 million and $65.5 million. And non-GAAP EPS in the range of $0.73 to $0.77 using a diluted share count weighted for fiscal year '25 of approximately $84 million common shares outstanding. Thank you. And I'll now turn the call back to the operator. Operator: [Operator Instructions] And our first question comes from Steve Enders of Citi. Steve Enders: I guess maybe just to start, it would be helpful to, I guess, get a update on maybe what you're seeing out there in the deal environment and if there has been any kind of change in some of the macro or how you're thinking about financial services side, in particular given some of the softness that you saw there in the past year or so? John Hall: No, we have not seen a change in the deal environment. Demand has been strong, our pipeline is quite strong. We do have the experience of lumpiness in the large deals as we've talked about from time to time, but we've not seen anything related to macro even in financial services. So that's been great. Steve Enders: I guess maybe just to ask a little bit differently, I think we're kind of getting the question from investors just on some of the ARR and billing dynamics here. And I guess, it would be good to kind of get your view on maybe how you kind of view the year shaping up from a timing perspective , and if this is maybe kind of in line with your expectations? Or just how you would kind of characterize how this year might take place versus what you might -- what we might have seen in the past? John Hall: So as we've discussed a little bit, Q4 was very strong. We had set up a new strategic team at the beginning of fiscal '24. We had done some investment over the previous years to really develop our enterprise grade features, because we were getting interest from larger and larger accounts, and we had good success with that model in '24. So at the start of 2025 here, we moved more of our sellers into that same model as strategics, we're calling it enterprise. And we've given more of the named accounts to both new logo pursuit team and a existing account, account management cross sell, upsell team to take advantage of all the new clients that we brought on board in that tier. So Q1 is definitely the time that we move the accounts to the sales team that has good success there. We also have the proof point from last year of how well that went. And there's, as we talked about on the investor day, 70% of our SAM is in our top 2,000 accounts. So we want to make sure that we put the right resource allocation to set ourselves up for the $1 billion and more. And that's going well but we did see some pause in the closing of those large accounts. We did not see anything like that in the midmarket accounts, which gives us good evidence about the macro. Also the commentary has been quite strong and the pipeline is the strongest it's ever been. Operator: Our next question comes from Kevin McVeigh of UBS. Kevin McVeigh: [Technical Difficulty] just framing the impact of the alliance that you have particularly is, let's say, the system continues to kind of be enhanced and just so we can get a sense of percentages more broadly kind of where it is today and what that can be over time? John Hall: The beginning of your question was... Kevin McVeigh: Just more -- how should we think about kind of the alliances, and does that kind of enhance over time or what percentage of revenue that is today and how can that scale over time? John Hall: The Microsoft partnership is the largest one obviously. We've had a very good amount of progress throughout fiscal 2024 and continued in the first quarter of fiscal '25 with increased co-marketing and co selling activities. Obviously, our product announcements around Intapp Assist and Walls for Copilot have gone very well. The Azure relationship where the firms can spend part of their minimum Azure spend, their MAC agreement with us because our entire portfolio is available now on the Azure Marketplace, and the Microsoft sales reps receive commission and quota relief when they sell Intapp products. So all the components are aligned for us to be co-selling. We also requalified for Microsoft's top tier status and global IC status, which we're very excited about and we've got good collaboration in the field. We even have some very important large account, deal sharing -- lead sharing going back and forth and we're co-selling in several important places. So I'm excited about the relationship with Microsoft. It takes a little while to get that going but a lot of good progress. And then in addition to Microsoft, we have very strong partnership growth. I gave some stats in the prepared remarks. But a lot of data partners coming on board, a lot of services partners helping to expand our reach to different parts of the market and internationally, the partnership program is really developing well. Kevin McVeigh: And then just to follow-up on that, obviously, you're seeing a lot of outsized success on the margin in terms of literally the margin upside, particularly relative to how you're guiding. Any thoughts as to what's driving that, number one? And then philosophically, does that continue to flow to the bottom line or do you use that as an opportunity to reinvest and capture more of the gen AI opportunity? Operator: One moment for our next question. John Hall: Kevin, just to answer your question on margin. Dave, do you want to take that one? David Morton: We'll continue to work on our productivity and efficiency, not only on the gross margin as we continue to scale, we still have some opportunity there, we've been working. And I want to thank publicly our services team continue to bring that to not only neutral, but beyond that, as well as there's still scale opportunity within our cloud operations altogether. And then when you go below the line, clearly, we're going to continue to invest in the company. We've continued to invest. So this hasn't been an absolute reduction. But where you have seen scale has been both in our sales and marketing productivity as well as in our G&A. And so when you think about how we continue to invest and stay ahead of the front, specifically in our product led growth organization, that's where you'll continue to see more of an orientation within our product and engineering teams, which gets to your question of gen AI and other narratives on that. Very excited about our roadmap and what that will continue to entail, as well as where that leads us in the back half of this fiscal year. Operator: Our next question comes from Alexei Gogolev of JP Morgan. Alexei Gogolev: John, David, may I confirm the implied guidance for year of SaaS revenues in the back half of fiscal 2025. It seems like you're suggesting there might be slightly lower share of those revenues in the second half of the year versus 2Q. Maybe some outlook or color on why that might be? John Hall: Could you repeat the question? Were you looking at just the pure SaaS or SaaS and support or... Alexei Gogolev: Well, you're disclosing pure SaaS now and in 2Q, you're guiding 67% or thereabouts, almost 67% and for full year, closer to 66%. Just trying to understand if you're expecting some change in the revenue mix or this is just conservative assumption? John Hall: No, we're being prudent on the overall metrics. I think what you'll see as we uptick both SaaS as well as the total revenue in total, we do have some shift evolutions as we continue to balance license as we talked about and putting more in the cloud, which is a time and effort and an evolution as well as you get an associated pickup when that happens that we've talked about. So it's not a matter of if, it's just when. So that's one balancing impact. And then the other balancing impact is also how we've continued to articulate the services portion and that we want to not only focus more on our customer satisfaction but then also continue to grow our partner economy. And so that's been a balancing act as we think about our respective guide, all of which is continue to be very prudent in our eyes and so we can continue to deliver the expected results. Alexei Gogolev: And can you remind us what your outlook is on net new customer additions versus upsell and cross sell, the ratio that you anticipate going forward? David Morton: We don't guide specifically on that per se. But I can tell you historically you've seen about 20 -- anywhere from, I'll call it, 20% to 40% of net new logo, as far as ACV dollars and then they have responded being the expand motion. So we do -- we've got the wonderful opportunity not only to deliver $1 billion and beyond just on our net new logos, but then also as you know as we continue to cross sell and upsell, we have a $1 billion opportunity in front of us just on that motion as well. But for this year and our time and place of how we're thinking about the back half of fiscal 2025, it's going to fall into those ranges. Operator: Our next question comes from Koji Ikeda of Bank of America (NYSE:BAC). Koji Ikeda: I had a question on cloud ARR. It just grew 27.5%. Really, really strong performance, all things considered, but I do look at it and it has been decelerating. And I listen to the commentary on the pipeline, which sounds really, really strong. But then I also listened to, it sounds like there might be a little bit of deal elongation out there too. So I guess the question is, what is the potential for this cloud ARR growth metric to accelerate over the next several quarters from here, and what would be the drivers for that? John Hall: So I'll give some points and then Dave, you can add anything you like. But the core of it is we sell all cloud now, as you know. We're steadily moving up the percentage of the overall business in the cloud and we report that. So all the new additions add to the cloud growth. We also have more new logos that we acquire each quarter and so the cross sell and upsell that we do to existing clients is all cloud. And so the fundamental growth of the business is in that cloud ARR number. There's also a movement to migrate the existing remaining components of our client base to the cloud, and we talked about that a little bit. I think as far as the deals go, as we move up to the larger firms and you saw some very large numbers in Q4 when we reported the number of $1 million ARR clients, those firms are not only large opportunities when we land them but there are large opportunities when we expand as well. So as we allocate our resources to pursue the 2,000 named accounts at the top of the market more and more, which we made a move here in 2025 to do more of, I think you're going to see an exciting opportunity for us to bring in larger deals. They do tend to be lumpier as we've talked about from quarter-to-quarter. At the same time, when they come in we can have some really exciting results. So those are the major components. Koji Ikeda: And maybe just a quick follow-up here. Last quarter, you gave a percentage of net new ACV coming from AI products at 4%. I know there's some qualitative commentary in the prepared remarks. But I was wondering if we could get that number, an updated number. What was that this quarter versus last quarter, if you could please? David Morton: We're just going to provide that more so on an annual basis. We know we kind of brought it out last quarter kind of as a rolling thunder just to give some insight and thought leadership in and around how we're monetizing that. That continues and we'll continue to provide periodic updates but not one of a quarterly metric. Operator: Our next question comes from Alex Sklar of Raymond James. Alex Sklar: John or Dave, can you just elaborate a bit more on the changes in the sales team and go-to-market that you elaborate -- that you spoke to? How much of the team was impacted, when did you make those changes? And I'm curious have you seen any market improvements in terms of productivity to that large account team in October that gave you some visibility to take up the full year guide above the Q1 beat? John Hall: So we tested out the model in '24. At the very top of market, we saw some excellent results. We moved a significant portion of the team at the beginning of fiscal '25 when we gave new territories and comp plans for the year. I'm very appreciative of the team's excellent work. We have longstanding team members who are very experienced in this industry and there was a lot of collaboration to help move accounts to folks in each area. We also followed through on what we discussed at investor day, which was to put the entire team into a new accounts, existing accounts model, because there's a significant number of new logos across the board for us to go, continue to focus on and win. We can get to $1 billion or more just doing that. But we also have $1 billion or more from cross sell and upsell. So we wanted to make sure we have the right account management investment to drive the whole portfolio through the business. The number of $1 million accounts that we showed in Q4 came both from new logo acquisition and cross sell into those large accounts, and there's a huge opportunity for us to meet the needs of the underserved market this way. So I think the resource allocation choice that we moved on here was well proven. I think the opportunity going forward as people now have had a chance to meet everybody and talk to their new accounts and get going with pipeline advancement, pipeline development and advancing the deals that were handed over to them are in good shape. And so we're excited about the rest of the year. Alex Sklar: And then maybe a follow-up for you Dave, just in terms of the drivers in cloud NRR this quarter. Any changes between end market growth or expansion by solution type? And then separately, are you going to -- can you disclose the total NRR number for this quarter? David Morton: Any key drivers? No, I mean, it's continued success. The teams that continue to garner the expands, right? They do a wonderful job doing cross sell and upsell and continue to monetize those opportunities, which even going back to our Analyst Day on February 22nd, you've seen the cohorts of each of those respective years and how big they can be. So that's just a continuation of that. I can't provide our total NRR and we'll continue to disclose that in our 10-Q. It was approximately 114% within the respective range of the 113% to 117%. But I really want to transition everyone over to primary cloud metrics, because those are going to be the ones that we're focused on and obviously that we're garnering more and more attention to as well as support and investment thereof, specifically on the expand motion because when you go from on prem to off prem, it's going to change some of those cohorts as well. And so just don't want to get into a reconciliation of how that attribution is going forward. So anyway, there you go. Operator: Our next question comes from Saket Kalia of Barclays (LON:BARC). Saket Kalia: John, maybe for you, a lot of great examples in the prepared remarks around new and existing customers and around gen AI. Maybe a bit of a broader question. Can you just speak to sort of where you think we are in the journey of converting those on prem customers to SaaS? I mean, there are a lot of things that you can do to entice them, to move over. Where are we sort of in that journey? And what do you think is going to change here in fiscal '25 around that, does that make sense? John Hall: We talked at Investor Day about the fact that we historically had been at the client's option. But starting in fiscal '25, we were looking to be a little bit more encouraging to move firms along, and we're definitely doing that. We're doing that in a few ways. The first, fundamentally, is you can only get the generative AI capabilities and, in fact, even more the AI capabilities more broadly in the cloud. And there's a lot of pressure coming from the professionals across these firms to create a more modern experience for them and for the way that they work inside their organizations that they want to take advantage of all these new capabilities. So there's a natural pull that was always there but I think AI obviously gives a lot of excitement to people to pull that in. Secondly, there's a real demand from the firms to move into the cloud, because of scalability and reliability and security. Firms have just come to the correct conclusion that they don't have the IT spend scale to create the right kind of security and scalability environment that they could get working with us and partnering with Microsoft around Azure that that the firms basically just need. And so there's a lot of pressure to the firms to get off their on prem remaining environments themselves, and we're benefiting from that. And then, I think to your point about what we're doing specifically, we absolutely have a program now in fiscal '25 that we have launched to go through each of the remaining firms that have some on prem component and help them in a variety of ways to get over the hurdle and move to the cloud platform, because as Dave showed at Investor Day in some of his client account expansion slides, boy, is it worth it to get those firms onto the cloud, because their expansion rate really picks up. So we're making judicious prudent choices in each area to help every firm through a variety of techniques make the case to get there. And I'm excited about how positively we're received. There is not a remaining firm out there that's making an argument that they should be on the cloud, and I'm sorry, be on prem. They all know they need to get to the cloud, it's just a practical question. How do they line up their IT schedule to do that. Saket Kalia: Dave, maybe for you, maybe to the earlier point just around net new ARR being lumpy. Total net new ARR was down year-over-year this quarter, of course. And -- but maybe the question is, as you sort of look at the strength that Intapp had in Q4, is there anything that -- just looking at the postmortem, we need to keep in mind when thinking about timing in terms of how deals sort of fall in one quarter versus the other? David Morton: Not necessarily from a pull forward or a push out or anything like that or even a nominal seasonality. I do think as we think about really coming into this new fiscal year, and as John alluded to, and getting the teams aligned and organized and the sales kick off, and seeing all the success from previous years, where is the opportunity of kind of how we've articulated how we're going to get to $1 billion in the named accounts and midmarket and so on and so on. I think for us, as we think about the opportunity coming into this quarter and others, we've been spending a lot more time on kind of our own hype gen, hype analytics, pre-shopping, shopping, where those cohorts land. And to John's earlier point, we haven't seen a strongest type maybe in the history of kind of our time. And so we're excited about those opportunities and it's for us to go and monetize and convert those over. And so we like how Q2 started to play out, as well as not only here but also into the back half of the fiscal year. Operator: Our next question comes from Parker Lane of Stifel. Parker Lane: You talked a lot about the development and go-to-markets around some of the generative AI opportunity. But I was wondering if you could touch on any particular learnings you've had in discussions with your customers around the pricing and packaging of those solutions? Has there been any, sort of, changes or excitement around the way you guys are pricing, what are your early impressions of how that's being received? John Hall: I think we, as everybody, have benefited from the whole gen AI buzz over the past year or two on one hand. So the world has done its work to educate the market even down to the professional users that there's the potential for something like this out there. I think we're moving into a phase of the gen AI generation where the general promise is hitting the real world. And our strategy, which we have argued from the beginning is that these generational shifts in the technology happen in specific applications. It's the old killer app idea, what is it that's going pull in these generations of capabilities with very specific applications that really understand the end user. And I think the vertically oriented companies and obviously, we with this particular end market that's very susceptible to the [Technical Difficulty] whole trick is how do you build very specific applications early on that the user can get an immediate benefit [Technical Difficulty] coverage and, sourcing and origination of new opportunities, cross selling and looking for opportunities inside the firm's client base [Technical Difficulty] I was very excited about this Intapp Assist for terms launch, which brings the whole concept into our compliance value proposition to help people just talk conversationally through Teams to Intapp Assist and it answers questions about their promises to clients across the firm or some promise that some other professional that's one of their partners made somewhere else in the world that they need to know about when working with the client. So those specific applications are really winning with the individual users and with the firm's leadership. And from a pricing and packaging standpoint, we've seen good success in being able to defend pricing even in this era when some of the more generic GenAI systems are getting a little bit of pressure. We've got great value because we've been able to isolate down to some of these specific value propositions. Obviously, over time, Intapp Assist will grow and we'll have more and more of those, it'll be a richer and richer platform. But I think the real trick from a marketing and go-to-market standpoint is really to nail those use cases, and the team's done a fantastic job. I'm very grateful to the work that they've done and to the clients for taking it up. Operator: Our next question comes from Terry Tillman of Truist Securities. Terry Tillman: I'm not going to ask about ARR. I'm going to focus on KPMG. I think last quarter you all had a pretty important win, I think, in terms of their -- across their global network of businesses. So maybe after that deal being signed, what can you say about your collaboration product in general? Has that been a linchpin to win more business? And then secondly, I think that deal was concluded with an Azure Marketplace situation. And so like what is that doing in terms of reducing friction and getting deals done in terms of the leveraging credits, et cetera? John Hall: So you're right. We were very excited about that announcement. It gives us an opportunity to go across the KPMG network in that case, and there are analogous opportunities for us across the whole market. Historically, this end market, these professional and financial services firms have been underserved by a vertical player like us and we're bringing a purpose built platform in the cloud. We have generative AI that they just haven't had access to before. So we're excited about that. With regard to collaboration specifically, this is the product that is most closely enabled through the Microsoft partnership, because we help firms take advantage of Microsoft Teams and SharePoint and Microsoft 365, Office 365 in a way that works in the professional firms where that -- it really understands the deals and matters and engagements and projects that the firms are working on and it also understands the compliance requirements that those teams have as they work together. So we think it's a great fit. KPMG is one example. But we have quite a few new firms that have come on taking up our collaboration solution in a way that gives us a lot of confidence about the future there. And KPMG is an interesting example in accounting. We've had a lot of uptake in the accounting market, I think, because they have been so underserved historically. We're seeing more uptake in the other markets but accounting has really gotten excited about it. So we're super happy about that. I think with regards to the Azure Marketplace question, it has a couple of benefits for reducing friction. One is the firms have already signed a contract with Microsoft that they're going to spend ex dollars this year on Microsoft stuff. And so once they've done that, if you can go in and show them capabilities like collaboration that fit their needs for their IT priorities and they've already promised to spend the money, why not spend it with you? And I think that's the simplest argument for the Azure Marketplace is those Mac agreements. But I also think that firms are trying to simplify their vendor relationships. They want to work with people that are at scale that can supply across the portfolio. And so the Intapp Microsoft partnership really helps them simplify their environment. And the fact that we're helping them get the most value out of the existing Microsoft spend on Office 365 and Teams really helps them as well. So the field loves it. When we engage now, this is one of the first questions that the team asks the prospect is, do you have a relationship here, do you have a Mac agreement, can we work with you on the Azure Marketplace? And the response is generally very positive, because people are getting used to buying it that way. Operator: Our next question comes from Arvind (NS:ARVN) Ramnani of Piper Sandler. Arvind Ramnani: I wanted to ask about your partnership with Microsoft, which obviously has been a really important part of the equation in terms of your AI strategy. So question one is, are you all keeping your options flexible? I mean, clearly, Microsoft is still sort of leading the way. But are you keeping your options open as this kind of AI technology continues to evolve and change and they may be like a new leader in the space? And the second thing is from a cost perspective is there any risk that Microsoft kind of takes its sort of leadership position to increase its cost -- it's pushing with its partners? John Hall: On the first point, as we've talked about on other calls and at Investor Day, we do have more than one AI technology capability in the company. As we've shared with you all, we have been developing AI based technology for this end market with specialized vertical purpose built applications for 10 or 15 years. We had some of the first technology in the market 10 or 12 years ago with our Time product that helped the lawyers at the time figure out what they should bill for. And over the years, we have grown our AI team and generative AI is the most recent example, and now it's kind of news everywhere. But we've been in that line of technology for quite a while, because there's such an opportunity in this market in particular to use AI techniques and AI technologies to help firms make sense of structured and unstructured information in a more productive way. So we're big believers in it. And yes, we do have other technologies working inside the platform. So we're not exclusive with Microsoft on AI technology. That being said, this end market is also a very Microsoft oriented end market. The professional firms, the financial firms, particularly in their IT departments but more generally, spend all their time in the Microsoft environment. So the partnership is very important. It's also very strategic for us to make sure we can say yes to these firms and be aligned with their IT strategy. And I think that this actually gives us a real advantage versus technology companies that don't have the same alignment with Microsoft's plan. I think your question about cost is kind of the flip side of that. There are all kinds of things progressing in the open source world and elsewhere around AI technologies. And Microsoft certainly has a tremendous position but there's also all kinds of options out there. So I think we're going to benefit from that as will the whole world and industry on this idea of how do you get the most effective AI at the right cost structure to enable you to bring solutions to market that firms can really take up. And we're going to see how it plays out but I think Intapp is very well positioned around AI to take the best advantage as we go forward. Operator: Our next question comes from Brian Schwartz of Oppenheimer. Brian Schwartz: John, I was hoping to just follow-up on your commentary that the large deal activity was, maybe it was less robust than what the business had seen the last couple of quarters. I'm just curious because the pipeline commentary is very strong. Do you think that that's just seasonality or is it a macro or maybe election related? Curious to get what your take is on that. John Hall: I think because we've seen such consistent performance in our mid-market business, the main factor is the realignment that we did at the beginning of fiscal 2025 to put more resources against the 2,000 enterprise accounts. I think that's the main driver. Whether the election has something to do with the market generally, we probably would have seen in the midmarket if it did. Who knows to that question? But I think, generally speaking, we started the year and did the appropriate assignment of resources to the large accounts with a good proof point from last year about what that could do for us, and I think the opportunity scale is significant. And so we want to build the company to a $1 billion and I want to make sure we've got the team set up to do it. And we've got sales professionals who have been through this before and all they got to do is go meet the firms and get their pipeline advanced, and that's what we saw in the first quarter. So I'm comfortable that we've put the right resources against a very large opportunity here and we're set up to go. Brian Schwartz: David, maybe just one with you. In terms of maybe the assumptions that's underlining your growth guidance, I'm just curious how you're thinking about the capital markets activity. Are you expecting any change in maybe the end market demand for that segment from maybe what you were thinking three months ago given how interest rates have changed since you last gave guidance? David Morton: No. For us, our end markets have been relatively healthy that we've commented on. We have one aberration that we commented approximately a year ago when we saw some headwinds specifically with one specific group within overall financial services. But if you think about in broad based everything's been really healthy quite candidly. And so this has been about us and able to execute and drive everything from pipe to conversion. We're just avid believers in our product, our platform. We believe we're one, nobody who's got the very specific purpose built platforms for what they're looking for. And so it's for us to go execute outside of whether it'd be election cycle, outside of some of the capital market, interest rates other things going on. Operator: Thank you. There are no further questions at this time. I'd like to turn it back to John Hall for closing remarks. John Hall: Okay. Thanks everyone. We appreciate your attention and questions. We have a great Q1 behind us and we're excited about our continued momentum throughout fiscal '25. Thanks again for your time today. We look forward to talking to you all next quarter. Operator: This concludes today's conference call. Thank you for participating and you may now disconnect.

Earnings call: DigitalOcean reports growth with AI and cloud innovations By Investing.com

DigitalOcean Holdings Inc. (NYSE:DOCN), a cloud infrastructure provider, reported a 12% year-over-year revenue increase in its third quarter of 2024 earnings call. The company's advanced AI/ML platform contributed significantly to this growth, with a nearly 200% rise in annual recurring revenue (ARR). DigitalOcean also raised its full-year revenue guidance and emphasized the expansion of its product offerings, including the launch of 42 new features and strategic partnerships aimed at enhancing its cloud services. Despite challenges in the managed hosting service Cloudways, management remains optimistic about future growth, particularly in AI capabilities. DigitalOcean's recent financial performance aligns with several key metrics and insights from InvestingPro. The company's 12% year-over-year revenue increase in Q3 2024 is reflected in the InvestingPro data, which shows a revenue growth of 13.09% over the last twelve months. This growth trajectory is further supported by an InvestingPro Tip indicating that net income is expected to grow this year. The company's focus on AI capabilities and product innovation is paying off, as evidenced by the strong return over the last three months, with InvestingPro data showing a 23.14% price total return over that period. This aligns with DigitalOcean's reported success in its AI/ML platform and the launch of new features. Despite the challenges faced by the managed hosting service Cloudways, DigitalOcean's overall financial health appears robust. An InvestingPro Tip highlights that liquid assets exceed short-term obligations, suggesting a solid financial foundation as the company pursues growth in AI and cloud services. The company's profitability is also noteworthy, with InvestingPro data showing a gross profit margin of 60.21% for the last twelve months. This strong margin supports DigitalOcean's ability to invest in new technologies and expand its product offerings, as discussed in the earnings call. For investors seeking a deeper understanding of DigitalOcean's financial position and growth prospects, InvestingPro offers 12 additional tips that could provide valuable insights into the company's performance and market position. Operator: Thank you for standing by, and welcome to the DigitalOcean Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I'd now like to turn the call over to Melanie Strate, Head of Investor Relations. You may begin. Melanie Strate: Thank you, and good morning. Thank you all for joining us today to review DigitalOcean's third quarter 2024 financial results. Joining me on the call today are Paddy Srinivasan, our Chief Executive Officer; and Matt Steinfort, our Chief Financial Officer. After our prepared remarks, we will open the call up to a question-and-answer session. Before we begin, let me remind you that certain statements made on the call today may be considered forward-looking statements, which reflect management's best judgment based on currently available information. I refer specifically to the discussion of our expectations and beliefs regarding our financial outlook for the fourth quarter and full year 2024, as well as our business goals and outlook. Our actual results may differ materially from those projected in these forward-looking statements. I direct your attention to the risk factors contained in our filings with the Securities and Exchange Commission and those referenced in today's press release that is posted on our website. DigitalOcean expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements made today. Additionally, non-GAAP financial measures will be measured on this conference call and reconciliations to the most directly comparable GAAP financial measures are also available in today's press release, as well as in our investor presentation that outlines the financial discussion on today's call. A webcast of today's call is also available the IR section of our website. And with that, I will turn the call over to Paddy. Paddy Srinivasan: Thank you, Melanie. Good morning, everyone, and thank you for joining us today as we review our third quarter 2024 results. DigitalOcean had a successful third quarter, continuing to deliver progress on our key metrics and executing on the initiatives we laid out earlier in the year, further establishing ourselves as the simplest scalable cloud. In my remarks today, I will briefly highlight our third quarter results, share tangible examples of how our increased pace of innovation is benefiting our customers, discuss the continued momentum we are seeing with our AIML platform and give an update on our strategic partnerships and engagement with the developer ecosystem. First, I would like to briefly recap our third quarter 2024 financial results. Revenue growth remained steady in the third quarter at 12% year-over-year with solid performance in core cloud and continued growth in AI, despite lapping difficult comps from our managed hosting price increase in April 2023 and from the Paperspace acquisition in July 2023. We continue to see momentum in demand for our AIML products, where Q3 ARR again grew close to 200% year-over-year. In addition, we saw revenue growth contributions from new customers and steady growth from core business as we continue to enhance our customer success and go-to-market motions. Having delivered strong results through the first three quarters, we are increasing the lower end of our full year revenue guide by $5 million and the top end by $2 million. We continue to focus the majority of our product innovation and go-to-market investments on our builders and scalers, who drive 88% of our total revenue and are growing 15% year-over-year ahead of our overall 12% revenue growth. We also delivered strong adjusted EBITDA margins at 44% and have maintained our full year free cash flow margin guidance as we continue to manage costs effectively while still investing to accelerate product innovation in cloud and AI. Matt will walk you through more details on our financial results and guidance later in this call. Let me start by giving you an update on our core cloud computing platform. In Q3, we continued our increased product velocity, specifically focused on the needs of our largest and fastest-growing customer cohort, the 17,000-plus scalers that drive 58% of our total revenue, and that grew 19% year-over-year in the quarter. In Q3, we released 42 new product features in total, which is almost double what we delivered in the previous quarter. We are accelerating features that will benefit our existing and potential scalers that are on other hyperscaler clouds today. Let me now provide a few highlights from these efforts that are specifically focused on the needs of these larger workloads. We announced the early availability of virtual private cloud peering or VPC peering for short, that gives customers the ability to connect two different VPCs on the DigitalOcean platform within a data center or between different data centers. Through VPC peering, customers can create strong data isolation and privacy via direct and secure networking between resources that doesn't expose traffic to the public Internet. Our global load balancer or GLB, is now generally available for all of our customers. GLB offers global traffic distribution based on geographical proximity of the end user, enabling lower latency services, dynamic multiregional traffic failover, enabling more service availability for our customers' applications, data center prioritization, edge caching and automatic scaling of the load balancers. We are thrilled to be able to roll it out to all of our customers, particularly to our Scalar customers with existing multinational deployments that will benefit directly from this new product. During the third quarter, we progressed daily backups from early availability to general availability, giving our customers the additional flexibility to manage backups at a daily and weekly cadence. This enables increased protection for our customers' workloads as with daily backups, we automatically retain the seven most recent backup copies. This was an explicit need given the large volume and growth of data we are seeing on our platform with our spaces object storage footprint growing 50% year-over-year. We're also launching larger droplet configurations, including 48 vCPU memory and storage optimized droplets, 60 vCPU, CPU optimized and general-purpose droplets and larger 7 terabytes and 10 terabytes disk density variance droplets. These large droplet configurations are particularly relevant to our scaler customers who can quickly scale up their workloads that require more CPU, memory or storage versus horizontally scaling out with multiple nodes. In September, we announced Kubernetes log forwarding, which also enables Kubernetes customers centralized log management, simplifying the monitoring and troubleshooting of their applications in the DigitalOcean platform. This was built with simplicity in mind. With just a few clicks from the Kubernetes settings panel, customers can easily forward cluster event logs from Kubernetes directly to the DigitalOcean managed OpenSearch for further analysis. We also enhanced application security for our cloud-based managed hosting product by introducing a new Malware Protection solution and saw 3,650 net activations within the first week. To-date, we have seen near zero false positives or false negative rates from our malware detection. This Malware Protection capability is now one of the fastest-growing revenue-generating product models we have seen on our Managed Hosting platform. All these innovations are not only helping us meet the needs of our large customers, but also helping us move customers with these larger workloads from purely usage-based to committed contracts. For example, an existing cybersecurity customer of ours, Cyble, a leader in Threat Intelligence, signed a multiyear seven-figure commitment in this quarter. The decision to continue leveraging DigitalOcean and sign a multiyear deal was driven by the release of our new large premium CPU optimized droplets that helps customers run computationally heavy workloads. Cyble is a petabyte-scale company. And after several weeks of diligence, they chose DigitalOcean for this new workload due to our scalability, coverage and cost efficiency. Another great example is Traject Data, who signed a multiyear commitment for a broad portfolio of DigitalOcean services, including over 500 droplets, managed MongoDB (NASDAQ:MDB), spaces, backups and volumes. Traject Data requires robust scalable and reliable infrastructure to power their real-time clean and bulk process data insights, serving domains, including marketing, retail and analytics. They use the DigitalOcean platform to host their APIs and manage vast amounts of search engine results page and e-commerce data to deliver critical insights to their customers. These product innovations and enhanced customer engagement is also helping customers migrate workloads to DigitalOcean from the hyperscalers. One specific example is PiCap, a leading ride sharing and logistics based in Latin America, operating in Mexico, Brazil, Peru and Colombia, and they moved all of their workloads from various clouds to DigitalOcean in the third quarter. They migrated to DO due to the simplicity of our products, transparent and simple pricing model and strong support from our customer-facing teams. Another example is NOBID [ph], a customer specializing in optimizing ad revenue for online publishers through real-time bidding technology. Upon technical validation of the DO platform scale, they moved most of their large-scale production applications from a hyperscaler to the DO platform, reinforcing our opportunity to increase our share of wallet with our scaler customers. Next, let me provide some updates on the AI/ML side. Our AI strategy reflects our belief that the AI market will evolve in a similar fashion to other major technology transformations with initial progress and monetization at the infrastructure layer which will eventually be eclipsed by the opportunities in value creation of platform and application layers. Like others in the market today, we are actively participating in the infrastructure layer. But we are also innovating rapidly in the platform and application pillars to make it easy for our customers to use Gen AI at scale without requiring deep AI/ML expertise. This is where we see our differentiation as our customers seek to consume AI through platforms and agents rather than building everything themselves using raw GPU infrastructure. At the infrastructure layer, we made GPU droplets accelerated by NVIDIA H100 Tensor Core GPUs generally available to all of our customers. Now all DigitalOcean customers can leverage on-demand and fractional access to GPUs, which is a critical step in achieving our overarching mission of democratizing AI for all customers. In Q3, we also announced the early availability of NVIDIA H100 Tensor Core GPU worker nodes on the DigitalOcean Kubernetes platform, or DOK for short, providing customers with a managed experience with GPU nodes ready with NVIDIA drivers, NVLink fabric manager and NVIDIA container toolkit. Customers can take advantage of the NVIDIA GPU operator and NVIDIA Mellanox (NASDAQ:MLNX) network operator to install a comprehensive suite of tools required for production deployment. Both GPU droplets and the H100 nodes on DOKs are examples of how we are innovating even in the infrastructure layer, making it simpler for customers. Let me give you an example. Calian Exchange is a paytech company that specializes in providing enterprise blockchain-based solution for bank payments. And they're leveraging DigitalOcean's H100 infrastructure to accurate the processing of high-volume financial transactions by providing advanced computational power. They use machine learning models to detect fraud in real time, assess risk and ensure that payments are processed securely and quickly. The GPU infrastructure allows them to process more transactions, while maintaining low latency and improving the overall user experience for both banks and end customers. Next, at the platform layer. In this quarter, we launched the early availability of our new GenAI platform to select customers so that we can iterate with them and shape the product and keep easy for them to build GenAI applications that deliver real business value. Users of this product will be able to combine their data with the power of foundational models, to create personalized agents, to integrate with their applications in just a few minutes. Customers can leverage our platform to create AI applications with foundational models and agent routing, knowledge bases and retrieval augmented generation or RAG. This is a key step towards our software-centric AI strategy, which is aimed at enabling customers drive business value from AI in a friction-free manner. An example of a customer that is already leveraging our GenAI platform is Autonoma Cloud, a planned digitization company that offers a platform for manufacturing plants and machine manufacturers. Autonoma Cloud creates and manages large volumes of documentation and data for each of their customers' plans and individual machines, and we're looking to create AI agents that understood their user-specific contacts and retrieve answers and machine-specific data to their queries. With DO's new GenAI platform, they quickly built an interactive experience with their custom data and that reduces the cognitive overhead for users. It is very important to note that these companies are not just doing internal proof of concepts or R&D projects, but are now starting to leverage our AIML products to build AI into their own products to deliver real business value to their customers without requiring deep expertise in AI, machine learning, data science or data engineering. Finally, let me talk about the third pillar of our AI strategy, the application or agentic [ph] layer. As I just talked about, our customers are using our Gen AI platform to create their own AI-driven agents. In addition to that, we are also innovating on this front by further simplifying cloud computing using AI and automating workflows that were previously done by humans. One of the frequent pain points for our customers is debugging their cloud applications when something goes wrong because; one, it is a very complex set of technical tasks; and number two, they typically don't have specialized site reliability engineers, or SREs, available in their staff to perform these complex tasks. So, we set out to mitigate this pain point for our customers using Gen AI by building a new AI agent to perform some of these tasks that are typically done by human SREs. We are using this AI SRE agent, both internally on our systems and externally by integrating it with our cloud-based products. Let me explain. Internally, we are using the AI SRE agent to help our human SREs troubleshoot ongoing technical incidents in the DO cloud platform. Based on our internal -- initial internal data, the AI SRE agent is reducing the time it takes to identify root causes by almost 35% by leveraging AI to quickly process an enormous amount of log data from disparate systems to pinpoint root causes and make next step decisions, including recommendations to fixes for underlying problems. Externally, we integrated this AI SRE agent into our cloud-based product, which host hundreds of thousands of mission-critical websites. Today, when issues happen on customer service and applications, they have to work with support engineers to debug the root cause and then apply a fix. This is true not just for the DigitalOcean platform, but across all managed hosting platforms. This can be a time-consuming job during which their business and even websites can be affected, if not offline. Our new AI SRE agent jumps into action upon detection of any performance degradation due to common issues like aggressive bot crawlers, denial of service attacks, and so forth to investigate and gather insights and provide recommendations real-time on how to fix these issues, thereby reducing the time to resolution significantly. Our testing results are very encouraging, and we have just started working with a few customers in early availability mode. Rounding out our AI strategy, we opened up a new front door by launching a strategic partnership with Hugging Face in Q3. Hugging Face is the leading open source and open science platform that helps users build, deploy, and train machine learning models. As a result of this partnership, DigitalOcean now offers model inferencing through one-click deployable models on GPU droplets, allowing users to quickly and easily deploy the most popular third-party models with the simplicity of GPU droplets and optimal performance accelerated by NVIDIA H100 Tensor Core GPUs. This offering simplifies the deployment complexity of the most popular open source AI/ML models as DigitalOcean has natively integrated and optimize these models for GPU droplets, enabling fast deployment and superior performance. The Hugging Face partnership will make it easier for the more than 1.2 million Hugging Face users to discover and use the DigitalOcean platform. In Q3, we also announced a new partnership with Netlify, a leading Web development platform to enable customers to seamlessly connect their Netlify applications to DigitalOcean managed MongoDB, offering developers all the right tools to build and scale their applications without the complexities of managing infrastructure. These announcements, in addition to the various other partnerships we already have in flight, highlight our efforts to augment our durable product-led growth motion with additional channels, including new front doors through partnerships with leading players in our ecosystem that will also help shape and improve our product offerings. I'm also excited to highlight the material progress we are making with a renewed engagement with the developer community. In October, we hosted the 11th addition of Hacktoberfest, which has now evolved from being an internal Hackathon event at DigitalOcean to one of the largest and premier open source community events. This year, over 65,000 developers from 172 countries participated in more than 115 community run events and contributed to 15,000 open source projects. Beyond Hacktoberfest, we also hosted more than 10 DigitalOcean meetups for developers and AIML community and participated in a number of industry conferences. This broad-based community engagement effort reinforces DigitalOcean's ongoing community to our developer ecosystem. In closing, I am encouraged by the progress on product innovation and customer engagement, particularly as it is helping our builder and scaler customers continue to grow on our platform as their businesses expand. We're also making great strides towards our software-centric AI vision by rapidly shipping products in each of the three layers: infrastructure, platform and applications. We're starting to see the green shoots from these investments in the form of customer wins, including cloud migrations from the hyperscalers, multiyear commitment contracts and real-world deployment of AI using the DO AI platform. We will continue to focus on our largest and fastest-growing customer cohorts as we seek to accelerate growth in the quarters to come. Before I turn the call over to Matt, I'm very excited to share that we will be hosting an Investor Day in New York City, and we are currently targeting late March or early calendar Q2 2025, in which we will share more on our long-term strategy, including more detail on our progress and metrics as well as a view of our long-term financial outlook. I will now hand the call over to Matt Steinfort, our CFO, who will now provide some additional details on our financial results and our outlook for Q4 2024. Thank you. Matt Steinfort: Thanks, Paddy. Good morning, everyone, and thanks for joining us today. As Paddy just covered, we had a very successful Q3, both executing on key initiatives and delivering solid financial performance. In Q3, we continued to see increased momentum from our AIML platform and steady growth across our core business while consistently delivering attractive adjusted EBITDA and adjusted free cash flow margins. Revenue in the third quarter was $198.5 million, up 12% year-over-year. Annual run rate revenue or ARR in the third quarter was $798.3 million, also up 12% year-over-year. We added $17 million of ARR in the quarter. Most notably, builders and scalers, which are our largest customers, together grew 15% year-over-year. Contributing to our overall growth was healthy incremental revenue from new customers and increased momentum from our AIML platform, which saw significant growth, again growing close to 200% year-over-year on an ARR basis. Overall growth was partially muted by our managed hosting platform as we are lapping difficult comps related to the April 2023 managed dosing price increase and a temporal surge of managed hosting revenue in Asia in late 2023. Our Q3 net dollar retention rate was steady at 97%. As with prior quarters, we continued to see consistent but below historical net expansion levels, while our churn levels have remained low for well over a year. We will continue efforts to improve growth in NDR, including executing our product road map, working to layer on additional go-to-market motions to complement our durable product-led growth engine. Turning to the P&L. Gross margin for the quarter was 60%, which was 100 basis points lower than the prior quarter and consistent with the prior year. We are able to maintain healthy gross margins, while continuing our investment in AI infrastructure due to the success of our ongoing cost optimization efforts. Adjusted EBITDA was $87 million, an increase of 14% year-over-year. Adjusted EBITDA margin was 44% in the quarter, approximately 200 basis points higher than the prior quarter. This increase quarter-over-quarter was primarily driven again by our ongoing operating cost discipline. Diluted net income per share was $0.33, a 65% increase year-over-year, and non-GAAP diluted net income per share was $0.52, an 18% increase year-over-year. This increase is directly a result of our ability to increase our share profitability levels by continuing to drive operating leverage while mitigating through share buybacks. Finally, Q3 adjusted free cash flow was $26 million or 13% of revenue. This is lower than the prior quarter by approximately 600 basis points due to timing of capital expense payments as we continue to make investments capitalized on the AI opportunity to fuel future growth. As a reminder, quarterly free cash flow margin will vary given the timing of capital spend and other working capital impacts. The lower free cash flow in Q3 does not change our expected full year free cash flow margin. Turning to our customer metrics. The number of builders and scalers on our platform, those that spend more than $50 per month, was approximately 163,000, representing an increase of 6% year-over-year. The revenue growth associated with builders and scalers was 15% year-over-year, ahead of our overall revenue growth rate of 12%. The number of builders and scalers on our platform, which together represent 88% of our total revenue, increased by 2,260 quarter-over-quarter. The continued growth of our larger spending cohorts is a direct result of our focused product development, much of which is driven by direct customer feedback, and the customer success and go-to-market investments that are concentrated on these builders and scalers. Our overall revenue mix continued to shift more towards our higher spend and higher growth customers, and we saw total ARPU increase 11% year-over-year to $102.51. Our balance sheet remains very strong as we ended the quarter with $440 million of cash and cash equivalents. We also continue to execute against our share repurchase program with $11 million of repurchases in the quarter, bringing total share repurchases to $29.9 million through the first three quarters of the year. With our healthy cash position and ongoing free cash flow generation, we are well positioned to continue to balance investment in organic growth with share repurchases, while moving towards our 2.4 times to 3 times net leverage target and maintaining appropriate flexibility to address our 2026 convert at the appropriate time. Moving on to guidance. Based on our performance year-to-date, we are increasing the bottom end of our full year 2024 revenue guide by $5 million and the top by $2 million, projecting revenue to be in the range of $775 million to $777 million, a $3.5 million increase in the midpoint of our guidance range, which will represent year-over-year growth of approximately 12%. This full year guide implies Q4 revenue to be in the range of $199 million to $201 million, representing approximately 11% year-over-year growth at the midpoint of our guidance range. While we are not yet going to provide 2025 revenue guidance, we expect to enter 2025 with baseline growth in the low to mid-teens. As demonstrated throughout 2024, we remain committed to driving continued operating leverage in our core DigitalOcean platform. Given our solid performance throughout the first three quarters of the year, we are raising our adjusted EBITDA margin guidance for the full year to be in the range of 40% to 41%. This full year adjusted EBITDA guide implies Q4 adjusted EBITDA margins to be in the range of 34% to 38%. For the full year, we expect non-GAAP diluted earnings per share to be $1.70 to $1.75. This implies Q4 non-GAAP diluted earnings per share to be $0.27 to $0.32 based on approximately $103 million to $104 million in weighted average fully diluted shares outstanding. Turning to adjusted free cash flow. We expect adjusted free cash flow margins for the full year to be in the range of 15% to 17%, consistent with what we guided in the prior quarter. While free cash flow margin will continue to vary quarter-to-quarter, we anticipate remaining in a similar 15% to 17% range on the rolling average quarterly basis in 2025 as we continue to accelerate the pace of product innovation and make disciplined investments to expand our emerging AI capabilities. That concludes our prepared remarks, and we will now open up the call to Q&A. Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Raimo Lenschow from Barclays (LON:BARC). Your line is open. Raimo Lenschow: Perfect. Thank you. Paddy, there is a lot of product innovation that you discussed. Can you talk a little bit about how we have to think about those new innovations around product and how that feeds into the installed base in terms of like what's the uptake there, what's the timing there? Because the financial number Matt and us will look at as NRR is 97% stable, but there seems to be a little bit of a disconnect. Can you maybe talk to timing there, et cetera? And I have 1 follow-up for Matt. Paddy Srinivasan: Thank you, Raimo, for the question. Yes, we are seeing a lot of product innovation across the board, both in the core cloud. That's why I spent so much time explaining all the things we are pumping out, especially in data and scalers, and allowing them or enabling them to run larger workloads on DigitalOcean. As you know from a timing and sequence point of view, there's no magical answer that we can provide, which translates our product innovation to adoption and hence, impact on our financial performance. But we feel, we have to do this to enable our customers move many of their larger workloads that they are currently running in other clouds and make it super compelling for them to run those workloads on the GO platform. And as I did just a few minutes ago, we will get into a habit of explaining some very concrete examples of customers that are starting to do that. So the examples I gave, we are now starting to sign customers in multiyear contracts with commitments on our platform. We are also starting to see a steady dose of migrations coming from other clouds, especially the hyperscalers. So we are playing -- we have we have to ensure that patience in terms of building these capabilities. We are starting to see the green shoots in terms of customer adoption and translation of that into leading indicators. And I have no question if we keep doing it for a handful of quarters; we are going to start seeing the translation into other lagging indicators, including some of the ones that you just mentioned, Raimo. So in terms of the NDR, I think Matt alluded to this fact that we have -- what we are seeing from a core -- the NDR of the core business is trending a little bit ahead of what we are reporting on a blended basis. So it gives us enough reasons to believe that what we are doing is starting to be appreciated by our customers. And as you know, this takes time for the adoption to happen. I have to keep reminding ourselves that we have 638,000 plus customers. So it takes time for the propagation to happen across the board with our customer base. Raimo Lenschow: Okay. Perfect. Thank you. And then matt, one for you. Like if you look on the EBITDA, that's kind of the one we're kind of at the moment outperforming quite a bit. Can you talk a little bit about that, how do achieve that? Like how sustainable are -- is the progression there, especially as you think about like more services coming on stream. You probably want to support them more and then obviously, more AI services coming as well. Thank you. Matt Steinfort: Thanks, Raimo. Yes, I'd say from a cost standpoint, Q2 was definitely a good quarter from an EBITDA margin perspective. As we brought on our new executives, we had talked about implicit in our guide for the full year. We were making sure that we had enough room to invest to enable them to really improve the pace of innovation and layer on additional go-to-market motion. But at the same time, we were evaluating, okay, what cost do we have now that we just aren't earning a return on? And can we clean those out before the team gets going with the new expenses? So we, I think, did a really good job of optimizing for that. And we also made some decisions to make sure that we were appropriately pacing the increases to see if we're getting a return on the investments as we did it. So I think it was just disciplined kind of cost management in Q3. And as you saw from the guide in Q4, we are expecting to ramp our expenses heading into next year. I don't think it's going to be a meaningful kind of change in the overall expense level. We feel pretty good about the kind of the trailing margin profile that we have and being able to continue that into next year. Raimo Lenschow: Okay. Perfect. Thank you. Operator: Our next question comes from the line of Mike Cikos from Needham. Your line is open. Mike Cikos: Hey, thanks for taking my question guys. I think the first would go to Matt, just coming off of Raimo's question there. But if I look at the EBITDA guide that we have today, the 34% to 38% margin guide in Q4 is the widest range that I think we've had in recent memory. And just wanted to get a little bit more granular there as far as I guess, what needs to go wrong or right or what you guys are weighing for that gets you at the 34% margin versus the 38% margin in December quarter? Matt Steinfort: Yes, it's a good question, Mike. I think part of it is, as we've been ramping the -- particularly on the R&D spend, we're evaluating kind of surge resources using contractors for -- to accelerate a handful of things on the product roadmap and the timing of that, which, again, I view that as a relatively lumpy potential investment and the timing of being able to get that spun up and fully staffed and moving, whether that hits in Q1 or it hits in Q4, I think that's really what's causing the range. Again, I think on a go-forward basis, we don't anticipate a material change in the overall kind of R&D as a percent of revenue, but we are advancing the expense. So, in any one quarter, it may be a little bit lumpier. But again, over a longer period of time, we don't -- we think we grow into that, and some of that is surge resource. Mike Cikos: Terrific. And just another follow-up. I know that you guys aren't providing explicit guidance for 2025 here. I do appreciate the qualitative commentary. Just wanted to see what gives you the confidence to kind of put that bogey out there for the baseline growth? And how should we be thinking about what it takes for DigitalOcean to be entering the year with that kind of baseline growth that you had commented on? Matt Steinfort: Yes, I think it's very similar to what we described at the beginning of this year, right? What can you count on. Well, you can count on the growth on the self-serve funnel, and we're a little bit better, doing a little bit better than that, on that year-to-date, and we had outlined at the beginning of year. We've got the managed hosting business, which is kind of returning to growth after lapping some difficult comps. We've got AI/ML that we had said would contribute around 3 points of growth. It's a little bit ahead of that for the year. And then NDR, while it's frustrating that we've had to print a bunch of 97s in a row. As Paddy said, the core DO, NDR is actually ahead of that it. We've got a little bit of a headwind for managed hosting that's going to be in place for the next, call it, through the first quarter of next year. And so if you take all those together, we've moved up a couple of points from the baseline growth that we had described coming into the year. And none of it is on the back of kind of macro improvements. It's steady kind of improvements and continuing to deploy products that our customers need. And so as we look at that trajectory, we feel comfortable kind of at the pace of growth that we're at right now and hopefully continuing to improve NDR every month going into next year and beyond to eventually get it to be above 100%. So, I'd say we're just making sure that folks understand that we feel pretty comfortable with the baseline growth that we're delivering. Mike Cikos: Great answer. Thank you very much guys. Operator: Your next question comes from the line of James Fish from Piper Sandler. Your line is open. James Fish: Hey guys. Paddy, for you. You guys are seeing adoption -- are you seeing adoption of the GPU droplet with more of the builders and scalers or more net new customers? And how should we think about the mix between on demand versus your contracts and what you guys are seeing around supply availability with GPUs? Paddy Srinivasan: Yes, great. Thank you, Jim, for the question. So, in terms of the adoption, we are seeing adoption across the board. A lot of new customers, which we absolutely love, that are taking the tires and also explained on the call, building real-world applications on our GPU infrastructure, both droplets as well as more hard and bare metal type of services. I would say from between on-demand versus contract, we see more contracts when the customer is deploying live workloads, whether it is training or inferencing. And sometimes these contracts are fairly short term, but some are longer term. And on-demand is typically for experimentation, which is what we would have guessed when we started this journey, but that's where things are. And from an on-demand point of view, we're also seeing a very nice uptick and interest in our Gen AI platform. So companies that don't have the deep bench in terms of AI/ML skill set have a very easy time just using our Gen AI platform, standing something up very quickly, many times in just a matter of a few minutes just to see if they can prove to themselves that there's value in integrating Gen AI into their platform. So that's what we are seeing broadly from an adoption point of view. Matt Steinfort: And from a supply chain standpoint. Yes, on the supply chain, James, we don't see the same kind of headwinds that we had seen coming into the year. We've got orders out for the next generations of the technology. We've got H-200s coming. We're keeping an eye on Blackwell to see the timing of that. And it's certainly not so tight that you can get it in a week or two from ordering. But it's -- I'd say the supply chain is open enough that we've been able to get the equipment in the time frames that we need it. And again, with our build-out of the Atlanta data center coming on kind of at the beginning of next year, we're in good shape from a logistics and a scheduling standpoint. James Fish: Got it. And then, Matt, for you, circling back on the 97% net expansion rate. The AI side of things turned organic this quarter. By my math, it's probably adding about 1 to 2 points to NRR as it looks like net new ARR for AI was up around $10 million. So what's going on with that core business? Specifically, you were starting to mention around Cloudways, obviously, the price increase lapping, but why is that business kind of weaker than what you guys are anticipating? And how should we think about the mix of Cloudways hosting DigitalOcean versus other cloud platforms? Matt Steinfort: That's a great question and good clarification. AI products are not in NDR. So just to make sure that everybody understands that. The revenue from the AI products are not in net dollar retention. And that's -- it's clear in the definitions that we have. A lot of the AI revenue, if you think about it, is project-based, right? So someone's training something, somebody is coming in and experimenting. It's not yet at the point where people are coming in and running large-scale inference workloads where you could say, "Oh, well, that should -- the revenue that you get from that inference workload should be bigger next year than it was this year because they're spending -- they have a lot more customers. If someone comes in and train a model for a month or two and then turns it off and then does -- goes and focuses on inferencing, the revenue is going to be lumpy. And so at this point, and we could reevaluate this going forward. But at this point, AI is not reflected in NDR, so it contributes nothing to the improvement in the NDR that we've seen. What we have seen is steady improvement in the core cloud business, which we said is tracking above the reported NDR. Cloudways, which has historically been literally until we lack the price increase, it was always a positive contribution to NDR. It's been a headwind to NDR since April and will continue to be probably until next April because of the vagarities of the lagging metric like NDR. But we expect, both the Cloudways, the managed hosting business and the core DO business, we expect to be able to get those back above 100, and we're certainly working aggressively to accomplish that. And we can't tell you exactly when that's going to happen. But we're very encouraged by the green shoots that we're seeing in both businesses on that improvement in NDR. James Fish: Very helpful. Thanks, Matt. Operator: Your next question comes from the line of Gabriela Borges from Goldman Sachs (NYSE:GS). Your line is open. Gabriela Borges: Hey, good morning. Thanks for taking my question. Matt, I wanted to follow-up some of your comments for 2025 and more specifically on how we should think about the seasonality of the business, given some of the moving pieces we've had this year versus last year. So any comments on seasonality? And I'm noticing that the size of the beat this quarter was about 1% versus the 2% last quarter. Any nuances we should be aware of there in terms of why the size of the beat was smaller this quarter? Thank you. Matt Steinfort: I don't think there's any seasonality in the business that would reflect that. I think that again, we've been very focused on the full year and providing guidance that's appropriate and reflective of that, that causes kind of bigger wins than the quarterly kind of beats, right? So we're more focused, I think, from an annual standpoint. But I think that as we look at the business going into next year, again, going back to my earlier comments, we're very encouraged by the steady growth that we're seeing and improving growth versus what we thought with the self-serve funnel and feel confident about that. The managed hosting business is coming back from, again, some difficult comps. The AI business is likely ahead of where we had expected and kind of in the last thing to move for us, which would give us the confidence to increase the -- our outlook on the revenue is that NDR just needs to come up and expense steadily, but stubbornly moving up. And so I don't think there's anything seasonal that would suggest we would be more or less on an individual quarter. Gabriela Borges: Got it. Okay. And then the follow-up is for Paddy. So given the paper change that we're seeing in the GPU as a service market. Maybe you could walk us through what are one or two of the areas where you feel like you've learned the most over the last three months as it relates to your AI services strategy and particularly around your LLM as a service offerings, the platform offerings, how you think you can differentiate versus something like a sage maker or a better option? Thank you. Paddy Srinivasan: Thank you, Gabriela. Great question. So in terms of what we have learned over the last 90 days, we have learned a lot. As you can see, we have also shipped a lot. So in preparation of that, I think we have learned quite a bit on all three layers of our platforms. I would say, for me, personally, the biggest learning has been that our customers, which are typically companies that don't have a tremendous bench of deep machine learning, data scientists or engineering skill sets, they look at the AI platform almost in an inverted fashion. What I mean by that is everyone, us included, the market, everyone looks at it from an infrastructure first and then platform and then finally applications, our customers actually look at it top down. They look at, okay, what applications can I or agents can I leverage today from Gen AI that makes my app more productive or my customers save money or deliver some innovation that was not possible so far. So it's almost a realization that we need to innovate more rapidly on the platform and application layer is why we accelerated some of our Gen AI platform capabilities, and we already have seen a customer push that into production, which is amazing. And the part two of your question is what makes our Gen AI platform stand out against something like a SageMaker or Bedrock. As you know, we have very deep expertise in both SageMaker and Bedrock at DigitalOcean today. And the biggest difference is some of our -- some of the technologies you mentioned are phenomenal. They're very broad and very powerful if you have a broad set of skills available to take all of that and build something fantastic for a very complex use case. For our customers and the customer that I talked about during the prepared remarks, specifically tested a variety of different Gen AI platforms and picked us primarily because of how easy it was for them to get started to inject their own custom data to build the RAG pipeline, to create a create a knowledge base and finally create a chatbot where they could project exactly how much it would cost them, and develop a business model that would be friendly to their customers. So, all of these things individually are fairly complex. But when you add these different steps to build a productionized application, it just balloons in its complexity. And we have tried to measure every click it takes to simplify the journey for our customers. And I think that's how we established ourselves as a credible cloud provider, and that's what we are doing to establish ourselves and differentiate ourselves in Gen AI. And also, we should also not forget that there's a lot of differentiation we are pushing even in the agent declared. As I explained, just came out with our first agent. We are working with customers in earlier availability mode. So we will learn and innovate on that faster. But the combination of the platform and applications gives us the ability to make things that are super salable, but at the same time, an order of magnitude, simpler to use compared to other alternate platforms that are available. Gabriela Borges: Thank you for the detail. Operator: Your next question comes from the line of Jeff Hickey from UBS. Your line is open. Jeff Hickey: Hey, everyone. Thanks for taking the question. The first one, I wanted to ask is it's very helpful just detailing that AI is not included in the NDR metric. But maybe with some of the existing AI customers that you've had a few quarters that maybe do have some workloads already in production, do you have any sense of like how they're expanding their spend over time, maybe even just on a quarterly basis? Or do you typically see those customers kind of launch a workload and then have that spend at sort of a stable level from there? Paddy Srinivasan: We've seen good traction with a number of our early AI customers that have come in and experimented on the platform, and they may have started with a small cluster. And as they touched it, they've expanded their use of the platform. So if the question is when we land customers, do we see them grow or do we see a big rotation of customers in and out, we actually see a fairly healthy expansion from the customers when they come in. But again, back to my earlier comment, it's in, okay, I'm training a model. I need eight nodes. And now I'm going to do something, I need more. But it's not the same dynamic because they're still evaluating. They're still going through the testing phases. But we've seen very good traction, growing customers, the initial customers that we've had on the AI platform. Paddy Srinivasan: And Matt, one thing I will add to that is, it's interesting to note that our AI customers are also very similar to our core cloud customers in the sense that most of them, if not all of them, are ISVs or independent software vendors or digital native application providers. So they are taking -- they are building solutions on our AI platforms, whether it is infrastructure or GenAI, to create software solutions for their customers. So as they grow and expand, they will -- they are expanding their footprint, to Matt's point, on our platform. So that's a very interesting thing for us to notice versus a customer that is coming to build a solution just for their internal use. Jeff Hickey: Got it. That's really helpful. And then one just quick follow-up. You mentioned earlier about just supply and that's gotten better relative to the beginning of the year for AI investments. Just curious with the October 1 launch of H100 instances broadly available. Are you supply constrained at all right now as we're kind of in the fourth quarter? Or are you able to meet all the demand you currently have as well? Thanks. Matt Steinfort: We've ordered enough. And we talked about this in the last earnings, because we have the ability to see the demand and plan out the capacity, that we've been able to get enough capacity to meet the demand as we've gone, which is a very good sign because we don't have those supply constraints. So again, because we're not spending hundreds of millions of dollars on GPU, we can get the quantums that we need to meet our requirements. And when you have something like the GPU droplet, which is more on demand and it's less committed contract, you have to see what the utilization is and then plan your purchases based on that capacity utilization. And we've been able to manage that effectively. So it hasn't been a drag or a constraint to us. Josh Baer: Great. Thanks for the question. One for Paddy, I guess just thinking about the 42 new product features more than higher period, and I think calling out some of them features that hyperscale customers are generally looking for, moving contracts to committed contracts, even migrating workloads from hyperscalers to DO. It's like in the past, the story was more about DigitalOcean's simplicity of the platform and better support, lower pricing and maybe a little bit less about getting into the competitive dynamic with hyperscale. Just wondering, is the right takeaway that there is a little bit of a shift in focus, either upmarket or a little bit of expansion outside the simplest start-ups in SMBs just to be a little bit more competitive in the market? Is there a strategy shift there? Paddy Srinivasan: Yes. Thank you, Josh. Great question, as always. The shift is essentially following our customers' fleet, honestly. So as I made a point during the prepared statements to make sure that we are not abandoning or taking our eye off being part of the DigitalOcean and the developer community. We continue to nurture that. In fact, we are doing a lot more with the developer ecosystem this year compared to recent past. But at the same time, we do recognize that have 17,000 hyperscalers who on an average spend more than $25,000 with us. That's a big, and that's 58% of our revenue. And if you add scalers, that's almost 88% of our revenue, which are growing much faster than our blended average growth rate. So we have a unique opportunity to follow their lead and make sure that we are delivering capabilities that will enable them to run or expand their footprint on DigitalOcean. We are increasingly in a multi-cloud world even for smaller customers, like the ones we target. And there is an opportunity for us to keep expanding our share of wallet to these companies. And the examples that I shared are just a starting point for what we believe our fair share slice of this enormous market. And if we keep doing what we are doing now, which is add compelling feature sets that enable our scaler customers to expand their footprint on us, I think there's a lot of value to be created for our customers on our platform. Josh Baer: Very clear. If I could follow up with one for Matt. Just on the -- some of the factors I called out, the managed hosting, tough comp, pricing increases, the Asia influx of revenue, even some of the M&A, like get how that could be impacting some of the -- like the net dollar retention rate or the year-over-year growth. If I'm just looking at quarter-over-quarter net new ARR added $32 million last quarter and $17 million this quarter. Anything to call out as far as that difference just on a quarter-over-quarter basis? Matt Steinfort: Yes, that's a good point, Josh. The big difference was the availability like the -- we brought on a ton of AI capacity in Q2, which we had pent-up demand for. So we got a bump, a material bump in ARR last quarter. If you look at we were -- we're on 17 or 18 in the quarter before, and then we jumped to 30, now back to 17. I'd say last quarter was more of an anomaly than this quarter. Clearly, we're looking to add more incremental ARR going forward. But most of that change was the result of a surge in AI capacity last quarter. Pinjalim Bora: Great. Thanks guys. Just one question for me. The baseline growth outlook that you kind of shared entering 2025 seems pretty positive. It calls for an acceleration from the exit growth rate in this year. So I want to understand that a little bit more. Are you seeing some signals that projects will accelerate next year around the core business based on some customer conversations? Does that assume 100% MDR as you go into Q1? And how should we think about AI? Paddy Srinivasan: Pinjalim, I didn't hear the last part of that question. I heard the first part, but let me answer and then you can maybe come back with the AI question. We're seeing a lot of green shoots around kind of like, as you said, all the product traction that we're getting and some of our larger customers, even be willing to commit to longer term -- there is a long-term contracts and commitment contracts, which isn't something that the company has done extensively in the past. But then the core NDR is improving steadily. We're not assuming that it gets to 100 by Q1. That's not implicit in that kind of comments that we made regarding next year. I mean we're going to work aggressively to get it to be 100, but we can deliver the growth rates that we talked about because we're effectively delivering that now, right, at 12% growth with an NDR that's only 97. And we expect both the managed hosting NDR and the core cloud NDR to improve as we head into next year. And we'll continue to get growth, very positive growth contributions from AI capabilities. We said earlier this year that we thought we'd get 3% of overall growth from AI, and we'll end a little bit ahead of that year. So that's also positive and encouraging as we think about what the baseline growth is heading into next year. Pinjalim Bora: Understood. One quick follow-up. The multiyear commitments is definitely interesting. Are you leaning in on any way to drive those commitments? Is that largely coming from customers? Or are you putting in processes to kind of enable those discussions? Thank you so much. Paddy Srinivasan: Yes. I can take that. So we are -- at this point, Pinjalim, we're just letting it happen organically. So we don't have any pronounced, established go-to-market motion. We're not pushing it on our customers. We're just letting it organically happen. The most important thing for us is to learn, learn the patterns, learn what kind of technologies we need to build, learn the migration process itself and things like that. And going into next year, we of course, will look into packaging it a little bit, productizing it and also expand our third-party ecosystem that can help orchestrate some of these things. So there's a lot of work to be done to scale it. But right now, we are focused on nailing it and understanding exactly what it takes to be successful. Pinjalim Bora: Thank you. Operator: And that is all the time we have for questions. This concludes today's conference call. Thank you for your participation. You may now disconnect.

Earnings call: Brightcove exceeds Q3 forecasts, raises full-year outlook By Investing.com

In the Third Quarter 2024 Earnings Call, Brightcove Inc. (BCOV) reported financial results that beat expectations, with revenue for the quarter reaching $49.9 million, surpassing the forecasted range of $48 million to $49 million. The company also experienced significant growth in adjusted EBITDA, which landed at $5.1 million, well above the anticipated $2.5 million to $3.5 million. This marks a nearly 35% increase from the previous quarter. CEO Marc DeBevoise and CFO John Wagner highlighted the company's strategic initiatives, including the launch of the Brightcove AI Suite and strong growth in new business, as key drivers behind the positive results. With these robust figures, Brightcove plans to increase its full-year revenue and adjusted EBITDA guidance. Brightcove has demonstrated a strong financial performance in the third quarter, with CEO Marc DeBevoise and CFO John Wagner expressing confidence in the company's strategic direction and innovation, particularly in AI technologies. The company's focus on long-term contracts, profitability, and new business growth has positioned it well for the future. With a debt-free status and a cash balance expected to exceed $30 million by year-end, Brightcove is also considering inorganic growth opportunities. The management team anticipates providing further updates in February, with a positive outlook for the crucial fourth quarter and beyond into 2025. Brightcove Inc.'s recent earnings call paints a picture of a company navigating challenges while showing promising signs of growth. To supplement this analysis, InvestingPro data offers additional context to the company's financial health and market position. As of the latest data, Brightcove's market capitalization stands at $119.94 million, reflecting its current position in the market. The company's P/E ratio (adjusted) for the last twelve months as of Q3 2024 is -8.08, indicating that the company is currently operating at a loss, which aligns with the reported net loss of $3 million for the quarter. Despite the challenges, Brightcove's gross profit margin for the last twelve months as of Q3 2024 remains robust at 61.65%, underscoring the company's ability to maintain profitability on its core services. This strong margin supports the company's focus on long-term contracts and profitability mentioned in the earnings call. InvestingPro Tips highlight two key points: 1. Brightcove's stock is trading at a low Price to Book ratio, currently at 1.01. This suggests that the stock might be undervalued relative to its book value, which could be of interest to value investors. 2. Analysts predict the company will be unprofitable this year, which aligns with the current negative P/E ratio and the reported quarterly net loss. These insights from InvestingPro complement the earnings call discussion, providing a broader perspective on Brightcove's financial position. For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and metrics beyond those mentioned here. Operator: Good afternoon and welcome to Brightcove's Third Quarter 2024 Earnings Presentation. Today, we'll discuss the results announced in our press release issued after the market closed. During today's presentation, we will make statements related to our business that may be considered forward-looking and are made pursuant to these Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended, including statements concerning our financial guidance for the fourth fiscal quarter of 2024 and the full-year 2024, expected revenue, profitability and cash flow, our potential 2025 business performance, our position to execute on our go-to-market and growth strategy, our ability to expand our leadership position, our ability to maintain and upsell existing customers, as well as our ability to acquire new customers. Forward-looking statements may often be identified with words such as we expect, we anticipate, upcoming, or similar indications of future expectations. These statements reflect management's beliefs as of today and should not be reflected upon as representing our views as of any subsequent date. These statements are subject to a variety of risks, uncertainties, and changes in circumstances that are difficult to predict and many of which are outside of our control. For a discussion on material risks and other important factors that could affect our actual results, please refer to those contained in our most recently filed Annual Report on Form 10-K and as updated by our subsequent SEC filings. Also, during the course of today's presentation, we will refer to certain non-GAAP financial measures. There is a reconciliation schedule showing the most directly comparable GAAP financial measures versus non-GAAP measures available in our press release issued after market close today, which can be found on our website at www.brightcove.com. Marc DeBevoise: Thank you all for joining today. I'm Marc DeBevoise, CEO at Brightcove, and with me today is John Wagner, Brightcove's CFO. As always, we are pleased to be streaming this to you on our own video cloud platform, and today we'll discuss our third quarter results as well as provide an update on our strategic progress and view for the remainder of 2024 and beyond. I'll begin with a quick overview of the strong financial results we delivered in Q3, which were meaningfully above the high end of our guidance range on both top and bottom line. Total (EPA:TTEF) revenue for Q3 was $49.9 million, well above the high end of our guidance range of $48 million to $49 million. This better-than-expected performance showed growth over 1% sequentially. Similarly, revenue excluding overages was $48.4 million, also better-than-expected and showed 1% sequential growth. Adjusted EBITDA was $5.1 million meaningfully above the high end of our guidance range of $2.5 million to $3.5 million and up significantly, nearly 35% quarter-over-quarter. This also represents a 10% adjusted EBITDA margin. We generated $1.6 million of free cash flow and have increased our cash balance every quarter this year now to $27 million, up $8 million since the beginning of the year. This was a good quarter. I'm pleased with the consistent performance of the business this year as we have hit or exceeded the high end of our guidance on both revenue and adjusted EBITDA each quarter in 2024. And as John will hit on later, based on our performance year-to-date and outlook for Q4, we are raising our full-year guidance on both the top and bottom line today. The top end of our revenue range is now $700,000 above the top of our initial range set earlier this year, and the midpoint is now $1.7 million higher. Our beat and raise here is even more pronounced on adjusted EBITDA where the top end of our revised range is now $1.8 million above the top end of our initial range, and the midpoint is over $2 million higher. Ensuring we consistently deliver on or beat our financial targets has been a key priority, and I would like to thank our teams at Brightcove for making this a reality. I think it's important to note some of the key attributes of our anticipated performance this year. First, we have committed to delivering meaningful profitability and to drive improved efficiency across the company in any revenue scenario. We've done a really good job on this regard. We now expect revenue to be only down fractionally, but we will have grown adjusted EBITDA 40% to 50% even faster than we expected at the beginning of the year. We have done this by focusing on improving the efficiency of our delivery and systems, which has lowered the cost of goods sold, as well as rigorously evaluating and managing our spending across the business. Second, it's important that this adjusted EBITDA profitability improvement translate to free cash flow. We are pleased to be tracking well to our full-year cash targets and noting the sizable growth we have seen in our cash balance as a result. Third, we've continued to progress in building the long-term stability of our business. This has been mainly supported by our focus on longer term deals, leaving less up for renewal in any given quarter and our move up market where customers are more apt to do larger, longer deals with us. Our record long-term backlog and record ARPU this quarter both demonstrate how this is working. And lastly, we have continued to invest in innovation that we believe will return the business to topline growth over time. I'll talk more about this in a moment, but we continue to see a number of opportunities to create more value for customers and generate future revenue growth over time with new products and solutions. Let me provide you with some color on our business and sales performance in Q3. Overall, it was in line with our expectations and was up slightly compared to our trailing four quarters average and similar to the second quarter. From a new business perspective, we had our best quarter of the year so far and saw a meaningful improvement from Q2 and similar performance to a very strong Q3 last year. We had a good mix of wins across the business with some specific strength in our international media business and continued success against our goal of signing larger new business transactions. More specifically, new business in Q3 was up over 50% quarter-over-quarter and up 20% versus the trailing four quarters average. Average annual contract values for new business were up nearly 50% year-over-year and over 90% quarter-over-quarter and versus our trailing four quarters average. As we talked about last quarter, overall demand trends have remained solid and our team did a better job proactively working with customers to complete deals in a timely fashion. Driving consistent execution in new business is a key priority and I feel better about our execution in this area given our Q3 performance. Our add-on sales performance was up modestly about 5% year-over-year, albeit down compared to the very strong performance we saw in Q2. We are seeing continued progress in building up our cross-sell and upsell motion, especially with our expanding portfolio of enterprise solutions. Marketing and communication studio activity is increasing along with our .TV thought leadership marketing solution and we are also pleased with the initial traction we have with our new sales use case offering set for a more formal launch later this quarter, which I'll discuss in more detail shortly. These solutions used as upsell and cross-sell as a critical part of our long-term strategy to deliver more diversified consistent growth. In terms of entitlements, we saw a similar dynamic to last quarter with some customers starting to add to their entitlement levels while others continuing to rightsize as contracts renew. Positively, we now believe we are in a position to say that we expect the pressure from entitlement downgrades to subside in 2025. We have now worked through almost all of the largest entitlement customers and feel like the large majority of our media customers are at or near the right entitlement levels. While there's always risk of specific customer entitlement pressure or specific customer churn from M&A in this market, we believe the pieces are in place for retention to improve in 2025. Generally, we believe the add-on business will likely be an area of strength for us in the fourth quarter as we move into next year. I'd like to mention some of the exciting new business add-on renewal deals we signed in Q3 across a wide range of industries and geographies with some incredible companies. On the enterprise side of the business, select new business customers included Pharma company, Parexel, J&J spin-off, Kenvue (NYSE:KVUE), Japanese drugstore company, Sugi Holdings, Korean HR Solutions company, Wanted Lab; and German exhibition company, Messe Frankfurt. Select enterprise renewals and add-ons included Abbott Labs (NYSE:ABT), Acquia, Apollo, Broadcom (NASDAQ:AVGO), Chick-fil-A, Deloitte, Dentsu, HP (NYSE:HPQ), Palo AltoNetworks, Pegasystems (NASDAQ:PEGA), Marriott, Nomura, Rakuten, S&P Global, ServiceNow (NYSE:NOW), UnitedHealthcare and Wendy's (NASDAQ:WEN) just to name some of the deals we've completed in the quarter. On the media side, select new business customers included international media company, Antenna Group with numerous properties across Central and Eastern Europe in a deal to power their ANT1+ streaming service. Philippine media and entertainment company TAP Digital Media to power their Blast TV streaming service. A next set as we like to call them, U.S. streaming service, and now that's TV Plus moving to our OTT platform and powering streaming for the U.S. leading sports entity, The Premier Lacrosse League. Additionally, now we are able to mention that the large U.S. broadcaster win we mentioned in Q2, was actually the CW Network (LON:NETW). This multi-year seven figure dollar win was driven by superior technical feature set, the superior speed of our platform and an attractive total cost of ownership relative to its previous solutions and other competitive offerings. This is a classic core media use case for Brightcove, where the CW will be utilizing our platform across their video value chain. Renewals and add-ons in the media sector also included leading Japanese Telco, KDDI (OTC:KDDIF) to power a new live streaming use case across the U.S. and Japan; leading Hispanic audience streamer, Canela Media; leading subscription service provider, Gaia (NASDAQ:GAIA), along with other major brands including BBC Studios, This Old House, Fremantle, Carnegie Hall, and The Academy of Motion Picture Arts and Sciences among others. From a product perspective, we had a major announcement this quarter with the release of Brightcove's AI suite. Overall, we now believe AI will be a meaningful accelerant to our business in the coming years, especially our enterprise business, mainly from the volume of video that will be created via the advancement of AI tool sets. We also believe our customers want us to help them utilize AI to drive real results in their business, either by helping them drive engagement and revenue or to be more efficient in their operations. Building on our two decades of innovation in the video and engagement technology market, the Brightcove AI Suite we announced is a multifaceted push into the future of video and engagement. Our new capabilities addressed our customer's growth driving and cost saving needs from creating content to optimizing it to growing its engagement and monetization, to reducing the cost of creating, managing, and delivering it without sacrificing quality. We have positioned ourselves at the app layer of AI as the place where customers will come to truly use AI and execute real business operations and needs, and we have partnered with many of the world's leading AI and LLM engines to help power our solutions, including Anthropic, Google (NASDAQ:GOOGL) and AWS. In mid-September, we launched five pilot products for a set of customers to start testing with us in this Q4 with the goal of commercializing the suite in early 2025. We also intend to add additional pilots and products to the mix over time and have already announced a few expansions. As we deepen our AI offerings, we are focused on four specific areas of value creation for our customers. The first area is automatic Content Creation. With the Brightcove AI Suite, customers will be able to take existing content and quickly repurpose it to create more content by auto-clipping, auto-summarization or creating highlight reels from long form videos. Auto creates alternative formats like vertical video or fully dubbed translations. We launched our two major pilots in Q3, our AI Content Maximizer and our AI Universal Translator. Here in Q4, just last week, we also announced a new pilot in this focus area launching in January that will enable our customers to create almost any video with just a few keystrokes via our AI Text to Video capability. The second area of focus is automated Content Management and Optimization. We are introducing capabilities to accelerate workflows and make our customers jobs easier in managing content libraries while turning those content libraries into a foundational layer of data. Our first pilot in this area, our AI Metadata Optimizer, which helps transform content into a searchable and AI-optimizable dataset, is making it more discoverable and more monetizable automatically while saving our customers time in generating this data. We also announced two additional capabilities in this area last week as well, including an AI aided auto mail thumbnail creation tool and an automated chaptering feature, which will both launch by year end as part of the AI Metadata Optimizer pilot. The third area of focus is Content Engagement and Monetization. We want to help our customers find the best ways to maximize the engagement and revenue their content generates. Our first pilot here is our AI Engagement Maximizer using data from our analytics and insights products in addition to our customer's data, we are able to improve engagement through recommendations and enhanced search and discovery. The fourth and final area is about Quality and Efficiency. We want to help our customers drive down the cost of encoding, storage and content delivery without sacrificing the viewer experience. Leveraging our Emmy Award-winning Context-Aware Encoding technology with improved optimization via AI, we have developed an AI Cost-to-Quality Optimizer that will allow our customers to choose the level of necessary delivery quality against the meaningful savings small changes can deliver. Initial reaction to our September announcement and launch has been incredible. We already have over 50 customers signed just in the first few weeks to the pilots to these initial products. As mentioned, we plan to commercialize these in early 2025 and continue to invest and iterate to add more in the coming quarters. We believe AI will be central to every company's video and engagement strategies and that Brightcove is in a great position to be their trusted partner on this journey. We've also been making meaningful progress on rolling out other new capabilities for our customer base to enhance what they receive from our platform. Most recently, we deployed marketing insights, our deep measurement and actions platform for marketers to help them maximize video engagement. We've taken our powerful broader insights platform and pointed it directly towards our enterprise marketing customer base to deeply track and derive actionable insights on their engagement. Put simply, you can think of it as a marketing funnel manager's dashboard for success. Perhaps most impactful in the quarter, we signed our second major real estate brand to our newest use case, which is effectively repurposing our marketing studio solution for sales teams. This use case capitalized on our core platform capabilities, but further reimagined and purpose-built a solution to serve thousands of sales professionals each coming into the Brightcove's platform to manage their own set of videos to reach their own specific potential customers. In this specific case, approximately 30,000 real estate brokers each with the power of Brightcove at their fingertips, fully enabled to create and distribute video to engage their potential buyers. It's a powerful new use case developed on our same platform to serve a new customer set with evolving needs. We intend to fully package this solution for broader deployment in the fourth quarter and grow its opportunity throughout 2025. Let me wrap up by saying that I'm pleased by the progress we have made so far in 2024 to meaningfully improve our business, especially our profitability and cash generation. At the same time, we have also strengthened our product offerings and value proposition to customers, which we believe will enable us to return to revenue growth. It's too early to discuss the specifics about 2025 as we are focused on executing in Q4, which will be very influential on the 2025 outlook we provide in February. Having said that, in any reasonable revenue scenario, we expect to target at least 10% adjusted EBITDA and free cash flow growth going forward. We know there are additional productivity gains we can achieve across the business and that the steps we have taken to rightsize our cost structure will lead to continued profitability growth as the business returns to revenue growth. And now with more than $0.50 a share in cash on our balance sheet and growing, adjusted EBITDA growth at 40% to 50% this year, and on a path to continued adjusted EBITDA and free cash flow growth going forward, we continue to believe our stock trades at a significant discount to our intrinsic value and that it represents an incredibly attractive investment opportunity at current levels. With that, let me turn things over to John to walk through the financials and our guidance in more detail, and I'll be back for Q&A. John? John Wagner: Thank you, Marc. I'll begin with a detailed review of our third quarter results and then finish with our outlook for the fourth quarter and full-year 2024. Total revenue in the third quarter was $49.9 million, down 2% year-over-year and up 1% sequentially over Q2 and above the high end of our guidance range. Breaking revenue down further, if we exclude overages of $1.5 million in the quarter, revenue was $48.4 million, down 2% year-over-year and up 1% sequentially. Subscription and support revenue, which includes overages, was $48 million, and professional services revenue was $2 million, down 1% and 18% year-over-year, respectively. 12-month backlog, which we define as the aggregate amount of committed subscription revenue related to future performance obligations in the next 12 months, was $122.4 million, an increase of 1% year-over-year. Total backlog was $183.2 million, up 5% year-over-year, including a record backlog of $60.8 million, up 15% year-over-year related to the portion of committed revenue to be recognized greater than 12 months in the future. We continue to see customers, especially our larger customers, confident in making multi-year commitments to our platform, providing us greater visibility into our long-term recurring revenue. On a geographic basis, we generated 60% of our revenue in North America in the quarter and 40% internationally. Breaking down international revenue a bit more, Europe generated 16% of our revenue and Japan and Asia Pacific generated 24% of our revenue in the quarter. Turning to the supplemental metrics we share on a quarterly basis. The recurring dollar retention rate in the third quarter was 80%, which was down from 83% in the previous quarter. Retention in the quarter was impacted by reductions in entitlements at contract renewal. In particular, this quarter, we had a sizable down-sell from one of our largest international media customers who transitioned a significant portion of its video infrastructure in-house. As a reminder, this metric only captures renewals in the quarter and upsells at the time of renewal and does not factor in the impact of add-ons during the contract term or multi-year agreements, both of which meaningfully improve our dollar retention. As Marc mentioned, we expect the pressure from entitlement downgrades to subside in 2025. Net revenue retention rate, which provides a more complete view of the year-over-year revenue retention was 94% in the quarter, which compares to 93% in the previous quarter and 93% in the third quarter of 2023. The stability of NRR captures our success growing customer relationships during the subscription term and effectively locking in successive annual renewals in the form of multi-year commitments. Our customer count at the end of the third quarter was 2,392, of which 1,923 were classified as premium customers. Looking at our ARPU within our premium customer base. Our annualized revenue per premium customer was a record $101,400, up 6% over Q3 2023. This excludes our entry-level pricing for starter customers, which averaged $4,200 in annualized revenue. Though we don't expect ARPU to always increase in a linear manner as it has in recent quarters, we do think strong ARPU is a successful reflection of our strategy to focus on and super-serve larger customers with more sophisticated requirements where we are able to win, grow and retain customers more effectively. Looking at our results on a GAAP basis. Our gross profit was $31.6 million for the quarter, giving us a gross margin of 63%, an increase compared to 62% in the third quarter of 2023 and 61% in the prior quarter. Gross margin benefited from a combination of durable improvements in the cost architecture of our platform, some one-time benefits in the quarter, and positive professional services margin. Operating loss was $2.8 million. Net loss was $3 million and net loss per share was $0.07 based on 45 million weighted average shares outstanding. Turning to our non-GAAP results. Our non-GAAP gross profit in the quarter was $32.3 million compared to $32.5 million in the third quarter of 2023 and represented a gross margin of 65%, an increase compared to 64% in the year-ago period. Non-GAAP operating income was $860,000 in the third quarter compared to non-GAAP operating income of $2.3 million in the third quarter of 2023. Adjusted EBITDA was $5.1 million, down 9% year-over-year and up 34% sequentially, representing an adjusted EBITDA margin of 10% and above the high end of our guidance range. The ongoing strength in adjusted EBITDA reflects the continued benefit of prior cost savings actions, efficiencies we are generating in our cost of goods sold, and our ongoing expense discipline. Non-GAAP diluted net income per share was $0.02 based on 46.2 million weighted average shares outstanding. This compares to diluted net income per share of $0.05 based on 43.4 million weighted average shares outstanding in the year-ago period. Turning to the balance sheet and cash flow. We ended the quarter with cash and cash equivalents of $27 million and remain debt-free. Free cash flow for the quarter was $1.6 million after taking into account $1.8 million in capitalized expenditures and capitalized internal-use software. The strong cash flow performance in the quarter and year-to-date reflects the profitability improvements we've made during the year and the expected decline in the pace of CapEx and capitalized software investments. I'll finish by providing our guidance for the fourth quarter and the full-year 2024. For the fourth quarter, we are targeting revenue of between $48 million and $49 million, including approximately $1 million of overages and approximately $2 million of professional services revenue. From a profitability perspective, we expect non-GAAP operating loss to be between $1.3 million and $0.3 million and positive adjusted EBITDA to be between $3 million and $4 million. Non-GAAP net loss per share is expected to be in the range of a loss of $0.04 to $0.01 based on 45.3 million weighted average shares outstanding. For the full-year, we are increasing our revenue guidance to $197.7 million to $198.7 million, which includes an estimate of approximately $5 million of overage revenue and approximately $8.3 million of professional services revenue. This reflects our better-than-expected performance in Q3 and a midpoint now above the high end of our prior guidance. We are also increasing our full-year guidance from a profitability perspective and expect non-GAAP operating income to be between $0.1 million and $1.1 million and adjusted EBITDA to be between $16.8 million and $17.8 million. This equates to adjusted EBITDA growth of nearly 40% to 50% for the year. Non-GAAP net loss per share is expected to be in the range of $0.02 to $0.00 based on 44.7 million weighted average shares outstanding. Lastly, we are maintaining our full-year free cash flow guidance, which is expected to be between $5.6 million and $8 million. We expect to end the year with at least $30 million of cash on the balance sheet, an increase of more than $11 million over prior year's ending cash with no debt. A few things to keep in mind as you think about our guidance. The expected sequential decline in revenue is being driven by two dynamics: a $500,000 decline in overage revenue and the impact of a large down-sell I mentioned earlier, which occurred at the very end of the third quarter. This sequential decline in revenue will also impact adjusted EBITDA in the fourth quarter. To wrap up, we are very pleased with the results in Q3, exceeding the high end of our guidance range on both the top and bottom line while generating meaningful free cash flow. We are successfully executing on our key strategic priorities that we expect will return the business to consistent revenue growth in the future. We will continue to deliver on our commitment to disciplined expense management, which will deliver significant adjusted EBITDA growth in 2024 and into 2025 as well. Please give us a moment to transition to Q&A, and we'll be back to discuss our results further. A - John Wagner: Our first question will come from Steven Frankel from Rosenblatt Securities. Steven Frankel: Good afternoon and congratulations on the progress we saw in the quarter. Marc, how much of that do you think is repeatable muscle memory of doing things you've been working on for several quarters versus the business continues to be lumpy and you've brought in some good business in Q3? Marc DeBevoise: Yes. Look, I mean, the Q3 performance comes from the stack of previous quarters of business we've developed. So I do think it is relatively durable. And we do feel like the cost structure changes we made over the past 18 months have really started to now pay the benefit that we thought would be there. From a new business perspective, as I said earlier, I do feel really better about how we performed in the quarter, really brought deals in. Those are not always 90-day cycles, right? And so it's really nice to see those land and have the team really perform well when that did. And then the add-on business, obviously, where it is how our customers' businesses are going, and we do, from an entitlement perspective, have to play in that regard. But I do feel better about the durability of our ability to upsell and cross-sell now with multiple product sets and suites. And then when we look to the real future, we think about our AI suite, we think about our new use cases, and some of the other products we've released over the last 12 to 18 months that can really help us build behind that. So I feel very good about the durability in the long run. There may be some choppiness in certain parts of our customer base, especially on the media side, but I think those are well-known, and we have a good plan on how to attack those. And I feel very good about the durability of our both upsell, add-on business as well as new business being able to close. Steven Frankel: And this new Salesforce product, how should we think about something like that ability to raise ARPU going forward? Marc DeBevoise: Well, I mean, I think the great part there is it's a new use case from effectively the same or very similar technologies, right? We basically purpose-built, we sort of took Marketing Studio and purpose-built it for a sales team, a big broad sales team in this case of over 30,000 real estate agents, being able to one-to-one or one-to-many communicate with their potential buyers as opposed to sort of our normal marketing case, which is very few employees handling tonnage of video and putting it on to help develop marketing leads. So I do feel like I'm very optimistic about the future of this specific use case. We haven't even really fully rolled it out yet. We've rolled it out to effectively one or two customers, had meaningful bookings from those customers in the first two quarters of its relative new existence. So you'll see us roll it out more formally this quarter, the next few weeks, and we'll officially name it, and then we'll go to market and do believe it can help add, especially to the ARPU on the enterprise side of our business, right? It's going to be meaningfully helpful to that side of the business for sure. Steven Frankel: Okay. And I know you don't want to talk about 2025 yet, but do you need any additional elements to get to consistent growth? Or is it more the external environment and things like making sure you're at the bottom of the entitlement shrinkage that's holding you back from growing? Marc DeBevoise: Yes. I think it goes to multiple factors, Steve, but I think we're optimistic about where the business is headed. First, we obviously need to see retention improvement from this year to next to have that growth be real. And our belief is that we're on a path to that. As we said on the call, that the entitlement sort of upgrade and downgrade cycle has been a little bit more normalized. We're getting through that sort of last few of the large media renewals through the end of this year. And so we feel like next year is going to be the year where we will stop effectively talking about that COVID issue and sort of talk about it as this is what our customers' businesses are. And then obviously, we need to go book new business, and we need to go book more business with our existing customer base. But we certainly believe we are on a path to do that, and our goal is going to be to grow the business going forward. John Wagner: Thanks, Steve. Our next question is from Max Michaelis with Lake Street Capital. Max? Maxwell Michaelis: Okay. Sorry. Hey, guys. Thanks for the detail you guys gave on 2025 in terms of adjusted EBITDA and then free cash flow. When we think about growth, I know you guys don't want to talk about it. I mean, is there areas in the market you've seen maybe from an inorganic perspective? I've seen cash rise throughout the year now, kind of get a sense of where you're comfortable with to go out and spend in the market. I think you're at $27 million in cash now. Yes. So I guess, is there any areas out in the market right now from an inorganic perspective that you guys would be interested in maybe to jump-start growth a little bit for 2025 and beyond? Marc DeBevoise: Do you want to give a point of view on cash? John Wagner: Yes. I'll start by just saying we're pretty happy with what we've done with cash this year. We are now at over $8 million more in cash on the balance sheet than we started the year. We expect, like you say, to finish the year at about $30 million or over $11 million more than we started the year. So we do think that cash is beginning to get to the point where it's more than sufficient for just working capital purposes. So we are starting to think about what is the best use of cash in terms of creating value for shareholders and value for the business. Certainly, inorganic opportunities is something that we look at. I'd say nothing specific, but something that we do keep our ear to the ground on. Marc DeBevoise: Yes. Well said, John. I think you nailed it. We're not going to talk about specific sectors or anything like that. Maxwell Michaelis: Yes. And I guess, great quarter from new biz. I guess how has that trended into Q4? Can you give any details on that? Marc DeBevoise: Obviously I don't want to get ahead of ourselves there, but we feel good about the execution in Q3, really being able to close deals. I think on Q2, we had mentioned that it was a little bit more challenging. I think that got a little better for us. I think our team did a fantastic job. So congratulations to them on doing that. I think we're going to have some interesting opportunities here in Q4. Q4 is obviously very influential over how we talk about 2025. Hence, we're going to wait until the appropriate time to talk about that in February. But I think we have a really important quarter on our hands here in Q4. Maxwell Michaelis: All right, guys. Thanks. Marc DeBevoise: Well, with that, we'll wrap it up. I want to thank you all for joining today. Just to reiterate a little bit of what we discussed, we're extremely pleased with the strong Q3 results, delivering above the high end of our guidance range on revenue, adjusted EBITDA, and cash. Also very pleased given the year-to-date performance to be raising the full-year top and bottom line guidance and setting us up to deliver adjusted EBITDA growth, as John said, of 40% to 50%. Backlog and ARPU hitting all-time records this quarter, net revenue retention continuing to improve quarter-over-quarter, really demonstrating the resilience of the business and that our move upmarket and our multiyear deal focus has delivered. And we continue to make some of those right innovation investments and have a meaningful future growth opportunity ahead of us, I believe, with new use cases and with our AI suite. And obviously, as we just talked about, our cash position expected to be above $30 million by the end of the year, adding like $11 million or so over the course of the year and remaining debt-free. So we really do continue to believe our share price at current levels does not give us appropriate credit and provides investors a great opportunity. So with that, I want to thank you again for joining, and we really do look forward to updating you on our progress after the New Year.

Earnings call: 8x8 Inc. beats expectations in Q2 Fiscal 2025 By Investing.com

8x8 Inc . (NYSE: NASDAQ:EGHT), a leading provider of cloud communications services, surpassed market expectations in the second quarter of fiscal 2025, reporting robust financial results, including an increase in service revenue to $175.1 million and a non-GAAP operating margin of 11.9%. CEO Samuel Wilson highlighted the company's successful transformation initiatives, which have led to significant growth in sales of new products and AI-based solutions. CFO Kevin Kraus detailed the company's financial achievements, including a substantial reduction in total debt and continued positive cash flow. Looking ahead, 8x8 expects to complete customer upgrades from the Fuze platform by the end of 2025 and maintains a cautiously optimistic outlook for future growth. Operator: Good day and thank you for standing by. Welcome to Second Quarter 2025 8x8 Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kate Patterson, VP of Finance. Please go ahead. Kate Patterson: Thank you. Good afternoon, everyone. Today's agenda will include a review of our results for the second quarter of fiscal 2025 with Samuel Wilson, our Chief Executive Officer and Kevin Kraus, our Chief Financial Officer. Following our prepared remarks, there will be a question-and-answer session. Before we get started, let me remind you that our discussion today includes forward-looking statements about our future financial performance, including investments in innovation and our focus on profitability and cash flow as well as statements regarding our business, products and growth strategies. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from forward-looking statements as described in our Risk Factors in our reports filed with the SEC. Any forward-looking statements made on this call and in the presentation slides reflect our analysis as of today and we have no plans or obligations to update them. All financial metrics that will be discussed on this call are non-GAAP unless otherwise noted. These non-GAAP metrics, together with year-over-year comparisons in some cases, were not prepared in accordance with U.S. generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP metrics to the closest comparable GAAP metric is provided in our earnings press release and earnings presentation slides, which are available on 8x8's Investor Relations website at investors.8x8.com. With that, I'll turn the call over to Samuel Wilson. Samuel Wilson: Good afternoon, everyone. Thank you for joining us today to discuss our results for the second quarter of fiscal 2025. I am delighted to share that we delivered a quarter of solid performance doing better than expected for key financial metrics like service and total revenue and non-GAAP operating income. Also, I am very pleased to report that we generated an operating profit on a GAAP basis. I believe our results this quarter are a testament to the increasing effectiveness of our go-to-market strategies and the strength of our product offerings. While it is still early, we are seeing important indications that our transformation strategies are working. Reinforcing my conviction is the fact that revenue generated by customers on the 8x8 platform, which excludes revenue from customers still on Fuze, was up on a year-over-year and quarter-over-quarter basis. We first outlined our transformation initiatives nearly 2 years ago, and we saw accelerating progress against everyone this quarter. Briefly, these are: one, accelerate innovation in contact center while maintaining leadership in cloud telephony; two, establish leadership in our Communications Platform as a Service offerings in the Asia Pacific and leverage these capabilities globally; three, focus on small and midsized enterprises; four, improve platform win rates and sales productivity; five, maintain an outstanding experience for our customers; and six, build a fortress balance sheet by reducing debt and remaining vigilant in maintaining our costs, allowing us to deliver value to our investors, customers and partners. Starting with Communications Platform as a Service. We posted a strong quarter in Q2 with platform usage revenue up more than 20% year-over-year and close to an all-time high. Notably, we achieved our highest single platform usage revenue day ever in early September as we continue to extend our leadership, particularly in the Asia Pacific and European regions. Engagement through our public APIs continues to increase, and sales of non-SMS products grew more than 50% year-over-year. We recently added Descope, a customer identification and authentication management solution as our first technology partner ecosystem member to integrate with our Communications Platform as a Service. The customer response in a series of Asia Pacific innovation roadshows was fantastic. Nuren Group, a leading Malaysia-based e-commerce and digital content provider is a great example of how our expanded solutions are addressing more complex requirements. With more than 5,000 merchants and 5 million-plus active users across 3 countries, they chose 8x8's WhatsApp business APIs to deliver bulk messaging, automated communications and real-time engagement to their community. I believe innovation is the spark that gets the growth engine started. It enables new conversations and creates new opportunities. This is why we continue to invest 15% of our revenue in R&D on a non-GAAP basis. The results of our investment in R&D are visible across our CX solutions. Let me share a few data points. Sales of new products were up more than 60% year-over-year, an acceleration from the prior quarter. Sales of artificial intelligence-based new products, including Intelligent Customer Assistant and other solutions from our technology partner ecosystem increased more than 50% sequentially and more than 200% year-over-year. We have hosted more than 1 million interactions since these products were introduced and usage is accelerating. I believe this growth reflects our differentiated approach to AI, which is built on 4 core pillars, each focused on enhancing customer experience through powerful, reliable AI capabilities. First, we prioritize comprehensive AI-driven data processing across all voice and digital interactions on our platform, which can deliver accurate transcriptions, summaries, sentiment analysis and topic tagging while keeping enterprise data secure and compliant. Second, we developed an ecosystem of what we believe to be best-in-class AI applications integrated seamlessly into our CX solutions. This approach allows our customers to achieve consistent AI-driven insights without duplicating costly processing efforts like real-time transcription. Third, we're investing in AI insights that assess the full CX deployment, identifying operational optimizations across both human and AI elements, benefiting both native 8x8 tools and third-party components. Finally, our professional services team is expanding its AI consulting services, providing clients with hands-on support to drive value from their AI solutions swiftly and sustainably. AI is just a tool, but we are focused on turning our AI technologies into the business outcomes that our customers want. Our focus on business outcomes is leading to an acceleration in new logo business, coupled with an increase in multiproduct lands. New logo business accounted for an increased percentage of our bookings in the second quarter. It is worth noting that the percentage of bookings from new logos has increased in each of the last 3 quarters. Once again, the majority of our top 20 new logo deals included Contact Center as a Service, in the initial commitment and several included more than 4 products. If innovation is the spark that ignites the growth engine, our relentless focus on customer success is the accelerator. Our customer loyalty and revenue retention for customers on the 8x8 platform is at multiyear highs. Our customers are being deployed faster with a higher level of satisfaction and a shorter time to value. Our support organization has maintained world-class satisfaction metrics for seven consecutive quarters. And our proactive white glove coverage of our top 1,000 revenue-generating accounts has increased customer loyalty and reduced customer churn. We have seen public recognition of our success in the awards we have received. One of our largest wins this quarter demonstrates what I mean. A leading specialty retailer chose 8x8 to help them move from a piecemeal Cisco (NASDAQ:CSCO) on-premise solution to a scalable single integrated UC and CC cloud platform. Their implementation will ultimately span 1,600 locations and more than 20,000 employees. A critical factor in their decisions process was the recommendation of an affiliated in-store service provider who had used our UC and CC solutions for 4 years. The ability to integrate the two solutions to enable a seamless customer experience was a clear differentiator, but we would not have had a chance to prove it if the service partner had not been satisfied with their 8x8 solution. Their recommendation is not unique. This quarter, we earned the Customers Love Us Badge on G2, the customer review site, because they do. Coronis Health, a leading provider of health care revenue cycle management solutions is another example of how our investments in customer success are paying off. A Fuze customer using Teams for collaboration, they chose to upgrade to the 8x8 platform after an extensive proof-of-concept period, supported by a cross-functional center of excellence team. This was one of several Q2 deals representing more than $1 million in annual recurring revenue. Speaking of our portfolio of Teams integrations, 8x8 is proud to be the only Gartner (NYSE:IT) UC Magic Quadrant leader besides Microsoft (NASDAQ:MSFT) itself to be accepted into the Operator Connect program leveraging our trusted and strategic partnership with Microsoft to deliver comprehensive integrated Teams solutions. Scandinavian Designs, a brand with 40-plus showrooms across 16 states chose 8x8 Contact Center with Operator Connect for Microsoft Teams to migrate to a single cloud platform. Differentiated features like Teams Chat Federation and presence visibility in agent workspace were key factors in their decision. They also liked our robust analytics and dashboards with call transcriptions and evaluation capabilities thrown in. 8x8 now supports more than 500,000 Teams users, and our Teams base continues to grow quarter-over-quarter and year-over-year. Another important aspect of our growing momentum has been our commitment to expanding our partner relationships including both our reseller partner programs and our technology partner ecosystem. Both programs are closely aligned with our commitment to go beyond technology to deliver outcomes to our customers. New partner Buchanan Industries embraces this vision on multiple levels. A leading managed IT service provider focused on mid-market and enterprise organizations; Buchanan believes in delivering business outcomes by turning their technology into a powerful competitive business advantage. Not only did they sign up as an 8x8 value-added reseller, they are also migrating their legacy on-prem system to 8x8 Contact Center as a Service solution for their nearly 300 contact center agents. They chose 8x8 for our shared values and vision, our comprehensive omnichannel solutions, our 7/24 agent support and our exceptional partner relationships. Our technology partner ecosystem has also been a clear win for us and our customers. By offering tightly integrated solutions with a carefully curated community of what we believe are the best-in-breed partners, we expanded our offerings and accelerated our time to value for our customers. I already mentioned our new partner Descope. We also added Regal.io, a leader in marketing campaign management to the exclusive sell with 8 tiers. We already have a customer using Regal and 8x8 in high-volume production. These customer wins and our Q2 results reflect the hard work and dedication of our team over the last 2 years. They underscore the resonance of our strategic initiatives in the market, increasing my conviction in our path and my confidence in the future of 8x8. In closing, I want to express my gratitude to our customers, partners, employees and you, the investors. Your trust and commitment to 8x8 are what empower us to continue our journey of growth and innovation. We are excited about the opportunities ahead and are committed to converting our momentum into increased value for our investors, partners and customers. With that, I will turn the call over to Kevin who is back this quarter for more details on our financial results. Kevin Kraus: Thanks, Sam and good afternoon everyone. We delivered solid financial performance in fiscal Q2 '25, meeting the high end of our guidance range for total revenue and beating the high end of our guidance range for service revenue and non-GAAP operating margin. Cash flow from operations was also healthy. Fiscal Q2 is our 15th quarter in a row of positive cash flow from operations and non-GAAP operating profit, trends we expect to continue. We also repaid $25 million of term loan debt in conjunction with our August refinancing. I'm pleased to report that subsequent to September 30, we retired another $33 million of principal value of our term loan debt, reducing our total debt principal balance to $369 million as of today. This represents a debt reduction of over $173 million or 32% since the end of fiscal Q2 '23. And we are doing what we said we would do, which is returning value to shareholders primarily through debt repayments. The press release and trended financial results we posted on our Investor Relations website provide a comprehensive view of our results, but I will point out a few of the highlights on this call. Before I continue, let me remind you that I will be using non-GAAP metrics, except for revenue and cash flow, unless otherwise noted. Q2 service revenue was $175.1 million, reflecting continued growth in both subscription and usage on the 8x8 platform. This was offset by a decline in revenue from customers remaining on the Fuze platform as expected. The remaining base of customers on the Fuze platform represented approximately 7% of service revenue in fiscal Q2 versus 12% of service revenue in fiscal Q2 '24. We expect this percentage to decline over the next 6 quarters as we plan to complete the customer upgrades from the Fuze platform to the 8x8 platform by the end of calendar year 2025. I would like to point out that Q2 revenue benefited slightly from favorable foreign exchange rates during the quarter of approximately $1.5 million versus our beginning of quarter expectations and approximately $2 million on a year-over-year basis. Excluding this FX favorability, we still achieved service revenue and total revenue above the midpoint of our guidance ranges. Gross margin was 70.2%, consistent with our expectations and slightly lower than 70.6% in Q1 '25 as we delivered on our expectations for increased usage on our Communication Platform as a Service business. We continue to operate within our OpEx envelope for Q2 with operating expenses flat with Q1 on a dollar basis at $105.5 million. As we have noted before, we have a natural hedge built into our model where the FX impact on revenue is essentially offset by the FX impact on expenses, minimizing any net impact on operating margin. Our Q2 non-GAAP operating margin was 11.9%, sequentially higher than 11.3% in Q1 and above the high end of our guidance range due to our strong top line performance. I would like to highlight that Q2 stock-based compensation as a percentage of revenue in our GAAP financials was 5.2%, well below our peers and at our lowest point in at least 5 years. The continued progress in stock compensation expense helped us attain GAAP operating profitability in Q2, a milestone that demonstrates our financial discipline. As previously stated, we've increased cash compensation in lieu of equity for the majority of our employees. Our intention is to reduce dilution by issuing fewer shares over time, but the increased cash compensation gets reflected in our non-GAAP operating margin as it isn't excluded for non-GAAP financials. Turning to the balance sheet and cash flow. Our cash, cash equivalents and restricted cash was $117.9 million at the end of Q2, which was down about $13 million from the end of Q1, reflecting the reduction in our debt balance by $25 million, as I noted earlier. You will notice that our current liabilities on the Q2 balance sheet includes $39.4 million of current term loan balance, net of unamortized debt discount and issuance costs. The principal value of this current portion is $40 million, which represents the minimum payments required by our term loan credit agreement for the 12 months following September 30, 2024. The $33 million of debt repayments since September 30 lowers the remaining current liability to only $7 million as of today. By the way, the $33 million represents $15 million in required fiscal Q3 '25 principal payments plus $18 million in prepayments. As I stated earlier, the principal value of our total debt outstanding today is $369 million and $202 million of this total is convertible to equity. To provide some perspective on our progress over the last 2 years, in August 2022, we had $548 million of debt and a net debt to trailing 12-month EBITDA ratio of more than 6x. At the end of fiscal Q2 '25 and as of today, our net debt-to-EBITDA ratio is approximately 2.6x. With a solid balance sheet and consistent cash flow, we have greater flexibility to pursue opportunities that align with our innovation-led growth strategy. Accounts receivable and current deferred revenue increased sequentially, reflecting improved bookings performance in Q2. Days sales outstanding of 32 days is well within a healthy range for our business. Our remaining performance obligation increased $20 million sequentially, a quarter-over-quarter and a year-over-year increase of 2.6%, reflecting improvement in our multiyear customer contract backlog and directionally consistent with the increase in our total deferred revenue. As a largely recurring revenue business, our RPO balance covers a significant majority of our future recurring revenue in the next 12 months, which is a strong stabilizing financial force for us. Cash flow from operations was $12.3 million in Q2, and total stockholders' equity remained positive. Now let's discuss a few points about our operating model. Our total cost structure in Q2 '25 on a dollar basis was very similar to our cost structure in Q1 '25. Total operating expenses were virtually identical in Q1 and Q2. We believe that our target cost structure with R&D at about 15% of revenue, sales, and marketing between 33% and 34% of revenue, and G&A between 10% and 11% of revenue continues to be the right level of investment to drive innovation and customer adoption of our growing portfolio of our products and services. We still expect the service revenue gross margin to remain in the 73% to 74% range, but it could vary slightly due to the mix between Communication Platform as a Service usage and subscriptions. We expect gross margin on total revenue to be between 69% and 71% as we include other revenue into the mix. With this operating model context in mind, we established service revenue, total revenue, and operating margin guidance ranges for the fiscal third quarter ending December 31, 2024, as follows: we anticipate service revenue to be in the range of $171 million to $174 million. We anticipate total revenue to be in the range of $177 million to $182 million, implying other revenue of $7 million at the guidance midpoint. Note that other revenue can vary based upon customer-specific deployment schedules and hardware shipments, so total revenue can vary based on these dynamics. The combination of modestly lower revenue compared to Q2 and slightly higher sequential operating expenses related to specific go-to-market investments drives our operating margin guidance of 10% to 11% for Q3 '25. For the fiscal year 2025 ending on March 31, 2025, we provide the following guidance ranges. We anticipate service revenue to be in the range of $690 million to $701 million. We anticipate total revenue to be in the range of $714 million to $727 million. We continue to focus on delivering a solid operating margin and anticipate a full-year operating margin between 10.25% and 11%. Please remember that our fiscal fourth quarter includes seasonally higher expenses as certain employer taxes and benefits restart in January. At the midpoint of our revenue guidance range, this translates into a non-GAAP operating income of between $73 million and $80 million for the fiscal year. We expect interest expense, including amortization of debt issuance costs to be about $5.5 million in Q3 and $5.3 million in Q4 based upon current interest rates and our outstanding debt balance. We expect cash paid for interest to be approximately $3.4 million in Q3 '25 and $7.2 million in Q4 '25 as cash interest on the 2028 convertible debt is due semi-annually. These interest amounts assume that the interest rate on the term loan remains approximately 7.6% or SOFR plus 3%. Putting all of this together, we expect fully diluted non-GAAP earnings per share to be in the range of $0.32 to $0.35. We anticipate full-year cash flow from operations to be between $59 million and $64 million, consistent with our prior comments. Note that cash flow from operations typically decreases in fiscal Q4 due to the timing of seasonally increased employer expenses and cash paid for interest. I continue to believe that our vision and strategy will keep us on the path towards profitable growth. Progress does not always happen in a straight line, but I believe that we are doing the right things to get us to where we intend to go. I would like to thank the entire 8x8 team for working together to deliver this quarter's solid results, and I look forward to reporting our progress throughout the remainder of fiscal 2025. Operator, we are ready for questions. Operator: Thank you. [Operator Instructions] Our first question comes from the line Ryan MacWilliams from Barclays (LON:BARC). Eamon Coughlin: Hi, this is Eamon Coughlin on for Ryan MacWilliams. And thanks for taking the question. Pleased to see the services revenue sequential growth improvement compared to the prior quarter. What would you attribute the key factors that drove these results? And how should we think about the sustainability of these trends that drove 2Q results? Kevin Kraus: This is Kevin here. Thanks for the question. Yes, we had a pretty robust platform usage revenue for the quarter. And also, our core business on the 8x8 platform grew. So it was multifaceted in terms of the growth that we saw this quarter. Samuel Wilson: I think the last thing, and Kevin, nice question. Look, our gross retention was great. It was fantastic, right? So for any recurring business model, the better that gross retention does, the better we have a strong foundation off which to grow. So I think as long as gross retention remains high, we continue to see leverage in our new products. There is some positive momentum, and I would say we're cautiously optimistic. Eamon Coughlin: Got it. Thanks, guys and great to see the 200% year-over-year growth in sales of AI-based solutions. Can you just help us understand what is driving this sale? And then are customers more willing to adopt these features today compared to 6 months ago? Samuel Wilson: I think the answer is yes, they're more willing to adopt than 6 months ago, and it's going to be sort of the - I am going to do these in reverse, right? So the reason we're seeing more momentum is because we, along with our professional services and our customers themselves are getting to the point where we can turn AI into something that solves a business outcome. I mean, I think the first year or so of AI, it was a lot of having it write an e-mail for you, but how does this solve a business problem. Now with things like summarization, automatic health scoring, transcription that's being used to improve agent productivity and even detect things like fraud, those kinds of things, we're actually turning AI into meaningful business outcomes. Once we do that, no one has a problem buying it. Michael Turrin: Hey, great. Thanks for taking the questions. Sam, you had a few comments on acceleration throughout the prepared remarks. But team is holding on to the midpoint of the full year target. So maybe just walk us through what it could take to eventually move those up. And for the business to see a return to growth from a year-on-year perspective, is it a better macro, certain product areas you're focusing on or just working through the final Fuze migration efforts as you work through the year that could ultimately get you there? Samuel Wilson: Well, okay. So I think we're trying to be pretty clear about this in the script, right? So number one, core 8x8, which is the customers on the 8x8 platform, up quarter-on-quarter, year-on-year. So what's going to drive future growth overall for the whole company is two things. Number one is as our new products become a larger and larger part and that growth, which is well above corporate starts to become meaningful, that will drive the overall company's revenue. And number two, Fuze, which is mid-single digits, high single digits, whatever, mid-single digits right now, continues to shrink as we upgrade the customers, that headwind will go away over time. I know it's not today or tomorrow, but we - I think we're starting to get pretty clear line of sight of getting to stable to growing core 8x8 - continued growth in the core 8x8 business. And so that's just - we need to sort of continue to run off the Fuze business and continue to grow the new products business. Michael Turrin: Helpful. And just maybe one on gross margin. Can you just help us unpack a little bit what we're seeing on the gross margin side? You're obviously outperforming on operating margin. Is the gross margin impact mostly tied to a mix towards CPaaS? And any commentary just on underlying gross margins across the product set, if those are holding in fairly consistent? Or just any further commentary there is helpful. Thanks. Kevin Kraus: Yes, that's correct. The platform business has accelerated pretty well this quarter, and that has a lower margin. So it is mix driven. The underlying UCaaS, CCaaS margin, if you will, has remained very steady. For us, which is great to see. We do a lot of work on that to maintain that gross margin profile in the majority of our business. But you will see the mix having some slight impact as it changes. Samuel Wilson: I would also add one more thing that just we will - on this because you guys on Wall Street blow out my comments a little too large. But there may be a little suppression of gross margins in the short-term as we launch more of these AI usage-based products. So the margins improve as the number of customer use cases and the amount of customer adoption increases. So there's an upfront cost to getting a customer up and running, getting the models working, getting it deployed, etcetera, etcetera. And so as our new product business grows, as the number of new customers we have on new products grows, there may be some near-term gross margin compression, not in thousands of basis points, right, just a few basis points here or there, but it's part of what you're driving at is a little bit of that mix shift. And so I want to make sure that you're sort of aware of that. Siti Panigrahi: Thank you. And it's good to see that improvement in debt-to-EBITDA ratio. But the question I'm going back to the comment on AI adoption, Sam, so what kind of trends are you seeing from those customers who are adopting this AI solution in terms of their number of human agents and how they're funding this kind of product? Any trend that you're seeing would you share? Samuel Wilson: Yes. Right now, what we're seeing is - okay, so let me take it. So you talk about products that are being adopted on the AI front, right? We're clearly seeing things like Agent Assist, bots of all sorts, voice and chatbots that are AI-based. We're seeing campaign management and those kinds of things that are AI-based. We're seeing certain things around health scoring, core CIDP, those kinds of things, all those technologies in some form or fashion are being adopted. In terms of agent trends, we're not seeing situations where customers lower the number of agents right now. I'm not saying it's not going to happen in the future. I'm not saying it is going to happen in the future. I'm just saying that right now, we don't see where customers generally lower the number of agents. Instead, what they're doing is they're adding this on as additional capabilities to make their agents more productive, more useful - and so what we see is that - I'll give you a simple example. The number one use case we're seeing with Agent Assist right now is that it shortens training cycle time. Remember, the average contact center is dealing with something like 40% attrition. Those are third-party numbers, not mine. And so things like 2-week shortening of training time is very meaningful when it comes to ramping productivity. And so I think that's a lot of what we see right now, Siti. We're not seeing this sort of raw replace humans with robot's thing. Siti Panigrahi: Okay. That makes sense. And you guys stopped disclosing the small mid-market enterprise. But wondering where did you see strength or weakness? Any kind of sort of trend by different segments? Samuel Wilson: Yes. So last quarter, we stopped closing ARR for a host of reasons, growth in our usage-based business, et cetera. And so yes, it's the same trend we saw in the past, right? We continue to - we're really focused on that enterprise, that multiproduct sale. And so we've been growing that segment. The tail - sorry, the headwind to that is we haven't been extensively focused on micro businesses and very small businesses. And so that's where we're generally seeing the customer count not keep up with the change in enterprise. So I think Kevin knows the number, but more than half our revenue comes from sort of XCaaS type customers. So that's customers that have contact center, UC potentially more products than that. And I think that trend will just continue to grow. Meta Marshall: Great. Thanks. You guys noted kind of channel expansion that you were seeing or kind of success with new customer bookings. And I just wanted to get a sense like what channels are you finding kind of most lucrative? Is there a certain vertical or customer type where you're having a lot of success? And then maybe just as a second question, clearly seeing traction in the underlying 8x8 business. Just if you could comment, was the Fuze transition kind of slower or faster than you expected this last quarter? Thanks. Samuel Wilson: Okay. So two things there. It was kind of channel and our go-to-market and Fuze. So on the channel new logo side, actually - the best source of business last quarter was direct not through any channel partners. Global reseller continued to see overall improvement, and we're really proud of that. So that's something we are focused on is growing our reseller business, which is sort of a backdoor indicator in the growth of our international business. The direct business was more driven by North America. We're still a channel-first company, but we've managed to close and do better with our direct business. And so I think that's just a testament to what we're doing. We are seeing more and more enterprise customers come to us directly via RFPs. And so I think we're just starting to benefit from that. On Fuze, is Fuze better or worse than - and the key, Meta, that you used was we because I think we - as we expected, it was an okay quarter. I was kind of hoping for a little bit more acceleration in the Fuze upgrade cycle. We're continuing to make a lot of progress there. We're continuing to really get this put behind us. We're still on track for end of next calendar year to shut down the Fuze platform. But I would certainly like to see us accelerate that if we can. And it's one of the reasons our guidance ranges are a little bit wider than you may expect because we don't know what's going to happen, but we are pushing really hard on the teams to get the customers moved over and get this behind us. Operator: Thank you. [Operator Instructions] Our next question comes from the line of William Power from Baird. William Power: Okay, great. Thanks. You all referenced the CPaaS strength in the quarter. It sounds like that was one of the sources of upside. Maybe just talk to the kind of the key drivers there and really kind of the sustainability of that. I guess, just trying to make sure there's not anything that's more one-time issue there. And I guess just kind of tying into that, I think the guidance is for service revenue to be down a little bit sequentially, so just trying to understand the drivers of that? Samuel Wilson: Alright. On the Platform-as-a-Service business and usage in general, strong quarter, above expectations, obviously, relative to what we were expecting to be in the quarter, will, I love your question on sustainability because as I think everyone on the call knows, in general, usage-based businesses don't have contracted revenue. So this is the part of the call where you guys want me to stick my neck out really far. So I always try to be at least a little cautious. We are doing a number of things in our CPaaS business. We have been spending money on R&D, on innovation, on sales capacity and those kinds of things, which drives future business. And the team I've got running the CPaaS business, I'm just really impressed with. And so from that front, I think it's great. Number two is our investments over the last year in the platform itself are paying benefits, our intelligent routing, our omni-channel, our packaging, some of our add-on bot capabilities in our CPaaS business, definitely resonating with customers. And the stuff I talked briefly about on the call in the future around descope and security. I was so blown away by the positive feedback on a roadshow we did. That being said, look, we've got Chinese New Year. We've got various events. There's always the trials and tribulations coming up in the beginning of the calendar year around changing the pricing the carriers do to us, those kinds of things. So I would say, like the overall business, we're very cautiously optimistic on where the CPaaS business could go. There was nothing one-time in the quarter, but I don't want you to like start drawing a linear line. It was a stronger-than-expected quarter, and we take that business month by month. William Power: So it sounds like there's some conservatism on that piece that perhaps is driving the slightly weaker sequential service revenue guide? Samuel Wilson: Definitely, we are trying to be conservative in our guide. Yes, with CPaaS, we don't have the visibility. The other thing is, I just want to be cautious, and I know Kevin mentioned it, but we did get a tailwind because of FX, and there is always a little bit of cautiousness when we pick up a little bit of a tailwind, I think you said how much it was. Kevin Kraus: Yes, $1.5 million. And so that could potentially flip to some degree. So, we don't know where that's going exactly. We don't forecast FX rates. Samuel Wilson: And when we do forecast FX, we are really bad at it. So, that's a little bit will of the other side of the equation we want to just be cautious of. William Power: Okay. And maybe just a quick second one, any kind of updated view on what you are seeing, just from a broader macro customer willingness to spend, sales cycle perspective, kind of, etcetera versus maybe a quarter or two quarters ago. Samuel Wilson: Yes. Look, what I see is it's a number of companies fiscal fourth quarter, not our fiscal fourth quarter, but a number of other companies, it's the fiscal fourth quarter. And I don't know if they take the irrational pill this quarter on purpose or it's by accident, but there is a little bit more strange behavior by some of the competitors. I think it's very fixated on this quarter, and it usually reverses out next quarter. So, I am seeing that, but I think offsetting that is also the fact that we have talked about in the past, is our pipeline is up, that's our deal pipeline is up. Obviously you can see from RPO, which I think is a record high, etcetera, that we are having some success. So, I think offsetting that is the fact that our product portfolio and our innovation strategy is showing products market fit, right. We are clearly seeing situations where customers are very appreciative in the products and capabilities we are offering. And so I don't know how much of this desperation is driven by the lack of investment by some of our competitors, etcetera, or it's just the fiscal fourth quarter, whatever. But I will tell you that as long as my pipeline is growing and my new products are growing 60% year-over-year, and my RPO is growing, I know that my leading indicators are pointed the right direction. Operator: Thank you. One moment for our next question. Our next question comes from the line of Michael Funk from Bank of America (NYSE:BAC). Michael Funk: Hey guys. Thank you for the questions tonight. So, thanks again for percentage of revenue, service revenue coming from views, I think you said 12% last year and 7% this quarter. So, by math is right, that decline, I guess about $9 million, $9.1 million year-over-year. How much of that migrated to the core 8x8 platform, so core 8x8 grew year-over-year, but how much of it migration from Fuze? Kevin Kraus: Michael, hi. it's Kevin, yes. We - let me go get the... Samuel Wilson: Why, is it looking that up, so the one thing I will tell you is, even without that core 8x8 still grew. So, I like is the number, but if he can find it, one of his 3,000 spreadsheets. But look, we did look at that ahead of time, just to make sure the growth wasn't all just, left pocket to right pocket. Core, 8x8 grew quarter-over-quarter, and year-on-year without any contribution from the Fuze migration last quarter, upgrade last quarter. Kevin Kraus: Yes. So, it's about$5.5 half million or so in Q2 '25 was where the Fuze upgrades that moved over. Michael Funk: Okay. Alright. That's very helpful in framing the future growth potential, so thank you for that. And then, Sam, you mentioned fiscal fourth quarter, some companies with their strange behavior. Can you define strange behavior, or expand on that comment exactly what you might buy that? Samuel Wilson: I just wonder what they are thinking with some of the bad shit crazy pricing they put in the marketplace. So, I mean I just I don't understand always what they are thinking when they do this, because it's just, overall, it's not helpful, and it just slows down deal cycles for both of us. In the end, I will be honest with you, we usually win the deals because I think it's counterproductive, because the customers ask, if you have to price that low, obviously your product isn't that good, and you are not investing in the future and those kinds of things. But it just slows down deal cycles. And so that's what I meant by strange behavior. Michael Funk: Yes. Thank you. One really quick one if I could, have you seen a change in the rate of change in seat count in the last 12 months, either a slowing in decline or reversal in decline in C count, and I appreciate you are selling more products from the customers now as well, but just that old legacy C count, is there any change in the rate of change? Samuel Wilson: Okay. So, what I am going to tell you is that, yes, but I am going to be very - just give me a second to get the full answer out, because I am going to be very cautious in this answer. We are seeing accelerating UC and CC seat sales. But I think that's us. I am not sure how the industry is working. I think a lot of that's driven by the fact that our value proposition over the last 2 years has substantially changed. And because my phenomenal CRO is busy restructuring my sales organization for the new world order. And both of those could be very macro to 8x8, not necessarily to the industry overall. Operator: Thank you. One moment for our next question. Our next question comes from the line of Peter Levine from Evercore. Peter Levine: Thanks for taking my question. Sam, as a follow-up to the AI, obviously, the stats you gave, up 50% quarter-over-quarter, 200% year-over-year, and you kind of said business outcomes is kind of what you are solving for. Can you help us remind us how you are monetizing the usage? Meaning is there like a value exchange or a value capture you can monetize? I know it's early in the cycle, but maybe just talk us through like how much of AI usage is part of that growth acceleration story, excluding Fuze coming off and obviously bigger products becoming more. But help us walk us through like the monetization of AI usage that continues to scale up. Samuel Wilson: Okay. That is a multifaceted question, and I am sort of shaking because I am going to try to give you a reasonable answer, but it's a multifaceted question, okay. So, on AI, we monetize it multiple ways. So, for our CPaaS partnerships that involve AI, we have the sell-with model and the sell-through model. So, on the sell-with model, we will introduce the prospect to the company, the product or whatever the case may be that we are jointly selling, and we may get a revenue cut or a usage cut based on that in the future. On the sell-through model, we are actually putting it on our paper. And so that's pretty common with intelligent customer assistant or some of those things where we buy at a lower price and then correspondingly sell at a higher price. You were also asking about usage in general. So, what we find generally when we land with these models, these AI-based models is, we sell the customer one use case. So and we purposely try to minimize this and make it fairly straightforward. But when we do that, we are selling them a platform. The reason we do that is we really want to get a hard ROI relatively quickly, fast time to value. If we get fast time to value, the customer likes it. So, what happens is we come in, we set up the bot, we get it working, they see very fast time to value and then it sort of turns out - what if becomes the next scenario, what if we deploy this use case, what if we deploy that use case, what if we deploy this use case. And then that's where we see the usage really ramp. Almost all of our customers that we landed over the last four quarters or five quarters have all grown their usage significantly quarter-on-quarter, kind of that concept of same-store sales. Same-store sales significantly quarter-on-quarter as they expand out the number of use cases because we have given them the platform, we have given them professional services to continue to drive. And so, it's almost like these turn into a simple use case, the slightly more complex use case, the fully more complex use case, etcetera. And each part along the way, we are monetizing. And as that gets - as the product gets more and more used, we obviously achieve better and better revenues, hence, the greater than 60% growth year-over-year. I would say the other thing that I think is advantageous to us is we become more and more of a strategic partner to that customer which I think over time should help retention. Peter Levine: If I take the color, and then maybe just one piggyback off of the Fuze dynamics you kind of talked about 7% in the quarter, call it, $12 million. If you were to annualize that number, is there a line of sight in terms of what percentage of that do you expect to capture or transition to the 8x8 platform, if you are willing. Samuel Wilson: Yes, there is. And to all my employees listening on this call, any number less than 100% is a discussion with me. But the answer is, look, I mean we are expecting that some of it won't transition for a host of reasons, but we would like to transition the maximum amount that we can, and we are putting a lot of resources forth to make that happen. Kevin Kraus: By the end of calendar '25. Peter Levine: Any incentives that you are - anything that you are putting in front of your sales folks or offers that... Samuel Wilson: Yes and yes. Offers to the customer, like for example, we are talking about if you transition, we will give you, for example, Intelligent Customer Assistant for a month or two months for free to try out some of our AI technologies and those kinds of things that are available on the 8x8 platform to sort of give them an advantage to go sell it. And there are some incentives to the sales guys to go make the deal happen. Operator: Thank you. One moment for our next question. Our next question comes from the line of Ryan Koontz from Needham & Co. Ryan Koontz: Thanks for the question. Nice to see the RPO pick up here. Sam, how is your visibility of that going forward given the indications, down sequential subscription revenue guide? How should we think about kind of setting those sort of expectations for the trajectory of RPO? Is it - do you think of it kind of lumpy, or are you seeing some risks around some of your particular customer segments here in the near-term? Samuel Wilson: Ryan, it's a completely legitimate question. It's - the side of my voice is a bit of a tough question to answer. And let me say why, when we get into more of these usage-based businesses, there is not necessarily always contracted revenue. And even if there is contracted revenues, frequently, it's significantly less than the amount of actual usage on the platform. And so I think what we are seeing is we are seeing an increase in RPO. We are seeing an increase in underlying business momentum. It makes me very cautiously optimistic about the future, but it's not a straight line either, right. Could it zig or zag, absolutely, and it could zig or zag simply by kind of the definition of RPO, which is future contracted revenue or a backlog of contracted revenue, where we know Intelligent Customer Assistant may be being used for x number of interactions per month, and there is a number significantly smaller that's contracted. And so, I want to say that what I think is that RPO will grow over time. It won't be a linear straight line. And a lot of it will depend on how much usage business we get in and some of the other things that we do from a financial model. In general, we are seeing more and more, I would say, customer push or customer request to have a consumption-based like pricing or consumption-based like commercial opportunities in future deals. And so that's just something that we all need to think about. Ryan Koontz: Got it. And just a quick follow-up, please. On the CPaaS business, are you seeing some of your international APAC kind of core markets there? Are you seeing any of this A2P fee stuff come along like they do in the U.S., these big up charges for A2P, cloud to person? Samuel Wilson: No. But let's be clear, those carriers in 2020, 2021 and 2022 pushed through pretty big price increases. So, I think unlike what we are seeing here, they don't necessarily need to be that obsessed about pushing through higher prices because I feel like they have already done it to us. They actually - this year, 2024, we saw some of the most mild price increases we have seen in 5 years, because they had pushed up prices so much. And so I don't think we need it, I mean the U.S. market is a bit of a Goldberg machine right now because of the whole registration thing, etcetera. I would say we are pretty bullish on RCS coming in the future. So, we have got some product innovation going around RCS. You should expect to hear about that shortly and those kinds of things. But I am not sure we are going to see much more from the carriers pushing forward. Operator: Thank you. At this time, I would now like to turn the conference back over to Samuel Wilson, CEO, for closing remarks. Samuel Wilson: Alright. Thank you everyone for joining us. I really want to thank our partners, our customers, our employees and most importantly, our shareholders for taking time out of their busy day to listen to this earnings call, we appreciate it. As I mentioned earlier, we think the company is sort of on the right path. Our transformation is getting hold, and we look forward to updating you again next quarter. Thank you. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

Earnings call: Informatica posts solid Q3 growth, focuses on cloud strategy By Investing.com

Informatica Inc. (ticker: INFA), a leading provider of enterprise cloud data management solutions, reported a solid financial performance in its Fiscal Year Third Quarter 2024 earnings call. CEO Amit Walia and CFO Mike McLaughlin shared the company's continued growth, with a notable 36% year-over-year increase in cloud subscription Annual Recurring Revenue (ARR), reaching $748 million. Total ARR grew by 6.7% to $1.68 billion, and the company reported a robust non-GAAP operating income increase of 18%. Informatica also reaffirmed its full-year guidance and emphasized its commitment to a cloud-only strategy. Informatica Inc. demonstrated a strong performance in Q3 2024, with growth led by its cloud offerings and a strategic focus on transforming customer experiences through AI and data management. The company's financial health appears robust, with a solid cash position and the Board's approval of a new share repurchase authorization. Despite the decline in self-managed services, Informatica's cloud-first approach and advancements in technology position it well for future growth and operational efficiency. Informatica Inc.'s (INFA) solid financial performance in Q3 2024 is further supported by data from InvestingPro. The company's impressive gross profit margin of 80.07% for the last twelve months ending Q2 2024 underscores its operational efficiency, aligning with the reported 18% increase in non-GAAP operating income. This metric reflects Informatica's ability to maintain profitability while investing in cloud-based solutions and AI capabilities. InvestingPro Tips highlight that Informatica's net income is expected to grow this year, which corresponds with the company's reaffirmed full-year guidance and management's confidence in meeting medium-term growth targets. The company's PEG ratio of 0.34 suggests that it may be undervalued relative to its earnings growth potential, potentially making it an attractive investment considering its strong cloud ARR growth and strategic focus on AI-driven data management solutions. Additionally, Informatica's revenue growth of 8.65% over the last twelve months supports the company's reported 3.4% year-over-year increase in total revenues. The stock's 39.1% price return over the past year indicates investor confidence in Informatica's cloud-first strategy and its position in the enterprise cloud data management market. For investors seeking more comprehensive analysis, InvestingPro offers 12 additional tips for Informatica, providing a deeper understanding of the company's financial health and market position. Operator: Good afternoon, and thank you for attending today's Informatica Inc. Fiscal Year Third Quarter 2024 Conference Call. My name is Cameron and I will be your moderator for today. [Operator Instructions] I would now like to pass the conference over to your host Victoria Hyde-Dunn, Vice President of Investor Relations. You may proceed. Victoria Hyde-Dunn: Thank you. Good afternoon, and thank you for joining Informatica's Third Quarter 2024 Conference Call. Joining me today are Amit Walia, Chief Executive Officer; and Mike McLaughlin, Chief Financial Officer. Before we begin, we have a couple of reminders. Our earnings press release and slide presentation are available on our Investor Relations website at investors.informatica.com. Our prepared remarks will be posted on the Investor Relations website after the conference call concludes. During the call, we will be making comments of a forward-looking nature. Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties. For more information about some of these risks please review the company's SEC filings, including the section titled Risk Factors, included in our most recent 10-Q and 10-K filing for the full year 2023. These forward-looking statements are based on information as of today, and we have no obligation to publicly update or revise our forward-looking statements, except as required by law. Additionally, we will be discussing certain non-GAAP financial measures, these non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation of these items to the nearest U.S. GAAP measure can be found in this afternoon's press release and our slide presentation available on Informatica's Investor Relations website. With that, it is my pleasure to turn the call over to Amit. Amit Walia: Thank you, Victoria, and everyone, for joining us today. I will start today's call by summarizing three key points. First, we are pleased to report another solid quarter. Third quarter results exceeded the midpoint of our guidance ranges, driven by continued customer momentum and consistent execution of a cloud-only consumption-driven strategy. Second, we achieved a historic milestone, surpassing 100 trillion processed cloud transactions per month. This speaks to IDMC's incredible scale and product capabilities as the industry's only AI-powered cloud platform processing mission-critical data management use cases. And third, with a comprehensive IDMC platform and GenAI capabilities, including expanding CLAIRE GPT's global footprint, we believe Informatica is even more well-positioned to strategically support enterprises and empower customers to use AI for data readiness and simplify their data estate. Starting with third quarter results. Total revenues grew 3.4% year-over-year, and total ARR grew 6.7% year-over-year, and both were above the midpoint of our guidance ranges. Cloud subscription ARR grew 36% year-over-year and came in at the high end of our guidance range. We strengthened our cash position and grew non-GAAP operating income by 18% year-over-year exceeding the high end of our guidance range. Now looking into the fourth quarter, we are reaffirming full year guidance, and our focus remains on executing plan to conclude 2024 strongly. The macro environment remained stable during the third quarter, consistent with our observations throughout the year. Approximately 76% of our cloud net new ARR in the trailing 12 months came from new cloud workloads and expansion. We are attracting new customers and expanding opportunities in the G2K market, supported by a robust partner ecosystem and healthy cloud pipeline. Customers have spent more than $1 million in subscription ARR increased 18% year-over-year and customers that spend more than $5 million in subscription ARR almost doubled year-over-year. We saw continued strong growth in average subscription ARR per customer, which reached over $327,000, a 15% increase year-over-year. Our cloud business is very well diversified. Approximately half of the cloud subscription ARR is from integration, which comprises of data integration and app and API integration solutions. And the other half comes from master data management, data catalog and data governance use cases. These solutions cover a broad set of customer use cases focusing on both the technical and business users across a digital enterprise, addressing everything from the front end, customer revenue generation to back-end business productivity-oriented use cases. We are seeing healthy growth across these solutions as customers create significant value using the IDMC platform. And for that, let me share a few great customer stories. SUBARU implemented our cloud data integration service to enable cross departmental management of product life cycle data from card development and manufacturing to sales and maintenance. Now enhanced card quality drives higher productivity and customer sat. Citizens employed our master data management capabilities to build a single customer view, enabling real-time personalization across many touch points. The architecture built on AWS and IDMC reduces data onboarding and democratizes access to trusted data. To create exceptional experiences, Holiday Inn Club Vacations unified its customer data with our cloud master data management, data governance and data quality solutions. With a 360-degree view of every member, the company will drive greater personalization across online and offline touch points, including building long-term live. Abodrola, a global energy leader top wind power producer and 1 of the largest electricity companies is enhancing its partnership with Informatica's IDMC platform to launch a global data governance project. This initiative aims to standardize its data strategy across its subsidiaries across the globe, in U.K., Spain and in the U.S., incorporating its technical ecosystem of AWS and Azure. I had the pleasure of meeting is from Dr. Anish from Dr. Reddy iLabs, India iLabs 20-year celebration last month. To keep pace with digital therapeutics and forensic regulations, Dr. Reddy's reimagined its cloud data strategy for the AI era, now the team uses Informatica's IDMC platform to automate data governance and quality across its data integration and engineering pipelines, speeding up project delivery and clinical AI use cases. Next, approximately 24% of cloud net new ARR in the trailing 12 months came from on-prem to cloud migrations. This is still a very small portion of our on-prem installed base but it enables us to modernize our customers' mission-critical workloads and, of course, leads to then platform expansion opportunities for us. We see strong customer adoption of PowerCenter Cloud Edition, which now represents over 90% of all modernization deals in Q3. For example, Lumen Technologies, a global integrated network solutions provider has successfully modernized their on-prem power center workloads to IDMC accelerating time to value and minimizing migration costs and effort in its expansion to the cloud. Our leading global food snack and beverage corporation is modernizing the power center footprint to IDMC. And expanding the users to include master data management and data governance. This will allow them to create a comprehensive enterprise AI-powered data management platform powered by Informatica with Azure as part of its global digital transformation. Turning to our ecosystem partners. We are pleased to be recognized by Oracle Cloud as a Global ISV Business Impact Partner of the Year, reflecting the rapid growth and success of our strategic partnership with Oracle. We announced expanded governance support for the OCI ecosystem with new GoldenGate scanners, the availability of power center cloud addition on OCI and our generative AI Blueprint for Oracle Generative AI and Oracle Database 23ai. As we become the Switzerland of GenAI, we have launched GenAI Blueprints for all six strategic ecosystems, including AWS, Azure, Databricks, Google (NASDAQ:GOOGL) CLoud, Oracle and Snowflake (NYSE:SNOW). For Databricks, we GA support for Databricks enable functions, we have native [indiscernible] push down and will showcase the blueprint and our latest Databricks integrations and innovations at the Databricks world tours. With our GSI partners, we saw continued strong progress from our partners with Informatica, enjoying a prominent place in their data and AI practice. For example, Capgemini launched a solution to help customers modernize Databricks using Informatica. Additionally, we celebrated 25 years of partnership with Deloitte, our most successful global partner with a practice of 6,000 Informatica trained and certified professionals. The partnership has never been stronger, and we launched a joint plan to accelerate our growth together and take advantage of the opportunity to help our customers modernize and get their data ready for AI. We are the innovators in our industry. and we're pleased to be named a leader in The Forrester Wave Enterprise Data Catalogs Q3 2024 report. We also achieved the highest rating possible in the Dresner Advisory Services Data Catalog Market Study and Master Data Management Market Study 2024. For the fourth consecutive year, we were certified by J.D. Power for outstanding customer service experience in a Certified Assisted Technical Support Program. We were also pleased to receive two 2024 awards from the Technology & Services Industry Association, or TSIA, for Leveraging AI in the Revenue Generation Workflows and Innovation in Knowledge Categories. This recognition is third-party confirmation of Informatica's core value proposition to customers. We have the best data management product in the industry offered on the only cloud native AI powered platform serving the multivendor, multicloud and hybrid needs of enterprise customers. In September, we crossed a historic milestone, in less than 10 years, IDMC has now grown to process 200 billion cloud transactions per month to 101 trillion cloud transactions per month. This remarkable journey demonstrates our component of product innovation, customer centricity, vendor neutrality and productivity at scale across hundreds of enterprise systems with gearing latencies and formats. Now we turn to GenAI. Informatica is an enterprise's path to AI-ready data management. Our efforts to assist customers with their AI strategic initiatives are twofold. Informatica for GenAI and GenAI from Informatica, both available on the IDMC platform. Let me give you more color. In Informatica for GenAI, which is where all of our solutions on IDMC are critical to drive GenAI projects, we offer the only Switzerland of data and AI platform with -- native integration across all cloud ecosystems and data platforms. As a system of record for metadata across an enterprise, IDMC allows users to seamlessly build and scale GenAI apps across different clouds, ensuring flexibility and future-proofing the data estate. Customers are choosing IDMC to build enterprise GenAI app using a no-cord low-code interface, eliminating the need for specialized skills. We've introduced GenAI recipes, prebuild for common patterns like RAG, prompt engineering and AI agents, which have seen rapid adoption. Hundreds of customers have downloaded them in just a month with recipes for AWS, GCP, Azure and Oracle available now and Snowflake and Databricks coming later. Real life customer stories include: one, a leading multinational biopharmaceutical company leveraging GenAI with contextualized data from IDMC to accelerate its clinical trials, ensuring optimal patient and site selection for successful outcomes. In Latin America, our retail giant is enhancing its customer experiencing using IDMC with OpenAI delivering personalized product recommendations that improve overall customer engagement and boost their sales. A major U.S.-based global event management company is using IDMC and open AI to speed up future development of the SaaS platform by automating client feedback into technical specs, significantly improving efficiency and reducing the time to value. Now to the second part. GenAI from Informatica, we've expanded clear GPT capabilities, including support for complex data lineage craft queries. Data lineage is one of the most popular use cases for our cloud data governance and catalog solutions. Additionally, clear GPT aggregate metadata exploration capabilities will help our data governance towards better understand the data landscape, which is a huge need within an enterprise, making it easy to manage complex, fragmented data landscape with natural language queries. Hundreds of our customers are using CLAIRE GPT today and the usage is expanding briskly. Recent CLAIRE GPT customer stories include a consumer finance company using CLAIRE GPT with their executive leadership and management teams to obtain answers to their ad hoc natural language queries on Snowflake without any need to know [indiscernible] pipeline. And appliances company in Mexico is using CLAIRE GPT with cloud data governance and data catalog to understand critical data elements identify the stakeholders for those developments that understand the linage of that data. We are excited to announce that we plan to expand CLAIRE GPT to EMEA, Asia Pacific and Canada later this quarter. Informatica for GenAI and GenAI from Informatica, both are driving more use cases and IP consumption on the IDMC platform, which is a tailwind for us for many, many years to come. We believe that the need for effective cloud data management is only increasing, driven by growing data complexity, fragmentation, evolving decision requirements and proliferation of this fragmented data across a mind of system, including warehouses, lakes, databases, apps, data science and GenAI and many, many more. We excel in this area more than any other company in the market today and at enterprise scale. So as I wrap up, I want to thank all of my Informatica colleagues our partners, our customers and shareholders for the support. We are pleased with our performance and remain focused on executing a cloud-only strategy as we close the year. With that, let me turn the call over to Mike. Mike, please take it away. Mike McLaughlin: Thank you, Amit, and good afternoon, everyone. Q3 was another solid financial quarter across the board with all key growth and profitability metrics within or above our guidance metrics. I'll begin by reviewing our Q3 results, focusing first on Informatica's annual recurring revenue or ARR. As a reminder, our total ARR falls into three categories: cloud subscriptions, which increased by 36% year-over-year self-managed subscriptions, which we no longer actively sell and are, therefore, gradually declining and maintenance from on-prem perpetual licenses, which we are no longer actively selling and are gradually declining. With that in mind, let's start with total ARR, which was $1.68 billion, an increase of 6.7% over the prior year. This growth was driven primarily by new cloud workloads, strong cloud net expansion with existing customers and steady self-managed subscription and maintenance renewal rates. Foreign exchange rates positively impacted total ARR by $1.4 million on a year-over-year basis. Now let's break down total ARR into its three components. First, cloud subscription ARR was $748 million, a 36% increase year-over-year and $4.8 million above the midpoint of our July guidance New cloud workloads and strong net expansion with existing customers drove cloud subscription net new ARR of $198 million year-over-year and $45 million sequentially. Cloud subscription ARR now represents over 44% of total ARR, up from 35% a year ago. Foreign exchange positively impacted cloud subscription ARR by about $300,000 on a year-over-year basis. Our cloud subscription net retention rate remained very strong in Q3. At the end-user level, it was 120%, up 2 percentage points year-over-year and up 1 percentage point versus last quarter. Cloud subscription net retention rate at the global parent level was 126%, up 2 percentage points year-over-year and flat versus last quarter. The second category of total ARR is self-managed subscription ARR, this category declined in the quarter to $471 million. This was down approximately 5% sequentially and down 11% year-over-year, slightly better than our expectations coming into the quarter. The decline of this category is driven by two factors: First, what we refer to as natural churn, which is the attrition of customers due to typical reasons like use case termination, M&A events, et cetera, and migration churn, which are customers who have migrated their workloads from Informatica self-managed deployments to our IDMC cloud platform. Both the natural churn and migration churn of our self-managed ARR were in line with our expectations. And the third component of total ARR's maintenance for on-premise perpetual licenses sold in the past, which now represents 28% of total ARR. Maintenance ARR was down approximately 7% year-over-year to $463 million, in line with our expectations. As with self-managed subscriptions, the decline in this category is due to both natural churn and the migration of on-prem workloads to Informatica's IDMC cloud platform. Subscription ARR, one of our quarterly guidance metrics is simply the sum of cloud subscription ARR and self-managed ARR, it grew 3% year-over-year to $1.219 billion. This was approximately $10 million above the midpoint of our July guidance. Foreign exchange rates positively impacted subscription ARR by approximately $900,000 on a year-over-year basis. Modernizing or migrating our on-premise customer base to Informatica's Intelligent Data Management Cloud is a large opportunity for us. As of the end of Q3, we have migrated 6.8% of our maintenance and self-managed ARR base to cloud, up from 6.1% last quarter. We have a life-to-date average 2:1 ARR uplift ratio on these migrations including power center and master data management migrations. The introduction of Power Center Cloud Edition a year ago has helped accelerate the volume of side migrations of our PowerCenter maintenance and self-managed customer bases this year. So to summarize our Q3 ARR performance, total ARR summed to 6.7% ARR growth year-over-year driven by cloud subscription ARR growth of 36%, offset by gradual self-managed and maintenance ARR declines. We expect similar trends to continue in future quarters as a direct result of our cloud-only strategy. Now I'd like to review our revenue results for the third quarter. GAAP total revenues were $422 million, an increase of 3.4% year-over-year, in line with expectations. Foreign exchange rates negatively impacted total revenues by approximately $1.2 million on a year-over-year basis. Subscription revenue, which includes cloud subscriptions and self-managed subscriptions, increased 10% year-over-year to $288 million, representing 68% of total revenue compared to 64% a year ago. Our quarterly subscription renewal rate was 89%, down 4.7 percentage points year-over-year due to lower self-managed subscription renewal rates, offset by higher cloud subscription renewal rates. Our subscription renewal rates have been largely consistent with our expectations this year. Cloud subscription revenue was $176 million or 61% of subscription revenues growing 37% year-over-year. As a reminder, due to the timing difference between revenue and ARR recognition, the relative growth rates of these two metrics may differ from period to period. Revenues in our maintenance and professional services category were $135 million, a decline of 8% year-over-year. Maintenance revenue of $115 million represented 27% of total revenue for the quarter. Our maintenance renewal rate was 94%, down 1% year-over-year and consistent with our expectations this year. Professional services revenues, which includes implementation consulting and education, make up the remainder of this category and are down $3 million year-over-year. As expected, our implementation services revenue has been declining year-over-year as our services partners assume a greater share of that work for our customers, and we back this trend to continue in the fourth quarter. Turning to the geographic distribution of our business. U.S. revenue declined 1% year-over-year to $262 million and represented 62% of total revenue. The decline in U.S. revenue growth is primarily attributable to the year-over-year decline in self-managed license and support services. International revenue grew 11% year-over-year to $161 million, representing 38% of total revenue U.S. exchange rates from Q3 last year using exchange rates from Q3 of last year, international revenue would have been approximately $1.2 million higher in the quarter. Now I'd like to move on to our profitability metrics. Please note that I will discuss non-GAAP results unless otherwise stated. In Q3, our gross margin was 83%, an increase of 70 basis points year-over-year we remain focused on maintaining healthy gross margins as our business transitions to the cloud. Operating expenses were consistent with expectations Operating income was $151 million, growing 18% year-over-year, exceeding the midpoint of our July guidance by over $6 million. Operating margin was 35.8%, a 4.4 percentage point improvement from last year. Adjusted EBITDA was $155 million, and net income was $89 million. Net income per diluted share was $0.28 based on approximately 313 million outstanding diluted shares. Basic share count was approximately 304 million shares. Adjusted unlevered free cash flow after tax was $144 million, better than expected due to faster cash collections and other working capital dynamics. Cash paid for interest in the quarter was $36 million, consistent with expectations. We ended the third quarter in a strong cash position with cash plus short-term investments of $1.24 billion, an increase of $371 million year-over-year, Net debt was $588 million and a trailing 12 months of adjusted EBITDA was $551 million. This resulted in a net leverage ratio of 1.1x at the end of September. Now turning to guidance, starting with the full year 2024. We are pleased with our execution in the third quarter and are comfortable reaffirming all previously issued guidance for the full year. This reflects confidence in our cloud-only consumption-driven strategy supported by strong customer momentum and steady renewal rates. Similar to the dynamics we've observed year-to-date, we expect cloud subscription ARR and revenue to grow, while self-managed and maintenance ARR and revenue are expected to decline sequentially and on a year-over-year basis. For the fourth quarter of 2024, we are establishing guidance as follows. We expect GAAP total revenues to be in the range of $448 million to $468 million, representing approximately 2.9% year-over-year growth at the midpoint of the range. We expect subscription ARR to be in the range of $1.265 billion to $1.299 billion, representing approximately 13.2% year-over-year growth at the midpoint of the range. We expect cloud subscription ARR to be in the range of $829 million to $843 million, representing approximately 35.5% year-over-year growth at the midpoint of the range. and we expect non-GAAP operating income to be in the range of $162 million to $182 million, representing approximately 6.3% year-over-year growth at the midpoint of the range. For modeling purposes, I'd like to provide a few more pieces of additional information. First, we expect adjusted unlevered free cash flow after tax for the fourth quarter to be in the range of [indiscernible] and approximately $144 million for the full year using forward interest rates based on 1 month [indiscernible]. Third, with respect to, our Q3 non-GAAP tax rate was 23%, and we expect that rate to continue for the full year of 2024. And lastly, our share count assumptions. For the fourth quarter, we expect basic weighted average shares outstanding to be approximately 307 million shares -- diluted weighted average sharing to be appreciate 315 million shares. For the full year at we expect basic weighted average shares outstanding to be approximately 303 million shares and diluted weighted average shares outstanding to be approximately 313 million shares. Now before opening the line for Q&A, I have two additional items to discuss. Yesterday, our Board of Directors approved a new share purchase authorization that enabled us to buy up to $400 million of our Class A common stock through privately negotiated transactions with individual holders or in the open market. This new authorization replaces the prior $200 million purchase authorization. No repurchases have been made under the existing authorization. Our committee of the Board will determine the timing, amount and terms of any repurchase. While we do not currently have any specific plans to purchase shares, this authorization gives us the opportunity to move quickly if and when opportunities arise. Next, beginning in fiscal 2025, we will modify our ARR disclosure to provide clarity to investors and better align with our cloud-only strategy. First, we will no longer provide quarterly guidance or quarterly reporting of subscription ARR. As you know, subscription ARR is simply the sum of our 2 -- of two of our other reported ARR metrics cloud subscription and self-managed subscription. Now subscription error was a useful metric during the IPO process and in our initial years as a public company. But following the adoption of our cloud-only strategy last year, the subscription AR metric became superfluous. Therefore, starting in Q1 '25, we will begin providing quarterly and annual guidance for cloud subscription era and total ARR dropping subscription ARR. We'll also continue to provide quarterly reporting of cloud subscription ARR, self-managed ARR and maintenance era. If you're interested in following subscription ARR in 2025, you can simply add together cloud subscription ARR and self-managed era. And second, we will no longer report the subscription net retention rate at the end user level and the cloud net retention rate at the end user level. Last year, we introduced cloud net retention rate at the global parent level, and we'll continue to report this metric, which we believe is consistent with the net retention rate reporting of our public market peers. In summary, we are very pleased with our third quarter performance, and we're focused on exceeding our cloud -- executing our cloud-only strategy and delivering our 2024 guidance. Operator, you can now open the line for questions. Operator: [Operator Instructions] The first question is from the line of Koji Ikeda with Bank of America Merrill Lynch (NYSE:BAC). Koji Ikeda: A couple for me here. So when I look at the deck and I look at the medium-term expectations of a 31% to 33% cloud subscription ARR growth between fiscal '23 and '26. That was given a year ago. And so we're essentially a 1/3 of the way through it, and you guys have been performing well above that range. So when I look at that CAGR, it does imply that cloud ARR begins to decelerate here pretty soon. But it has been a year since you've given that medium-term expectation. So curious to hear what you've learned over the past year that's given you more confidence in that medium-term target? And what could happen from here that could drive that medium-term growth CAGR higher? Mike McLaughlin: Well, I'll start and then maybe Amit can chime in with other qualitative observations. But we feel as though we're tracking very much in line with the expectations we set when we offered that guidance last December. The growth we're delivering this year is consistent with our '24 guidance, and everything we can see for '25 and '26 given where we sit here in October of 2024, it gives us confidence that, that medium-term guidance is still the right expectation for the market. We won't, of course, offer formal 2025 guidance until we report Q4 earnings. But everything is on track, and our goal of consistently executing against the expectations we set is how we've been operating so far this year and expect to in 2025. Amit, anything to add? Amit Walia: I think Mike said it very well. I think we will have -- we will talk more about it as we come in February of next year and talk about Q4 fiscal year 2024, and we'll layer on 2025 guidance at that point, and we'll give you more color on that part [indiscernible]. Right now, we couldn't be more happy and excited about what we set out last year for medium-term guidance in that context of 2024, we have continued to not only deliver but I would say out deliver that, and that gives us tremendous confidence against what we have in front of us. Koji Ikeda: Got it. And just a follow-up here. When I look through all the metrics, everything looks pretty good, except for one, and I was hoping to get a little bit of color on it. When I look at the 1 million-plus customers, it's $264 million. I know that's up 18% year-over-year. But when I look at it compared to the second quarter, it's down a little bit sequentially from 272. So could you help walk us through that a little bit, please? Amit Walia: Sure. I'll take that one. Drawing a line in the sand at $1 million or $500,000 or $2 million isn't a great way to evaluate our performance, particularly in any particular quarter. It was down on a sequential basis, and - we expected the question. So we've looked into it carefully to see exactly what happened. A number of those were state and local customers who had COVID use cases that don't exist anymore. So they downsized themselves a little bit and dropped across that in artificial one. We have some customers that completed large migrations and the maintenance during the migration period rolled off and you understand how that accounting world works. And so they dip below the $1 billion line. Look, our average ARR per subscription customer grew by 15% year-over-year. The growth in customers over $100,000 grew very nicely. And this isn't a metric that we will regularly disclose, but our customer is about $5 million in the quarter. So it's not something that indicates anything we're concerned about. It's just the idiosyncrasies of having an artificial line in the sand and customers tipping one way or another over that line. Operator: The next question is from the line of Will Power with Baird. Will Power: Okay. Great. Mike, maybe just starting on results in the quarter and guidance, it looked like some slight upside in the quarter and continued strong cloud trends that you reaffirmed the full year guidance. And I just wonder if there's anything you're recalling out any sort of caution around with respect to Q4 or any changes in tone of conversations or linearity kind of as you move through the quarter that might be informing kind of Q4 versus Q3. Mike McLaughlin: Well, I'll start it again if there's anything qualitative that I missed, Amit can chime in. But the tone feels very consistent, both with last quarter and with last year. And if you do some of the implied math around the NARR required in Q4 to get us to our guidance and the linearity that implies for the year, it's all very consistent with what we saw last year. And it all -- that all adds up to comfort with being on track to meet or beat that full year guidance. So it really is steady as she goes well. Amit Walia: I think that's about it. It's a conversation with customers. As I said and I talked about in my prepared remarks, Bill, on macro, very stable, very consistent with what we saw last quarter or the quarter before. So we feel pretty consistent about where we've been before in Q4. Will Power: Okay. That's great. And then maybe just any kind of qualitative commentary you can provide on the cloud growth breakdown, I know you noted 50% of the growth of the ARR split between, I guess, data integration and the other half, at least that was a big chunk of it, they have MDM, catalog, governance. Anything to call out with respect to trends you're seeing in either of those buckets? And one or the other that you think could be a bigger growth driver as you move forward here? Amit Walia: I think, well, I would generally don't look at one quarter dictating anything because it's a full year. And I think each quarter, there's some product area or some category has a story of its own. But philosophically, like I highlighted, the beauty that we are seeing is that customers definitely are - they have moved from what I call defensive cost-cutting productivity use cases to also going after what I call offensive transformational use cases. And we serve the entire digital enterprise. So it could very well be that, hey, like I give you examples about how do you figure out grabbing a bigger share of the wallet with our existing customers and acquiring new customers. We get to see those kind of use cases coming up as well as, so 360-degree view of a customer becomes important, whether you do a managing your churn, getting a bigger share of the wallet of your customers or getting new customers. And at the same time, when you have an existing customer and you're basically getting more and more of analytics, governance becomes very important, also becomes important as customers are thinking about taking their pilots of GenAI, and try to expand that into the pilot going into even a small operationalization before it becomes enterprise. So we're seeing pretty well diversified growth. I didn't see anything one necessarily spike over the other. And that's kind of like the best way to highlight that. The other thing I'll also highlight is remember, all o' our use cases end up being multiproduct. So even if it's integration for a warehouse or a lake, it's integration, it could be data integration, some API, some data quality. It's MDM, its MDM plus integration plus quality, so on and so forth. So they all end up being multiproduct. Operator: Next question is from the line of Matt Hedberg with RBC. Matt Hedberg: It seems like both cloud native wins as well as cloud migrations are doing well, and it really does feel like PowerCenter cloud is driving some pretty significant momentum there. I'm wondering, as we think about going into Q4 and into '25, are there mechanisms in place to drive even faster migrations there now that a lot of the technology -- and the sort of the cloud-first sales focus is in place? Amit Walia: Yes. I mean we all want the same outcome, right, Matt, thanks for the question. I mean, look, I think we had a pretty solid start to the year. If you remember, we always think of the year as an annual year. Yes, we have to go report every quarter. We all know that. But if you remember, the first half of the year was a pretty solid growth on migrations, and we see the momentum of PowerCenter cloud [indiscernible], continue to hum very strongly and don't see any reason to think differently. I think as we think about not just Q4, we think about next year, we have many things that we are evaluating, talking to our customers also. And to be kind of one of the things that we are also doing in particular is, and I always say we balance a character mistake, I'm a believer in balancing it both for customers. is that really getting our customers to understand that if they really want to get the power of GenAI, they have to digitize. For digitizing, they have to modernize. So sometimes that makes it an easier conversation and that is totally resonating with our customers that they can get to GenAI they are not the models, IDMC architecture, leveraging the power of CLAIRE. And we see that messaging as we run those campaigns quite a bit in the second half of the year, actually getting deeper and deeper. And that allows our customers to start planning for next year because these are not necessarily, I can do something instantly. We allow our customers to plan for that. So we're seeing that traction and seeing that learning coming in and the conversation of having customers are realizing that. So we expect those kind of things to trickle into next year for sure. Matt Hedberg: Got it. And then maybe Mike, one for you. You had a really strong quarter and you reiterated guidance, which, I mean, I think you talked about stable macros. It feels like a conservative guide for 4Q. I guess my question is when I look back last -- to last 4Q, you guys had a really strong quarter. And I don't know if there was a function of like budget flush last year that you saw and you're not anticipating it this quarter -- or this year, I should say. I'm just sort of curious if you could maybe talk about like what you normally see from a budget flush -- December budget flush. Are you anticipating any of that this year? Mike McLaughlin: It's too early to tell. You only know in the last couple of weeks of the quarter, frankly, you can maybe start to get hints in December, but that would be after we've already entered our quiet period. It feels like I say, similar sitting here on October 30 to how it fell end of October last year. It's certainly possible that there could be a budget for us that we don't see but we're expecting a solid quarter, delivering north of 35% of our - 38% of our bookings or whatever it is linearly for the year in the fourth qua'ter. So it's'always a big quarter and a lot of work to do to deliver it. So we feel this is the prudent place to be in terms of guidance, and we'll just have to see if there's a budget flush that comes out of the woodwork. Operator: The next question is from the line of Kash Rangan with Goldman Sachs (NYSE:GS). The next question comes from the line of Alex Zukin with Wolf Research. Unidentified Analyst: This is Patrick on for Alex. I wonder if you can just sort of talk through any of the changes and trends you've seen. Around budgets for data initiatives so far this year? And maybe how that compares to your expectations heading into the year? And then how do you expect those budgets to trend into the fourth quarter and into next year? Amit Walia: Yes. I think as I was sharing earlier to Matt's question, I think definitely, what we have seen is - I'll bifurcate into be different things. One is customers have moved very consistently in the last couple of quarters from what I call defensive productivity, cost saving initiatives to also transformational offensive initiatives. And they end up becoming data [indiscernible] in general, like I gave the example of, hey, if I was worried about customer churn, I'm now excited about doing new customer acquisitions, new product launches, new offers to new customers, things of that nature. So we definitely see that. And customers are becoming more and more and more ambitious or comfortable to do those growth-oriented initiatives. Number two, obviously, GenAI, and GenAI is embedded in every conversation. Needless to say, there's a whole amount of CapEx spending happening everywhere, the freeways I think laid out, where we said we see the pilots happening whether it's IDMC for GenAI or even our GenAI from us like CLAIRE GPT. The customers using it. I gave you examples of customers. So absolutely, the GenAI pilots or small areas where customers are trying to roll it out to test it and then basically make it bigger and bigger. We see those happening. All our conversations are like, "Hey, I want to do GenAI and the beauty is an IDMC, you can do non-GenAI digital transformation and GenAI digital transformation, the customers benefit from that and they can use Ips for anything, including running Ips to do CLAIRE GPT queries, those conversations up front, et cetera. We had our AI Summit in New York a couple of weeks ago, I forget a month or so ago, it was a tremendous success. So we see that as well. So I think, I'm seeing definitely. Now having said that, the third thing I see is that definitely data and AI and cyber are the two areas where customers are parking their spend. Definitely, those areas spend are happening. I had the CIO to tell me that security that defense spend in data as an offensive spend concerns. So we see these kind of things across global customers. Thank you. Operator: The next question is from the line of Pinjalim Bora with JPMorgan (NYSE:JPM). Jaiden Patel: Great. This is Jaiden on for Pinjalim. To follow up on an earlier question, can you talk a little bit more about any trends you saw in the public sector customers in the quarter? Amit Walia: Sure. I mean, Q3 is always a big public sector quarter as we all know their fiscal year. Pretty robust. We saw, obviously, our public sector business kind of as always, outdelivered the Q3 or the Q4 which is our Q3. And trends remain the same. I do see public sector now. So first of all, very well done across a broad area of different kind of customers that we serve within public sector, state and local and the agencies and all that stuff. We absolutely see the public sector customers getting to more and more of digital transformation and accelerated one state and local ad in a different phase. They obviously have rest, less intense compliance and regulatory situation than the federal or the 3-letter agencies. But I absolutely see the conversations we are having and even the ones I was engaged in more and more desire to do accelerated digital. GenAI's top of their mind, of course, you can imagine that there is so much that they have to put a box around GenAI are to do it the right way, but everybody is having that conversation. But definitely, digital and modernization, by the way. A lot of our public sector customers are moving towards the cloud, definitely. We saw a big push towards modernization happening over the course of the year. So we're seeing some of those kind of trends within our broad public sector business. Operator: The next question is from the line of Tyler Redke with Citi. Tyler Radke: Amit, I'm curious, for customers where you've seen adoption of Open Table formats like Iceberg. Have you noticed any meaningful changes either positively in terms of Informatica utilization or IPU credits or too early to tell, just would just love your perspective on that theme based on the customers that you've worked with. Amit Walia: Sure. Very early. And in fact, what we see is, like I've always said, look, Open Tables don't just happen to fill themselves. Actually, what we are seeing is customers actually needing to do ESP on Open Table, preparing the data getting data from different operational systems and making sure that the five formats are organized, quality has happened, and we are seeing some of that stuff customers getting ready for that. In fact, Databricks and us have been in strong partnership in that area. We are collectively helping customers figure that out. But we see the need for ELT, see the need for data preparation, see the need for quality to even get the Open Tables to be populated for them to then be in some operational use absolutely be there, which is why we continue to benefit because that's more IP consumption and usage. That's where things are right now. Mike McLaughlin: And I would emphasize is you would note if you've listened carefully to our remarks or seen of our press releases that we support very deeply the Iceberg table format for all the cloud service providers and [indiscernible] our warehouse providers. So we are there to be the most efficient and effective partner to manage and transform the data that is going into those tables. Tyler Radke: Great. I appreciate the answer there. And Mike, if I look at your updated guidance for the full year, you took up cloud ARR, which is good to see solid performance in the quarter. Subscription it looked like it stayed the same and self-managed did decline a bit more sequentially than you've seen recently. So is the way to think about that incremental cloud subscription rates, is that kind of coming more from migrations? Or is it hey, you're just seeing a bit more falloff on the self-managed business, but you're more than offsetting that or offsetting that just on the strength of new business. Just help us understand kind of the puts and takes there. Mike McLaughlin: Yes. And just to clarify, we didn't change our full year guidance at all. We established Q4 guidance for the first time, which because when you report Q2 and give Q3 guidance and the year, there's an implied Q4 in there. So I think what you're talking about is puts and takes of how the math works out of what the implied Q4 was 3 months ago versus what the actual Q4 guidance is today. And I wouldn't look at it as particular strength or weakness in any of the categories it's simply on track to deliver what we always thought was going to be the full year starting out and then feathering in the up the raise of the cloud we did after Q2 and the non-GAAP OpEx free cash flow raise that we gave after Q2. We still think that cloud is going to grow north of 35%. We still think that for the year, that self-managed is going to decline about 13%, and we still think that maintenance for the year is going to decline about 7%. So no big changes in mix shift assumptions are net new versus migration or anything like that. Operator: The next question is from the line of Patrick Colville with Scotiabank. Patrick Colville: Congrats on all the momentum you guys are seeing. I guess I just want to ask Amit and Mike about the 2024 guidance. So I guess what was implied for 4Q both on the cloud ARR line and on the total ARR line, I guess the guidance for 4Q implies kind of a net new ARR, sequential net new ARR, but we haven't -- Informatica has never reported before. I mean if my math is correct, it points to $53 million of net new total ARR and $88 million of net new cloud ARR. So I guess what gives you confidence going into 4Q to guide to those levels? Mike McLaughlin: Yes. Look, it's bigger than ever because we are bigger than ever. It's off a base that's 35% higher than it was coming out of Q3 last year. It's actually -- it's kind of as simple as that. we have more go-to-market. We have more pipeline. We have more prospects and more renewal base to work with than we did in Q3 of last year. I think the right way to think about it and the format your own judgment about how attainable it is, is just to look at what percentage the net new ARR represents in Q4 of the full year in 2024 versus the same look in 2023. And you'll see that as a percentage of the year as the percentage of sequential growth that it's all very consistent with what we actually delivered in Q3 of 2023 -- or sorry, Q4 of 2023 versus Q3 of 2023. Amit Walia: And just to add to what Mike said, I may think -- we also look at, obviously, our pipe create pipe coverage and things of that nature and those have consistently be better each quarter and each year. So hope we feel good about that. Patrick Colville: Great. Okay. Yes, that's very clear. I guess I want to ask just for my follow-on, please, around migrations versus net new ARR. I mean what many investors like about Informatica is you have both of those kind of pickers. But specifically on the migrations, the disclosure Informatica provides this quarter, on a TTM basis, 24% of new ARR from migrations, very impressive, but I guess a slight downtick versus last quarter. Why would migration, net new ARR contribution downtick, given the launch of [indiscernible] a year ago. Like I would have expected a net uptick. So any color you could provide there would be super helpful. Mike McLaughlin: Yes, sure. It's quarter-to-quarter variability, Patrick. I mean, your math is right. It wasn't a blowout quarter for migrations. But some will be blowout, some will be a little bit below expectations. But over the year, we continue to see really strong acceleration. And continue to expect a contribution of migrations to the total net new ARR in the cloud in the 25% to 30% range. for the year. And over time, we would expect that to grow to maybe as big as 1/3 of the contribution. But as I've said before, the most important value creator for Informatica shareholder is winning net new, winning new customers, winning new workloads from existing customers, Migration is great, and it's going to provide a very long tail of opportunity to increase the value footprint with our customers and therefore, our shareholder value. But the net new is doing what we expect it to is the strong majority of what we do, and the migration continues to be healthy, but you'll see some quarter-to-quarter variability. Amit Walia: The other thing I'll add to that is that adding to what Mike just said is that look, we feel very good about how we balance our business, and it's net new customers or net new workloads in cloud. The other engine that used to be smaller, but as we've shared about, and you can see in our NRR is consistently outperformance becoming bigger and bigger expansions expansion of our business with existing customers once they buy the IPUs and then, of course, migration and modernization. So we have a healthy and we'll never want to be a one-trick pony to just do one thing or the other. And hence, we -- at the end of the day, it's growing the total cloud ARR is what matters. And we feel good about we have many vectors to get there. Operator: There are no additional questions waiting at this time. I would like to pass the conference back over to the management team for any closing remarks. Amit Walia: Thank you. Well, look, I really appreciate everybody taking the time to join on the call today. As you can see, we feel very good about where we are for the year-to-date as much as it [indiscernible] about Q3. I mean growing our cloud business, which has been a paramount growth strategy, which you can see growing 36% cloud ARR, cloud platform growing up to 101 trillion transactions a month and to our subscription ARR per customer growing at healthy 15%, and we feel very good about where we are. And of course, while we are growing all of that to continue to be growing our operating margin and maintaining a gross margin of growing that. So it's a very well balanced across the board, P&L that we are managing, and we feel very good about it. So once again, I really want to thank each and every Informatica employee and our partners and customers who are partnered with us. And thank you all for taking the time today and for your questions. So thank you very much. Operator: That concludes today's Informatica Inc. Fiscal Year Third Quarter 2024 Conference Call. Thank you for your participation, and enjoy the rest of your day.

Earnings call: Gen reports solid growth and raised full-year guidance By Investing.com

On October 30, 2024, Gen (ticker not provided) reported a solid second quarter for the fiscal year 2025 during its earnings call. The company revealed a 5% increase in bookings, amounting to $964 million, and a 16% growth in earnings per share (EPS). Total revenue climbed to $974 million, up by 3%, with Cyber Safety revenue increasing by 4%. The company also reported a significant growth in its customer base, adding 400,000 direct paying customers to reach a total of 39.7 million. Gen's CEO, Vincent Pilette, underscored the importance of the company's innovative solutions in the face of increasing data breaches, particularly highlighting the success of the AI-powered Genie anti-scam product, which has surpassed 1.6 million downloads. In summary, Gen's earnings call painted a picture of a company on the rise, with increased bookings, revenue, and customer base. The management's focus on innovation and customer protection, along with a robust AI-enabled product roadmap, has positioned Gen favorably in the cybersecurity market. The company's raised guidance reflects confidence in its business strategy and market position, even as it navigates challenges such as increased customer acquisition costs and currency fluctuations. With a strong commitment to shareholder returns and an emphasis on global adoption of cyber safety solutions, Gen continues to strive for growth and market leadership. Gen's solid second quarter performance for fiscal year 2025 is reflected in its robust financial metrics. According to InvestingPro data, the company boasts a market capitalization of $16.58 billion, underscoring its significant presence in the cybersecurity market. Gen's revenue for the last twelve months as of Q1 2025 stood at $3,834 million, with a notable revenue growth of 7.27% over the same period. This aligns well with the company's reported 3% increase in total revenue to $974 million for Q2 2025. The company's profitability is particularly impressive, with a gross profit margin of 80.65% and an operating income margin of 40.71% for the last twelve months as of Q1 2025. These figures support Gen's strong financial performance and its ability to generate substantial profits from its operations. InvestingPro Tips highlight that Gen has raised its dividend for 3 consecutive years, which aligns with the company's commitment to returning excess free cash flow to shareholders. Additionally, Gen's stock price has outperformed the S&P 500 in the past year, with a one-year price total return of 65.1% as of the most recent data. This impressive performance reflects investor confidence in Gen's business strategy and market position. For those interested in a deeper analysis, InvestingPro offers 16 additional tips for Gen, providing a comprehensive view of the company's financial health and market position. Operator: Good afternoon, everyone. Thank you for standing by. My name is Victoria, and I will be your conference operator today. This call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. At this time, for opening remarks, I would like to pass the call over to Jason Starr, Head of Investor Relations. Jason Starr: Thank you, Victoria, and good afternoon, everyone. Welcome to Gen's second quarter fiscal year 2025 earnings call. Joining me today are Vincent Pilette, CEO; and Natalie Derse, CFO. As a reminder, there will be a replay of this call posted on the Investor Relations website, along with our slides and press release. I'd like to remind everyone that during this call, all references to the financial metrics are non-GAAP and all growth rates are year-over-year, unless otherwise stated. A reconciliation of non-GAAP to GAAP measures is included in our press release and earnings presentation, both of which are available on our IR website at investor.gendigital.com. We encourage investors to monitor this website as we routinely post investor oriented information such as news and events, and financial filings. Today's call contains statements regarding our business, financial performance and operations, including the impact of our business and industry that may be considered forward-looking statements, and such statements involve risks and uncertainties that may cause actual results to differ materially from our current expectations. Those statements are based on current beliefs, assumptions and expectations as of today's date, October 30, 2024. We undertake no obligation to update these statements as a result of new information or future events. For more information, please refer to the cautionary statement in our press release and the risk factors in our filings with the SEC and in particular, our most recent reports on Form 10-K and Form 10-Q. And now, I'll turn the call over to Vincent. Vincent Pilette: Thank you, Jason. Q2 was another solid quarter of consistently executing on our strategy, meeting our commitments for profitable growth, while continuing our investment to meet the long-term consumer needs of ever expanding digital lives. We delivered another quarter of mid-single-digit bookings growth, up 5%, our highest growth rate since the Avast acquisition and a double-digit earnings per share growth, up 16%. We also grew our direct paying customers by 400,000 in the quarter, now at a record 39.7 million. Those results are a testament to the solid disciplined and consistent execution of our team. On top of that, it is also a clear reflection of what we have talked about for many quarters. People are being exposed to an accelerating threat environment and their awareness is growing with every new breach and scam, text or email. Those trends are here to stay and are being enhanced by the use or misuse of AI. As consumer awareness grows, we stand ready to empower your digital life with the most innovative and easy to use solutions that secure and protect your identity and your hard earned assets. It is easy to get desensitized to news of yet another breach, but the impact recently is truly staggering. In August, the US National Public Data Breach exposed an estimated 270 million social security numbers, practically two-thirds of all social security numbers ever issued, leaving one out of three Americans at risk of identity attacks. The scale and the frequency of breaches along with the sophistication and volume of phishing emails and scams makes everyone vulnerable. As we shared in our last report around rising election scams, even young adults who are expected to be the savviest online are proving to be susceptible at higher rates. This unfortunate reality is a big part of why our team at Gen is so mission driven. We believe that no matter how good these cyber criminals get, our goal is to give you the tools and the solutions that empower you to live your digital life without worry. Delivering digital freedom and peace of mind is no small task, so every day we are focused on upping our game. Just about a year ago, our threat team and technology detected the growing threat of personalized scams at high volumes and quickly delivered our Genie anti-scam product. Powered by AI, Genie was the first embodiment of the future of digital freedom. Not only does it interact with you in an accessible and intuitive way, it also continually learns and adapts with every interaction. Today, we have over 1.6 million downloads and its overall efficacy is approaching 100%. Genie is a great example of how we continue to put innovative solutions in the hands of consumers, but it is just the start. In the coming quarters, we plan to enhance the product and expand this anti-scam technology into our core offerings. More to come on that front. Protecting consumers from scams is one of the biggest attack vectors, but as I mentioned earlier, breaches pose an entirely different threat and are also on the rise. Breaches put you, your information and your hard earned assets at risk and it generally happens through no fault of your own. Data you provided to your favorite stores, your healthcare provider, your banks and the government is being put on the dark web. And as the breaches proliferate, cyber criminals are stitching together different pieces of information to increase their ability to successfully steal your identity or target you for sophisticated and personalized scams. No one is immune. And if you don't believe me, I challenge you to go out and try our free LifeLock data exposure scan and I'm sure you will be surprised at how much of your information is out there and available. That constant growing threat is why we are continuously investing in and innovating around how we keep your financial assets, your personal information and your reputation safe. No one is better at helping a victim recover from identity theft than LifeLock. We invented the category and we have a world-class restoration team that helps repair the damage. But we want to also be sure that we can stop things earlier. That's why we have alerts algorithm and full spend tracking through financial monitoring features to keep you aware and safe in real time. We recently released Credit Insights to our large block customers as part of our strategy to address the customer needs to keep their finances safe online. This new LifeLock feature provides customers with contextual information to better understand what factors impact their credit score with actionable insights to build or improve their credit rating over time. From spend tracking to helping you better manage your subscription spending or virtual secure credit card, we see an increase in demand for trust based services and will continue to expand what we do for consumers in that area, so they feel empowered to manage their finances confidently, achieve financial freedom and thrive in their digital journeys. We see a long runway of growth with meaningful opportunities to expand in each pillar of our consumer cyber-safety portfolio as we continue to innovate and execute. In Q2, we grew cyber savings bookings over 5% driven by strong momentum in identity where bookings were up 8% year-over-year. We also drove double-digit growth in new customer acquisitions, maintained solid momentum in upselling into identity memberships and continued expanding our partnership network. With so much opportunity in front of us, we will continue to invest to serve the expanding needs of consumer, whether that be adding to our AI capabilities to better match our services to our customers and deliver more intuitive and engaging experiences from them or through innovation into new and existing products or even expanding our reach to new markets for services like identity theft protection. Even with the most comprehensive solutions in the market, we know we can't rest, so expect us to delivering innovation and more engaging experiences to our customers. While we remain focused on the future and innovation, operating with discipline and meeting our commitments are core parts of our Gen DNA. Operating KPIs remain very healthy, supporting yet another quarter of double-digit growth in non-GAAP earnings per share, which includes many of our investments for long-term growth. Since our Investor Day last year, where we laid out our long-term goals of accelerating growth to the mid-single-digits and driving non-GAAP EPS growth of 12% to 15%, we have consistently executed and delivered on our commitments. We are pleased with our Q2 results and excited about what we can deliver in the future. As a result, we strengthened our annual guidance and we are making steady progress towards achieving the three-year financial goals we shared at our Investor Day last November. We are passionate about our mission to empower and protect every aspect of digital life and we're confident that our focus on the customers, our pace of innovation and our disciplined execution will enable us to achieve our goals to drive shareholder value. And with that, let me pass it on to Natalie to review our financial performance in detail. Natalie Derse: Thank you, Vincent, and hello, everyone. For today's call, I will walk through our fiscal Q2 2025 results followed by our outlook for Q3 and full year fiscal year 2025. I will focus on non-GAAP financials and year-over-year growth rates unless otherwise stated. Q2 was another quarter of solid execution with strong financial results at or above the midpoint of our guidance and reflects our 21st consecutive quarter of growth. Q2 bookings were $964 million, up 5% in constant currency and up 4% in USD. Cyber Safety bookings, which exclude our legacy business lines, also grew 5% year-over-year in constant currency, our highest growth rate since the Avast acquisition. This quarter, there was a surge in consumer awareness, interest and demand for identity theft protection after the national public data breach. This is when our brand awareness and vast LifeLock protection offerings really cut through and we drove stronger customer acquisition and bookings as a result, helping to shore up the higher bookings growth rate in the quarter. Moving to revenue. Total Q2 revenue was $974 million, up 3% in USD and constant currency. Cyber Safety revenue grew 4% year-over-year, driven by broad based growth across our consumer security and identity and privacy business lines. Stable growth in our Security business lines reflects the success of our cross sell program as our Norton 360 security customers continue to add more adjacent offerings and we drive improved monetization. Identity and privacy growth was more pronounced with faster growth in our Norton 360 with LifeLock product as consumers increasingly adopt comprehensive cyber safety membership with identity solutions. Direct revenue was $860 million, up 3%, supported by improvements across our key performance metrics of direct customers, ARPU and retention. Let me share some specifics. A key ingredient to our growth strategy is driving net new customers and in Q2 we expanded our customer base for the fifth consecutive quarter, increasing to 39.7 million, up 389,000 sequentially and up over 1,1 million year-over-year. We continue to leverage our broad range of marketing channels and vast product portfolio, dynamically shifting and increasing marketing investments based on demand, while optimizing our sites to drive improved traffic conversion. This quarter, our net new customer count growth was mostly driven by continued international and mobile expansion efforts and we had the additional opportunity to further drive our identity offerings with the increased market demand. On monetization, our monthly direct ARPU was $7.26 in USD, up $0.03 sequentially and up $0.01 compared to last year's result. Note that FX helped this metric by $0.02 sequentially, but had no impact year-over-year. Operationally, ARPU remains stable to slightly up across our customer cohorts by brand and by market. As we grow our customer base, we have demonstrated the ability to further monetize after their first purchase, whether through cross selling complementary products or upselling to higher tier memberships, both avenues providing additional customer value and enhanced cyber safety protection coverage. Our efforts to better customize and personalize offerings at the right moments of truth are working. And as we add new features and expand our portfolio, we will continue to feed this flywheel. The expanded values and services provided to our customers is also reflected in the retention increases to-date. In Q2, our direct retention rate was 78%, in-line with the prior quarter and improving by a point year-over-year, steadily progressing towards our goal of 80%. While each point of retention will get harder to achieve as we continue to drive new customer growth, our teams are focused on driving gains at the cohort and product level. And as Gen Stack gets rolled-out to more customers, we are driving better targeting and in-product messaging with the goal to create more personalized customer experiences that will in turn drive higher customer loyalty, retention and increased lifetime value. As we look-forward, we will continue to focus on keeping our already high retention rates in our Norton and LifeLock brands stable, and drive increases with our mobile customers and our Avast brands. Turning to our partner business. Partner revenue was $102 million in Q2, up 7% year-over-year as reported and up 8% in constant currency as we grow our identity and privacy offerings. Our employee benefits channel continued to scale, helping over 10,000 companies protect their employees from identity and cyber threats. As consumer awareness of identity theft grows and companies turn to offering more comprehensive benefits to their employees, our pipeline is strengthening. Our telco partnerships are also helping us scale our identity membership offerings internationally, leveraging their partner scale and broad customer base to drive adoption in targeted expansion markets. And as consumers increasingly gravitate towards identity and privacy solutions, our private browsers have also been an accelerator for partner growth as we see strong adoption in our customer base. Across our diverse set of partner channels, we are making steady progress towards $0.5 billion in annual partner revenue over the next years. Rounding out our revenue, our legacy business lines contributed $12 million this quarter, down from $16 million the prior year. As a reminder, we expect our legacy revenue to continue declining double-digits year-over-year and represents approximately 1% of our total revenue. Turning to profitability. Q2 operating income was $567 million, up 4% year-over-year and translating to an operating margin of 58.2%. As I noted earlier, we're making focused investments to capitalize on the growth opportunities we see in the market, and that's reflected in our strong first half booking results. We continued to invest in marketing across all channels with an always-on optimization of existing funds and deployment of incremental funds to expand our customer base and accelerate growth. We're also investing in R&D and our longer-term foundational technology capabilities, while launching new offerings to fortify our comprehensive cyber safety product portfolio and stay ahead of emerging threats. And as we've demonstrated in prior quarters, we will continue to fund these investments through our operating leverage and by operating lean across the G&A organizations now at a record-low of approximately 2% of revenue. Building on the strength of our KPIs, along with our solid execution against expectations in the first half, we will continue to invest in our business with the same disciplined approach as we focus on driving sustainable mid-single-digit growth. Q2 net income was $336 million, up 12% year-over-year. Diluted EPS was $0.54 for the quarter, up 16% year-over-year, in line with our guidance. Interest expense related to our debt was $142 million. Our non-GAAP tax rate remained steady at 22%. And our ending share count was 622 million, down 22 million year-over-year, reflecting the impact of share repurchases. Turning to our balance sheet and cash flow. Q2 ending cash balance was $737 million. We are supported by over $2.2 billion of total liquidity, consisting of our ending Q2 cash balance and $1.5 billion of revolver. Q2 operating cash flow was $158 million and free cash flow was $156 million, which included approximately $70 million of cash interest payments this quarter. As a reminder, Q2 is seasonally high, our highest use of cash given the concentration of tax payments that are due in the quarter. And as a result, we did not purchase any stock or pay down additional debt this quarter. Also important to note, due to the timing of our quarter-end being on September '27 this year, our Q2 ending balance does not reflect our $89 million in cash interest and $58 million paid for our maturity schedule on September 30th. As we look-forward, we remain committed to our capital allocation strategy, returning 100% of excess free cash flow to shareholders, maintaining our dividend, and balancing our capital allocation to both debt paydown and opportunistic share buyback. In the quarter, we paid $77 million to shareholders in the form of our regular quarterly dividend of $0.125 per common share. For Q3 fiscal 2025, the Board of Directors approved a quarterly cash dividend of $0.125 per common share to be paid on December 11, 2024 for all shareholders of record as of the close of business on November 18, 2024. Since the start of fiscal year 2023, we have paid down over $2 billion worth of debt and have deployed a total of $1.6 billion of share repurchases over that time period. With our strong cash flow generation, we will continue to deploy our capital to achieve the long-term objectives laid out in our Analyst Day. Now, turning to our Q3 and fiscal '25 outlook. For Q3, we expect non-GAAP revenue in the range of $980 million to $990 million, translating to approximately 4% growth in cyber safety and Q3 non-GAAP EPS to be in the range of $0.54 to $0.56. For fiscal year 2025, we are strengthening our prior guidance range and now expect full year revenue in the range of $3.905 billion to $3.930 billion, translating to 3% to 4% growth in cyber safety, expressed in constant currency, supported by expected cyber safety bookings growth of 4% to 5%. We have raised the lower end of our EPS guidance and now expect non-GAAP EPS to be in the range of $s2.18 to $2.23 per share, representing an annual increase of 12% to 15% in constant currency and in line with the EPS growth objectives we shared last November. In summary, our Q2 results keep us on-target for our 2025 plan and we remain well positioned to achieve our long-term goals. Our key performance indicators continue to trend in the right direction. We are executing our plan and our strategic growth framework provides us guide points along the journey. As always, thank you for your time today, and I will now turn the call back to the operator to take your questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Andrew Nowinski with Wells Fargo (NYSE:WFC). Your line is now open. Andrew Nowinski: Okay, good afternoon, and thank you for taking the questions and congrats on the strong Q2 results here. Vincent Pilette: Yeah. Absolutely. Welcome to the coverage. Andrew Nowinski: Thank you. Thank you very much. I wanted to dig into the net adds this quarter, which I thought were very impressive. I mean, it seems like it's almost a guarantee that every adult in the US now has their personal data on the dark web, thanks to all the breaches we saw this summer, including that National Public Data breach. So do you think the net adds will improve, particularly in the US going forward? Because I think you said it was more influenced by the international growth this quarter? Vincent Pilette: So, definitely the national data breach helped making people more aware of the risks. But this quarter, we grew our cohorts across all of our brands and across the continents, both Americas and Europe. So we've seen kind of a broad base. Granted, it was a little bit more pronounced in the identity and in the US for that reason. And you're right that today we believe that about one American out of three has enough of their personal data out there on the dark web for any criminals to stitch together a profile and do an identity test. We know -- ideally, we know that everybody should be protected and that the awareness is something that we need to continue to work on to ensure that everyone understands the risk. It's a bit like an insurance service, if you want, you need to have a first catastrophe to never skip a protection. Andrew Nowinski: Got it. Thank you. And then I wanted to maybe just a clarification. I think last quarter you talked about the Norton cross-sell penetration had increased to 20%. I didn't catch it this quarter if you gave that. But I was really wondering also, did you see an improvement in the LifeLock attach rate or customers upgrading to that higher-end membership that includes LifeLock this quarter, given all the breach activity? Natalie Derse: Yeah. Thanks for the question. Hey, this is Natalie. So, for sure we saw an increase in our cross-sell penetration. It's been a growth driver for us and with us for several consecutive quarters. We laid that out as one of the five for five levers of what you have to believe for sustainable accelerated growth in the mid-single-digits. And we definitely needed and wanted to show you guys and share with you guys what our starting point was and the milestone achievements that we would need to achieve mid-single-digit rate of growth over the long-term. So it won't be a specific metric that we give you every single quarter, but absolutely consistent performance and driver of our -- not only our bookings growth, but our ARPU coming from cross-sell. And then from a LifeLock attach rate, yes, I mean, you probably heard it more than a handful of times in my script because the LifeLock customers are such high value, highly retaining customers for us. This has been a very healthy quarter for our business. We did see more LifeLock acquisition. We saw more upsell into membership tiers with the LifeLock Identity protection value. And we saw acquisition into higher tiered LifeLock offerings this quarter, especially even more fueled by that NPD breach, and the increased demand in the market. Ryan Powderly: Hey, team, good evening. This is Ryan Powderly on for Saket tonight. Thanks for taking the question. Congrats on a nice quarter. And, Natalie, maybe first for you. That was some helpful commentary just around the buybacks and de-levering activity this quarter, understanding the cash constrictions. Just going forward as we take a look at the next near and mid-term, can you talk about how you're going to be balancing buybacks and de-levering over the next few quarters? Natalie Derse: Yeah. I would say it's going to be a consistent approach that we've taken for the last handful of quarters. Of course, we all know what's happening in the debt market and the cost of debt now is very different than the environment than we were in a year ago. But both are very important for us in terms of capital allocation strategy. We'll strike the right balance quarter-in, quarter-out, not a specific percentage because we flex based on the macroeconomic indicators. So, everything from the cost of debt, the timing of the cash, Q2 is our highest use of cash, so we were largely constricted in terms of what else we could do for additional capital allocation, but we also know we're highly, highly cash generators. So the back half of capital allocation would be very, very balanced and very interesting. Ryan Powderly: Got it. That's super helpful. Maybe for my follow-up. I'd just love to dig into one other part of net adds that was really interesting to see. Can you talk about first year retention and how that's been trending? Because I know we talked about that at Analyst Day, just what do you think is -- are there any improvements there and how has that been trending? Natalie Derse: Yeah. So our first year retention rate is very consistent to up. And I'd point that to our continuously innovative product roadmap. The range of values and services that we are bringing to market is very, very competitive, very relevant and highly in-demand. And we make sure that we're not only bringing great products and services to market, but that we're competitively priced, and our messaging and our personalization is as cut through to the customers as possible so that they understand what we can be for them in their ever-increasing risk of cyber safety. And so, yes, we see very, very solid results in first year -- in all of our retention rates, which is why we've been able to scale up to 78% overall. But yes, the first year renewal rates are higher than they have been in the past. Operator: Thank you for your questions. Our next question comes from the line of Peter Levine with Evercore. Your line is now open. Peter Levine: Specifically, first of all, can you talk about Genie AI -- hi, Natalie, how are you? So with -- I think you mentioned, I think it was like 1.6 million, 1.7 million downloads. But Vincent, in your commentary you called out, I think, you said more to come on that front, but will enable or embed AI across your core offerings. Can you maybe just talk a little bit about your kind of what the aspirations are there in terms of putting that across the platform? And then maybe explain to us the monetization opportunities, or if it's more of a tool to just to kind of be more competitive? Just help us kind of balance those out there. Vincent Pilette: Yeah, it will be all of our lever, but let me explain, right. So definitely we can see a very strong rise in scam, personalized scam and volume personalized scams through the use of AI. And when we came out with Genie, we're singly focused on really developing our LLMs to be able to spot those scams and then help our consumers detect what is a scam and what is not. And we did that also with a conversational interface, you can also decide on what's the next step with the scam. We've had 1.6 million downloads, very strong models and I think we're now ready to move that into our overall portfolio. We'll start first with the Norton 360 membership being the core Genie assistant or the anti-scam assistant in the first three-level of our Norton 360 plan. And then we'll ramp-up in features moving from tech scams to voice scams to call blocks to scam insurance through the different plans, if you want, all the way to Norton 360 with LifeLock. So that's coming now. The first path of monetization is to help our customers to move and upgrade to the next level of plan that not only provides the current features of safety, but extend to all of those I've just mentioned. And there will be a Genie Pro cross-sell, if you want for those who want to stay steam to their old plan and just want to have a standalone anti-scam tool. Peter Levine: Thanks for that. And maybe the second question or follow-up here is, benefits enrollment, I know this was the quarter and I think most would sign-up for it. So maybe can you just give us an update on how that pipeline kind of closed out for the quarter versus expectations? And then kind of if you think about how this season ended, any changes that you're making to the go-to-market or to your partners to kind of accelerate that for next year? Thanks. Vincent Pilette: So, we continue to grow our employee benefit channel double-digit. It's both growing on acquiring new account, but also we're working with each account and putting the right marketing and communication engagement materials to have more sign-ups in those accounts. We've seen growth through the last few quarters. We have a very strong funnel. We've always had a very strong funnel. It comes more to another jump in growth if you want when it comes to the enrollment view where we can subscribe more customers if you want within those accounts. We obviously integrate everything we see, the strong funnel and the activity in marketing I have just mentioned into our forecast. And I think we feel very good about the continued development of that channel, in which we've enroll also on new products and go all the way to a full reputation defender service for executives and below. Peter Levine: If I can actually just ask one more. Are these agreements when you go into a company and offer the benefits, is it an enterprise agreement or how does that get priced versus the consumer model? Just curious in terms of the pricing model versus the consumer model? Vincent Pilette: Absolutely. So the pricing is kind of an enterprise agreement, but it's on a [proceed] (ph) basis. It either is fully sponsored or partially sponsored by the employer benefit plans, and the pricing is slightly below, but not materially below what you charge from the consumers. Operator: Thank you for your questions. Our next question comes from the line of Tomer Zilberman with Bank of America (NYSE:BAC). Your line is now open. Tomer Zilberman: Great. Hi guys. I wanted to go back to the direct customer net adds. So when we look at the 389,000, how much of that would you say is coming from the adds of international and mobile versus what you said the better identity sales on the back of the national data breach? And really what I'm trying to ask here is what do you think is the normalized customer growth in the remainder of the year? Natalie Derse: Hey, this is Natalie. So I'll take that one. The majority of our customer count net adds sequentially has consistently been coming from, as we expand and broaden our solutions available on mobile, as well as our international market expansion. So both of those have been consistent levers and consistent drivers of growth for us in customer acquisition as we expand and get -- and increase the penetration, increase the value proposition that we've got with our mobile users. And that stayed consistent in Q2. And then on top of that, we saw the increased demand coming from the identity offerings. On a go-forward basis, we -- it is very, very critical for us to continuously focus on healthy customer acquisition. We do that on a global basis across all of brands, across all of our platforms. And we will continue to expand internationally as we identify new markets of healthy customer acquisition. And yes, we're just getting started in terms of expanding the value proposition and the engagement that we've got with the ever-growing mobile users and customers in our portfolio. In addition, we will continue to foster all of the brands across our portfolio. All of them are critical and on a go-forward basis we're going to be balancing our investments, whether it's product -- the product roadmap and the technology solutions that we bring, as well as combined with the different marketing channels that we've got to optimize the healthy customer acquisition that feeds our flywheel, feeds our increase in ARPU, feeds our cross-sell, feeds our upsell and therefore feeds our retention and accelerating bookings growth. Tomer Zilberman: Got it. Excuse me. And maybe as a follow-up, looking at the guidance raise this year. For the full year, I saw in the quarter your negative currency impacts went down to about $1 million from $7 million over the last few quarters. How much of that is driving your guidance raise versus just the better business trends that you're seeing? Natalie Derse: Yeah, it's immaterial for us. And then when we set our -- when we revise our guide, we just use the current currency rates that we all know as of right now. We don't predict or project any currency fluctuations. Hamza Fodderwala: Hey. So I wanted -- it's a solid quarter in terms of top line, really strong sort of record net adds. I wanted to ask a question on the cost side of the equation. The EBIT margin, I think, was slightly higher than it was in recent quarters. I'm just curious on the cost side, what are you seeing in terms of advertising cost? I know in the past that kind of gone up and down, so I'm curious what you're seeing currently? Natalie Derse: Yeah, it varies across all the brands, quite honestly in all the different channels. And we've got such a diverse set of channels and increasing marketing spend going to those channels. I think you're specifically talking about the gross margin rates. And yes, we do see shifts across our marketing portfolio. We optimize for healthy ROI customer acquisition and we leverage the different channel diversification that we've got. In terms of what's -- there is different accounting treatment depending on what marketing channels there are. So I would encourage you to consider that when you think about the gross margin versus the op margin versus the EBITDA margin. And that's why we're able to hold the operating margin so consistently quarter-over-quarter. It's just P&L profile of where the marketing channel expense for this quarter actually hit. Hamza Fodderwala: Maybe can I be more specific in the direct-to-consumer side of the business, how would you say advertising costs have been trending in the last few quarters, up or down? Natalie Derse: Yeah. So overall, I would say it is definitely getting more competitive. Now keep in mind, our CACs by brand and CACs by channel are very, very different. And so overall, it's stable to up in terms of cost of acquisition. But when you think about it side-by-side and when we talk about our business sequentially, when we talk about taking and leveraging the increased market demand for LifeLock, that's obviously going to be a much, much higher absolute dollar CAC to acquire that much higher valued customer than if you were to think about a lower AV security customer add in a new growth market internationally. Hamza Fodderwala: Got it. So it's higher lifetime value subscriber, but maybe initially might be a little bit higher CAC, does that make sense? Okay. Thank you. Natalie Derse: Yes. Operator: Thank you for your question. Our final question comes from the line of Dan Bergstrom with RBC. Your line is now open. Dan Bergstrom: Hey, it's Dan Bergstrom for Matt Hedberg. Thanks for taking our questions. Natalie, you just mentioned accelerated bookings growth in your answer to one of the last questions. That 5% constant currency number, really nice to see, especially following the uptick to 4% last quarter. And then it looks like the key assumptions moved up to 4% to 5% from 3% to 5% last quarter. Maybe just what could that 5% portend for revenue growth over the next year? Should we think of maybe the difference between bookings and revenue growth that's maybe narrowing or maybe solidifying the potential around revenue acceleration? Just any further thoughts around the accelerating bookings growth here. Natalie Derse: Yeah. A large -- the majority of our portfolio or our book of business is going to be ratable. And so it's about rolling off the balance sheet relatively consistently. We don't have a ton of seasonality in terms of the size of our quarters. And so largely speaking, super-high level, it will roll-off over the next 12 months. We do have our monthly subscribers, which is still a small share of our business, you would see that hitting bookings and revenue in the same period because we have recognized the revenue as we deliver on the service, so monthly. But largely speaking, our portfolio and our book of business is on an annual subscription and we -- the majority of that is ratable over the next four quarters. Dan Bergstrom: That's helpful. Thanks. And then maybe a little more on any action that you may be undertook following that social security number breach. I mean, did you change marketing, messaging channels? It seems like you had pretty precious timing around the personal data exposure product. Any specifics you may have done to lean into it a little further? Natalie Derse: Yes. We did a full reallocation in terms of assessing where to put the marketing dollars, a reallocation into the LifeLock business for sure in the brands and services. And with that, we did a healthy balance across the different channels to go where the demand was. There's a lot of demand for identity, obviously, in SEO as well as paid search, and then also the affiliate channels really helped us with referral traffic to bring them to our platform on the LifeLock side. Operator: Thank you for your questions. That concludes our Q&A session. I would now like to pass the conference to Vincent Pilette, CEO of Gen Digital Inc., for closing remarks. Vincent Pilette: Thank you. As the leader in consumer cyber safety, we have a bold vision to provide digital freedom for everyone. The threat landscape is more dynamic than ever and our investments in technology, AI and product innovation are key to our success and future opportunities. We have a compelling AI-enabled product roadmap focused on security, financial safety, personal data control and other trust-based solutions. Our go-to-market strategy is effective and we have a long track record of serving our customers. We are well-positioned to expand the adoption of cyber safety globally with our trusted brands and omnichannel expertise. Thank you for your interest and your support. Operator: That concludes today's call. Thank you for your participation and enjoy the rest of your day.

Earnings call: Thomson Reuters sees steady growth and AI investment By Investing.com

Thomson Reuters (NYSE:TRI) reported its third-quarter 2024 earnings on October 30, 2024, revealing organic revenue growth of 7% and a 9% increase in its Big 3 segments. The company has raised its full-year organic revenue growth forecast to approximately 7%, with the Big 3 segments expected to grow by about 8.5%. Despite the positive growth, adjusted EBITDA saw a 4% decline to $609 million, and adjusted EPS dipped slightly to $0.80. The company also announced the sale of its FindLaw business, which is projected to enhance organic revenue growth by 30 basis points. Thomson Reuters continues to demonstrate resilience and growth despite a challenging macroeconomic environment. The company's strategic investments in AI and the legal sector, coupled with its focus on customer success, suggest a confident long-term outlook. As Thomson Reuters gears up for further developments in 2025 and beyond, investors and industry watchers will be keenly observing the impact of these initiatives on the company's financial performance and market position. Thomson Reuters' recent earnings report aligns with several key metrics and insights from InvestingPro. The company's organic revenue growth of 7% and increased full-year forecast reflect its strong market position, which is further supported by InvestingPro data showing a market capitalization of $77.12 billion USD. One InvestingPro Tip highlights that Thomson Reuters "has maintained dividend payments for 36 consecutive years," underscoring the company's financial stability and commitment to shareholder returns. This is particularly relevant given the reported free cash flow increase to $1.40 billion in the first nine months, a 12% rise year-over-year. Another crucial InvestingPro Tip notes that Thomson Reuters is "trading near its 52-week high," with the stock price at 96.8% of its 52-week high. This suggests investor confidence in the company's performance and outlook, despite the slight dip in adjusted EBITDA and EPS reported in the latest earnings. The company's P/E ratio of 32.95, as reported by InvestingPro, indicates that investors are willing to pay a premium for Thomson Reuters' shares, possibly due to its strong market position and growth prospects in AI and strategic acquisitions. It's worth noting that InvestingPro offers 16 additional tips for Thomson Reuters, providing investors with a comprehensive analysis of the company's financial health and market position. These insights can be particularly valuable for those looking to make informed decisions in light of Thomson Reuters' recent earnings report and strategic moves. Operator: Good day, and welcome to the Thomson Reuters Third Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Gary Bisbee, Head of Investor Relations. Please go ahead, sir. Gary Bisbee: Thanks, Ruth. Good morning, and thank you all for joining us today for our third quarter 2024 earnings call. I'm joined by Steve Hasker, our CEO; and our CFO, Mike Eastwood, each of whom will discuss our results and take your questions following their remarks. To enable us to get to as many questions as possible, we would appreciate it if you'd limit yourself to one question and one follow up each when we open the phone lines. Throughout today's presentation, when we compare performance period-on-period, we discuss revenue growth rates before currency as well as on an organic basis. We believe this provides the best basis to measure the underlying performance of the business. Today's presentation contains forward-looking statements and non-IFRS and other supplementary financial measures, which are discussed on this special note slide. Actual results may differ materially due to a number of risks and uncertainties discussed in reports and filings that we provide to regulatory agencies. You may access these documents on our website or by contacting our Investor Relations. Let me now turn it over to Steve Hasker. Steve Hasker: Thank you, Gary, and thanks to all of you for joining us today. Good momentum continued in the third quarter with revenue and margins modestly ahead of our expectations. Total (EPA:TTEF) company organic revenues grow - rose 7% and the Big 3 segments growing by 9%. As expected, the pace of organic and inorganic investments picked up in the third quarter as we work to position the company for faster revenue growth in 2025 and beyond. To incorporate a strong year-to-date, we are modestly increasing our full year 2024 organic revenue growth outlook to approximately 7%, including approximately 8.5% for the Big 3 segments. We continue to see healthy momentum from many areas in our portfolio. This includes double-digit growth from key products, including Practical Law, Confirmation, Pagero, indirect tax and our international businesses. Interest in our Generative AI offerings remains strong with Westlaw Precision and CoCounsel momentum continuing. Our 2024 investment plans are on track as we execute against the ambitious product roadmap we discussed at our March Investor Day. We made important progress against our roadmap in the third quarter, including the launch of CoCounsel 2.0, which I will discuss in a few minutes. We remain focused on driving innovation across our portfolio and markets, particularly as it relates to AI. To this end, our investments in AI are now running at more than $200 million annualized, which is a pace we expect to continue over the next few years and is incorporated within our 2024 to 2026 financial framework. In addition to our organic efforts, we have made two small but strategically important inorganic investments that reflect our continued confidence in the Generative AI opportunity. The acquisitions of Safe Sign Technologies and Materia bring key talent and accelerate our Generative AI roadmap. We also recently announced the signing of a definitive agreement to sell our FindLaw business to Internet Brands. While FindLaw is a premier provider of customer acquisition and marketing services for small law firms, its offerings differ from our primary focus within legal professionals of helping lawyers practice more effectively and efficiently through the use of content-enabled technology. This has led in recent times to outsized management focus on the business relative to its scale. The transaction will allow both Thomson Reuters and Internet brands to concentrate on their respective strategic priorities, ensuring customers continue to receive top-tier service and support from FindLaw. We remain extremely well capitalized and focused on shareholder value creation. We currently estimate $10 billion of capital capacity through 2027, up from our previously discussed $8 billion through 2026. We continue to assess additional inorganic opportunities. Now to the results for the quarter. Third quarter organic revenues grew 7%, modestly ahead of our expectations. Organic recurring and transactional revenue grew 8% and 12%, respectively, while print revenues declined 6%, in line with expectations. Adjusted EBITDA fell 4% to $609 million, reflecting a 430 basis point margin decline to 35.3%. This lower profitability was expected and results from organic and inorganic investments that we are making in 2024 to position the company for accelerating profitable revenue growth. Turning to the third quarter results by segment. The Big 3 segments delivered 9% organic revenue growth. This is the fourth consecutive quarter of 8% or better growth for the Big 3. Legal organic revenue grew 7%, driven by continued momentum from Westlaw Precision and CoCounsel. Corporates organic revenue grew 10%, driven by offerings from our Legal, Tax and Risk portfolios. Tax & Accounting organic revenues grew 10%, and our Latin American business and tax compliance offerings were key contributors. Reuters News organic revenues rose 8%, driven by additional Generative AI-related transactional content licensing revenue and growth from the news agreement with the Data & Analytics business of the London Stock Exchange Group (LON:LSEG). While we have called out the transactional benefits for Reuters from Generative AI-related licensing revenue, it is worth noting that there is also a growing recurring revenue component to these contracts for the use of our Reuters News content in AI applications beyond model training. These contracts with both transactional and recurring revenue highlight the value of our Reuters News content. And lastly, Global Print organic revenues met our expectations, declining 6% year-on-year. And in summary, we're pleased with our results. Let me close my prepared remarks with updates on our product portfolio and innovation efforts. At our March Investor Day, we discussed a robust product roadmap that if executed well, should deliver strong value for our customers and improving growth prospects for Thomson Reuters. The third quarter featured important progress against this roadmap, including a number of new capability launches. In August, we introduced CoCounsel 2.0, a major upgrade to the CoCounsel AI Assistant. The new version delivers results three times faster, brings important connectivity to customer documents and includes a highly requested document comparison tool, along with several other user experience enhancements. During the quarter, we also launched CoCounsel Drafting, Checkpoint Edge with CoCounsel and the Claims Explorer tool in Westlaw Precision. Customer feedback on these offerings has been positive, and we continue to work toward delivering additional enhancements and launches over the next few quarters. As we've discussed in the past, our organic innovation efforts are supplemented with partnerships and strategic M&A through our Build, Partner, Buy strategy. We made two small but strategically significant acquisitions in recent months. In August, we acquired Safe Sign Technologies, which brings a strong team affiliated with Cambridge and Harvard Universities that is developing legal-specific language models. In addition to its unique talent, our testing of Safe Sign's models in development has shown potential to enhance outcomes and improve accuracy of our Generative AI offerings in the future. In October, we acquired Materia, which has developed and recently launched an Agentic Generative AI assistant for accounting, tax and audit professionals. We believe Materia will meaningfully accelerate our AI roadmap in the Tax & Accounting and audit spaces. Thomson Reuters Ventures is an early investor in Materia and led a proof of concept that allowed certain Checkpoint users to leverage its content through Materia's AI assistant. The promising initial results from this work provides confidence in our joint potential to deliver significant value for tax accounting and audit professionals. I'll now turn it over to Mike to review our financial performance. Mike Eastwood: Thanks, Steve. Thanks again for joining us today. As a reminder, I will talk to revenue growth before currency and on an organic basis. Let me start by discussing the third quarter revenue performance for our Big 3 segments. Organic revenue grew 9% for the third quarter, continuing the trend of 8% or better growth we have delivered in recent quarters. Legal Professionals organic revenue grew 7%, consistent with the first half. Key drivers from a product perspective remain Westlaw, CoCounsel and our international businesses. Government grew 6% in the quarter and FindLaw remained a headwind to the segment growth rate. Legal Professionals revenue growth continues to benefit from the migration of customers from a global print product to Westlaw. This added $5 million to year-over-year revenue growth in the quarter. Our Corporate segment had a strong quarter with organic revenue growth of 10%. Recurring revenue grew 9%, while transactional rose 13%. Trust, Practical Law, Direct and Indirect Tax and our international businesses were key contributors. Tax & Accounting continues to deliver robust growth with another quarter of 10% organic revenue growth. Recurring and transactional revenues grew 10% and 13%, respectively. Our Latin America business, ONESOURCE, UltraTax and Confirmation were key drivers. Moving to Reuters News. Organic revenue increased 8% for the quarter, boosted by transactional revenue from additional Generative AI content licensing agreements signed in the quarter. Excluding this revenue, Reuters organic revenue increased approximately 4%. On a year-to-date basis, we have recorded $33 million of transactional revenue from the AI content licensing agreements, up from $18 million in 2023. As a reminder, we will face difficult comparison for Reuters and for total TR in the next two quarters as we lap the $18 million and $25 million of transactional revenue that occurred in the fourth quarter of 2023 and the first quarter of this year, respectively. Lastly, Global Print organic revenues declined 6% or 3% when excluding the impact of the migration of customers from a Global Print product to Westlaw. This was in line with our expectations. On a consolidated basis, third quarter organic revenues increased 7%. Before I turn to our profitability, I would like to discuss a new metric we are introducing this quarter to help you track our success at bringing Generative AI capabilities into our product portfolio. The metric is the percent of our annualized contract value or ACV from products that are GenAI-enabled. At September 30, approximately 15% of our ACV is from these GenAI-enabled products. Currently, Westlaw Precision and Practical Law Dynamic are the largest contributors with CoCounsel, CoCounsel Drafting and Checkpoint with CoCounsel also contributing. As we grow penetration of these products, introduce new GenAI-enabled products and add GenAI tools to other existing offerings, we expect the GenAI product-enabled ACV penetration percentage will continue to rise in the future. Turning to our profitability. Adjusted EBITDA for the Big 3 segments was $555 million, down 2% from the prior year period with a 39.5% margin. The lower profitability results from organic and inorganic investments we're making in 2024 to position the company for improving profitable revenue growth in 2025 and beyond. We expect the higher level of investments to continue through Q4. Moving to Reuters News. Adjusted EBITDA was $40 million with a margin of 20.4%. Global Print's adjusted EBITDA was $43 million with a margin of 33.1%. In aggregate, total company adjusted EBITDA was $609 million, a 4% decline versus Q3 2023. Turning to earnings per share. Adjusted EPS was $0.80 for the quarter versus $0.82 in the prior year period. Currency had no impact on adjusted EPS in the quarter. Let me now turn to our free cash flow. First 9 months of 2024, our free cash flow was $1.40 billion, up 12% from $1.26 billion in the prior year period. Higher EBITDA was the largest driver of the increase. I will conclude with a few thoughts on the financial impact of recent M&A and our updated 2024 outlook. On October 3rd, we announced the signing of a definitive agreement to sell our Fine Law business to Internet Brands in a transaction valued up to $410 million. We expect the transaction to close later in the fourth quarter. For modeling purposes, Fine Law remains in our financial results through the close date. The business has approximately $300 million of annual revenue with margins somewhat below overall TR levels. Looking forward and on an annualized basis, we expect the sale to boost our total company organic revenue growth by approximately 30 basis points and be roughly neutral to margins when including stranded costs. We expect minimal impact on our full year 2024 results. We are very excited about the Safe Sign and Materia acquisitions, as Steve indicated. From a financial perspective, both are early-stage start-up businesses. Safe Sign is developing legal-specific language models that in the future could bring performance and/or cost benefits to our GenAI offerings. Materia is on the cusp of generating revenue, having recently released an Agentic AI assistant showing strong early potential. Both Safe Sign and Materia will be loss-making in 2025, but we plan to absorb this within the framework we have discussed for delivering 75 basis points of margin expansion in 2025. We remain focused on strategic M&A and are optimistic we will be able to complete additional transactions over the next year. As a reminder, we follow a rigorous financial approach to M&A grounded by a 10-year IRR NPV framework that is used to assess all acquisitions. We target an IRR of at least two times our weighted average cost of capital and consider a number of additional metrics, including payback period, integration complexity, return on invested capital, organic growth impact and accretion dilution to free cash flow and margins. We also risk-adjusted analysis based on the characteristics of the particular transaction being considered. As Steve outlined, we are raising our 2024 outlook for organic revenue growth for TR and the Big 3 by 50 basis points each to incorporate strong year-to-date performance. We now see organic revenue growth of approximately 7%, up from 6.5% and organic Big 3 revenue growth of approximately 8.5%, up from 8%. We maintain our outlook for the remaining line items. This includes our total revenue growth outlook, which is unchanged despite the higher organic growth due to the impact of the FindLaw divestiture. Looking forward, we remain confident in delivering to the 2025 and 2026 financial framework we discussed earlier this year. We are currently in our 2025 planning cycle, and we'll provide more detailed 2025 and 2026 guidance on our Q4 conference call in February. But let me provide one early view on 2025. We expect our effective tax rate to be approximately 19% to 19.5%, up from approximately 18% in 2024 as the full impact from the OECD global minimum tax regulations materializes. We expect our cash tax rate to increase by a similar amount, but remain roughly 5% below our effective tax rate. Based on currently enacted tax legislation, we would expect our tax rate to remain stable in 2026 at the 19% to 19.5% level. These estimated increases in our effective and cash tax rate are already included in our 2025 to 2026 financial framework. Turning to the fourth quarter. We expect organic revenue growth of approximately 5% and our adjusted EBITDA margin to be approximately 37%. As a reminder, Q4 revenue growth will be impacted by 1% from a tough comparison driven by the $18 million of Reuters Generative AI content licensing revenue recognized in the fourth quarter of 2023. We also expect a moderation of revenue growth from our Corporates and Tax & Accounting segments due primarily to the seasonal mix of revenue. Let me now turn it back to Gary for questions. Scott Fletcher: Hi. Good morning, everyone. I wanted to ask a question on M&A, given there's so much capacity on the balance sheet. Particularly as it relates to AI deals, you've now done a few, some on the smaller end and then Casetext on the larger side, at least from a capital deployed standpoint. I'm just wondering, as you get further down the road map of GenAI, are you more comfortable looking at larger deals that involve a significant GenAI component? Or does the risk reward get more challenging as you start to look at larger deals on the GenAI standpoint? Steve Hasker: Scott, it's Steve. I'll start, and I'm sure Michael will supplement. What I would say is we have spent, I think, $2.2 billion over the last 12 or 18 months on the deals that we've spent a lot of time on these calls on. We're happy with each of those. We're happy with the way we identified them, the way we prosecuted those deals and the subsequent integration efforts. So I think you'll see - to assuming that the targets are there and they meet our criteria, you'll see us do more of those kinds of deals in terms of size and scale and being additive to the customer experience within the Big 3. And as it pertains to anything bigger, we're going to keep the bar really high. So we will not be - we won't get deal fever, notwithstanding the capital capacity that we have. And we're going to stay very rigorous and very disciplined about how we identify those deals and look to execute them. And Mike, anything to add? Mike Eastwood: Scott, I would just mention that when we think about M&A, we also have to think about financial capacity, which Steve just mentioned, which we have the $10 billion through 2027, check the box there. The other item that we consider is integration capacity throughput within our organization operationally, commercially, which we think we're in good shape there with the resources that we've added, Scott. And as Steve mentioned, the bar remains high, but we'll consider acquisitions that for our shareholders and customers. Scott Fletcher: Okay. Great. And then just a follow-up on the M&A front. Is there any - can you provide any detail on sort of how much of the margin impact in the quarter was organic versus inorganic in terms of integration? Steve Hasker: Scott, that's one we'll ask Gary to follow up on with you later today. I think he has a follow-up with you. Gary, if that's okay. Gary Bisbee: Yeah. Gary Bisbee: But certainly, Scott, there was a combination of organic and inorganic impact on the Q4 - sorry, Q3. Manav Patnik: Thank you. I just wanted to ask on the 15% of ACV from your GenAI-enabled products. I'm guessing most of that is on the legal side versus Tax & Accounting. And I guess, over time, what is the right number that 15% should grow to? Steve Hasker: You're correct, Manav, in regards to currently, that 15% primarily relates to the Westlaw Precision AI. Secondly, the Practical Law Dynamic and then to a lesser extent right now, but growing is the CoCounsel and we have CoCounsel Drafting and then Checkpoint with CoCounsel. In regards to the right percentage, that number will continuously increase. I think it's difficult to say what that percent will be going forward other than we would expect continuous improvement in increases on a monthly, quarterly basis, which we will provide. Certainly, with the additional acquisitions of Safe Sign and Materia, we have optimism that the Tax & Accounting, Corporate-related products will continue to help us on this evolution. But we'll see that 15% continuously expand, Manav. Manav Patnik: Got it. And Mike, maybe just a follow-up. Just on the moving parts, apologies if I missed it, but I guess you raised the organic guide by 50 basis points, but the overall growth is the same. So what is the moving pieces on the divestiture and the two acquisitions, I guess? Mike Eastwood: Yeah, the impact there, the reason we did not increase the total revenue growth is the impact of the FindLaw divestiture. Normally, we've had this year about a 50% - 50 basis point delta. But with the pending close of FindLaw, we factored that in, Manav, and that's why we did not increase the total revenue growth percentage. It's the FindLaw divestiture. Vince Valentini: Thank you very much. Can I start with a clarification. The 15% ACV, is that just on Big 3 recurring revenue? Or does it include news and print? Does it include transaction revenue? Mike Eastwood: That's on the Big 3, Vince. Thanks for the clarification points there. Basically, think of that underlying ACV correlated Big 3 recognized recurring revenue, so Big 3, Vince. Vince Valentini: Thank you. And a question, I mean, there's not much to criticize in what you guys are doing. It's obviously great execution. But if I can nitpick a little, I mean, FindLaw it looks like you're getting four times EBITDA for it. I mean you can't do any better than that with the assets you're looking to sell? Should we expect other noncore stuff to be that low on the divestiture price? And if it's that cheap one, why not just keep it? It's not really hurting you, is it? Mike Eastwood: Vince, there are multiple things to consider certainly the financial lens that you just applied, but the additional lens that I don't think is reflected in your comment is in regards to the leadership focus or as I think about the management time that's required. Similar to last year when we acquired Elite, FindLaw requires a significant amount of outsized management time and bandwidth. So when you think about the opportunity cost, what it takes to lead FindLaw versus some of the other opportunities, we have to balance the financial metrics that you just mentioned, which are obviously important with the bandwidth that it requires. So that was certainly a factor. An additional factor, Vince, similar to Elite, FindLaw is a little different than the core Legal Professionals business, meaning if you think about legal professionals, we're helping lawyers practice more effectively, and that's outside the scope. Last point, and Steve may want to supplement with FindLaw, we have additional industry dynamics, more cyclical, more macro there. But I would just double down and emphasize Vince, the amount of management time that FindLaw was requiring. Steve? Steve Hasker: Yeah. The only thing I'd add is, I think, Vince, over the last 12 months, we have sharpened and I think enhanced our strategy as it pertains to serving law firms and in-house lawyers, court systems, attorneys general and so forth. And a lot of that, not all of that, but a lot of that is around this GenAI opportunity. And that has focused the mind. We also see significant international growth opportunities for our legal professionals and corporate legal business. And with that as the backdrop, the time spent navigating Google (NASDAQ:GOOGL) algorithm changes and the disruptive impacts of GenAI on this lead generation business that is for small law firms that is FindLaw. We just felt that, that distraction was starting to far and away outweigh the size and benefit of holding on to that business, which is why we did the deal that we did. Kevin McVeigh: Great. Thanks so much. I just wanted to just clarify that the $200 million of GenAI investment up from $100 million, is that all kind of reflected in the P&L, the incremental 100? And I guess, where is the offset? I mean you're seeing some pretty good momentum on the license sales, things like that. But just - is that all - it sounds like '24. Again, just maybe help us understand that a little bit because I think it was a critical part to the story. Mike Eastwood: Sure, Kevin, let me break that down into multiple pieces. Certainly, for calendar year '23, it was slightly over $100 million. When we referenced the $200 million, that includes both operating expense and capital expenditure. It does not include any cost of acquisition. So that's strict within our core operating P&L and underlying CapEx. So that $200 million, Kevin, does reflect the amount. If you go back 20 months ago, when GenAI really began to accelerate, we earmarked X amount for it. Then when we acquired Casetext in August of 2023, that certainly added additional amounts to our run rates, both OpEx and CapEx. And as we began 2024 we were very purposeful and intentional as we set our 2024 management plan to make additional investments, OpEx and CapEx and GenAI. So it's really a culmination, Kevin, of OpEx, CapEx evolution, which is all factored into our operating expense and capital. Directionally, it's about half and half if you think about OpEx and capital directionally, Kevin, does that help? Happy to go deeper. Kevin McVeigh: No, that's super helpful. And Mike, that would be the same split as the $100 million goes up to $200 million, it's the same split in terms of OpEx as opposed to CapEx? Mike Eastwood: Directionally, certainly, in a given quarter, you're going to have a little bit of ebb and flow. But if you look at it on an annualized basis, that's roughly 50-50, Kevin. Kevin McVeigh: Got it. And then just real quick, especially relative to Investor Day, it feels like the organic growth in the Big 3 is accelerating kind of even faster than what we would have thought. Is that the kind of pacing of the GenAI? And just maybe is that retention starting to improve? Just any thoughts around the broad strokes there on the organic growth? Mike Eastwood: It's a very fair question, Kevin. If you go back to February when we set guidance and then expanded out in March Investor Day, three things have evolved over the time horizon. First is the Corporate segment, about 4 to 5 basis points stronger than we had anticipated, Kevin, at the beginning of the year. Huge credit to Laura Clay McDonnell, President of Corporate segment and her leadership team. Execution has been phenomenal. As a reminder, 7% organic growth in calendar year '23, be over 9% this year. Second item that's contributed is Tax & Accounting and Professional. Obviously, 9.5% last year. We're probably looking at 10.5% this year, about 20 basis points stronger than we anticipated in Tax & Accounting. And then the third vector, Kevin, is Reuters GenAI. We certainly did not anticipate the incremental GenAI. We had baked in the plan the $25 million in Q1 that we were very transparent about, but the most recent GenAI content licensing deal was accretive. So in summary, Corporate is about 45 basis points, Tax & Accounting, 20 basis points; and Reuters GenAI, about 20 basis points, Kevin. Kevin McVeigh: Super helpful. Thank you. Operator: Our next question comes from the line of Aravinda Galappatthige from Canaccord Genuity. Aravinda Galappatthige: Good morning. Thanks for taking my questions. Just a quick, I guess, a housekeeping question before the main one. With respect to corporate costs, I mean, it does look like you're tracking below the guide meaningfully when I look at the 9-month numbers. Is there anything we should sort of consider when you look at Q4 there? Mike Eastwood: No, Aravinda, it's a very fair question. There is a little bit of variability or seasonality with our corporate costs. If you just annualize through year-to-date 9 months, it would appear that we're going to be below our guidance. I believe, Aravinda, we're going to be spot on at least the lower end of our corporate costs just due to, I'll call it, seasonality that we're expecting in Q4, have good visibility into that, Aravinda. So I think we'll be within the range that we have provided, but a very fair question. Aravinda Galappatthige: Okay. Great. And then maybe just going back to the $200 million in spend. Obviously, you have the space to continue to invest and sort of the encouragement from the results you're seeing so far. But the 75 basis point margin expansion that you've originally guided for 2025, does that sort of envisage this $200 million level, recognizing, of course, only half of that is OpEx? Or can that - is there more room to grow that within that margin guide? I just wanted some color on that. Thank you. Mike Eastwood: Yeah. A couple of points. I would just add clarity, as I referenced in my prepared remarks, if you look at 2025, we committed to 75 basis points of margin expansion, which we've reaffirmed today. That means that we'll be able to absorb this $200 million of GenAI, the portion that's OpEx. Also, as I mentioned in the prepared remarks, we'll be able to absorb the dilution from the Safe Sign acquisition and the Materia acquisition. One item to consider, Aravinda, is we go - historically, I've talked about 75 basis points of natural operating leverage at 6% organic growth. If you go up to 7% organic growth, that natural operating leverage increases from 75 basis points to slightly over 100. So when you look at that decision in regards to margin expansion versus reinvestment, that incremental operating leverage now that we're at 7% kind of affords us that optionality, but we are comfortable absorbing the GenAI at the 200 in addition to the acquisitions that we mentioned today. Andrew Steinerman: Hi, Steve. You know, as law firms have embraced Thomson Reuters GenAI-enabled products, have you seen law firms change any of their intentions around hirings and/or practices around value billing? Steve Hasker: Andrew, the short answer is not yet. There are very active conversations going on amongst law firm partnerships, amongst the partners as to, firstly, what happens to the per hour billing and how much of the efficiencies will be shared with customers. So that's sort of an active conversation both within the partnerships themselves and with the general counsels that they serve. There's also active conversations around how much they spend and what sort of in-house data analytics, data science, technology talent they need. And so I think we're starting to see law firms resolve they're going to spend a bit more on technology and then try to figure out sort of where that funding and investment is going to come from as they think about their people spend and their real estate spend. A number of law firms in that, you know, through the middle of this year sort of said, okay, we're thinking about holding the number of new graduates that we hire or perhaps even reducing that number as we go forward in the next few years. But I think it's too early to tell as to sort of exactly how this is going to play out across the large, medium and small firms. We're obviously every single day in conversation and providing support and monitoring those conversations and they're occurring, and I think they're healthy, but it is early in the context of that broader transformational change. Maher Yaghi: Great. Thank you for taking my question. Just my first one relates to your NCIB program. I noticed that you did not buy any stocks during the Q3 because you exhausted your NCIB back in Q2. As we stand today, your leverage is very healthy at 0.5 times. What are your plans in terms of returning capital to shareholders here with another potential NCIB program? And if so, should we expect a similar size to 2023 or the formulaic requirements allow you this year to buy more than the $10 million of last year? The second question is on Casetext. So with 1 year now under your belt, can you update us on the performance that you have been able to achieve on net assets since you closed the transaction? Maybe if you can provide some metrics on revenues or amplification implications to existing products, i.e., is it delivering on your expectations and returns expectations? Thank you. Mike Eastwood: Maher, I'll take the first one in regards to NCIB. I think we foreshadowed on the August earnings call not to expect any NCIB or share buyback in Q3 or Q4. And that's really driven by the current interest rate environment. Certainly, we have seen a decline in interest rates. But at the current interest rates, based on our calculations and assessment, we're still slightly dilutive. So I would not expect any share buybacks or NCIB in Q3, Q4. As you go into calendar year 2025, we remain very open to considering NCIB or share buybacks, but the timing will be directly correlated to the interest rate cuts and interest rate environment. In regards to size, we certainly have optionality given our $10 billion worth of capital capacity. We'll discuss - if we decide to move forward with an NCIB, we'll certainly discuss with our Board. But given at the beginning of 2024, we committed to a 75% capital return over the time horizon. If you look at just our dividends, our dividends gets about 50% to 55%. So mathematically, we would need on an annualized basis, about $500 million of an NCIB in calendar year 2025 to hit that 75% capital return guidance that we provided earlier this year. So to summarize, we do not anticipate any NCIB in Q4. The timing in 2025 will be based on interest rate environment and then the size will be based on a multitude of factors considering including the timing of potential strategic M&A. Steve Hasker: And then, Maher, it's Steve. On Casetext, we don't provide sort of product-by-product revenue guidance for something like Casetext. But unequivocally, from my point of view, this one is on or ahead of track relative to the acquisition case we made and the price we paid. And there's a few reasons for that. The first is we're seeing really good growth in the core CoCounsel product in the United States. And of course, we put out CoCounsel 2.0, and we're excited about some of the enhanced features and functionality I mentioned in my prepared remarks. Secondly, CoCounsel is a vehicle through which we plan to explore international growth in the legal field in a way that perhaps we haven't in the past given the association of research with a common law rather than civil law markets. And then thirdly, we've extended CoCounsel to Checkpoint with Checkpoint with CoCounsel and also most recently under the leadership of Ray Grove, one of our product executives, into our ONESOURCE suite. And so not only is it sort of within that core legal franchise, we're seeing real applications and I think excitement from customers beyond that. And of course, the Materia acquisition, we think, is additive here and will be an accelerant to that extension of the core AI assistant capabilities. So in summary, we're excited about what Casetext has brought to TR, and we're equally or even more excited about what the next few years will hold for that set of capabilities and the impact it will have on our customers. Toni Kaplan: Thank you. I wanted to go back to the FindLaw sale. And I definitely understand the growth challenges you've been having there and unnecessary focus that you're paying to it. Just wondering if the sale also represents a shift in strategy with regard to small law firms. Is there less of a focus there? Or was just this was not the right product to be selling to them and you're better off selling the AI products? Thanks. Steve Hasker: Yeah. Toni, it does not represent a shift away from small law firms. We are excited about that segment under the leadership of Aaron Rademacher. He is doing - he and his team are doing a great job. And specifically, what we have seen is an interesting shift, which is as we've brought to market some of these brand-new features and functionality around GenAI, we've seen the very smallest of our law firm customers pick them up as quickly as the global large law firms. And I think historically, that was not the case. It was the large law firms with very sophisticated teams, research and knowledge teams and budgets that would be first in adopting these products and the smaller firms were much further down the line. We've seen a pretty equal balance. So no, very excited about the small law firm segment and Aaron's (NYSE:AAN) leadership thereof. And the reason for the divestiture of FindLaw, as I said before, our strategy has sharpened, and FindLaw was just not part of it, and we felt it was an increasing distraction. Mike Eastwood: Toni, I would just supplement. Small law firm is over 25% of our legal revenues. Hopefully, that amplifies the importance of small law that Aaron leads for us. Toni Kaplan: Very helpful. I was also hoping you could give us an update on your thoughts around how you're pricing the CoCounsel product, if there's been any changes to that and how you think about pricing it across different customer types. Steve Hasker: Yeah. I mean, without giving too much away, Toni, we've been in test and learn mode, I think, since we acquired CoCounsel. This is a dynamic market with a brand-new proposition to a set of existing and prospective customers. So there has been a degree of sort of testing and iterating. What I would say is we price to value, firstly. Secondly, we prefer enterprise-wide pricing rather than per seat. We've never gone down that path, and we don't plan to start. And we're always very mindful of covering - more than covering the variable cost components associated with pinging large language models, which is obviously a relatively new dynamic for us. So I would say so far, so good on the pricing front. We're pleased with what we see in terms of that pricing to value component, and we'll just stay diligent and continue to be flexible as we see the market evolve. Anything to add on that, Mike? Drew McReynolds: Yeah. Thanks very much. Good morning. And hopped on late, so hopefully not repetitive here. I did hear an earlier question, Mike, on the organic revenue growth guidance increment where you broke it down in terms of the three components. So super helpful there. Bigger picture, when we kind of look at the 7% guided growth for 2024 and then acceleration in 2025, we're kind of firmly into high single digits here, which I think for long-standing Thompson followers is great to see. At that high level, can you just kind of update us on whether the components or drivers of that growth have changed with respect to price. Obviously, TAM expansion you talked at your March Investor Day, market share, how much of this is asset mix evolution, et cetera, just again, at a high level? And then second, maybe for you, Steve, on the Agentic AI acquisition with Materia, fascinated from my perspective on kind of the next-generation capability here on the agency side. Can you kind of give us a sense of what additional capabilities that acquisition brings you? Thank you. Mike Eastwood: Yes, Drew, on the first one in regards to the 7% and is driving that. First, in regards to pricing, pricing today is very consistent with what we expected and forecasted at the beginning of the year. I think we've consistently stated about 3.5% price lift on a year-over-year basis if you do like-for-like, if you look across all of our total TR, it certainly varies by segment and subsegment there. If you look at the convergence of factors, we're certainly doing better on new sales, new logos, cross-sell, upsell, certainly helping. I think the one item, if you dissect the kind of some of the parts for TR is the Corporates, which I mentioned earlier in the call, 7% organic growth last year and approaching probably 9.5% this year. That's been a key factor for us. And I think that's largely the sales execution that we referenced earlier on this call and on prior calls there. So we've seen good execution sales-wise by Corporates throughout calendar year '24. So if I were to isolate one item, that would be it. The second one, which I've referenced is on the Reuter side, the GenAI content licensing deal, that's certainly helping us in Q3. But pricing is very consistent, Drew. Retention, just slightly higher. It's incremental. I think Kevin asked a related question earlier. We have not seen a significant uptick yet in retention. We remain optimistic there, but it was just a small incremental increase thus far this year. And then, Steve, on the Agentic. Steve Hasker: Yeah, Drew, firstly, congrats on the 332 New York City Marathon. That's an extraordinary achievement. And then as it pertains to Materia and the Agentic capabilities that Kevin and Lucas and the team there have built, we're pretty excited about this one for a few reasons. The first is, obviously, in layman's terms, what the Agentic capabilities enable the Materia to do is perform in sequence and in parallel multiple related tasks and then be able to bring them together to provide answers to more sophisticated questions and problems. And what Kevin and Lucas did from day 1 was built their set of capabilities around Agentic models. So that's sort of been the heritage and starting point for that capability. And that was one of the reasons we were really intrigued. The second reason is they they've dedicated their time to Tax & Accounting and Audit. And as we think about Elizabeth Beastrom's teams and all the activities that are going on there and the work that Dave Wyle is doing in leading our audit capabilities, we are very excited about taking that capability starting this week at our Synergy customer conference in Orlando to our customers. And then last but not least, the other thing the Materia team did was, we think, in a very unique way, put together the ability to interrogate and integrate customers' documents. And that, of course, sets these capabilities on a whole new sort of path to value creation. And that's something that our Head of Engineering, Joel Hron, has been focused on for a period of time. And so when he was able to get to know Kevin and Lucas and understand the capabilities, I think our excitement grew here. So it's early days for this one. But starting this week in Orlando, we're excited about the journey. George Tong: Hi. Thanks. Good morning. The Legal business has seen 7% organic revenue growth for several quarters now. Can you talk about when you expect Legal organic growth to accelerate and what the top drivers will be? Mike Eastwood: Certainly, George. Certainly, Q3 Legal Professionals was consistent or stable with Q2 performance slightly over 7% rounding to 7% there. However, if you look at a longer time horizon over the last 12 to 18 months, there's been a meaningful step-up in the Legal Professionals organic growth rate driven by Westlaw Precision and also the GenAI launches that we discussed there. We did see a slight uptick in the recurring revenue in Q3. We had a downtick in the transactional revenue. I mentioned government was 6%. Some of that transactional relates to government there. So you have the correlation. If you look at Q4 '24 and calendar year '25, we do anticipate a modest improvement as we go forward we'll price there. We touched on here the CoCounsel. Certainly, we're optimistic there. Westlaw, we still have more room on the Westlaw Precision penetration that we've discussed in prior quarters there. So a very solid 7% and we anticipate modest improvements as we go forward, George. Steve Hasker: Yeah. Just to add to that, George, I would say we talked at Investor Day about potentially the potential for our TAM to expand on the back of GenAI and its ability to enable us to play a larger role in the success of our customers. Everything we've seen since March 12 supports that. But the other thing we said on Investor Day was this will require a degree of change management within and across the law firms. And it was really central to Andrew Steinerman's earlier question. That process is underway. We will play a role in supporting our customers through that transformation, but we're not the sole determinant. And so we're focused on the long-term growth opportunity and expansion of the role we play with and for the profession rather than the quarter-to-quarter. We'll keep ourselves accountable quarter-to-quarter, but we're laser-focused on that longer-term expansion. And we're not going to do anything in the short term that compromises our ability to meet or exceed our customers' interest in pursuit of that. George Tong: Got it. That's helpful. And then you touched a little bit about your pricing philosophy with CoCounsel. Can you discuss how you plan to monetize GenAI more broadly across the segments, given the step-up in investments, how much of a pricing or revenue uplift in return do you expect from GenAI? Steve Hasker: I think it's - we've obviously talked about this percent of ACV that has a GenAI component, and we'll keep you apprised of that, George. I think it's a bit early to sort of say here are the direct through lines between the GenAI capabilities and explicit pockets of revenue. We've seen good growth of Westlaw Precision since we put the AI functionality in the marketplace, same with Practical Law, same with Checkpoint, as Mike talked about, CoCounsel. So all of that points, I think, to a positive outcome. But the focus, as I said, is on ensuring that these capabilities are to the benefit of our customers. And that's what we're focused on. That's what we're starting to see. And as long as we stay focused on that, I think you'll see our growth rates expand as we believe they will. Doug Arthur: Yeah. Thanks. Hey, Steve, just on Reuters News, you made an interesting comment that some of the AI modeling, or Atal [ph] is becoming recurring in nature. Does that sort of change your outlook for that business on an intermediate-term basis? Steve Hasker: Thanks for the question, Doug. No, it doesn't because you got - bear in mind that half or more than half of the revenues of Reuters News relates to the 30-year news agreement with the Data & Analytics side of the London Stock Exchange Group. So there's a fair bit of weight of that business there, and we believe that's a real strength of the business and our ability to do a better and better job of serving LSEG is a laser and primary focus of Paul Bascobert, Alessandra Galloni and the team. The - we've obviously benefited in the fourth quarter and through this year from these deals. As I said earlier, I think it's too early to tell as to sort of what the longer-term run rate, recurring run rate will look on these deals. We're pretty optimistic. We're focused on ensuring that the customers see value and are incented to expand and renew those over time. But as I said earlier, Doug, I think it's a bit early to tell. And of course, the agency side of the business, the new subscription, the event side of the business all bring some variability. So we're sort of optimistic and I think growing in confidence, but it really is early in this journey. Sami Kassab: Thank you very much. And good morning, everyone. I'm trying to put some context around the 15% share of ACV from GenAI-enabled products. Now given the relative contract lengths across the Big 3, I am tempted to think that every year, renewals from the Legal Professionals division probably accounts for around 15% to 20% of total Big 3 ACV. And therefore, given that most of the GenAI revenues sit in the Legal Professionals, am I right to conclude that it means over the last 12 months or so, pretty much every single law firm that had to renew decided to trade up to a GenAI product. Would that be a fair statement? Or if not, then could you comment on the share of renewals in Legal that trades up to GenAI? Thank you, Steve. Steve Hasker: Yeah. Sami, I'll start. Certainly, we've been sharing the ACV penetration for the Westlaw Precision product. I think we're around 37% there. As you'll remember, with Westlaw Edge, the previous version, earlier version of Westlaw, we reached around 75%, I think, was the last percentage that we applied. So it's difficult to provide a direct correlation to your question there, Sami. I would say, certainly, as contracts come up for renewal, we have a very strong hit rate in regards to customers adopting the Westlaw Precision that's GenAI enabled. I think that's probably as much specifics as we could provide today. Gary Bisbee: Ruth, I think that brings us to the end of the Q&A session. So thanks, everybody, for your interest and attention. Thank you. Operator: Thank you. This does conclude today's conference call. Thank you for your participation. You may now disconnect.

Confluent (CFLT) Q3 2024 Earnings Call Transcript | The Motley Fool

Welcome to the Confluent third quarter 2024 earnings conference call. I'm Shane Xie from investor relations, and I'm joined by Jay Kreps, co-founder and CEO; and Rohan Sivaram, CFO. During today's call, management will make forward-looking statements regarding our business, operations, sales strategy, market and product positioning, financial performance, and future prospects, including statements regarding our financial guidance for the fiscal fourth quarter of 2024 and fiscal year 2024. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated by these statements. Further information on risk factors that could cause actual results to differ is included in our most recent Form 10-Q filed with the SEC. We assume no obligation to update these statements after today's call, except as required by law. Unless stated otherwise, certain financial measures used on today's call are expressed on a non-GAAP basis, and all comparisons are made on a year-over-year basis. We use these non-GAAP financial measures internally to facilitate analysis of our financial and business trends and for internal planning and forecasting purposes. These non-GAAP financial measures have limitations and should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. A reconciliation between these GAAP and non-GAAP financial measures is included in our earnings press release and supplemental financials, which can be found on our IR website at investors.confluent.io. And finally, we will post the Confluent earnings report to our IR website after our prepared remarks. And with that, I'll turn the call over to Jay. Jay Kreps -- Co-Founder and Chief Executive Officer Thanks, Shane. Good afternoon, everyone. Welcome to our third-quarter earnings call. Subscription revenue grew 27% to $240 million. Confluent Cloud revenue grew 42% to $130 million and non-GAAP operating margin expanded approximately 12 percentage points to 6.3%. And I'm proud to report that total revenue grew 25% to $250 million, surpassing a $1 billion revenue run rate in just 10 years since Confluent was founded. In Q3, we hosted Current 2024, the only industry event fully dedicated to all things data streaming. More than 4,200 people from 1,200 companies participated, making it our biggest and best current yet. Data leaders from Mercedes-Benz R&D North America, Viacom 18, and Accenture joined me on the keynote stage to discuss how Confluent sits at the heart of their companies, allowing them to push the boundaries of what's possible for their customers. And some of the most popular sessions focused on how companies leverage data streaming to power transformative AI use cases like creating customer chatbots, building AI and ML pipelines to detect fraud, and delivering hyper-personalized AI customer experiences. We continue to see excitement, interest, and use cases around GenAI growing across our customers and in the ecosystem of AI solutions providers. Last week, we hosted our first Confluent AI Day, a one-day event designed to help our customers advance ideas into fully built AI applications. In partnership with AWS and MongoDB, we brought together hundreds of attendees from companies like Google, PNC Bank, Whirlpool, and Rocket Mortgage, who joined expert discussions, interactive sessions, and an exciting AI hackathon. At the event, we launched the Confluent for Start-ups AI Accelerator program. This exciting new program is about empowering early stage AI companies with the tools and mentorship they need to lead in the world of generative AI. Confluent for Start-ups AI Accelerator program provides start-ups with early access to Confluent's latest AI tools, expert mentorship, and product credits from Confluent, MongoDB, and Anthropic. We're committed to helping these start-ups create new breakthroughs in real-time AI. We spoke about our relationship with OpenAI during the Q4 2023 earnings call when we discussed how OpenAI's team uses Confluent to deliver real-time data streams. I'm happy to report that OpenAI has expanded their use of our data streaming platform to help scale with the increased usage of their platform. The momentum and growth further validate the strategic role of data streaming in the generative AI landscape. Last quarter, we also celebrated our 10th anniversary as a company. When we started Confluent 10 years ago, data streaming was just emerging as a nascent paradigm. What started with a small group of companies like LinkedIn, Uber, and Netflix, disrupting the status quo with real-time data streams has turned into a movement. Today, more than 40% of the Fortune 500 rely on Confluent to set their data in motion. We serve customers broadly across industries, including 10 of the 10 top U.S. banks, eight of the top eight global carmakers, and nine of the top 10 U.S. insurance companies. We see significant expansion opportunities across our customer base as we expand from individual use cases to the central nervous system for real-time data. Our growth in capturing this opportunity has gone through two distinct waves and is now entering a third. The first of these waves was built directly on the back of the open-source traction and was about commercializing that with our software offering, Confluent Platform. That provided the bulk of our business in the first five years of Confluent's growth. However, we knew that for the long-term platform we wanted to build and to capture the bulk of the opportunity around streaming, we needed to make streaming far, far easier to consume. This spurred the early investment into what fueled our second wave of growth, Confluent Cloud. Indeed, even when we went public three years ago, our cloud business was a small percentage of our revenue, and we were in the early stages of taking our cloud business to scale. That being said, we strongly believe that the secular shift to cloud would present a meaningful long-term driver of growth. I'm proud that our team has successfully executed on our cloud vision, and Confluent Cloud is now more than 50% of total revenue and continues to outpace our Confluent Platform business. At the same time, cloud is our most frictionless path to monetizing the thousands of organizations using open-source Kafka. But with 150,000 organizations using Kafka, we're just getting started. Already, our cloud product comprises over 90% of our customers, demonstrating its broad appeal as we continue to grow into this space of open-source usage. These first two waves aren't done. We continue to work to serve the broad base of Kafka users through compelling pricing and packaging optimizations for Confluent Cloud and Confluent Platform. Our differentiated cluster types like enterprise and freight enable us to deliver data streaming offerings for all customers and workloads with low TCO and strong ROI. Our recent acquisition of WarpStream adds a third deployment mechanism of BYOC to this portfolio. WarpStream's Bring Your Own Cloud model offers a deployment model midway between fully managed and self-managed and opens up opportunities in a set of high-volume, high-tech customers that form a good chunk of our digital native customer base. WarpStream is BYOC done right, built directly on top of object storage. WarpStream's zero disk architecture enables zero ops auto-scaling while making it five to 10x cheaper than other alternative systems. And unlike traditional BYOE offerings, WarpStream prioritizes security by avoiding break-glass access to customer networks and systems. Confluent is now the only company with a data streaming offering for everyone, regardless of use case, cloud environment, or deployment type. Kafka is the foundational layer of our data streaming platform and could sustain our business for many years on its own, but it only represents a portion of the opportunity ahead of us. We believe our third wave of growth comes from being a complete data streaming platform, a one-stop shop for all real-time data needs. To do this, we are bringing together the key capabilities to stream, connect, process, and govern continuously flowing streams of data so organizations can power their next-generation real-time applications. Over the course of the past year, we have been on our most aggressive pursuit of our vision since we started the company, and that is starting to yield strong traction. Major new product and pricing innovations like Flink, TableFlow, freight clusters, AI model inference, and new connectors will extend our already significant category lead. And we continue to see strong traction across our customer base. Our DSP portfolio continues to grow substantially faster than overall cloud revenue. One of the areas we're most excited about is the opportunity around stream processing at Apache Flink. Let me share two examples of how customers are using Flink on Confluent Cloud and Confluent Platform. One of the largest private companies in the U.S., a Midwest grocery chain with over $20 billion in revenue is using Confluent's fully managed Flink offering to accelerate the growth of its e-commerce business, a critical driver of the company's revenue. This retailer had already overhauled its e-commerce solution with Confluent Cloud and wanted to integrate stream processing for all the Kafka topics that had built inside its digital environment, including pricing, promotions, and inventory details without any lag in production. So, the retailer implemented Confluent Cloud for Apache Flink to combine and enrich streams of data flowing across hundreds of retail stores, its website and mobile app, and third-party fulfillment partners like Instacart. This data spans more than 100,000 product SKUs and tens of millions of orders. With our Flink offering, this retailer's real-time inventory and pricing are accurate and customized to each local market so the company can consistently deliver a trustworthy and personalized shopping experience to its customers. Since working with Confluent, it has grown its e-commerce business by 700% and can stay a step ahead of the national grocery chains it competes with every day. A Fortune 50 telecom company in the U.S. and a Confluent Platform customer is using our offering for real-time analytics. Initially, the telecom provider used an alternative stream processing tool, which struggled to meet the demands of real-time data processing. This affected how the telecom's enterprise customers could serve consumers and led to higher churn. So, the telecom provider deployed Confluent Platform for Apache Flink, shifting processing to the left and rolling out thousands of Flink instances across its infrastructure to run real-time analytics on data earlier in the data pipeline before it moves downstream. Flink processes and analyzes data such as network performance to help its customers deliver consistent personalized experiences to consumers and network visibility for threat detection. By using Confluent Platform's Flink offering and tapping into our team of Flink experts, the telecom provider has saved tens of millions of dollars and significantly reduced churn, boosting its overall margins. In closing, I'm pleased with our strong third-quarter results, and I'm incredibly excited about the opportunity ahead of us. I'm even more excited for the next 10 years. We're in a prime position to win the $60 billion data streaming category. With that, I'll turn things over to Rohan to walk through the financials. Rohan Sivaram -- Chief Financial Officer Thanks, Jay. Good afternoon, everyone. In Q3, we drove robust top-line growth, record gross margin, and another positive quarter for both non-GAAP operating margin and free cash flow margin. These results demonstrate our market leadership in data streaming and our commitment to driving efficient growth over the long term. Q3 subscription revenue grew 27% to $239.9 million, exceeding the high end of our guidance and representing 96% of total revenue. Confluent Platform revenue grew 13% to $110.1 million and accounted for 46% of subscription revenue. The strength was driven by healthy demand for Confluent Platform in the financial services industry. We serve 10 of the top 10 U.S. banks with an average ARR of greater than $5 million. The substantial majority of their ARR is attributed to Confluent Platform as these banks are still early in their move to the cloud. Confluent Cloud revenue grew 42% to $129.8 million and accounted for 54% of subscription revenue compared to 48% a year ago. We saw consumption stabilization in our digital native customer cohort during the quarter. While they remain cost-conscious, we were pleased with the consumption growth trajectory of our largest cloud customers, many of whom are shifting their focus to implementing new use cases and adopting our DSP products. Q3 cloud revenue also saw a one-time low-seven-figure revenue benefit. Adjusted for this benefit, we still handily exceeded consensus expectations. Revenue from DSP continued to grow substantially faster than our overall cloud revenue. While monetization remains in its early days, we are pleased with the adoption of new products by our large cloud customers. Nineteen of our top 20 cloud customers have adopted at least one DSP product and 13 have adopted products across all three categories. Additionally, multiproduct customers continue to grow at a faster clip and exhibited a much higher NRR profile. Turning to geographic mix of total revenue. Revenue from the U.S. grew 28% to $152.4 million. Revenue from outside the U.S. grew 21% to $97.8 million. Moving on to rest of the income statement. I'll be referring to non-GAAP results unless stated otherwise. Subscription gross margin reached a new record of 82.2%, up 210 basis points, while total gross margin also reached a record high of 79%, well above our long-term target. Our gross margin outperformance continued to be driven by strong Confluent Platform margin and the improving unit economics of our Confluent Cloud offering. Turning to profitability and cash flow. Operating margin expanded approximately 12 percentage points to a record high of 6.3%, representing our ninth consecutive quarter of nine points or more in margin improvement. Free cash flow margin of 3.7% was also a record, expanding 10 percentage points. This marks our third positive quarter for both operating and free cash flow margins and reflects our team's track record of driving margin expansions at scale. Net income per share was $0.10 for Q3 using 353.6 million diluted weighted average shares outstanding. Fully diluted share count under the treasury stock method was approximately 366.8 million. And we ended the third quarter with $1.86 billion in cash, cash equivalents, and marketable securities. During the quarter, we acquired WarpStream to further differentiate our data streaming platform to include the BYOC native form factor. WarpStream is particularly well suited for digital natives and high-scale workloads with relaxed latency requirements such as logging, observability, and feeding data lakes. In fiscal year '24, we do not expect WarpStream acquisition to have a material impact on our financials. Over time, we expect WarpStream to be a growth driver as it expands our reach into more workloads across customer segments. Turning now to other business metrics. During the third quarter, we saw a notable increase in overall win rates for new business, both year over year and sequentially. Our win rates against smaller start-ups were well above 90% as we compete favorably with our cloud-native complete and ubiquitous platform. This translated to sustained momentum in new logo acquisition and customer expansions. Total customer count growth accelerated to 16% and ended Q3 at approximately 5,680, representing a sequential add of 240 customers, 3x the sequential add of the year-ago quarter. New customers include a top three U.S. airline company, a Fortune 50 carmaker, one of the largest online meal kit providers, a leading lifestyle retailer, one of the world's largest online furniture companies, and many more. The network effects of our data streaming platform continues to take hold in our large customer base. We added 40 customers with $100,000-plus in ARR and seven customers in $1 million plus in ARR, bringing the total to 1,346 and 184, respectively. Our $100,000-plus ARR customers continue to represent more than 85% of our revenue. Our new $1 million-plus ARR customers include customers from a variety of industries, including healthcare, travel and retail, technology, financial services, and more. Q3 NRR was 117%, while GRR remained above 90%. We saw many of our large digital native customers shifting their focus from cost optimization to new use case implementation and adopting DSP products. This trend has continued into October, which we believe will help stabilize our NRR around current levels in Q4. Turning now to guidance. We are increasing our Q4 revenue outlook in addition to raising full-year subscription revenue, non-GAAP operating margin, non-GAAP EPS, and free cash flow margin. For the fourth quarter of 2024, we expect subscription revenue to be in the range of $245 million to $246 million, representing growth of approximately 21% non-GAAP operating margin to be approximately 2%, and non-GAAP net income per diluted share to be $0.05. For full-year 2024, we are raising subscription revenue to be in the range of $916.5 million to $917.5 million, representing growth of approximately 26% non-GAAP operating margin to be approximately 2% non-GAAP net income per diluted share to be $0.25 and free cash flow margin to be between 0% to 1%. Looking back at the last 10 years as a company, we have established data streaming as a major category in the tech stack. As the data streaming pioneer, we have continued to extend our market leadership by delivering world-class innovation and business outcomes for our customers. This has enabled our growth and profitability journey at scale. We exceeded $1 billion revenue run rate in just 10 years since inception, including growing Confluent Cloud revenue run rate from less than $50 million to more than $0.5 billion in just four years. We serve 5,680 great customers, including more than 40% of the Fortune 500 across a variety of industries. We sustained positive non-GAAP profitability metrics in Q3 with 79% total gross margin well above our long-term target threshold. 6.3% operating margin, now within the range of our midterm target and free cash flow generation at a record margin of 3.7%. And for the first time in Confluent's history, we expect to exit 2024 with positive non-GAAP operating margin and positive free cash flow margin for the full year. These are fantastic milestones for a 10-year-old company. I'd like to thank our employees and partners for your important contributions and our customers and investors for your continued support. Looking ahead, the intersection of cloud, data, and AI reinforces our vision of companies becoming software and AI. Harnessing the power of data streaming will be more critical than ever for companies to deliver differentiated products and services, ultimately driving their success in the AI era. The secular tailwind puts us in a stronger position to drive durable growth while generating significant free cash flow over a long runway. We are more excited than ever about capturing our market opportunity ahead. Before turning to Q&A, I would like to announce that we will host Investor Day 2025 in San Francisco on Thursday, March 6. Management will provide an update on driving profitable growth for the next few years. Please save the date. Now, Jay and I will take your questions. Shane Xie -- Investor Relations Thanks, Rohan. [Operator instructions] When selected for Q&A, we ask that you limit yourself to one question and one follow-up. And today, our first question will come from Sanjit Singh with Morgan Stanley, followed by RBC. Sanjit, please go ahead. Sanjit Singh -- Analyst Yeah. Thank you for taking the question, and congrats on a very solid Q3, particularly the revenue acceleration and the margin expansion that you're seeing year over year. So, Jay, I guess when we look at the past couple of quarters, there's been sort of fits and starts with the digital native group, and it looks like those stabilized. Are you at a point where you're starting to see more confidence from your digital native customers in terms of bringing on new use cases, getting past optimization? Or is it still kind of touch and go quarter by quarter? Jay Kreps -- Co-Founder and Chief Executive Officer Yeah. Look, I think each quarter is kind of a mixture of optimization activities and new use cases. I do feel like we felt like in conversation with the largest set of customers, they've kind of done the bulk of what they need to do in terms of larger changes in their environment. So, we did see better growth this quarter and feel that puts us on a good trajectory going forward. So, yes, I do think we feel pretty confident about that segment when we think about the year ahead. Sanjit Singh -- Analyst Thanks. And I really appreciate the two customer examples on Flink. As we look at kind of this stage of where Flink is, do these consumers sort of represent the early sort of beta customers that are now exploring these use cases? And where are we in terms of getting like the broader base to start to onboard in use cases in their environments? Jay Kreps -- Co-Founder and Chief Executive Officer Yeah. Yeah. Yeah, I think they're very representative. So, we've seen a ton of enthusiasm. We've had a bunch of product unlocks as we've released the private networking support across some of the clouds and getting it out to all of them. We've announced the programmatic support so you can write direct on Java and Python programs, and that will be going through EA and GA. And so, yes, we're starting to ramp of production use cases. And these are some of the early ones. It was nice that we've been able to land not just Confluent Cloud customers but also Confluent Platform Link customers, even though that product is still in limited availability and just going toward GA. And so, yes, we're actually seeing a ton of enthusiasm in the customer base, and we're really excited about where that takes us in the year ahead. We'll take our next question from Matt Hedberg with RBC, followed by JPMorgan. Matt Hedberg -- Analyst All right. Thanks, Shane. Congrats. I'll offer my congrats as well. Maybe as a follow-up to Sanjit's question, it was great to see the acceleration in cloud and the digitally native stabilized. I guess my question is on the go-to-market. You guys made some changes at the start of the year. It really looks like they're paying off in terms of the kind of the record customers that you guys keep adding. Can you talk a little bit more about that process? And maybe comment on the level of consumption that you're seeing. I know you're trying to land fast and then accelerate those, that consumption trend. But maybe talk about what those customers are looking like when they land. Jay Kreps -- Co-Founder and Chief Executive Officer Yeah. Yeah, I'm happy to do that. So, one of our goals this year, both in what we were doing with the sales team and sales compensation as well as on the product-led side of the building was to really broaden our reach into the large set of Open-source Kafka users and land more customers more quickly. And I think that's an ongoing journey. We've made a ton of progress this year. We're really pleased with that. I think we'll continue to work on that in the years ahead. We feel like, look, there's 150,000 organizations using Kafka. We want to go get them all. So, yes, the sales focus on these lands has been really important. It's both about numbers, but also about targeting. I think we're much more intentional about the customers we wanted to land with. We have this idea of the Confluent 2000, which are the highest propensity or potential accounts, and those are the ones that we're targeting on the sales side. On the product-led side, it will fluctuate. We try out different things to try and land more customers, but also track them through and making sure that we're getting to high ROI customers, not just landing university students with their projects, but really getting into the right companies. And so, that total customer count will fluctuate quarter to quarter as it has. But we do think we're on a better trajectory in terms of landing more customers at a faster pace. And then, of course, we follow these customers all the way through their adoption. Our goal was get into more customers earlier in the journey. We've definitely done that. We've now been able to see a lot of these companies kind of start that ramp toward production usage and expansion out into other use cases. And so, we feel pretty good about the overall trajectory of these organizations. So, that's definitely a positive factor heading into next year. Matt Hedberg -- Analyst That's great. Yeah. It feels like a lot of momentum on the expansion side, too. I guess, Jay, you mentioned in your prepared remarks, sort of seeing early GenAI demand. I think you mentioned some of those comments at current. Can you talk about, like, how that's actually showing up in customer conversations? Is it just translating to more consumption? Maybe a little bit more specifics on how you're kind of identifying that within your base. Jay Kreps -- Co-Founder and Chief Executive Officer Yeah. Yeah, absolutely. So, I mean, there's two impacts. One is kind of growth in the set of AI providers, right, OpenAI being an example of that. The second is a new set of use cases in the wider enterprise customer base. There, it's really about delivering data to these AI applications. And I think there's kind of two things happening. The initial thing is a set of use cases really around that. I think the larger push that this is leading companies toward is more thinking and investment in data infrastructure overall. All of this, I think, takes time. I know when I talked to investors, some people felt this is going to be like an immediate pop in every infrastructure layer. I think we were very upfront that we didn't think that would be the case. When I talk to people now, some people think, oh, these AI things are never going to materialize. I don't think that's the case either. There's something very real happening. There's definitely a set of use cases and applications in customers. Different customers move at different bases. The tech companies are faster. The more conservative enterprises are a bit slower. But there's definitely the rise of a new set of use cases around this. Great. We'll take our next question from Pinjalim Bora with JPMorgan, followed by Barclays. Pinjalim Bora -- Analyst Hey, thank you so much, and congrats on the quarter from me as well. Jay, I wanted to ask you on WarpStream. Talking to your channel, we kind of picked up a large opportunity unlocked by WarpStream, seems like. But I want to ask you in general, is that broadly true? Is WarpStream kind of starting to bring you into conversation, especially as it relates to migration of open-source Kafka? Jay Kreps -- Co-Founder and Chief Executive Officer Yeah. Yeah, absolutely. So, the reason we thought that this was appealing was there's a set of large users of open source where the wholesale migration to some fully managed cloud thing is actually a very big jump. And often hard to accomplish in one step, something like this that has a nice cost savings, keeps the team running it kind of in place, but it allows you to get kind of halfway there is really beneficial. And we think that this can help us open up some of these large digital native companies that have been on the open source for a while. In some cases, since before, Confluent the company even existed and start to bring them into the fold, and we're really excited about that. We've started to see some progress in some of those companies. These are big accounts, so it takes time to land them, but we're pretty confident in where that's going to take us in the year ahead. Pinjalim Bora -- Analyst Yeah. Understood. And one for Rohan. Rohan, the NRR seems like down-ticked a little bit, but your cloud kind of accelerated. So, I'm trying to reconcile the two, right? Was there a downtick and expansion from the long cloud portion, or were the core organic cloud trends a little bit lagging if you take out WarpStream? Rohan Sivaram -- Chief Financial Officer Yeah. Pinjalim, thanks for your question. Listen, when you really look at the results for Q3 and you look at the cloud results, we're actually very pleased with our cloud growth. We grew the business 42%, and it's a $0.5 billion run rate business. And when you double-click into the NRR dynamics of it, it is the health of the installed base continues to be very solid. Our GRR for the overall business is greater than 90%. And there are two drivers of performance that we called out in the -- especially on the cloud side for Q3. That was when you look at our digital native customer base, we saw stabilization in consumption. And second, for some of our larger cloud customers, we did see that these customers are taking up new use cases and adopting the DSP. Why is that important? That's important because these two trends have kind of moved into Q4. And that's why I made the comment around stabilization of NRR around the current levels. To your specific question, listen, I mean, it's very marginal. So, not a whole lot to call out there with respect to the move from 118 to 117. But what I'll call out is the couple of drivers that we are entering Q4 with gives us confidence around the stability of NRR around these current levels. Jay Kreps -- Co-Founder and Chief Executive Officer Yeah. And I'd just add, when you think about the trajectory the kind of longer-term trajectory, I think we feel really excited about the set of product investments. Like I mentioned this in the prepared remarks that this has probably been the most aggressive period of new product development and release over the last, say, year and a half in Confluent's history, more or less as expounded. And I think that's now kind of starting to come to fruition, and we're seeing really good signs in how that's being adopted with our customers. A lot of work to do. But when we think about that longer trajectory, I think that's a really solid driver for us of expansion in the customer base. the obvious use case for all of these is growing from just a pure Kafka usage in those customers to a broader platform that not only has more items you can spend on, but actually allows you to address a set of use cases that would have been inaccessible otherwise or too difficult. Shane Xie -- Investor Relations Our next question is from Raimo Lenschow with Barclays, followed by Deutsche. Raimo Lenschow -- Analyst Hey. Thank you. Congrats from me as well. Two questions. One for Jay. Jay, if you think about work stream, could that be actually a bigger opportunity for you guys? Because I remember when those guys started out, they were like, OK, we want to be even more modern Kafka or like be more on serverless, etc. Is that kind of, in theory, actually like a broader opportunity for you in terms of like using that more than where you are at the moment? And then the one for Rohan, like you called out the little bit of extra help you got this quarter in cloud. Can you kind of help us there a little bit because cloud in theory is like subscription, like how do you get that as a one-off thing? That would be helpful. Yeah. Yeah. Let me try and address that. So, the way I would say it is this. Open-source Kafka is a very good kind of open-source project. You can take it and download it and use it. What we look for is in each of these deployment models that we try and support, do we have the best possible product in that area? So, if we think about our self-managed customers, there's a set of things that they need. We've built an offering with Confluent Platform that's really good at that. When we look at a fully managed cloud offering, we put a ton of investment in Cora, which is the back end for that. It's an amazing piece of software. It's extremely sophisticated in making something that runs itself, balances data, expands elastically, all the really hard things in a full cloud service. When we looked at this kind of Bring Your Own Cloud opportunity, we thought, well, is there something there? We felt there was a segment of the customers that would be easier to access if we had an offering there. We looked at like, hey, should we take Confluent platform and try and turn it into that? Should we try and take Kora and try and push it into the customer's account in some way? The reality is neither of those would have been very good. Like we could do it, we could check the box, but it wouldn't really be a good product. What made us excited about WarpStream is they've actually done that in the right way. They actually had something that was designed from scratch for that deployment model. And that's kind of a deep enough architectural divide that I think you need to do it that way to have a really good product. And so, now we feel really good where we have something that is kind of best-in-class across each of these deployment models. And so, across customers, across customer use cases, across different parts of the company, we can now really span everything they want to do in the streaming world, kind of without hesitation or reservation. And I think that's a really powerful position to be in. And that's always been our goal with customers is make this something that's a ubiquitous technology across the business. Rohan Sivaram -- Chief Financial Officer I'll take the second part of Raimo's question. Raimo, as it pertains to the one-time revenue benefit, one of our existing customers had plans to basically expand into a new international market, which did not end up materializing. As a result, we took some revenue at the end of the quarter as unused credits. As we speak, this customer is a very strategic partner of ours, and we are working on multiple use cases with them. So, if you take a step back, and I know you commented on the Q3 performance, our Q3 performance, which was very solid, the underpinnings of that performance was, I'd say, twofold, primary drivers. The first one was the stabilization of the digital native segment. And the second one was some of our larger cloud customers actually adopting DSP and starting to look at net new use cases. So, this -- the third benefit, which you called out was one-time. But if you adjust it out, we still handily beat our consensus expectations. All right. We'll take our next question from Brad Zelnick with Deutsche Bank, followed by William Blair. Brad Zelnick -- Analyst Thanks very much, Shane, and good to see you all. It's great to hear all the excitement coming out of current and the improvements you're seeing in win rates. And I appreciate it takes time for wins to turn into revenue. But is it too early to be characterizing what you're seeing out there as perhaps green shoots? And how does it inform your early thinking about sales capacity as you gear up for next year? Jay Kreps -- Co-Founder and Chief Executive Officer Yeah. I can address some of those, and Rohan, you may want to address some as well. So, yes, we've definitely seen positive signs in the customer base. We don't typically draw that line too far forward. So, we don't try and make some kind of big pronouncement about IT spending next year. But yes, we've seen, I would say, stabilization and maybe some acceleration in investment in the digital native segment, which is, I think, very positive. We've seen continued expansion across the broader base of cloud customers, which is great. So, yes, all of that gives us confidence. When we look at the sales capacity that we have in place, we feel very good about that. So, this is a quarter where we saw kind of good ramping of new sales reps, lower than target attrition. Overall, that puts us in a good position as we think about what we're entering next year with in terms of both our sales motion and kind of systems as well as just ramped sales reps to go execute. Hey, Brad, you're on mute. Brad Zelnick -- Analyst Thank you very much. I'm still trying to figure this zoom thing out. Rohan, maybe just a follow-up. As we think about the range of outcomes for next year, I appreciate that you're not giving us guidance just yet. But is there anything you can tell us about perhaps the visibility that you have coming out of this Q3 versus the last couple of years where you did give us an early look? And I mean, it would seem to me that the bias would be toward acceleration, at least from the exit rate that you're guiding here for Q4 for 21% subscription growth. How are you thinking about that? And how should we, as we begin to lock down models and project next year, think about that? Thank you. Jay Kreps -- Co-Founder and Chief Executive Officer Yeah, Brad, we're not early guiding for fiscal year '25. I'll say, which is very consistent with most other software companies out there. But what I'll tell you is the momentum of the business in Q3 was solid. We entered Q4 with a similar momentum, which shows up in our guidance. And we also spoke about stabilization in our NRR. So, as you kind of look at the second half of the year, in general, we feel good with where we are. So, to your question around looking ahead, I'll kind of reiterate a couple of points that Jay made. I mean, in general, you've heard us talk about it. DSP has been a big focus for us this year. With respect to the number of product innovations we've had this year has been, I would say, the highest in the history of the company. And we're seeing good adoption with respect to our DSP products. 2025 is where we're expecting monetization. And when you look at the different DSP products, all three of our DSP products, be it Connect, be it governance, or be it stream processing, they're in their earlier stages of their S curves. So that's one area of growth driver as we look ahead. The couple of others that Jay briefly touched on was GenAI, although timing -- exact timing is still a TBD, but we feel that in general, streaming as a category will benefit from GenAI. And then we have a couple of other ones like Table Flow and FedRAMP, which are also lower in the list, but again, growth drivers. So, overall, a decent amount of growth drivers as we look at next year. But again, we'll be providing a more formal guide for 2025 in our Q4 call. Brad Zelnick -- Analyst Understood. Lots to be excited about. Keep up the great work. Thanks, guys. Shane Xie -- Investor Relations Thank you, Brad. We'll take our next question from Jason Ader with William Blair, followed by Wells Fargo. Jason Ader -- Analyst Yeah. Good afternoon. Thanks, Shane. Good to see everybody. My question is on the Q4 guide. It implies a sequential growth rate on the revenue that is well below kind of typical seasonal patterns, if I look over the last few years. I know you're a bigger company now. But is there something specific to call out in Q4 that might cause a lower sequential growth rate than normal? I just wanted to unpack that a little bit. Happy to. Jason, good to see you as well. Yeah. So, for our Q3, I'm assuming your question is specifically around the cloud revenue. Jason Ader -- Analyst Total subscription revenue of like a 2.4% sequential versus the year ago, and the year before that was 12% in Q3 to Q4. Rohan Sivaram -- Chief Financial Officer All right. Yes. So, there are a couple of puts and takes as you look at. I mean, obviously, when you look at our Q3 performance, we feel very solid and Q4 guide is also solid. I called out two drivers in last call. One was, in general, Confluent Platform business tends to be lumpy and purely because about 20% of revenue is recognized upfront and the timing of some of these larger deals can have an impact. So, that's something that I called out in our last call. And the second, I would say, a smaller driver is the one-time benefit that we spoke about in Q3 makes it a little bit of a tough compare for our cloud business. So, when you isolate the cloud business and you take out that one-time benefit, it very much falls within historical trends and more normalized patterns. So, that's probably the second driver. But in general, if I kind of take a step back, we're seeing this momentum with respect to some of our larger digital native customers adopting new use cases and adopting DSP. We just don't want to get ahead of ourselves, and we want to be prudent with our outlook as we look ahead. Jason Ader -- Analyst All right. And then one quick follow-up maybe for you, Jay. Just talk about the federal business. We've heard kind of through the grapevine and some other companies have talked about it, but it seems like federal spending was kind of weaker than expected for a lot of companies in Q3. What did you guys see in the federal vertical? I know that's an important area for you guys. Did you see some of that kind of budgetary pressure that others saw? Jay Kreps -- Co-Founder and Chief Executive Officer Yeah. Yeah. Federal was reasonable and is a decent-sized chunk of the business. It's limited today because it is only Confluent platform. So, we're still kind of waiting to open up the Confluent Cloud side of that, at which point, I think we would see a bigger overall impact, both positive and negative, with the kind of trends you're describing. So, yes, I would say it was not particularly noteworthy. We saw reasonable performance, but nothing to write home about. Thanks, Jason. We'll take our next question from Michael Turrin with Wells Fargo, followed by Oppenheimer. Michael Turrin -- Analyst Hey, thanks very much. Good to see everyone. Jay, I appreciate the video at the start commentary throughout the call. It's helpful. I was hoping we could go back to AI and specifically use cases you see there for streaming. Where do Agentic solutions, which we're getting whole host of announcements around fit within that discussion? It would be great to just get your view on how this AI focus we're getting everywhere impacts competitive positioning for Confluent streaming of the overall DSP landscape. Jay Kreps -- Co-Founder and Chief Executive Officer Yeah. Yeah, that's great. Yeah. So, there's two primary use cases that we're seeing around AI. One is really gathering all of this context data for the AI. So, all the enterprise data that wants to be used in decision-making. The second is really a Flink use case, which is actually taking some of the processing that you want to run as a background task and actually operationalizing that, turning it into something that kind of runs continuously. Every time something happens to the business, it reacts or processes that. That's very much the kind of agentic background work that you're talking about. That's earlier in terms of what we've seen. If I look at kind of customer adoption patterns, I would say that that whole category of use case is a little earlier. I think it's very dependent on the quality of the models. We think that's going to be a big thing over time, and we think we're very well-positioned to do it. I think ultimately, the goal for AI isn't just to build these chatbots. It's actually to take some of the background work in the company and turn it into something that just happens. And maybe there's some amount of human oversight or maybe there's not, but it's something that's just kind of working in the background. If you think about what does that translate to in terms of the infrastructure or computational model, it's very much stream processing. If you think about the kind of more work that humans do, they're sitting there and they're answering emails that they're reacting to new customer orders that they're doing whatever it is that kind of background processing. And so, I think having something which takes that directly integrates the LLM models with some of the AI model inference work that we announced at current allows you to run that in a way that's parallelizable, that's fault-tolerant, that's scalable, that's understood and that integrates this context data that you can gather, I think it's very compelling. So, I would say that -- I would think of this as a couple of directions of growth around AI. One is selling to the AI companies, that's kind of off and running. The next lump is these enterprise use cases around RAG. I think that's going well and will be durable. The last is this kind of agent use cases, which is the most nascent, but I think actually may be the biggest opportunity. And probably the thing that streaming is the most well suited to where it's kind of the natural model for running that thing. That's -- I would describe that as unproven, but we're very excited about it. Michael Turrin -- Analyst That's great. Rohan, just given that '25 shaping up is a fairly significant product cycle for Confluent as you layer on WarpStream's other capabilities. I'm wondering how you think about -- or how we should think about margin progression as these newer efforts layer on. Can you keep the efficient growth motion going forward, alongside the innovation? Or just how are we thinking about the balance between those two? Thank you. Rohan Sivaram -- Chief Financial Officer Yeah. Michael, when you really look at the last eight or 10 quarters for us, we've improved our operating margins by more than 40 percentage points. So, our philosophy around growth and profitability or efficient growth is really part of the DNA of the company. So, every key decision that we make is based on ROI-based thinking. And that will continue not only into '25 but '25 and beyond. So, that's not going to change. So, as we think about next year, we'll continue to have the same philosophy that is growth and profitability, how can you drive efficient growth, and we're not going to basically take our eye off the ball on that front. Jay Kreps -- Co-Founder and Chief Executive Officer Yeah. I think that's exactly right. And one point I would make that's specific to that. I think what Rohan said that this is kind of a discipline in terms of looking at efficiency throughout the company. I think it's a very important point. But I think you asked specifically around as we're adding these additional product capabilities, how does that impact things? I think it's important to understand that the investment around the new products, including the training of salespeople, getting people to be able to sell these things, that's all happening now, right? So, you kind of -- you put in all the effort, you build a cloud platform that can operate many different product areas. You make the investment in engineers to build out the capabilities. You put in all the tools to be able to track and drive revenue targets around these different things. You train up the sales force, you spend a lot of time on these things that are still nascent businesses, right? And then as those come to scale, that's obviously a very positive thing. But to some extent, we're kind of bearing that cost now. We feel good about that trajectory. And obviously, as these are -- as DSP is a larger contributor to the overall revenue numbers, then those investments are less kind of an added weight and more a natural part of the business. So, I don't know if that's clear, but that's the way I would think about it. It's not like we're thinking about, oh, we're going to start investing next year to make that true. We have been investing for some time on the R&D side for several years, on the go-to-market side, certainly heavily this year. Thanks, Michael. We'll take our next question from Ittai Kidron with Oppenheimer, followed by Mizuho. Ittai Kidron -- Analyst Thanks, Shane. And hey, guys, nice results. Great to see this. Jay, I'm going to start with you, more of a go-to-market question. There's two parts for it. First of all, do you still see a lot of low-hanging fruit in improving your go-to-market motion? And maybe tied to that, clearly, with DSP becoming a bigger focus for you, how do you think about the changes you need to implement in comp next year to better perhaps fine-tune the effort around this? Jay Kreps -- Co-Founder and Chief Executive Officer Yeah. Yeah. Look, we feel really good about the set of changes we made. So, this year was a very aggressive adjustment to orient the cloud business around consumption to drive broader reach to enable us to actually incentivize some of these individual DSP components at a higher rate. That is -- I would call that a radical shift, right? Heading into next year, yes, I don't think we need any kind of radical shifts. We've got some -- we do some tuning each year where we look at can we tweak this thing? Can we tweak that thing? Well, there's plenty of that that we'll do. But I think it will certainly be a smaller thing. I do think that as some of these DSP components come to maturity and scale, it does open up a new motion around directly landing use cases. If you think about Confluent, maybe the motion has been primarily kind of open source upsell where you take people who are interested in Kafka, there's better Kafka, there's other components around Kafka. I think as we have this full set of capabilities to capture, stream, process, connect, transform, and govern real-time data, there's suddenly a whole set of business problems you can go after much more directly. And so, I think that opens up another vector for the team to kind of attack and expand within a lot of these customers. I think we'll still land in areas where there's interest around Kafka, but I think this kind of gives you another way of going to market. And so, I think that's something we'll build over time, not comp-related, but just makes it -- gives us another path into use cases. Ittai Kidron -- Analyst Excellent. Second question is on the win rates. I think you mentioned that win rates have actually increased this quarter, if I'm capturing the comment correctly, but you also commented that the win was against small vendors is more than 90%. Is that the specific area they improved or they also improved in general? Jay Kreps -- Co-Founder and Chief Executive Officer Yeah. I think we're seeing both, that we saw very strong win rates overall. And then there have been questions on this point. I think we specifically called out, hey, like really strong performance well above 90% against start-up competition. Thank you. We'll take our next question from Gregg Moskowitz with Mizuho, followed by D.A. Davidson. Gregg Moskowitz -- Analyst OK. Thank you very much. The net new Confluent cloud ARR is higher than any other Confluent quarter that we've ever seen, and that includes your seasonally strong Q4 periods. And it's an impressive quarterly performance regardless. But Rohan, can you say whether or not would be a record net new ARR quarter for Confluent if we were to exclude that one-time revenue benefit that you called out? Rohan Sivaram -- Chief Financial Officer Yeah. Gregg, the one-time revenue benefit that we called out, what I said was if you take that out, we still handily beat our expectations. And when you really double-click into the performance, which is the vast majority of the driver of the performance, is stabilization in the digital native segment from a consumption standpoint and the net new use case of DSP adoption for larger cloud customers. So, we've not broken down that one time exactly. But what I can tell you is if you adjust for that, we still very handily beat our expectations and the primary drivers were the first one that I called out. I hope that helps. Gregg Moskowitz -- Analyst OK. Thank you. And then you spoke earlier, Jay, about work stream and potential open-source conversions. But I'm wondering if you also foresee many content platform customers adopting Work stream potentially over the medium term, whereas perhaps they otherwise wouldn't have moved away from their on-prem deployments anytime soon. Jay Kreps -- Co-Founder and Chief Executive Officer Yeah. Yeah, there's certainly an opportunity for conflict platform customers that are kind of self-managing the cloud to have kind of a progression toward a more fully managed cloud-type offering. And we see that as a positive thing as well. It's not the initial target set of customers, but yes, over time, that may be appealing. Thanks. Great. We'll take our next question from Rudy Kessinger with D.A. Davidson, followed by Needham. Rudy Kessinger -- Analyst Hey, guys. Thanks for taking my questions. Rohan, first with you, very strong gross margins. It looks like if I exclude low figures from that one-time revenue, it's only 20 to 30 bps impact. So, is 82% kind of a good run rate going forward? And just what do incremental gross margins look like on the DSP products as revenue from those start to come in more meaningfully next year? Rohan Sivaram -- Chief Financial Officer Yeah, sure. Happy to take it. Rudy, the gross margin profile for the business, obviously, record gross margins when you look at subscription gross margins. So, there are obviously two components, Confluent Platform, software-type gross margins, fairly consistent over a period of time. So, the variable is in the cloud side, and we've consistently improved our cloud margins over time. And I mean, I put it in maybe three categories, right? One category is, in general, with volume and with more scale, you get efficient. So, that's one. The second area is there's been this focus around multi-tenant and as more of our business becomes multi-tenant, which includes the DSP side as well, a lot of the DSP products, right, that's going to be a tailwind to gross margins, right? So those are probably two drivers. And when you kind of take a step back and look at where we are operating, we're actually operating well above our thresholds that we put out there. So, feel good about our gross margin profile, and we will obviously keep an eye on it as we look ahead. Rudy Kessinger -- Analyst OK. And then as a follow-up, I appreciate the commentary on win rates. I guess does that comment on win rates, I guess, do you include -- do you factor in renewals where a current customer considers a small start-up or going back to open source as well when you calculate those win rates in. And if not, could you just maybe comment on gross churn or gross retention trends over the last few quarters? Jay Kreps -- Co-Founder and Chief Executive Officer We do include renewals in that. And I do include renewals, but it would be equally high, not including renewals. So, it's not like we're patting it with renewals. All right. We'll go to Needham, Mike Cikos for our next question, followed by Cowen for a last question. Jay Kreps -- Co-Founder and Chief Executive Officer Just to comment really briefly on what Rudy said, to underline a little bit of what Rohan was saying, yes, we don't anticipate the DSP growth to be a significant headwind on margins. The products are largely multi-tenant, and we see that as a positive factor. We've taken cost into consideration when designing those things. So, I know often new cloud products kind of come in upside down and then eventually write themselves. We don't think there'll be a big aspect of that with what we're doing. Great. Go for it, Mike. Mike Cikos -- Analyst I just wanted to cycle back to the strength that we're calling out this quarter and into October now for those digital native customers. When did you actually start to see that behavior shift just because I know if we cycle back a quarter ago, that increased focus on optimization was bleeding from June into July, right? So, when did that start to show up as far as that cohort that you're speaking to the digital natives? Yeah. I mean, it was -- typically, Mike, when you look at consumption, it is also a business that's driven by momentum you did not see this like one particular date or where things shifted. But in general, we did see a couple of things. The first is, just Jay called out earlier in the call, some of our larger customers we feel that every customer kind of looks at optimizations for some of our larger ones, that's actually behind us. That's something that we saw and that had that progressively through the quarter. And the second piece is around the net use cases and some of our larger cloud customers adopting DSP. That's been a huge internal go-to-market focus for us. And again, early days, but that's also starting to show up little by little in the numbers. So, that's how I'd call it. And as I said, it's more around momentum. And as we exited Q4, some of these trends actually bled into Q4 as well. Mike Cikos -- Analyst That's terrific. I guess, for the follow-up there, and it sounds like you're partially answering this already, but trying to get a sense for that recovery in demand for new use cases or DSP adoption coming from digital natives. Is that explained by maybe customers who have been rolling over or pushing out projects that are coming online now, or is it more a function of that go-to-market that you guys have and the transformation you've instilled, and maybe that's starting to make more headway into your existing customers? Jay Kreps -- Co-Founder and Chief Executive Officer Yeah, it's a combination of both. Customers -- what you would see in any of these digital native customers, even going over a long period of time is kind of a sawtooth up and to the right, right? It's not a pure graph. They tend to make investments and then they tune, and they make investments and then they tune. We did see a little bit more tuning in the recent quarter, but that -- it's not like that pattern hasn't occurred. It just -- we just sought in more customers all at the same time. Even in that time period, we did see an intention in those customers of making further investments, new projects. So, I would say, on the whole, that's in keeping with what we've seen. On the DSP side, there definitely is a comp as well as just intentional focus. Like we are putting a lot of effort into driving these new products. There's very specific sales plays. We're tracking the pipeline in a very distinct way. There's targets and goals around that. It's very much a new muscle to build. But the consumption comp makes it possible to do this because, in the past, we would have goals that were purely on your committed spend. And really, of course, there's no distinction of what the spend is on. Now, we can have multipliers on specific components of revenue that's Flink or Connect or whatever it is, and drive those in a disproportionate way. And so, I think that does help a bit in terms of making sure that the smaller products that are kind of newer in the journey still get some focus out of the team. Great. Thanks, Mike. We'll take our last question from Derrick Wood with Cowen. Derrick Wood -- Analyst Thanks. Jay, I'll start with you. You guys called out strength in financial services. We know this is obviously a big vertical for you, but I don't know if you've highlighted it in recent quarters. Anything to call out what drove this? Are you starting to see larger deal activity? Or is there some broader industry trend developing that could be more beneficial in the medium term? Jay Kreps -- Co-Founder and Chief Executive Officer Yeah. I wouldn't say it's a sudden shift or even a one-quarter thing. I mean, I think there's been a broad-based build in financial services going back some years. And I think we just thought it was worth highlighting kind of the point that we've got to, where this is now a very substantial data platform and the largest financial services institutions in the world. And there's really exciting stuff happening. And this is -- it's not just that it's big in terms of volume. I mean, this is powering some of the most critical systems that they have. In many of these organizations, they're actually starting to think about how streaming not just enables them to share data internally, but how it enables them to connect into many of the other institutions that they share data with on a regular basis. There's kind of that larger economy within that industry. And we think that's a really positive thing. So, yes, it's going very well. We called out the kind of ARR and penetration in the largest customers. We expect that to continue. No sign of slowdown. There's not a particular catalyst this quarter. I would say it's more just continued strength. And it makes sense when you think about the nature of those businesses that there's just a huge amount -- they're the largest spenders on IT and a huge amount of kind of real-time event-driven machinery behind the scenes and as well as a few pushes on the regulatory side toward real-time payments, real-time reporting. There's definitely some nudges as well as pressure on having a modern customer experience, all of which kind of nudges it forward. Derrick Wood -- Analyst Understood. Rohan, maybe one for you. The strength of new customer is obviously very impressive. I think I assume that most of these are open-source Copco conversions. But just wondering how you're thinking about the follow-on expansion. Is this something that could come in a quarter or two because of the consumption model or we think of a land and maybe an expand like nine to 12 months from now? Rohan Sivaram -- Chief Financial Officer Yeah. The way I think about the new customer is, of course, the total customers, I think that's top of funnel. And then how successful we are progressing these customers to $100,000-plus ARR, $1 million plus ARR is something that we internally focus quite a bit as well. So, on the total customer numbers that you mentioned, it's a combination of two things, of course, like as part of our consumption transformation, there's been a big focus around landing new customers, but not just new customers landing very high-quality logos. And I called out some examples there, right? So that, coupled with our product-led growth, the P&G motion, which is driving some of this customer growth on top. But that can obviously vary quarter over quarter. So, the best way to look at that is over a 12-month period. And when you look at the first nine months, you're right, I mean, we are very happy of the momentum that we've seen. When you look at 100,000-plus ARR customers and $1 million-dollar-plus ARR customers, both those cohorts get see good consistent growth. And as a reminder, $100,000-plus ARR customers account for greater than 85% of our revenue. So, overall, the focus is across all 3, but we are pleased with the progress that we are making. All right. Thanks, Derrick. This concludes our earnings call. We know it's a busy night for earnings. We appreciate so many of you joining our call today. Have a nice evening.

Earnings call: Kinaxis Q3 results show strong growth and optimistic outlook By Investing.com

On October 31, 2024, Kinaxis Incorporated (ticker: KXS), a leader in supply chain orchestration solutions, reported solid third-quarter results, with a 12% increase in total revenue to $121.5 million and a 16% rise in SaaS revenue to $78 million. The company's adjusted EBITDA soared by 32%, reaching over $30 million, demonstrating a robust 25% margin. Kinaxis also highlighted significant customer acquisitions, particularly in life sciences and industrial sectors, and reported a strong annual recurring revenue (ARR) of $347 million, a 14% increase year-over-year. The company remains committed to enhancing shareholder value and executing strategic initiatives despite facing some special charges. In conclusion, Kinaxis Incorporated displayed a strong performance in Q3 2024, with significant revenue growth and strategic customer acquisitions. The company is well-positioned for continued success, driven by a robust demand for its innovative supply chain solutions and a favorable market outlook. As Kinaxis heads into the final quarter of the year, investors and stakeholders can look forward to the company's sustained efforts to drive growth and shareholder value. Operator: Good morning, ladies and gentlemen. Welcome to the Kinaxis Incorporated Fiscal 2024 Third Quarter Results Conference Call. [Operator Instructions]. I'd like to remind everyone that this call is being recorded today, Thursday, October 31, 2024. I will now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Kinaxis Incorporated. Please go ahead, Mr. Wadsworth. Rick Wadsworth: Thanks, operator. Good morning and welcome to the Kinaxis earnings call. Today, we will be discussing our first quarter results, which we issued after close of markets yesterday. With me on the call are John Sicard, our President and Chief Executive Officer; Robert Courteau, Our Executive Chair; and Blaine Fitzgerald, our Chief Financial Officer. Some of the information discussed in this call is based on information as of today, October 31, 2024, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release as well as in Kinaxis's SEDAR filings. During this call, we will discuss IFRS results and non-IFRS financial measures, including adjusted EBITDA. A reconciliation between adjusted EBITDA and the corresponding IFRS result is available in our earnings press release and in our MD&A, both of which can be found on the Investor Relations section of our website and on SEDAR+. The webcast is live and is being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations section of our website. Neither this call nor the webcast archive may be rerecorded or otherwise reproduced or distributed without prior written permission from Kinaxis. To begin our call, John will discuss the highlights of quarter as well as recent business developments, followed by Blaine, who will review our financial results and outlook and Robert will provide an update on some recent strategic activities and open the line for questions. We have a presentation to accompany today's call, which can be downloaded from the Investor Relations homepage of our website kinaxis.com. We will let you know when to change slides. Over to you, John. John Sicard: Thank you, Rick. Good morning, everyone, and thank you for joining us today. I will be starting on Slide 4. We delivered solid third quarter results that allow us increase key elements of our guidance for the year. We reported $78 million in SaaS revenue, representing 16% growth. Total revenue was $121.5 million or 12% growth. We reported over $30 million in adjusted EBITDA representing 32% growth and an impressive 25% margin. I'm extremely pleased with the steps we've taken to enhance our profitability. As Blaine will highlight, this result and our outlook will allow us to raise our profitability guidance for the third consecutive quarter. Moving to Slide 5. Once again, we won an impressive number of new customers, equaling the total from Q3 last year and up slightly year-to-date. This is an ongoing reflection of the strength and persistence of demand for supply chain orchestration solutions and of our superior position in the market. Our enterprise tier contributed the highest number of new wins for the quarter. Last year, we spoke about a 60% plus win rate against our core competitors, and I'm thrilled to see that performance continue year-to-date. During Q3, we announced a number of new customers. I'm happy to share a sample of those with you now. In life sciences, where we continue to dominate, we've been selected by Ono Pharmaceutical based in Japan, a company committed to creating innovative medicines that focus on oncology, immunology, neurology and other critical areas. We added Octapharma based in Switzerland, one of the largest human protein manufacturers in the world, employing nearly 12,000 people to support the treatment of patients in 118 countries. In the industrial market, we won Krones AG based in Germany, a one-stop shop for producers of liquid consumer goods, including solutions for production, filling and packaging through to plastics recycling and more. We also won Nippon Seiki based in Japan, which manufactures and sells instrument clusters for automobiles, motorcycles, construction, agricultural machineries, marine instruments, air conditioning and much more. In the consumer products space, we've recently added CMI Foods, which has a vast portfolio that includes food processing and production operations, animal and pet foods and standalone restaurants. Suave Brands, a U.S. based producer, which you probably recognize from the shelves of local retailers, creators of affordable quality hair and body care products and finally, in the automotive sector, we're proud to be working with Mahindra & Mahindra, a leading high growth company in India that offers both internal combustion and electric vehicles and boasts a workforce of approximately 10,000 employees. As you know, these successes and many more have been earned in an environment where buying decisions particularly for our largest opportunities continue to be subject to elevated levels of scrutiny. Moving to Slide 6. We continue to widen Maestro's competitive gap as some of our newest innovations hit key milestones, including some of our unique AI based products. Our brand new GenAI enhanced client experience is being used extensively today. Over 100 customers have been active on the Maestro AI chat agents and we're pleased to see such a rapid uptake. Demand.AI is significantly improving demand forecasts at 14,000 plus restaurants in North America, while deployment is also underway at a very large consumer goods company. Multiple proof of concepts are also in progress and scheduled with other major customers. Supply.AI has been adopted by over 10 customers and we are in a number of opportunities to see growth by the end of the year. Enterprise scheduling is live for an extremely large global CPG company in key North American sites and we're heading into negotiations and proof of concepts with other customers for that product later this year. Under the hood of Maestro, we've made good progress with our new data fabric layer that will greatly improve and simplify the integration of AI across the product and with solution extension partners that will be part of an end-to-end supply chain orchestration solution. On Slide 7, we're absolutely thrilled to continue to receive exceptional validation from third party industry observers. According to Gartner (NYSE:IT) Voice of the Customer survey, 93% of customers are willing to recommend Kinaxis, 93% of the nine vendors in the review, which include two of our core competitors, Kinaxis is the only company, the only one to be named a 2024 Gartner Peer Insights Customer Choice for Supply Chain Planning Solutions. This kind of achievement is only possible through outstanding strategy and execution companywide. We were also named by Nucleus Research as a leader in the 2024 Transportation Management Technology Value Matrix, which includes our supply chain execution application. Finally, just last week, we were named by Newsweek as one of Canada's Most Responsible Companies for 2025. Newsweek partnered with Statista to recognize 150 companies across 13 industries for their commitment to the climate, social welfare and responsible governance and Axis was placed number 38 on that list. Since we last spoke, I've held countless phone calls and face to face meetings around the globe with customers, prospects, partners, industry analysts and others. I can say that I have never had more conviction about our leading position and the opportunity we have in the market, and I'm excited from multiple perspectives. First, as the current CEO, to be able to hand off to the experienced incoming leaders, a company that is in such strong shape, I'm extremely pleased we were able to secure Mark Morgan as President of Commercial Operations. Second, as a large personal shareholder of Kinaxis, I remain fully vested in supporting the company and its drive to create shareholder value and I'm confident in our ongoing success ahead and third, as a future advisor to the company, quite simply with over 30 years of my life dedicated to Kinaxis, it is now in my DNA and I will always care deeply about its well-being. I look forward to supporting the Board and the management team through 2025. It has been my greatest honor to serve you, the Kinaxis shareholders for the past nine years as CEO and to lead our incredibly dedicated and talented teams that strive for excellence each and every day. I'm extremely proud of the growth we've been able to accomplish together. With that, I'll turn the call over to Blaine. Blaine Fitzgerald: Thank you, John and good morning. As a reminder, unless noted otherwise, all figures reported on today's call are in U.S. dollars under IFRS. Move to Slide 8. We reported solid Q3 results with very strong profitability, excellent trailing 12-month free cash flow margins and are once again able to increase key aspects of our 2024 guidance. Briefly, total revenue was $121.5 million up 12%. SaaS revenue was $78.6 million up 16%. Our subscription term license revenue was $2.3 million which was higher than expected due primarily to expansions at renewal. Professional services revenue was $35.5 million up 8%. As I've talked about before, our goal is to continue to ship professional services work to partners. Maintenance and support revenue was $5.2 million. Our gross profit was up 17% to $76.4 million or 63% margin up from 60% last year primarily reflecting lower cost of services following recent restructuring initiatives and a large proportion of revenue coming from higher margin software business. The software margin was 76% and the professional services margin was 32%. Adjusted EBITDA was extremely strong, up 32% to $30 million or a 25% margin versus 21% last year 19% last quarter. This reflects our continued heightened focus on profitability and relates to very successful initiatives aimed at gaining operating leverage as we scale. Beyond the usual items for better comparability of results we have excluded from adjusted EBITDA $3.1 million in special charges relating to consulting fees for the review of our strategy and to execute executive transition costs. Our profit in the quarter was $6.8 million or $0.23 per diluted share versus $0.25 a year ago. After tax affecting the special charges they reduced profit by $2.2 million or 0.08 per share. Absent these charges our profit and EPS would have shown growth over the prior period. Cash flow from operating activities was $29.9 million compared to a $1.5 million use of cash in Q3 2023. Cash and cash equivalents and short-term investments were $294.6 million up from $293 million at the end of 2023 despite some of the special charges and our active share buyback program impacting the balance. If we move on to Slide 9, as you can see our trailing 12-month cash flow margin continues to show tremendous improvement. It was 21.3% in Q3 2024, the highest level since 2020. This was achieved even after significant strategic investments across the business over that time. Again, this excellent result would have been higher absent certain of the special charges. On slide 10, our annual recurring revenue or ARR grew to $347 million an increase of 14% from Q3 2023, 55% of new business added to ARR during the quarter came from new customers and 45% from existing customers. Year-to-date, the split is closer to 65/35 in favor of new customers. The AR balance continues to reflect the current environment including generally slower deal approvals particularly for large enterprise businesses, the S4/HANA migration which is a net benefit but can extend sales cycles near term, ramp deals that start smaller and ramp in future years and for the first time in several periods a more favorable FX environment. Our incremental ACV or annual contract value added in both Q3 year-to-date is very similar to the amounts added in the comparative period last year. So not all of that flows through to ARR right away. The ratio of annual contract value or ACV to ARR year-to-date is 1.23, the highest level yet. That compares to 1.18 last quarter and 1.08 at the end of 2022. In other words, due to more ramp deals recently, free ARRs coming in future periods. Looking ahead, we see reason for optimism. The Q3 end of quarter pipeline for fiscal year 2025 is bigger than the fiscal year 2024 pipeline was at the same time last year. The 2025 pipeline of expansion business is already significantly larger and represents a much higher mix of total pipeline than it did for 2024 at this time last year. Expansion business has a higher margin and much higher conversion rates, roughly doubled new name accounts conversion in recent years. New go-to-market initiatives will start to bear fruit as we progress through 2025. We get free ARR from phased deals in 2025 that benefit the growth rate. We have a well-recognized industry leader driving our sales organization and he has scaled businesses to well over $1 billion in revenue. We also have a maturing sales team that he gets to work with. We believe the more favorable interest rate environment will help spending in many of our verticals. As well in an October 2024 report, Gartner projected worldwide IT spending to experience one of the largest percentage increases in this century and software spending is one of the biggest drivers. Finally, all these incremental opportunities get factored through our very strong 60% plus win rate against core competitors. On slide 11, our three-year CAGR for total RPO and SaaS RPO is 24% which is extremely strong and reflects both ARR growth over that time and elite growth customer retention, consistently between 95% and 100%. The three-year result is the best way to look at RPO as it normalizes for expected quarterly fluctuations in customer renewal cycles. So we continue to direct your attention to those results. More details on our RPO can be found in the revenue notes to our financials. Now if we go to Slide 12, I'm extremely pleased to be increasing our 2024 profitability margin guidance for the third consecutive quarter, while also increasing our guidance for subscription term license revenue. We reaffirm all other guidance elements as follows: We're maintaining total revenue at $483 million and SaaS growth at 15% to 17% growth. We're raising subscription term licenses revenue guidance to $11 million to $12 million and adjusted EBITDA margin guidance to 20% to 22%. We are very proud that our heightened focus on profitability is generating real results. Overall, this is a strong outlook given the environment in 2024. We expect to take another step towards a 25% midterm adjusted EBITDA margin target next year and we'll give some specific guidance with next quarter's results after we see Q4 performance as new executives settle in and the variables around our investment planning are further developed. Finally, for me on Slide 13, we've continued to be active on our normal course issuer bid. Today, we've repurchased almost 3/4 of the plan limit. During the nine months ended September 30, 2024, we repurchased and canceled 724,298 common shares representing an investment of approximately $78.3 million. We've been pleased with our share buyback strategy and the Board has approved another normal course issuer bid for the upcoming year from November 6th this year through November 5th, 2025. We can purchase up to 5% of outstanding shares or approximately 1.4 million shares with a daily maximum of 15,500 shares subject to typical exceptions. I'll now turn the call over to Bob. Robert Courteau: Thank you, Blaine and John, and good morning, everyone. Well, I've only been in the role as Executive Chair for a few weeks now and let me start by saying it's been fun to run with Blaineand John and the management team. I'm so excited about the work we've been doing and opportunities and growth prospects for our business. I'm going to discuss in more detail shortly, but first want to take a moment to reemphasize that over the last six months, as always, our entire Board, including our newly appointed Lead Independent Director, Angel Mendez, have been highly engaged in the business, including management changes and the review of our strategy. As we announced in September, Goldman Sachs has been supporting our efforts with financial advice and addressing inquiries about the company. While the Board has not closed the door to any path, there have not been any material developments. That's the latest on these topics and we'll provide further updates as warranted. Slide 14, please. As I said, the entire Board is focused on adding value to Kinaxis. We've taken a number of decisive actions over the last six months, which have benefited Kinaxis and will add value to the company in the near and midterm to the benefit of all shareholders. Let me talk about that. We continue to review our strategy, both from the inside out and with the help of expert outside consultants. The process has reemphasized that Kinaxis is in extremely strong position and that we have some exciting opportunities, particularly in the go to market functions that will enhance that position, building on our many strengths as a company. Working with management and at a leading external management consulting firm, we've identified the best opportunities, we organized the company to align with them and have moved talent into the highest value roles. We're already benefiting through the development of our growth opportunities and seeing significant improvements in profitability and free cash flow. We're steadily driving towards our 25% normalized midterm adjusted EBITDA margin target. We've doubled down and all that makes Kinaxis such a strong company, including our product and innovation leadership. Since day one, we set ourselves apart with our concurrency approach, real-time processing and embedded unlimited scenario analysis. To that, we've recently added market leading AI capabilities, supply chain execution capabilities, public cloud delivery with Google (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) and a vision to lead the AI infused supply chain orchestration space. The work of Gartner and other industry experts consistently provides third party recognition of our product leadership. Importantly, we're transforming our alliances with the world's most important systems integrators into far more strategic relationships. As you know, we signed a contract to co invest with Accenture (NYSE:ACN) to integrate our pursuit of the best opportunities in select verticals and geographies, so we can jointly own these spaces. We're building pipelines, creating new deployment capacity, enhancing the delivery expertise, creating joint go-to-market resources and even building some vertical specific product enhancement plans. Our joint pipeline with Accenture at the end of Q3 is already ahead of the expectations we had for this time. Other major systems integrators are investing in their Kinaxis practices instead of our competition, reflecting our momentum and our joint successes. This is and will create a snowball effect that will reinforce Kinaxis' leadership position in the market. Taken together, our alliances will bolster our growth paradigm and simultaneously improve margins as system integrators take on more of our services work. We are undertaking a number of other initiatives that will expand our TAM, including a broader mandate for our value-added resellers, focused upsell and cross sell of our proven new product capabilities and low hanging fruit around pricing opportunities. Our competitive position has never been better. Our win rate against our three core competitors continues to exceed 60% and certain of those competitors have recently fallen dramatically in the Gartner Magic Quadrant, including two that are no longer in the leader's quadrant and our product and innovation strength is shining through and I'm so excited about the addition of Mark Morgan, who can help to leverage our enviable market position. Everyone at Kinaxis has spoken to Mark through this process instantly knew he was the right guy and that belief was only reinforced by talking to the many people that have worked with him in the past, including partners, customers, many people that know him very well. He's a well-liked proven leader, who knows our space extremely well and has scaled businesses well beyond $1 billion in revenue. Mark has hit the ground running and we're thrilled to have him on board. A lot of credit for what has put Kinaxis in such a strong position goes to John Sicard. I'm so happy that John will be with us as a key advisor through 2025. Over the last few weeks, John and I spent time with many of our large clients who remain enthusiastic supporters of Kinaxis. I am thrilled to be able to lock arms with John as we head into the New Year. Our CEO search is advancing, progress is positive and the candidates befit the excellent opportunity that Kinaxis represents. We'll continue to be thoughtful and thorough throughout this process. As I said at the outset, our numerous actions over the last six months have already increased the value of Kinaxis and much more value creation lies ahead. I know I can speak for my fellow directors when I tell you that we are moving with urgency and discipline to optimally position Kinaxis to deliver increasing and sustainable value. To everyone that's listening in, as always, thank you for your ongoing interest in the company and great support to date. We're excited about the future and welcome you on the next step in Kinaxis' highly successful journey. I'll now turn the line over to the operator to start the Q&A session. Operator: Thank you. [Operator Instructions]. Your first question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Please go ahead. Thanos Moschopoulos: Good morning. John, congrats on your upcoming retirement and the great success you've had in building Kinaxis over your career. John Sicard: Thank you, Thanos. Thanos Moschopoulos: Maybe just to start off, it might be too early to talk about 2025, but if we look at recent ARR growth, that would seem to point towards a deceleration in SaaS revenue growth next year. Would that be a fair conclusion or the offsetting factors you said that could offset the dynamic? Blaine Fitzgerald: Yes, I'll take that Thanos. As you noted there is a high amount of correlation between SaaS growth and our previous year ARR growth and I appreciate obviously your comment about it may be too early to talk about 2025. We still have another quarter to get through and we're 1 month into that last quarter of the year. So we'll see how things turn out, but I'll remind you that one of the things that I mentioned as part of the script is that there are some interesting macroeconomic effects I think are in our favor at these days and the IT spending prediction that Gartner has in terms of that increasing for the largest amount in the century is a nice little tailwind that we're hoping to benefit from. Our pipeline as you mentioned for 2025 at this point in time at the same time last year it's much higher than it was before and the pipeline mix is a very important component of that. It's an interesting dynamic when you look at the difference between the conversion metrics on expansion revenue or expansion pipeline versus a new logo and everyone realizes that what we've been doing is actually fairly incredible considering the amount of new logos that we've been bringing on compared to the installed base that we haven't really moved forward as far as we can at this stage. And I'll finally finish all that with we have one secret, I guess not so secret tool that we have right now which is we're really pleased to have Mark Morgan on board and I've had the pleasure of working with him now for less than a week, but I think it'll be an incredible addition, brings a lot of supply chain understanding of the industry and I think it'll be a great help for accelerating that growth in the future. Thanos Moschopoulos: Great. And question for Bob, Bob you said the board hasn't closed the door at any path. Should we take that to mean that the board is open to engaging with interested parties if appropriate? Robert Courteau: Look, we're following a process here to create value for the company and I think my comments stand. Thanos Moschopoulos: Okay. Last thing I'll ask is, has there been any impact on bookings from recent corporate events or has that not really been a factor? Blaine Fitzgerald: Yes. At this stage, whenever you have a change in leadership, there should be some type of execution risk that may occur. At this stage there hasn't been anything that we've encountered. We've been very happy with the outreach and I think John's been very happy with the outreach from our current customers. I think they're relieved the fact that he is going to be around, he's not like going on a cruise over the next couple of years or next year. So we'll see how that plays out but as of right now there's nothing that's occurring that is indicating that the execution risk is there. Robert Courteau: I just add that John has been unbelievable and a great partner over the last month in really locking down the customer relationships, engaged in deals. He was in Europe a few weeks ago. I'm going to Europe next week. So if anything, we're all hands on deck. Thanos Moschopoulos: Great. I will pass it along. Thank you. Operator: Our next call comes from the line of Richard Tse from National Bank Financial Markets. Please go ahead. Richard Tse: Yes. Thank you. So, John, all the best in your retirement and advisor role. It's been great working with you over the years here. It's been a pleasure. So I don't know if this question is for you, Bob, or Blaine, but with respect to your comments around the strategic review, what areas have you identified as having sort of the greatest opportunity? Is it kind of a sales and marketing sort of motion or is it on the product side? I'm just trying to get a bit more detail in terms of what you've uncovered so far. Robert Courteau: Yes. So maybe I'll take it. It's Bob. So first of all, hi, Rich. How are you doing? Look, we're going to push on all our advantages that are in front of us and there's been a lot of talk about go to market and the reality is that what we're absolutely doing right at the top end of this is to really think about the monetization of our product leadership. We are absolutely creating a gap between us and the competitors that allows us to really think about our go to market from a perspective of monetization. The value that our products bring to our customers and now with AI infused applications and the demand that John talked about is one of the biggest parts of our strategy that we're pushing on. Bringing Mark Morgan onto the team allows us to really double down on the industry and global solutions that come along with that big push right now in terms of, as Blaine talked about, restructuring or repositioning the company opens the door to take people that are highly talented people inside of Kinaxis and put them into areas where they can have an immediate and dramatic impact on the company and that's been part of the strategy. The whole focus on enhancing our partners' relationships, not unlike Accenture, but not limited to Accenture. I think you know that system integrators are the bellwether on the winning formula and a big part of what we're trying to do is make sure that we're the in demand, on demand company when it comes to those relationships and that's working because as I said, they're over investing in our platform relative to other opportunities that they could pursue and then for me, probably one of the big ones is leveraging our customer base. We have, as indicated by Gartner, way higher customer satisfaction than our competitors. We find ourselves in a place where our products work. We're seeing increasing churn coming from those competitors and we're going to take advantage of that and so we're doing all the things that great software companies do. Richard Tse: Okay. That's super helpful. Thanks. My other question has to do with sort of the comments around the level of scrutiny. I think it's fair to say that a lot of your competitors in the industry are sort of pointing to similar things. So when it comes to that scrutiny, do you think it's kind of normal course of business now or do you think that there will be a trigger to sort of, turn that around again? I know, Blaine, you talked about sort of the Gartner stuff, but it seems like there's something more that there is other than the economy that's sort of having people pause here a bit. Are they kind of waiting for how AI scales and structurally they don't want to make a move ahead of that? Or am I reading too much into that? Blaine Fitzgerald: No, so I'll take that one, Richard. So here's what I've observed. As it relates to the selling motion, the area that's most elongated happens after you've been selected. It's sort of the contractual negotiation portion is what has been much more protracted, often going for months before getting signatures. The other area of scrutiny, and I have a belief that this may be infused or induced by one of the larger analyst firms in the world suggesting that proof of concepts are becoming part of the norm of every single sales cycle, no matter what and that is creating some elongation as well and again, I think a lot of that is coming from the AI kind of promise, sounds fantastical, but show me before I lay down some dollars, show me, show me proof and so those are the areas that we're seeing. I don't see necessarily a curbing of that effect in 2025 or beyond. I think that is becoming part of the norm and it's becoming part of the selling motion, I suspect, not only for us, but for a lot of software companies that are talking about the potency of AI and the promise of AI. Before spending dollars, it's like, okay, sounds fantastical, prove it. So I think those are the drivers, Richard, and I think that they won't subside anytime soon. Robert Courteau: Yes. I would add to it that if you look at our performance and some of the metrics that we've evaluated over the last few months, we're closing the best brands in the world. We're closing deals with the companies that are treating supply chain as the strategic asset inside their company. One of the complexities of the close time is it's so important and AI is becoming a parameter of choice that there's expanded decision making. CEOs get involved. The COO, the CFO are getting more and more integrated in that decision maker because this is best of your business stuff, but the companies that we're closing that are absolutely growing market share, being a new innovator, we had a couple in the quarter, are very quickly coming on to the Kinaxis platform and that thing that John was just talking about is really exaggerated in the largest enterprise customers. Because when you make a decision to buy supply chain in a global company, it's a one-way trip. The neat thing about our category is that once a customer signs with Kinaxis, they stay with Kinaxis. And again, our differentiation is that the products work. They go in. We got the best partners in the world. But there is definitely a lot more scrutiny in those largest companies in the world. And that's the biggest differentiation from how we were operating before is with those large customers. Richard Tse: Okay. Super helpful. Thanks guys and all the best John. Operator: Our next question comes from the line of Paul Treiber of RBC Capital Markets. Please go ahead. Paul Treiber: Thanks so much and good morning. Just first question, just for Bob, you managed very large enterprise software sales forces in the past. You've been on the board of Kinaxis for a number of years. Have you seen or would you attribute any sales force execution or sales execution or sales related strategic missteps as a driver of the slower growth here? Or is sounds like what you're saying is it mostly or entirely externally related? Robert Courteau: First of all, hi, Paul. The way I look at it is that if I look the last two years first, the thing that we're trying to do with management and the Board is to take a company that's $500 million and become a $1 billion company and to do that, as I said earlier, there's a whole bunch of things you do as a software company to get there, to get that scale and I feel like we've done a lot of them. The partnerships with our size, the focus on moving to public cloud, the opportunity to think about driving an AI strategy first in the industry, great pickup. These are things that we've done over the last couple of years that drive scale. The whole go-to-market strategy has been really about broad scale globally and the work that we've done in the last few months is to double down on our strength. So create market share in the categories that we already have advantage and we think there's still a lot of TAM and really the thing we're doing going into next year is to repurpose people around that strategy and that includes our go to market capability, meaning that how we set up territories, the kind of talent we want to apply to that, really bringing people into the company that really understand this new complex selling and so that's how I'm thinking about it. We've covered a lot of ground. We've got a higher win rate. We're creating market share, both directly with respect to TAM, but also with the SIs. We have an unbelievable reference base and customer satisfaction, and now we got to take advantage of those things and that's kind of how we're driving forward and the benefit of that is that when we enjoy now in the two times we've pretty well doubled the number of customers that we have in the last couple of three years and so the metrics aren't bad. What we got to do now is take advantage of the position in the marketplace and that's where Mark Morgan comes in. He gets this industry. He's when we did our assessment of Mark, I talked to customers, I talked to the partners, I talked to the influencers in the industry. His followership is going to be unbelievable and he's already brought a couple of people into the company and there's a lot looking to join the company. So, I would say that the one thing that we might not have anticipated is the importance of supply chain with the largest customers in the world against the backdrop of them being careful in the way they procure. That's been the gap and we even want to get organized around that as we go forward. Paul Treiber: Thanks. And secondly for John, best of luck in the future. The you've been at the company for 30 years, that gives you a really long-term perspective and I'm sure you've seen ebbs and flows in the past and looking at where we are right now, going through a little period of slower growth, you sound very bullish on the opportunity. Can you sort of relay or express comparatively how it was in the past and the bullishness where you are on the company's prospects here? John Sicard: Absolutely. Look, supply chain as a practice, supply chain as a competence is the operating system of humanity. It's not a nice to have. It is a requirement for a fully functioning successful society to exist and I absolutely see the industry at a pivotal moment, perhaps caused by a global pandemic and people realizing that their mad obsession for accuracy was at the expense of agility and there's a realization that successful supply chains for society require both and I think there's so we are -- I think at a very pivotal moment. I call it a renaissance, some people laugh when I use that word, but I it's a rebirth of the craft. Now these things don't happen overnight. People have asked me what's the likelihood that everybody adopts concurrency and automation and resilience, 100%. I just can't tell you exactly when and what the uptake will be. Now obviously, we've doubled the number of customers inside of a two-to-three-year period and we're starting to see that adoption even from some of the smallest and some of the very largest companies that do 100 companies that do a $100s billion in revenue are all recognizing that and that's causing my confidence at very least in the approach and the techniques that we've invented here at Kinaxis. I'll call it the new AI infusion to this equation carries a tremendous amount of progress promise. The notion of artificial intelligence applied to supply chain is going to drive automation, intelligent automation and I think that when you apply that to the overall solutions, that's what's going to ultimately build resilience. So that's driving my confidence and certainly adding Mark Morgan here into the equation, listen I spent probably the longest amount of hours with him prior to the selection, he was my first pick and I'm thrilled that we were his first pick and so I think he's going to have a pronounced impact on our growth as well. Paul Treiber: Thanks for taking the questions. Operator: Our next question comes from the line of Doug Taylor from Canaccord Genuity. Your line is open. Doug Taylor: Yeah. Thank you for taking my questions. I'm going to drill down from some of the bigger picture questions that have been answered so far and talk about the guidance for this year and what you're signaling with that. It remains a pretty wide range given how late we are in the year and so I just want to understand the implications for Q4 as the midpoint would suggest an uptick in the overall growth profile, while a similar profile to what we've seen over the last couple of quarters would suggest the lower end of the range. So my question is whether the mid or high end of the range is an achievable target still for this year and whether there's something you're seeing in the market that supports that? Blaine Fitzgerald: Sure. I'll take that Doug. Obviously, you're focusing on total revenue which is obviously one of the key areas and has a large range at this stage. $483 million to $495 million is what we've been consistently saying for the from the beginning of the year and we're continuing to say that at this stage. In Q2, I did make a mention of we'd be at the lower end of that range and I would say that's still consistent with what our thoughts are at this stage. There's always things that can change that though and we see that things that are there sometimes outside of our control such as foreign exchange rates and then there's other things that are completely in our control, which at this stage now is professional services, which is again continue to be a very high demand area, but we're actually getting control about how that growth is going. As we continue to leverage off of what we have from our partners and we're doing that more and more at this stage, which is partially why we're seeing an increase in our margins going all the way up to 32% for professional services. The one other key thing that can throw off our numbers and have a big upside is if subscription term license came in much higher than we expected. That can always be a last second change in a contract, especially for customers who want to have a hybrid contract where they want the option to have on prem and that's particularly why we have such a wide range at this stage. Doug Taylor: That's great color. Thanks for clarifying. Blaine, while I've got you, I think you mentioned in your prepared remarks the SAP S4/HANA migrations being a benefit and not a headwind in some aspect of the pipeline in the near term despite us hearing over the last couple of quarters some delays to rollouts related to the Hana migration. I just want you to if I could get you to clarify your comments there and maybe expand on that and what you're seeing? Blaine Fitzgerald: Yes, so number 1, we love that there's an S4/HANA migration. We've seen our win rates against SAP in particular go up as a result and they are included in that over 60% win rate against our three core competitors. On the other hand, they're a pain in the butt and because it does take a little bit longer to get those deals through because there is a lot more forward input on these massive transformations that are going through. It's trying to figure out the resources that are available to ensure that it's not only deploying S4/HANA but also the Kinaxis solution. So it creates a longer sales cycle, but again it's given us more opportunities, more wins against a very key competitor against us and I will welcome any S5/HANA migration that they might have in the future, but I'll even add in, we're always lucky to have someone who led a sales force at SAP. So Bob, why don't you add some color? Robert Courteau: The only thing I'd say is in these large enterprise companies, part of the challenge is what Blaine describes is the idea of transformation. Our biggest competitor is do nothing because and particularly around SAP. A lot of the doubling of the number of customers, predominant customer type is one that's innovative that sees supply chain as strategic. The alternative is do nothing and the S4/HANA upgrade is going to cause the do nothing clients to have to consider alternatives. And when they consider alternatives, we'll win. That's how this is going to play out over the next couple of years because we can these customers that are very careful know that we have the solutions with the highest customer satisfaction. The products go in and they're the least risky alternative and so that's why that whole opportunity over the next couple of years is significant for Kinaxis. Doug Taylor: Okay. Thank you. Last question for me, and I guess this could be for anyone. If we wind back the clock to the Maestro announcement a couple months ago. I think you had laid out a couple of different horizons as to the GenAI roadmap, and the business model that you had supporting it. Can you give us an update on where you sit with flushing out those the revenue model for some of the GenAI products you're hoping to bring on and the milestones we should expect here in the near and medium term? John Sicard: Yes, absolutely. So first, we're quite proud of our rapid progress here on our AI journey and we announced the event first our Maestro GenAI chat agent, which we seeded the market with, okay and we've got well over 100 customers now already actively leveraging that technology and anybody who's ever used that kind of technology, they know it's kind of addictive actually and so we've seeded our customer base with that usage while we're simultaneously moving towards our next layer and the future layers which will all be monetized. The next layer is having AI conversations with your data. Right now, when you use say ChatGPT, you're often having conversations with text documents. The future of this technology is to have conversations with your data, which is a giant leap forward and also to have this technology generate content for you, right, to have GenAI be a creator for you and these are the areas that we're investing in now and there'll be future releases which will get monetized for all those that are currently using the chat agent now. Ultimately and the holy grail is to have the agent become essentially your copilot in decision making and automating what I described in supply chain anyway, the ability to automate 80% of the obvious transactions should be hands free without human intervention and you can only do that if you have an AI technology that sits on top of an entirely current system. You cannot create an automation of a transaction without predetermination of whether it's safe on either side. What does it do to customer sat? What does it do to distribution downstream? So that's where our AI technology is at. We look forward to our next connections, which will be earlier in 2025 and we'll be showcasing some new stuff there. Blaine Fitzgerald: And Doug, maybe I'll even add on to that because you said revenue and I like revenue. One of the things -- so we were in board meetings obviously the last couple of days and our Chief Product Officer started talking about the timeline of when we're expecting what we'll call Phase 2 and Phase 3 of GenAI and when it's going to be ready for market and I think people will realize that it's coming sooner than they think. In fact, the targets they've set, they've already set for Phase 2, it's ahead of schedule at this stage, which as you can imagine, most product timelines are generally pushed back. So I'm pretty excited about when I start getting that revenue and we'll see how 2025 looks with some of those opportunities in our forecast. Doug Taylor: All right. Thank you, Blaine, and thanks, John, for your insights and I'll echo everyone else's congratulations on your upcoming transition to what I guess will be the next phase of your contributions to this organization. John Sicard: Thank you so much, Doug. Thank you. Operator: Our next question comes from the line of Lachlan Brown from Redburn Atlantic. Please go ahead. Lachlan Brown: Hi, all. Thanks for the question. The ACV over ARR 1.23 year-to-date, that was up from the first half. Was that driven by one large signing or was it more-broad based? And just on the sales deals, could you provide some color on the additional modules that you're typically upselling into throughout these contracts? And how should we think about the ramp up of these sales deals over the last of the contract? John Sicard: Lachlan, sorry, it's a little hard to understand you, but Blaine will do his best. Blaine Fitzgerald: I will. So ACV ARR, you asked a question about the ratio getting to 1.23 and that was a pretty big jump we saw again in Q3 after some big jumps we've seen over the previous quarters, we were at 1.18 at the end of Q2 and again only two years ago 1.08 and the year before that 1.04. So we are seeing a lot more rent deals and it's not just one or two, it is significant amount of deals that are asking for this that just gets in line with how they think about their budget constraints in the near term and the usage of our solution over a longer period of time. It's hard to say is it just one application or modules, it is numerous things that are happening, it is the number of users they want to roll out over time. There are specific modules like Demand.AI and Supply.AI they're starting to get a lot of attention at this stage and are being put into the back end of some of these contracts. I'm always hopeful that those timelines get moved forward as we move ahead, but at this stage, yes, we are seeing a lot more activity around ramp deals, but I would say it's across the board. They're looking at all of our modules and applications as well as our users and growing that. Lachlan Brown: Okay. That's very clear. And just on the Professional Services margin, you previously talked about these reverting, but they've been closed over the year. Obviously, that's a great outcome, but how should we think about these margins going forward? Is 30% the right way to think about this? Blaine Fitzgerald: Yes. When we started the year, I had a target for them, they're exceeding their targets. As soon as you get closer and closer to a number, I think we're at 20. 7%, as you get closer at 30%, I start saying, hey, we can hit 30%. And so, I like the fact that we have a very strong pricing power right now and I want to make sure that we utilize that pricing power to the maximum that we can and the next milestone is 30%. If people want to keep paying us that amount versus using our partners, we'll take that, but, we want to utilize our pricing power as much as we can in the near term. Lachlan Brown: That's clear. And if it's all right, I might just ask the last one. Fourth quarter, normally, it's a really high bookings quarter. I know it's early days, but any color on what you're seeing in October and the pipeline heading into the next few months? And just any color on how should you think about any lumpiness of renewals in the quarter? Thanks. Blaine Fitzgerald: Yes, Q4 is always a bigger quarter for renewals. So I won't really get too much into the details, but it's usually a higher renewal quarter. As far as talking about the quarter so far, we're not going to talk about how Q4 is going. Obviously, you're right, it is a bigger quarter generally for us, so. Lachlan Brown: Ok. Thanks. Operator: This concludes our Q&A section. I'm going to turn the call back over to Rick Wadsworth. Rick Wadsworth: Thanks, operator. For those of you who didn't get around to asking your questions, we'll follow-up with you immediately after the call. We do have a hard stop now. So thank you, everyone as always for participating. Appreciate your questions and your interest in Kinaxis. We look forward to speaking with you again when we report Q4 year end results. Bye for now. Operator: Thank you all for joining. This concludes today's call. [Operator Closing Remarks].

Earnings call: Hackett Group Beats Q3 Guidance with Strong GenAI Growth By Investing.com

Hackett Group (ticker: HCKT) has reported its third-quarter earnings for 2024, with total revenues reaching $79.8 million and adjusted EPS of $0.43, exceeding the company's quarterly guidance. The Oracle (NYSE:ORCL) and SAP segments performed robustly, and there was significant growth in GenAI engagements. Despite a decline in e-procurement, the overall revenue from the Global S&BT (LON:BT) segment remained unchanged year-over-year. The company's focus on GenAI and strategic acquisitions, such as LeewayHertz, is set to enhance its software service offerings. With a strong cash flow from operations, Hackett Group is accelerating its stock buyback program and has announced a quarterly dividend. In summary, Hackett Group's third-quarter performance in 2024 reflects a company in transition, capitalizing on the burgeoning potential of GenAI technology while navigating temporary setbacks in its e-procurement segment. With strategic acquisitions, a focus on innovation, and the return of key personnel, Hackett Group is positioning itself for sustained growth in the evolving landscape of AI-driven business solutions. The next earnings update is anticipated in mid-February, where the company will provide further insights into its progress and outlook. Hackett Group's (HCKT) strong third-quarter performance aligns with several key metrics and insights from InvestingPro. The company's adjusted EPS of $0.43, which exceeded guidance, is reflected in InvestingPro's data showing a P/E ratio of 19.17, suggesting a reasonable valuation given the company's growth prospects. InvestingPro Tips highlight that Hackett Group "has maintained dividend payments for 13 consecutive years," which is consistent with the company's recent declaration of a quarterly dividend. This long-standing commitment to shareholder returns is further supported by the current dividend yield of 1.81%. The company's robust financial health is underscored by another InvestingPro Tip indicating that "liquid assets exceed short term obligations." This aligns with Hackett Group's strong operational cash flow and its ability to accelerate the stock buyback program while maintaining dividend payments. Hackett Group's focus on high-margin services like GenAI is reflected in its impressive gross profit margin of 40.32% for the last twelve months. This strategic direction is likely to contribute to the company's profitability, as noted in the InvestingPro Tip that "analysts predict the company will be profitable this year." The revenue growth of 4.26% over the last twelve months, as reported by InvestingPro, supports the company's positive outlook and its ability to capitalize on increasing IT budgets for AI initiatives in 2025. For investors seeking a deeper understanding of Hackett Group's financial position and growth potential, InvestingPro offers 7 additional tips that could provide valuable insights into the company's future performance. Operator: Welcome to The Hackett Group Third Quarter Earnings Conference Call. Your lines have been placed on a listen-only mode until the question-and-answer session. Please be advised the conference is being recorded. Hosting tonight's call are Mr. Ted Fernandez, Chairman and CEO, and Mr. Rob Ramirez, Chief Financial Officer. Mr. Ramirez, you may begin. Rob Ramirez: Good afternoon, everyone. And thank you for joining us to discuss the Hackett Group's third quarter results. Speaking on the call today, I'm here to answer your questions for Ted Fernandez, Chairman and Chief Executive Officer of the Hackett Group, and myself, Rob Ramirez, Chief Financial Officer. A press announcement was released over the wires at 4:15 p.m. Eastern Time. For a copy of the release, please visit our website at www.thehackettgroup.com. We'll also place any additional financial or statistical data discussed on this call that is not contained in the release on the investor relations page of our website. Before we begin, I would like to remind you that in the following comments and in the question-and-answer session, we will be making statements about expected future results, which may be forward-looking statements for the purposes of the federal securities laws. These statements relate to our current expectations, estimates, and projections and are not a guarantee of future performance. They involve risks, uncertainties, and assumptions that are difficult to predict and which may not be accurate. Our actual results may vary. These forward-looking statements should be considered only in conjunction with the detailed information, particularly the risk factors contained in our SEC filings. At this point, I would like to turn it over to Ted. Ted Fernandez: Thank you, Rob, and welcome everyone to our third quarter earnings call. As we normally do, I will open the call with some overview comments on the quarter. I will then turn it back over to Rob to comment on detailed operating results, cash flow, and guidance. We will then review our market and strategy-related comments, after which we will open it up to Q&A. This afternoon, we reported total revenues of $79.8 million and adjusted earnings per share of $0.43, both of which exceeded our quarterly guidance. Our Oracle and SAP segments continued their strong performance, but what is new is the emergence and increased revenue growth from our GenAI engagements, which grew strongly on a sequential revenue basis in the quarter. This new GenAI consulting revenue, driven by our AI Explorer, Capital XPLR platform, was offset by the weakness in our e-procurement group and resulted in our GSBT segment being flat on a year-over-year basis. We are seeing clients quickly moving from awareness and education about its GenAI adoption opportunity to budgeted projects, which we expect to further increase in the fourth quarter and continue throughout 2025. We believe GenAI is a generational opportunity which will fundamentally change the way companies operate as well as the way consulting services are sold and delivered. The GenAI platform capability we have developed in AI Explorer and now expanded with the ZBrain platform, which was part of the LeewayHertz acquisition, are highly differentiating and should allow us to compete strongly for the emerging growth in this important space. Our Oracle segment performance was consistent with the momentum we have experienced since early 2023, when Oracle re-established its dedicated sales team in its Enterprise Performance Management, or EPM, offerings. Our SAP solutions segment performed above expectations for the third quarter in a row as it closed several value-added reseller transactions which benefited the quarter. This increase is directly attributable to our decision last year to expand our sales force and more broadly leverage our market-leading life sciences capability. We continue to see the GenAI opportunities emerge. We have conducted hundreds of meetings with Global 1000 organizations since our introduction of AI Explorer earlier this year. These demo meetings and conversations have provided us with valuable client adoption considerations along with their implementation concerns and limitations. These initial meetings are now becoming new meaningful opportunities for us to serve clients strategically and broadly. We use this unique insight to make powerful improvements to our recent release, AI Explorer Version 2.0. The most important of the enhancements is our ability to simulate an organization's enterprise use case opportunities by leveraging Hackett IP, including our benchmarking, best practice business processes, and software configuration knowledge to identify AI automation opportunities and data source requirements at the work step or activity level. This enables us to identify, design, and evaluate meaningful AI solutions or use cases, including AI agent opportunities, using our AI Explorer's GenAI assisted capabilities. We believe that our new Explorer Version 2.0 capabilities and our acquisition of LeewayHertz are already favorably impacting our conversion rates and significantly expanding the downstream revenue opportunities with our clients. Given the strategic access and platform expanding capabilities of AI Explorer, it was natural for us to extend our AI implementation capabilities to fully be able to develop and implement GenAI use cases that we were identifying. This resulted in our acquisition of LeewayHertz, a highly recognized provider of advanced GenAI solutions. The acquisition also included a GenAI orchestration solution, ZBrain, which we agreed to contribute into a newly created joint venture with the LeewayHertz founder. The JV, which will bring together the AI Explorer and ZBrain software platforms and will focus on licensing the platforms and creating a first-of-its-kind GenAI ideation through implementation software-as-a-service offering. We believe this JV creates an entirely new value creation opportunity for our shareholders that could result from the growth of annual recurring revenues. It would also allow us to have the opportunity to raise capital and achieve stand-alone valuations due to its GenAI software focus. Our pre-acquisition collaboration with LeewayHertz during the third quarter resulted in strong sequential quarterly GenAI revenue growth, which we expect will continue into the fourth quarter and could have consequential impact on our 2025 results. There is no doubt that in just nine months, our aggressive pivot to become the architect of our client's GenAI journey is being well-received and has significant value creation potential for our organization. We have extended and strengthened our capabilities and continue to add GenAI-enabled transformation engagements driven by AI Explorer. Our unique ability to identify meaningful use cases, determine their feasibility leveraging Hackett IP, which now extend to implementation and platform licensing prospects is highly differentiated. On the executive advisory front, we continue to invest in growing our IP-based programs. We believe our move to fully integrate GenAI content, which is now being further augmented by the highly recognized GenAI content, which was infused by the LeewayHertz acquisition, will be responsive to our client's strong interest in this area. We expect our fourth quarter sequential growth in our advisory program sales and renewals to reflect this impact. On the balance sheet side, as we announced today, in the near term, they can expect us to use our strong cash flow from operations to accelerate our stock buyback program rather than pay down our remaining outstanding balance of our credit facility while continuing to invest in our business. Our $20 million stock back addition to our existing $11.1 million authorization leaves us with $31.1 million as we start the quarter. With that said, let me ask Rob to provide details on our operating results, cash flow, and also comment on outlook as we will make additional comments on strategy and market conditions following Rob's comments. Rob? Rob Ramirez: Thank you, Ted. As I typically do, I'll cover the following topics during my portion of the call. I'll cover an overview of our 2024 third quarter results, along with an overview of related key operating statistics. I'll cover an overview of our cash flow activities in the quarter, and I will then conclude with a discussion on our financial outlook for the fourth quarter of 2024. For purposes of this call, I will comment separately regarding the revenues of our global S&BT segment, our Oracle solution segment, our SAP solution segment, and the total company. Our global S&BT segment includes the results of our North America and international GenAI consulting implementation, benchmarking and business transformation offerings, executive advisory and IPaaS programs, and our OneStream and e-procurement implementation offerings. Our Oracle solutions and our SAP solution segments include the results of our Oracle and SAP offerings respectively. Please note that we will be referencing both total revenue and revenue before reimbursements in our discussion. Reimbursable expenses are primarily project, travel related expenses, passed due to our clients, and have no associated impact on our profitability. During our call today, we will also reference certain non-GAAP financial measures. Which we believe provide useful information to investors. We've included reconciliations of GAAP to non-GAAP financial measures in our press release filed earlier today, and we'll post any additional information based on the discussion from this call in the investor relations page of the company's website. For the third quarter of 2024, our total revenues were $79.8 million. Our revenues before reimbursements were $77.9 million, which was above the high end of our quarterly guidance. The third quarter of 2024 reimbursable expense ratio on revenue before reimbursements was 2.3%, as compared to 1.6% in the prior quarter, and in the same period in the prior year. Total (EPA:TTEF) revenues from our global S&BT segment were $44.1 million for the third quarter of 2024. Revenues before reimbursements for our global S&BT segment were $43.3 million for the third quarter of 2024, essentially flat when compared to the same period in the prior year. As Tim mentioned, the revenue from our GenAI consulting and implementation projects in this segment were primarily offset by weakness in our e-procurement implementation offerings. Total revenues from our Oracle Solutions segment were $22.8 million for the third quarter of 2024. Revenues before reimbursements for our Oracle Solutions segment were $21.8 million for the third quarter of 2024, an increase of 7% when compared to the same period in the prior year. These results continue the strong momentum we've experienced since the second quarter of 2023. Total revenues from our SAP Solutions segment were $13 million for the third quarter of 2024. Revenues before reimbursements for our SAP Solutions segment were $12.9 million for the third quarter, an increase of 17% when compared to the same period in the prior year, primarily driven by strong software-related sales in the quarter. Approximately 22% of our total company revenues before reimbursements consisted of recurring, multi-year, and subscription-based revenues, which includes our research advisory, IP as a service, multi-year benchmarks, and application-managed services contracts. Total company adjusted cost of sales, which exclude reimbursable expenses, non-cash stock-based compensation expense, and all acquisition-related cash and non-cash compensation expense totaled $44.2 million, or 56.8% of revenues before reimbursements in the third quarter, as compared to $42.9 million, or 57.5% of revenues before reimbursements in the prior year. Total company consultant headcount was 1,262, at the end of the third quarter of 2024, as compared to 1,105 in the previous quarter and 1,177 at the end of the third quarter of the prior year. Third quarter ending headcount was primarily driven by increases from our GenAI acquisition practice. Total company adjusted gross margin on revenues before reimbursements, which excludes reimbursable expenses and non-cash stock-based compensation expense, and all acquisition-related cash and non-cash compensation was 43.2% in the third quarter, as compared to 42.5% in the prior year, driven due to the revenue growth from both our Oracle and SAP segments. Adjusted SG&A, which excludes non-cash stock-based compensation expense and all acquisition-related cash and non-cash expenses was $17 million, or 21.8% of revenues before reimbursements in the third quarter. This is compared to $15.3 million, or 20.5% of revenues before reimbursements in the prior year. The year-over-year absolute dollar increase is primarily due to foreign exchange fluctuations, as well as incremental commissions from increased SAP and Oracle segment sales. Adjusted EBITDA, which excludes non-cash stock-based compensation expense and all acquisition-related cash and non-cash expenses, was $17.7 million, or 22.7% of revenues before reimbursements in the third quarter, as compared to $17.3 million, or 23.2% of revenues before reimbursements in the prior year. GAAP net income from the third quarter of 2024 totaled $8.6 million or diluted earnings per share of $0.31, as compared to gap net income of $9.4 million, or diluted earnings per share of $0.34 in the third quarter of the prior year. GAAP net income for the third quarter includes non-cash stock compensation expense from our recently approved Share Price Appreciation Equity Program of $602,000, and acquisition-related non-cash compensation expense of $232,000, which in total impacted our GAAP results by $0.02. Adjusted net income, which excludes non-cash stock-based compensation expense and all acquisition-related cash and non-cash expenses, for the third quarter of 2024 totaled $12.1 million, or adjusted diluted net income per common share of $0.43, which is above the top-end of our earnings guide range and compares to our prior year adjusted diluted net income per common share of $0.41. Our adjusted net income for the third quarter of 2024 was favorably impacted by approximately $0.01 due to a lower GAAP effective tax rate on adjusted earnings than we originally estimated when we provided guidance last quarter. As announced in September 2024, during the third quarter, the company acquired the operations of LeewayHertz, an India-based AI implementation services firm. Due to the timeliness of transaction, this acquisition did not have an impact on our adjusted net income for the third quarter of 2024. Acquisition-related cash and non-cash stock compensation expense relates to a portion of the purchase consideration for the LeewayHertz acquisition. This consideration contains either performance or service vesting requirements and as such is reflected as compensation expense under GAAP rather than purchase consideration. The company's cash balances were $10 million at the end of the third quarter of 2024 as compared to $19.1 million at the end of the previous quarter. Net cash provided from operating activities in the quarter was $10.6 million primarily driven by net income adjusted for non-cash activity partially offset by increases in accounts receivable. Our DSO or day sales outstanding was 70 days at the end of the quarter as compared to 68 days at the end of the previous quarter and as compared to 75 days in the prior year. Cash utilized for purchase consideration for the LeewayHertz acquisition amounted to $7.6 million in the quarter. This does not include any stock purchase consideration or any contingent compensation that may be earned in the future. During the third quarter of 2024, the company paid down $7 million on its credit facility. The balance of the company's total debt outstanding at the end of the third quarter of 2024 was approximately $20 million. Subsequent to the end of the quarter, the company has paid down an additional $3 million. During the quarter, we repurchased 71,000 shares of the company's stock for an average of $26.66 per share at a total cost of approximately $1.9 million. Driven by open market purchases and from employees to satisfy income tax withholding triggered by the vesting of restricted shares. Our remaining stock repurchase authorization at the end of the quarter was $11.1 million. At its most recent meeting, subsequent to quarter end, the company's board of directors authorized a $20 million increase in the company's share purchase authorization. Additionally, the board declared the fourth quarterly dividend of $0.11 per share for the shareholders of a record of December 20, 2024 to be paid on January 3, 2025. Before I move to guidance for the fourth quarter of 2024, I'd like to remind everyone of the seasonality of our business. Specifically, the increased holiday and vacation time that is historically taken in the fourth quarter would decrease our available billing days by approximately 10% when compared to the third quarter. The company estimates total revenue before reimbursements for the fourth quarter of 2024 to be in the range of $73.5 to $75 million. We expect all second revenues before reimbursements to be up and the total company will be up 3% to 5% when compared to the prior year. We estimate adjusted diluted net income per common share in the fourth quarter of 2024 to be in the range of $0.41 to $0.43 which assumes a GAAP effective tax rate on adjusted earnings of 27.6%. We expect the adjusted gross margins percentage of revenues before reimbursements to be approximately 45% to 46%. We expect adjusted SG&A and interest expense for the fourth quarter to be approximately $17.2 million. We expect fourth quarter adjusted EBITDA as a percentage of revenues before reimbursements to be in the range of approximately 23% to 24%. Lastly, we expect cash flow from operations to be up on a sequential basis. At this point, I'll turn it back over to Ted to review our market outlook and strategic priorities for the coming months. Ted Fernandez: As we look forward, let me share our thoughts on the near and long-term demand environment and the growth opportunity it offers our organization. Although demand for digital transformation remains strong in traditional areas, it continues to be somewhat impacted by thoughtful decision-making as organizations assess competing priorities due to economic concerns. As we head into 2025, we expect client program budgets and allocations to increase to the rapidly emerging GenAI solutions area. While in 2024, GenAI budgets were primarily focused in developing awareness and AI, a dip-in-their-toe-in-the-water kind of approach, in 2025, we believe you will see an increasing amount of IT budgets specifically allocated to GenAI initiatives in high-feasibility and high-impact areas. We also expect to see an increase in investment in data quality and value initiatives which are critical to any GenAI strategy. The potential of AI will define an entirely new level of GenAI-enabled world-class performance standards, driving all software and services providers to extend the value of their existing offerings. We believe this will result in innovations which all organizations will have to consider. The shift is consistent with our aggressive pivot to GenAI-enabled transformations, which we believe positions a generational value creation opportunity for our organization. Strategically, we continue our focus on recurring high-margin IP-related services, but what is new is the accelerated focus and investment we're making on GenAI. The most significant investments have been in AI Explorer, as well as training and development of our associates. Our strategic acquisition of LeewayHertz, a highly recognized GenAI consulting and implementation firm, further expanded and accelerated all of our efforts. We are using the AI Explorer platform as the vehicle to integrate the GenAI capabilities and impact across all of our offerings. We also continue to hire and upgrade our skills in critical data and tech architecture resources to further support our efforts. These efforts are rapidly allowing us to become key architects, advisors, and consultants of our clients' GenAI journey. We now believe that AI Explorer will be our primary strategic entry point to clients that we will use to position our traditional strong benchmarking, digital transformation, as well as our advisory offerings. The halo effect or downstream revenue impact has been around 40% over the last several years, and that refers to our IP-based services. We now believe this will only be expanded by our AI Explorer offering and the enterprise-wide strategic access it provides us. We believe the integration of our other IP platforms with AI Explorer significantly enhances the value of our IP and fully aligns it into the emerging GenAI world-class performance standards we believe it will establish. Another critical investment that we have made is to build our own GenAI-assisted knowledge-based solution called AppHacket AI. We expect the integration of our valuable IP and content that leverages GenAI to significantly enhance the delivery of our insight that we are asked to provide our clients every day, but will now be provided in a more efficient and with more significantly personalized insight. We are ingesting proprietary IP, including benchmarking, best practices, and research IP to support the myriads of queries that we are required to support our executive advisory and consulting clients as well as support our associates in general. We have also embarked on a new initiative which extends to also address the efficiency and quality of the delivery of our technology implementation-related services. All of these initiatives are harnessing the power of GenAI to improve and accelerate the delivery of our solutions and services with the intent to differentiate our capabilities and result in improved revenue growth and margins. On the talent side, competition for experienced executives, especially with high technology agility, continues. Overall, we saw turnover continue to moderate in turnover and expect it to remain low during the quarter and we expect that trend to continue. We also continue to explore strategic partnerships and acquisitions that will allow us to extend our GenAI capabilities and sell our IP through new channels that will allow us to reach beyond our current Global 1000 focus in an efficient manner. As I have mentioned on previous calls, we are adding videos of our platforms on the Investor Relations page of our website that investors can utilize to become more familiar with all of our new capabilities. Lastly, even though we believe we have the client base and offerings to grow our business, we continue to look for acquisitions and alliances that strategically leverage our IP and add scope, scale, and capability which can accelerate our growth. As always, let me close by congratulating our associates on our performance and by thanking them for their tireless efforts and always urge them to stay highly focused on our clients and our people no matter what challenges we may encounter. Those conclude my comments. Let me turn it over to our operator and let us move into the Q&A section of our call. Operator? Operator: Thank you. [Operator Instructions] Our first question comes from George Sutton with Craig Hallum. You may go ahead. George Sutton: Thank you. Guys, it's impressive to watch how AI has really shifted the opportunity here. Ted, I wondered if you could walk through Version 2.0. You've mentioned hundreds of meetings you've had with clients or potential clients. Can you just talk about the pipeline that is getting created? And you also mentioned a favorable impact in rates. I wondered if you could be a little more specific about what you mean there. Ted Fernandez: Version 2.0 is very significant. As you know, George, we conducted hundreds of meetings throughout the first, second, and nearly half of the third quarter. We started with a beta version of Version 2.0 probably halfway through the third quarter. I think it's also important to note that it was probably around that same time where our collaboration with LeewayHertz, even though it was pre-acquisition also accelerated. So the capability of Version 2.0 and the inclusion of their GenAI implementation skills significantly impacted I'm going to say the response we were getting from clients. And when we look at those meetings that we have held using Version 2.0, which include our new LeewayHertz leaders and associates, those conversion rates are meaningfully higher than anything we were previously experiencing. What makes Version 2.0 so compelling? What's been unique about our approach from the beginning was that we decided to understand how to enable a work step, which was the lowest component of we thought enablement that we could evaluate given our very strong business process knowledge. And that has turned out to be actually very favorable to us because that was not only a way to be able to simulate or anticipate and design and identify use cases, but it also becomes a very granular way to evaluate the related cost of any of the use cases that we're identifying. So what's important about Version 2.0 is that we can now walk into a client and provide a demo by having industry client information and their technology landscape and actually walk them through the use cases that are available throughout their entire enterprise, front mid, or back office. I know that sounds too good to be true and hard to believe, but that is exactly what we're doing. And it allows us to help clients quickly prioritize the areas that they deem to be important. It allows us then to, we believe, with very strong credibility, speak to why that use case opportunity exists, the benefits related to that use case, and now with the integration of LeewayHertz, what we call a detailed calculation of costs so that we can provide ROI. So the combination of all of those things, which was happening throughout the third quarter, probably more in the mid to the latter part of that quarter are the things that we've seen have impacted our close rate and allowed us to either go back or reengage with clients that have been exposed to Version 1.0, but approach them with a much more compelling, confident, detailed feasibility and impact presentation that we believe has started to accrue in our favor and has led to the success that we expect to continue from Q3 to Q4. George Sutton: Ted, you talked about 2025 showing increased IT budgets for AI initiatives with '24 being just the toe in the water. I know Rob doesn't want me to get too crazy in terms of how we built that out in our model, but can you just talk about what you mean quantitatively relative to that statement? Ted Fernandez: We believe just for any software service consideration for clients, all software and service solutions providers that have the ability to engage clients strongly about relative their services. They should all see a marked increase in both the client engagement and the revenues that initially launch. I would expect then those engagements to then increase because what's happening is the first step was the call it awareness and education and clients depending. Obviously the highly sophisticated ones jumped out early, built out pretty strong AI centers of excellence with their own capability and tech platforms to do all that, but that wasn't the majority of these large clients. In fact, I would say it was the minority. So what you're now seeing is everyone now evaluating exactly what do they want to have in place, how much do they want to build themselves or outsource, where they should start, and what the return is for any of those initiatives. In that back opportunity when it comes to helping someone identify the opportunities across the enterprise and helping them have a pretty well defined benefit case feasibility impact ROI assessment that is where we play. So we believe that that benefit will accrue to us throughout the year. Time will tell just exactly how that impacts our '25 results, but we believe it provides a very meaningful opportunity as we close out the year and we prepare to go into 2025. George Sutton: Great. Last question for me. You pay 40% historically. I'm not really sure what you're referring to there. I think you mean attachment of proprietary IP opportunities. I want to make sure I understand what you're referring to there and how that's going to shift in your view. Ted Fernandez: As you recall historically, our strategic entry point when it came through our IP-led offerings, which are primarily our benchmarking and executive advisory and then subsequently market intelligence program was the way clients would engage us and then from those who relied on our IP and valued it ended up becoming meaningful consulting clients. So our historical results that those entry points were driving approximately 40% of our total revenues over the last several years. The point I wanted to make is that AI Explorer will only add to that because AI Explorer is, I'll call it IP rich on steroids and with its capabilities that we would expect more of our halo effect or downstream revenue to come from our traditional entry points but also through our AI Explorer capability, which by the way also envelopes our benchmarking and best practice insight that our clients value in our executive advisory programs. So that 40% should increase throughout 2025 when we look at IP-based entry points into the delivery of consulting or technology implementation services. Jeff Martin: Thank you. Good afternoon. Ted, was curious if you could compare and contrast the types of conversations that you're having now post-acquisition of LeewayHertz with client prospects versus when you were going without LeewayHertz. Ted Fernandez: It's significantly different. Some of it driven by our, I'll call it this new additional capability, but we also learned as we started qualifying those demo meetings that we were taking, we started learning what were more educational and awareness-related opportunity versus which had higher engagement opportunities. So what happened as we, I think, started Q3, we started becoming much more demanding on who needed to be on the call in order for us to do an AI Explorer demo. It became only more increasingly demanding as we got closer to releasing Version 2.0. At the beginning, we were just delighted that a, I'll call it a global 1,000 client wanted to learn more about our new capabilities. As we got into Q3, it was clear that we wanted to really qualify the opportunity more. And we understood by then that having a strong GenAI implementation partner with us on those calls could significantly influence the impact and credibility of the call. So as we went through Q3, we then became more demanding and said it's got to be a CIO, CTO, or AI leader within that organization, along with any of our traditional C-level officers across other functions that we have very strong relationships with. But we realized that we needed to have both strong implementation capability and credibility, which that initial partnering, which you could have called pre-acquisition collaboration became very helpful, especially as we were completing our acquisition due diligence, but also understanding that at the end of the day, you needed AI leadership or IT leadership to participate in a strategic engagement around either ideation or evaluation of GenAI opportunities. So we became just more demanding. Now, as we have full simulation capabilities, we're becoming more demanding because we believe we are delivering a lot of value in that initial introductory call by virtue of this simulation capability. Jeff Martin: Thank you. On the implementation side, could you talk about what it takes to scale that, what your plans are perhaps for investing in personnel and anything else you might need in order to really build out further implementation capabilities? Ted Fernandez: Our plans are to aggressively increase the GenAI implementation capabilities that either came with the LeewayHertz acquisition or that were part of Hackett, part of our development in GenAI efforts pre- LeewayHertz acquisition. So, I mean, initial goal here is to double those resources as quickly as we can. Jeff Martin: Great. The last one for me is on the market intelligence side. One of your key hires, I believe, had a non-compete inhibitor to being able to really focus on that business. I believe we're near the end of that non-competition term. Could you provide us an update there and what the plans are for further build out of the market intelligence offerings? Ted Fernandez: The answer is that that individual actually returns to us on the 7th. So he was the global leader of our executive advisory and that includes our market intelligence program, so all of our subscription based products. So we are welcoming him back later this week. And obviously, I'm sure he can't wait to get started and try to re-engage with that team and try to impact our year-end results and 2025 plan. Jeff Martin: Thank you. Operator: Our next question is from Vincent Colicchio with Barrington Research. You may go ahead. Vincent Colicchio: Yeah, Ted, shifting gears. What should we expect on the e-procurement side? Should we expect this weakness to be extended? Ted Fernandez: If it just remains flat to where it is right now, that year-over-year impact goes away at the end of Q1. So we will no longer have that, but that negative impact actually, without that negative impact, GSBT would have been up close to 5% in the quarter. Vincent Colicchio: Nice quarter with nice growth with Oracle and SAP. On a seasonally adjusted basis, should we expect to continue to have strength there? Ted Fernandez: The answer is that you should consider strength as Rob just provided in his guidance comments. All three segments will grow and we expect our guidance rates indicate 3% to 5% year-over-year growth. So follow Rob's guidance. Vincent Colicchio: Thank you. Operator: Thank you. At this time, I show no further questions. I will now turn the call back over to Ted for final remarks. Ted Fernandez: Thank you, operator. Let me thank everyone for participating in our third quarter earnings call. We look forward to updating you on the fourth quarter in our annual results when we report our fourth quarter results in the early third quarter of February. Is that correct, Rob? Rob Ramirez: Third week. Ted Fernandez: Third week. I'm sorry. Early third week. Mid-February. Thank you for participating. We'll look forward to catching up soon. Operator: Thank you. That does conclude today's conference. Thank you all for participating. You may disconnect at this time.

Earnings call: Grid Dynamics exceeds Q3 2024 expectations with record revenue By Investing.com

Grid Dynamics (GDYN), a leader in enterprise-level digital transformation, reported a strong performance in the third quarter of 2024, surpassing revenue and profit expectations. The company's revenue reached a record $87.4 million, beating the guidance range of $84 million to $86 million. Non-GAAP EBITDA also exceeded forecasts, coming in at $14.8 million against the anticipated $12.3 million to $13.3 million. The impressive results were driven by demand across key sectors, with substantial growth in the Finance vertical and strategic acquisitions bolstering the company's capabilities. Grid Dynamics' third-quarter earnings call, led by CEO Leonard Livschitz, CFO Anil Doradla, and COO Yury Gryzlov, showcased a company on the rise, with record revenues and a robust outlook for the future. Strategic acquisitions and a focus on AI solutions have positioned the company well to capitalize on the growing demand for digital transformation and financial services, as evidenced by the impressive growth in the Finance vertical. The company's expansion into new markets and continued investment in technology and training indicate a commitment to maintaining its momentum into 2025 and beyond. With a strong balance sheet and stable pricing trends, Grid Dynamics appears to be on a path of sustained growth fueled by innovation and strategic partnerships. Grid Dynamics' strong Q3 2024 performance is reflected in several key metrics and insights from InvestingPro. The company's market capitalization stands at $1.22 billion, underscoring its significant presence in the digital transformation space. One of the most notable InvestingPro Tips is that Grid Dynamics holds more cash than debt on its balance sheet. This aligns with the company's reported $231.3 million in cash and cash equivalents as of September 30, 2024, providing a solid financial foundation for future growth and potential acquisitions. Another relevant InvestingPro Tip indicates that net income is expected to grow this year. This expectation is consistent with the company's strong Q3 results and positive Q4 outlook, where revenues are forecast between $95 million and $97 million. The InvestingPro Data shows a robust revenue of $318.34 million for the last twelve months as of Q2 2024, with a quarterly revenue growth of 7.36% in Q2 2024. This growth trajectory supports the company's record-breaking Q3 revenue of $87.4 million mentioned in the earnings report. It's worth noting that Grid Dynamics has demonstrated a strong return over the last year, with a 1-year price total return of 55.77%. This performance aligns with the company's successful expansion and increasing demand for its services across various sectors. For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for Grid Dynamics, providing a deeper understanding of the company's financial health and market position. Cary Savas: Good afternoon, everyone. Welcome to Grid Dynamics Third Quarter 2024 Earnings Conference Call. I'm Cary Savas, Director of Branding and Communications. At this time, our participants are in listen-only mode. Joining us on the call today are CEO, Leonard Livschitz; CFO, Anil Doradla; and COO, Yury Gryzlov. Following the prepared remarks, we will open up the call to your questions. Please note that today's conference is being recorded. Before we begin, I would like to remind everyone that today's discussion will contain forward-looking statements. This includes our business in a financial outlook and the answers to some of your questions. Such statements are subject to the risks and uncertainty as described in the company's earnings release and other filings with the SEC. During this call, we will discuss certain non-GAAP measures of our performance, GAAP to non-GAAP financial reconciliations and supplemental financial information are provided in the earnings press release and the 8-K filed with the SEC. You can find all the information I just described in the Investor Relations section of our website. I now turn the call over to Leonard, our CEO. Leonard Livschitz: Thank you, Cary. Good afternoon, everyone, and thank you for joining us today. Grid Dynamics reported another solid quarter as positive trends continued to favorably influence our business. Our third quarter results were above our guidance range and exceeded Wall Street expectations, both in revenue and non-GAAP EBITDA. More importantly, our revenue and profitability were the highest in a company's history. Similar to the second quarter, we exited the third quarter with a record billable engineering headcount. Customers, both existing and new, are contributing to our strong results, which is a testament to our technology differentiation and delivery excellence. The addition of Argentina-based Mobile Computing enhances our Follow-the-Sun capabilities, and the acquisition of U.K.-based JUXT elevates our industry expertise in Banking and Financial Services. With both acquisitions, our teams have started working together and I expect them to generate immediate, scalable synergies starting in the fourth quarter. There are many trends shaping the company, both in the fourth quarter of 2024 and in 2025. Some notable ones I will share with you today. As we exit 2024, our long-term targets around the company's growth, profitability and technical leadership remain unchanged. Now coming to the demand environment. Similar to the first half of 2024, demand trends improved across our customers. In the third quarter, we witnessed our customers funding key programs and initiatives. At many of our customers, there is a sense of urgency to complete projects by the end of the year. Numerous initiatives that were held back during the economic cycles are being prioritized for completion. This is something we witnessed across a wide range of customers and industries. In many ways, the foundation of the third quarter demand trends were set up in the first half of the year. If you recall from my last quarter commentary, I highlighted the first quarter was characterized by customers focusing on sharing their outlooks and forecast plans, but not aggressively spending. In the second quarter, customers were more willing to release budgets and implement their plans. Bottomline, the positive demand environment that we witnessed in the third quarter was a result of steady improvements over the past couple of quarters and we expect it to continue into the fourth quarter and beyond. We set a new record for partnership influenced revenues. Year-to-date, partnership revenue contribution is 18% of the total revenue. Our focus on hyperscalers paid off, with three of the largest being in the top five for the partnership revenue. As I pointed out earlier, we are thrilled to welcome JUXT and Mobile Computing to Grid Dynamics. Each company brings in a unique set of capabilities. Founded in 2013, JUXT is known for delivering complex end-to-end solutions from design user experience to deep functionality and ongoing managed services. Their specializations in mission-critical platforms and products for leading banks and financial institutions make them a strategically important addition to Grid Dynamics, especially as global demand for reliable, scalable, future-proof data solutions continue to grow. Their focus on risk platform, structured products, equity derivatives and financial reporting is highly complementary to our current offering in Financial Services, which adds into our portfolio some of the world's largest banks and financial institutions. The acquisition of Mobile Computing expands Grid Dynamics' global footprint and follows the Sun delivery model. Founded in 1998, Mobile Computing is recognized as a leader in digital transformation offering a comprehensive suite of solutions spanning industries including Manufacturing, CPG and Financial Services. By adding this talented team in Argentina, our clients now have expanded options in the Americas, complementing our established presence in the United States, Mexico and Jamaica. During the last earnings call, I shared some insight around vendor consolidation across many of our clients. Over the past 12 months, customers have been scaling back on the number of IT vendors they work with. During the third quarter, the majority of vendor consolidation efforts across customers were completed. Grid Dynamics' technology and operations excellence is highly valued and this helped us join a short list of strategic partners for those customers. Now turning to our AI initiatives, I am pleased to report that our AI capabilities continue to gain significant traction across our customer base. We've substantially expanded our AI portfolio and now have over 30 service offerings and solutions specifically targeting Fortune 500 companies across various industries. These solutions are designed to drive both topline growth and bottomline efficiency for our enterprise clients. On the revenue side, we're focused on innovative customer experiences and enhanced marketing, pricing and product decisions. On the cost side, our solutions center on efficiency improvements and enterprise knowledge management. What's particularly encouraging is the evolution we're seeing in our AI engagements. While previous quarters were dominated by POCs and user-facing pilot programs, this quarter marked a significant shift as more projects moved into the full production environment. Our pipeline of AI opportunities has grown to more than 100 active opportunities, representing a 50% increase from the last quarter. This growth reflects the increasing enterprise readiness to move beyond experimentation to implementation of AI solutions at scale. Currently, we're seeing particularly strong demand in three areas of AI. AI-based search, conversational AI and catalog enrichment. This demand is driven by rapidly evolving customer expectations as interactions with the AI-based assistance become more commonplace in both consumer and enterprise contexts. To support this growing demand, we're expanding our partnerships with hyperscalers, building specialized accelerators based on their foundational models and AI-based services. Internally, we continue to invest in our own AI capabilities. We've made significant strides in improving our engineering productivity through the implementation of AI coding assistance. This enhances our delivery efficiency and ensures our teams stay at the forefront of AI technology implementation. Now, let me share a few examples of our AI programs at large enterprises. At one iconic retailer, we've launched an AI solution that streamlines their product catalog management by automatically extracting and harmonizing product attributes from unstructured data, significantly improving operational efficiency and data quality. For one of the largest U.S. auto parts provider, we are implementing an advanced AI assistant that connects customers with the store associates through instant messaging. This solution incorporates visual auto part recognition and conversation and part finding capabilities, enhancing both customer experience and operational efficiency. At one of the largest beverage companies, we are developing a conversational knowledge AI platform focused on improving employee productivity by providing intelligent access to corporate knowledge and streamlining internal processes. These implementations showcase our ability to deliver AI solutions that drive meaningful business outcomes across diverse industry verticals. As we look ahead, we remain confident in our positioning as a leader in Enterprise AI implementation, supported by a growing pipeline and expanding partnership ecosystem. In the quarter, there were several trends and I want to share some of the notable ones. Number one, logo momentum. In the third quarter, we signed six new logos, which are large enterprises. Of these customers, we signed in a quarter, one is a global food product and hospitality distribution company, another one is an automotive part company and another one is one of the largest grocery retailers in Europe. Partnerships. Revenues driven by strategic partnerships have shown sustained growth, contributing 18% of our total revenue in the first three quarters of 2024. In response to this positive trend, we're investing in a joint sales and marketing and collaborating closely with hyperscale and SaaS providers. These efforts span across critical areas such as digital commerce, application modernization, data platforms and engineering services, allowing us to tap into an even broader range of opportunities. Additionally, our partners are emerging as critical channels for seizing opportunities in artificial intelligence and Generative AI, as demand in these areas continue to rise. To further strengthen our footprint, we're actively deploying our AI and Generative AI accelerators across hyperscaler platforms and marketplaces, enhancing accessibility and engagement for clients seeking advanced AI solutions. Indian expansion. Our Follow the Sun strategy provides the framework of scaling our global locations. India is now in our top two countries by headcount and it is an integral part of our global delivery model. Bangalore, our third location in India, is now scaling its team, has been a successful addition to our Indian operation. We're scaling relationship with India-based GCCs, recently hosting a technology and innovation forum attended by more than a dozen GCCs. European business. With roughly mid-teens of our revenue, Europe continues to be strategic to our growth. We're increasing our footprint with the European division of our large global accounts. We're also expanding our business with joint go-to-market strategies with hyperscaling across all our services. We're witnessing significant AI adoption trend with clients engaging us to assess their AI and data platform capabilities in preparation for building AI platforms that will support multiyear business transformations. A major U.K.-based Retail customer is engaging us not only on the e-commerce transformation, but also on their cloud migration journey this year. In Q4, we're launching a composable commerce B2C solution for a major auto part distributor. We're working toward helping them further modernize and consolidate their complex technology landscape into 2025. During the quarter, Grid Dynamics delivered some notable projects. A leading global technology company sought a solution to maintain user data in compliance with privacy regulations. Grid Dynamics successfully implemented a consolidated system, enabled centralized monitoring and management of datasets and user workflows. The UI application has been widely adapted across multiple cross-functional teams within the organization. The new system provides business teams with a standardized method to ensure datasets meet current regulatory requirements. It also maintains a comprehensive audit trails for any changes, enhancing transparency and accountability. A leading financial and investment services company aimed to enhance experience on its internal web portal, which serves over 10,000 financial advisors. The goal was to improve search result accuracy by understanding financial advisors' intent and delivering the most relevant information. The solution incorporates a do-no-harm analysis to ensure reliability. This feature prioritizes accuracy over completeness by withholding results which the system cannot confidently provide correct information. Grid Dynamics implemented the solution leveraging AWS and NVIDIA (NASDAQ:NVDA) technologies stack. We recently introduced a contactless payment system for a major U.S. DIY retailer, enabling customers to complete purchases quickly and securely with the tap of their phone or a card. This solution enhances the shopping experience by reducing checkout times and minimizing physical contact. The rollout is underway across more than 2,000 stores with overwhelmingly positive customer feedback. This upgrade underscores the impact of Grid Dynamics' work on our clients' business operations. We successfully launched passwordless biometrics-based identification that leverages cutting-edge authentication standards to enable users to securely authenticate their online payments using biometric data such as fingerprints and/or facial recognition in Summer Olympics starting from proof-of-concept to production in the record time of six months. With that, let me turn the call to Anil who will discuss Q3 results in more details. Anil Doradla: Thanks, Leonard. Good afternoon, everyone. Our third quarter results were solid as we exceeded our expectations both on revenue and non-GAAP EBITDA. During the third quarter, we recognized a record revenue of $87.4 million that was organic and ahead of our guidance range of $84 million to $86 million. Our non-GAAP EBITDA of $14.8 million exceeded our guidance range of $12.3 million and $13.3 million. The better-than-expected results were driven by a combination of factors that included strength from existing and new customers and operational efficiencies. During the third quarter, our Retail and TMT were the two largest verticals at 34.1% and 27.7% of our revenues, respectively. Our Retail vertical grew 11.4% and 12.4% on a sequential and year-over-year basis, respectively. On a sequential basis, we witnessed growth from multiple customers in the specialty retail, home improvement space and department stores. TMT saw an increase of 4.1% and 1.9% on a sequential and year-over-year basis, respectively. Similar to last quarter, our largest customers in TMT vertical grew both on a sequential and year-over-year basis. Here are the details of the revenue mix of other verticals. Our Finance vertical was the strongest both on a sequential and on a year-over-year basis, and grew by 12.7% and 94%, respectively. As a result, its share in total revenues increased to 16.2% in the third quarter of 2024. Similar to last quarter, the growth was from customers across the fintech and insurance space. Our CPG and Manufacturing, representing 11.2% of our revenue in the third quarter, remained relatively flat on a sequential basis and increased 1.4% on a year-over-year basis. Our Healthcare and Pharma, representing 2.9% of our revenues, decreased 20.5% and 26.9% sequentially and on a year-over-year basis, respectively. And finally, the Other vertical represented 7.9% of our third quarter revenue and was down 6.9% on a sequential basis and up 3% on a year-over-year basis. We ended the third quarter with a total headcount of 4,298, up from 3,961 employees in the second quarter of 2024 and up from 3,823 in the third quarter of 2023. At the end of the third quarter of 2024, our total U.S. headcount was 345 or 8% of the company's total headcount versus 8.4% in the year-ago quarter. Our non-U.S. headcount, located in Europe, Americas and India, was 3,953 or 92%. In the third quarter, revenues from our top five and top ten customers were 39.8% and 59.2%, respectively, versus 36.8% and 54% in the same period a year ago, respectively. During the third quarter, we had a total of 201 customers, down from 208 in the second quarter of 2024 and 224 in the year-ago quarter. During the quarter, we added several customers, some of which Leonard referred to in his prepared remarks. The year-over-year decline in the number of customers was primarily driven by our continued efforts to rationalize our portfolio of non-strategic customers. Moving to the income statement, our GAAP gross profit during the quarter was $32.7 million or 37.4%, compared to $29.6 million or 35.6% in the second quarter of 2024 and $28.2 million or 36.4% in the year-ago quarter. On a non-GAAP basis, our gross profit was $33.3 million or 38% up from $30.1 million or 36.2% in the second quarter of 2024 and up from $28.7 million or 37% in the year-ago quarter. The increase in gross profit, both in dollar and as a percentage on a sequential basis, was mainly driven by a combination of higher levels of revenue and better utilization of engineering resources. Our non-GAAP EBITDA during the third quarter that excluded stock-based compensation, depreciation and amortization, restructuring and expenses related to geographic reorganization, transaction and other related costs was $14.8 million or 16.9% of sales up from $11.7 million or 14.1% of sales in the second quarter of 2024 and $10.7 million or 13.9% in the year-ago quarter. The increase on a sequential basis was largely due to higher revenues, partially offset by increase in operating expenses. Our GAAP net income in the third quarter was $4.3 million or $0.05 per share based on a diluted share count of 78.8 million shares, compared to the second quarter loss of $0.8 million or $0.01 per share based on a diluted share count of 76.6 million and an income of $0.7 million or $0.01 per share based on 77.3 million diluted shares in the year-ago quarter. Our sequential increase in GAAP net income was due to higher gross profit, lower levels of stock-based compensation and lower provision from income taxes. On a non-GAAP basis in the third quarter, our non-GAAP net income was $8.1 million or $0.10 per share based on 78.8 million diluted shares, compared to the second quarter non-GAAP net income of $6 million or $0.08 per share based on 77.9 million diluted shares and $5.9 million or $0.08 per share based on 77.3 million diluted shares in the year-ago quarter. On September 30th, 2024, our cash and cash equivalents totaled $231.3 million down from $256 million in the second quarter of 2024. Coming to the fourth quarter guidance, we expect revenues to be in the range of $95 million to $97 million. We expect our recent acquisitions contributing 10% of the total revenue. We expect our non-GAAP EBITDA in the fourth quarter to be in the range of $13.5 million to $15.5 million. For Q4 2024, we expect our basic share count to be in the range of 77 million to 78 million and our diluted share count to be in the range of 80 million to 81 million. That concludes my prepared remarks. We are ready to take your questions. A - Cary Savas: Okay. Thank you, Anil. As we go into the Q&A session of this call, I will first announce your name. At that point, please unmute yourself and turn on your camera. And the first question is going to come from Mayank Tandon from Needham. Mayank Tandon: Oh! Great. Thanks. Hi, Leonard. Hi, Anil. Congrats on the quarter. So... Leonard Livschitz: Thank you. Mayank Tandon: ... Anil, let me just clarify. Sorry, I missed your last comment on the contribution from M&A in the fourth quarter. And then I just want to get a sense, sort of related, if you strip out the revenue from the fourth quarter in terms of M&A, then can we expect this organic growth to continue in the future quarters? Why would it not continue? So, any color on your outlook for the next few quarters would be helpful just given what you've had in terms of performance the last several quarters. Leonard Livschitz: Anil? Anil Doradla: Yes. So, Mayank, we said 10%, right? Now, I think the most important thing you have to understand as we go from Q3 to Q4 is that you had some of the working time, right, the number of hours. The billable headcount will grow from Q3 to Q4. So, if you look at the underlying foundations, which is at the end of the day is driven by billable headcount, of course, working time moves around, right, as we're going through the seasonally part of the year into -- as we exit, you'll see some variations. But the billable headcount, new customers, existing customers are continuing. Mayank Tandon: Got it. So, just to be clear, in terms of the organic trends, it sounds like that can continue based on the demand climate. I'm just trying to get a sense if there's anything on the horizon in terms of budget flush or companies going through their budgeting process for next year that could maybe change the dynamic in terms of the current organic growth trajectory you've seen quarter-to-quarter? Anil Doradla: So, look, there has nothing changed from a, what I call, some abnormal or artificial movements. So, the trends that we're seeing, it points to more fundamental. As we get into next year, obviously, we will talk next year. We don't guide beyond a quarter. But our underlying results, which is 5% sequential growth, there's an acceleration in quarter-to-quarter, right? This is all driven by fundamentals. It was not driven by budget flush. It is not driven by some artificial behavior in the organic business. It is across the Board, as Leonard pointed out, both from our existing customer and new customers. Leonard Livschitz: So, Mayank, I'll add one more point just to make sure it's clear. October is a great month. We are very confident. We have numbers, right? But we don't get all the details. The conservatives in the guidance is driven by two factors. As you know, December has certain furloughs and holidays. It's -- we want to be a little bit more careful. And also, the revenue coming from the new customers will be unique and I'm sure we'll talk more with other guys who will ask me similar questions. And that's driven by the fact that we started to collaborate even before we closed. This is different from the previous acquisitions we had. So, I'm not sure how much result will be in Q4. But Q1, we'll see the additional revenue to this synergy. So, we're bullish on both fronts. Mayank Tandon: So, just want to get some perspective on pricing. It's been a point of debate in the services industry, just given some of the demand headwinds. Are you seeing pricing stabilized? Maybe even uptick a little bit? Any color around what your conversations are like with clients around pricing? Leonard Livschitz: All right. I'll take this, Mayank. So, first of all, so we have Yury Gryzlov today. He's our not only CEO, but also he runs Europe. So, I will tell you a little bit about U.S. because next time I'll bring Vasily Sizov, who runs U.S. But Yuri will give you a few color on Europe. Fundamentally, we do see a bit of improvements in terms of the pricing performance. With new clients, also relate to this, obviously, more engagements on the technology side. We'll talk more about, hopefully, again, other people ask questions about how technology drives the differentiation in new business for Grid Dynamics. So, those colors are on a growing business, upgrading business. You talk about the more traditional legacy business, pretty much stable. So, you can see that -- I mean, again, Q3 was good every way you say. So, they're proving, they're putting. There's a Q4, there's Q1. Seasonality always works there and we'll need to arise as we go toward the middle of next year significantly. For now, we enjoyed the run. We see good stable pricing. We see new, improved pricing, at least on this U.S. So, let Yuri speak for the first time. I knew I talked for 20 times together already. So, Yuri. Yury Gryzlov: Yeah. I think I just wanted to add that it's the same in Europe. I think that, as Leonard just mentioned, the pricing has been stable and we don't see those fluctuations anymore. So, it's pretty much business as usual as we see right now. And then we'll see if Q4 and Q1 next year. Cary Savas: Thank you, Mayank. The next question comes from Puneet Jain of JPMorgan (NYSE:JPM). And just give me a second and I'll get the cameras going. Okay. Anil Doradla: All right. So, why don't you -- Puneet, why don't you do one thing? Just dial in through the mobile and then we'll get back to you. But just call in. You don't have to do the video. So, Cary, let's just go to the next one. And Puneet, you just call in or call me. I'll put you on speakerphone here. Cary Savas: Okay. Then the next question comes from Bryan Bergin of TD Cowen. Please turn on your camera, please. And I'll make sure you are in. Bryan Bergin: All right. Very good. Let's talk on demand recovery. So, you conveyed a sense of urgency here from clients before your end. It's definitely different from what we've heard from peers, just as far as the urgency to complete deals. Are there any particular types of programs or subsets of clients that are demonstrating that behavior or is it more broad-based? And just as you think about that dynamic, are there any implications from that as we think about just the early 2025 spend potential in those types of accounts? Leonard Livschitz: Hi, Bryan. Yeah. Always good questions. So, I don't want to get too broad on the scope of the clients. Not everyone is in this accelerated mode to spend. And there -- we know there are some cases where people would like to kind of flush their old budgets and all that stuff. But that's a minority. What happened was, when it relates to new activities and it's just -- it's not just AI. AI, it's a good excuse to spend more money from the, when your boardroom wants you to be more aggressive. It's the efficiency and capability. And what I mean by efficiency and capability, there are more demand right now from very broad base of the customers to have a better reach with lower costs. So, basically, working on various LLMs and co-pilots and all the program just demonstrated to the clients what could be done with the good data. But data needs to be properly analyzed. It needs to be properly adjusted. There needs to be proper formatting. So, they start getting to understand that this is not just a magic bullet, which turned their business into a hugely profitable enterprise. So, they opened the coffers for a longer term activities and the focus is on applications, not just proof points that some models work. When it comes to AI assistant, of course, it's clear. It's about the conversational part. We were talking about confirming, for example, verdict search, vector search, the verdict AI and many other features. It's just a much broader base. So, we see a lot of activities data-related, as well as customers right now are -- having a little bit more confidence generally in the industry-wide, right? So, there's a little bit more planning going on. So, you're absolutely right. Most of the activities on the spend usually comes around February, April timeframe. That's usually we see this uplift. Last year, it actually was pushed more to the April, May. But this year, we see it started as early as the mid of the third quarter. Bryan Bergin: Okay. Okay. That's helpful. If we shift to profitability now, if revenue improvement continues to materialize, do you expect to see a commensurate improvement in margin or are there offsets that we need to consider here just near-term, such as, needing to scale the bench? Just key inputs and takes as you go into 4Q here on the profitability front. Leonard Livschitz: Yeah. Very good. So, Anil, will give you numbers in a second, because he always likes numbers and you can torment him after the meeting, by the way, he has everything for you. Bryan Bergin: Okay. Leonard Livschitz: But I want to go a little bit on more fundamental philosophical skill, because it's important. So, we're adding new regions, India becomes a big part. We're doing more technology solutions and we're adding more accelerators. When you have more at home, at house developed codes, your efficiency is higher, right? And you bring the ROI to the client, so you get a little bit better margin on it. Now, again, third quarter was somewhat unique from the overall billability perspective is you know very well. And we went to July, we are always were as at 40-20, the magic number. So, we felt the taste of the target. Now, this is not, and I bet October is going to be very good as well. But it's not just the bench. So, bench is a function of our long-term visibility. So, there's always a swap of the bench. But there is a training of enormous army of the AI related specialists. And it comes from the internships, Grid Dynamics University and then Grid Dynamics Labs. We expand more investment into our own AI labs for various functionality, our partnerships with the hyperscalers and NVIDIA, and a few other guys are taking more space. So, this is non-linear investments, which I can allow myself to do, even maybe not giving you an immediate short-term, this glorious 20-40, because I see the return, return on robotics and it's not as a true robotics automation for various clients, how to improve their production efficiency, AI systems. So, we do balance, we would break down how bench is contributing, and how innovation is contributing, and how skill set modernization is contributing. But overall, of course, if we don't get efficiency longer term, why we're in this game, right? You're like me and all the shareholders want to see the profit in the end of the day. Anil? Anil Doradla: Yeah. Bryan, just adding to what Leonard said, you got the gist of it. But this is something that we highlighted in a couple of quarters ago, right? So, there are three, four factors that we're working on, right? As Leonard pointed out, we're doubling on internship programs. So, the cost optimization for me, that point of view helps us. We're scaling India too. The nature of our programs, from T&M going to pod to fixed price, that also helps. And Leonard and Yuri just pointed out, the pricing environment is improving, right? So, all these things put together, point to the underlying fundamentals of our business improving. Now, that has to be judged against what Leonard pointed out, investments for growth. So, that's the thing. But again, what I want to convey is the underlying price cost element is improving in our business. Bryan Bergin: Okay. Okay. Yeah. Growth, investments are appreciated there, for sure. The AI commentary -- last question here, the AI commentary, as far as actually scaling now beyond kind of the POCs and the science projects. As you are scaling, are there any changes to the contracting structures, or more of the same, getting more productivity, incremental volume of work? Just talk to us about that nuance as these programs are becoming bigger? Leonard Livschitz: Yes. So, there's no magic bullet there either, right? So, the customers are still a bit shy from, between technology visionary who say, let's have performance-based compensation, outcome-based compensation versus fixed bids and T&Ms. It happens on a very rare occasion, because most of the time, those programs, when they wrap up into the production implementation, they're part of the bigger initiative. So, we're trying to actually -- it works favorably for both sides. But it's still a limited base. Now, as we become smarter, and we do more homegrown stuff, there's maybe a somewhat change to our model offering as well. But I know how you guys are cautious about when a service company starts throwing some different models of compensation, right? So, we're still being there, but we certainly offer our clients various methods which make a little bit more performance-based, not often to be compared. But we see that those solutions actually result in more efficiency to the client immediately. So, hopefully, I can give you better news that we do get more performance-based outcome in the upcoming quarters. Cary Savas: Thank you for your questions, Bryan. The next question comes from Maggie Nolan of William Blair. Maggie, please turn on your camera and unmute your mic and. Maggie Nolan: Hi. How are you? I'm trying to get my video on here. Nice quarter. Congratulations. I wanted to ask a little bit about the end markets and I know you gave some commentary for this quarter. But any thoughts on how your verticals might trend as you exit this year and then over the course of next year? Are there particular areas where you anticipate growth is going to come from? Leonard Livschitz: Okay. Well, I'll start and maybe Yuri will chime in and Europe may be slightly different to some extent and definitely in India with GCCs, we have some more dynamics. So, the three drivers for our business today pretty much are unchanged, right? So, it's a TMT, CPGs and Retail. The notable addition to the growth vertical is actually various Financial Services, the payment system, the fintech. The other guys like Manufacturing and Life Science, and Others are a little bit behind. Now, the addition of insurance and other things to be emphasized. And with acquisition, as a matter of fact, in Europe, and that's what you were talking about, there's a very big potential upswing on top tier financial institutions. I think what is actually happening is very interesting. The dynamic of additional shift on the vertical is now it's coming from our partners, particularly with a very notable hyperscaler who we are doing a lot of initiatives together. So, what happened is they see our successes in one or two industries, and they are kind of passing the baton to their salespeople in adjacent industries. So, the horizontal capability around knowledge of the major factors, and the major factors is a cloud behavior called migration, various AI initiatives, and now even going into the -- at least in the early stages, we're going today into the various applications specific, which is basically connected devices and everything around it. That creates the potential. So, we are actually retuning, it's more about sales, right, because engineering services are more or less expandable. And then a specialization in new tools. So, we're investing in partnerships with the industry-specific software providers and that training has been happening actually from Q1. So, we'll see that dynamics early next year. But that's pretty much. So, the big players are still there. The new players come in existing industries, but expanding on the biggest notable expansion, I would say it's a fintech. And Yuri, could you? Yury Gryzlov: Yeah. Just to add on fintech, I think that, again, our distribution of industries in Europe are pretty much the same. They've been stable. But obviously, with the addition of JUXT, right, that we just acquired, I think that brings us into kind of expanded into fintech and Banking and Financial Services overall. So, JUXT, as Leonard mentioned earlier today, they are specializing in data-intensive systems for banking and financial services. And that's -- it's a highly complementary area to what we are offering in this field. So, from that perspective, I think we will see the immediate synergies and opportunities to go beyond that and offer their capabilities to our existing clients and obviously adding more clients in this area. But at the same time, transitioning to the U.S. as well is very, very important, because while, again, this acquisition accelerates the growth in Europe, but we see a very high potential of immediate expansion into the largest U.S. financial institutions as well. So, I think that's pretty exciting. So, we'll see the shift, I think, in Europe in particular because of the size, but that will be Q4 and beyond. Maggie Nolan: Perfect. That makes sense. Thank you. And then, Anil, you mentioned, balancing investments as we're thinking about profitability. Where are we in the investment cycle? You've made some investments in recent past in the sales force. How do you feel the return is on those? Are those folks ramping up nicely? How are you thinking about your ability to add new logos as the demand environment recovers? Are you well set up to scale the business from here or are there additional investments ahead? Leonard Livschitz: Very good. So, the biggest investment which pays off is a technology investment, right? That makes us differentiate. We remember always when you talk about green eggs being a kind of a canary in the lean times and the good times. And when our technology capabilities align with the market upswing, then it creates a double whammy and we grow faster. So, technology capability is bespoke. Partnership capability, there's a significant investment which is, again, in the process. As a matter of fact, the good news is our partners demand us to invest and they're kind of really vigorous about making sure we balance our investments with the solutions they provide and certification associated with it. So, that's going on. In terms of the new logo acquisitions, a traditional way, right? So, it's still a lot of new opportunities come because, remember, again, we work with a very large Fortune 500 companies as the most, comes from either referrals, that's still the best way, industry is dynamic, so that works well or in the clients where our technical solutions implementations of the applications become reachable and they want to do something very rapidly and that's where sales force is needed. The good news about our sales force, especially in the U.S., we're positioned well virtually in every region, but the rate of return so far is more driven by individual clients rather than a planned area. I can say that you want X amount of productivity in certain, Southeast, and that's what I'm getting. Now, we have investment in all the areas, so that what we do in the sales force and account management force, the main investments is to make sure once we get into the first programs, the execution is flawless. And because people that are in rush right now on the client side to do something, we spend more time deliberately on defining a statement of works, to defining the milestones, because the getting new clients is no longer a problem for us. How to make this $5 million, $10 million, $20 million revenue works driven by flawless execution? Today, it's not only on engineering, as you've always been, engineering has to be great, delivery has to be great, but in account management and front-facing organization, we seek time and align with the clients. So, we're getting more consultancy on architecture side. We're adding more account management specialized with the engineering background and understand coming from the execution background before and we train delivery management guys towards not just the timeline, but changes in the scope. Now, I'm giving you a lot of kitchen for a very small question, but it's not about acquisition about right now, but rapidly scaling those top guys with the existing capabilities. Maggie Nolan: Understood. That makes a lot of sense. And then you've just -- I mean, you've transformed the business so much, even since becoming public. You've become incredibly global as a company and you continue to have that at the forefront of your acquisition strategy and imperatives. So, I'm wondering how this global expansion has impacted conversations with your clients, maybe comment on how adding Argentina, for instance, as a delivery location has impacted conversations with clients? Leonard Livschitz: All right. Well, near-shoring has been always on the list of our clients, right? And for many of them, especially, and when I talk about near-shoring now being a global company, I assume the clients are in the United States because of the customer in Europe, there's a different near-shoring. The customers now in India is near-shoring and now we have customers in Latin America, right? But if we talk about our traditional U.S. business, they rush in and then they want to have the same quality, the same performance, and the same conversation as they've had with the U.S. colleagues. Well, it's not always happened that way, right? And in our case, our Mexican team is very good, but PASA was appreciating for a long time now, it's a bit declining. So, there was not as much productivity when good people, good people cost you money no matter what. System solutions, an approach that that matters. So, what happened, we started, as you know, Mexico, started Jamaica, now we have first green shoots in Canada, some consultants, we're not opening yet offers, but that's not impossibility because we have now clients in Canada. But Argentina is kind of unique. For a long time, it was, you know, there's a very, very successful our peer in the industry. I mean, they might like us to call them peers, but I treat them as peers who come from Argentina and they're doing a great job. They extended Columbia, now they're investing into India and Eastern Europe, right? And for that matter, I always had a strong affinity to the culture, to the education, to people in Argentina, it's just very close. And the connection with them, it's also strong with the European organization. So, I see that our clients, again, remember I mentioned we started working on integration in advance. So, with the clients from JUXT, we were talking about our positioning for a while already. But with the clients in the U.S., we obtained an approval for expanding in Argentina before the ink dried on the contract. So, once we finished acquisition, there's already a demand coming for a supply from Argentinian organization, which is pretty cool. Leonard Livschitz: Maybe because -- Happy Diwali, maybe because you should not be working today, but it's a day of prosperity... Puneet Jain: This was a sign. This was a sign. Maybe my wife did something here. But anyway, no, very strong quarter. So, let me ask, like, about overall demand. Like, many peers who have reported, they all are talking about seeing steady trends. Your tone, your growth rates definitely indicate, like, that things are better now than what they were six months ago. So, what's driving this separation in growth rate for you? Like, you grew about 13% year-on-year this quarter, right? So, what's driving this separation in growth for you versus many of your digital peers? Leonard Livschitz: So, I mentioned before a few things. The AI solutions opened the door for bigger implementations. So, that's obviously. But I'm sure you sit through many, many, earnings calls, and I guarantee that my good friends from other companies, regardless where they are, tell the same story, right? And I read one of the reports yesterday. We're talking about 100 early engagement, people talk about thousands. Size matters, right? The reality is, we are a truly technology partner, and as we mature and grow and become more global, more people learn about us early. Remember about this concentration, right? So, the reality is we still have some of it. The top clients, to some extent may actually invest more with us because they trust us more, especially when it's innovative projects. But we see some rapidly increasing demand from certain clients, which are new, much faster. And the reason is a ramp up happens is because they put more bets on us. What I told Maggie, we need to make sure we have not only flawless execution, but a very well-established expectations. People rush to have some results and it's all about applications. You know probably well, and trust me, we live through that. The customer wants to do something immediate. And we are kind of pulling back and we're talking about longer roadmap. Once they appreciate what we do and it happened not just Q3, it happened even earlier, they're more comfortable to lay larger dollars in front of us. So to some extent, it's still size. But more important is, and at times of investment of technology, we ramp up quicker and we are more in a strategic critical applications for the business, because it's very important, people always say, okay, you go fast, you fall fast. We'll see how next turn cycle goes. But I think we're holding our line pretty well, because we are having this stream of technology innovation into the larger execution. And also, Anil mentioned probably before to you as well, some of the clients who measured to decline in 2023, now also in a rebound, right? So that helps too. So it's a combination of the factors. I know Yuri, you want to mention something notable in Europe? Yury Gryzlov: No. I think it's -- yeah, it's pretty much aligned with what Leonard mentioned. I just want to also to add that the inorganic strategy as well, right? Every time when we're looking at those companies and those two that we just acquired, no exceptions. I think that we are always trying to understand if they can bring some non-linear value to us, right? In terms of like our giga cube strategy, technology expertise, footprint expansion and things like that. I think it's also very, very important. And if you look at those and as Anil mentioned, right, they're contributing some amount of revenue already. I think it's very important for us to stay focused. And if we go too broad, then we will kind of fall into the same category of many bigger players. But if we stay focused, I believe that's the, that's the key. Leonard Livschitz: And the other thing I think worth mentioning, the GCCs is not just ultimate definition of India, it's also Europe. So some of our big U.S. notable clients... Yury Gryzlov: Yeah. Leonard Livschitz: ... trust us with a strong position in European organizations as well. So in India, it's a big thing. The Bangalore office was the best investment recent. And all we're doing is a fighting for talent and to some extent, successful because people are curious about us and there's a good, having three major areas good, but we also have a very large pool from the GCCs in India. But recent pool from, they don't even call themselves GCCs, but from the big clients, their engineering organization in Europe becomes quite valuable as we continue to balance growth in Europe with the growth in India. Puneet Jain: And let me ask on that, like, how are clients deciding between like the work that should go to like a vendor like yourself, especially like a digital vendor like yourself, versus their in-house operations? I understand like you're working more with GCCs there, but like how like the work allocated between GCCs and vendors? Leonard Livschitz: Yeah. So working with the U.S. centers of excellence is definitely easier than with GCCs in India. I mean, this is perfect, because we have very smart, a lot like U.S. guys are not smart, but the people who naturally have been brought in for GCCs in India, they're doing a pretty good job themselves. But remember, when you have a client base recruiting and you have a supplier base recruiting, there are very two different desks, right? So there are some very notable clients, which may go very broad and the competition is very fierce. When it comes to suppliers, they know the job will stay for one client with another client with the third line. So some of the GCC guys, what they're saying is, we want to give you a part partial work. And we say, look, we need to be cooperating. So we want to some project work as well. We're another staffing company. There was a bit of a discussion on that. But over time, they give us more because they feel we're part of the team. Sometimes we work in their offices, there's a big, by the way, reverse back to the office thing. So a little bit remote is not as helpful. But also the competition for the specific talent, when we double down on a fewer narrow, but extremely deep expertise, driven by the technology experts locally, then they open up. But I agree with you, we just finished a really nice tech conference in Bangalore. More than a dozen GCC guys send their participant, there were more than 30 technical and business executives and this is the first one. So I'm sure next year, we'll have a bigger and these guys don't come just to write the notes. There's a lot of active discussion. So that gives us a bit of a testament or respect of the capabilities. Puneet Jain: Yeah. No. That's good to know and thanks for the answer. And then like the clients, Leonard, you talked about like the client spending on AI projects, like they're getting ready for AI projects, investing in data and all that. Does that represent incremental spend, which should result in overall increase in budget for clients or are they just like reclassifying or shifting budget from one area to spend in this? Leonard Livschitz: Well, they're both, right? Some people are mesmerized by a demonstration from, Elon Musk, having robots walking on the stage, right? Not everybody knows exactly what goes into that and I will leave it at that level. But it gives you the perspective of level automation, which goes into the foundation of our society. And that's, that's very critical. Some of the clients, because they're revolutionizing the things around our daily work, consumer work, recruiting, as you know, assistance, AI assistance, so robotics just start changing. There are a few of them. They're experimenting, obviously, but there's a big cost in the regulatory stuff. But most of the guys, what they expend in applications, they want to be very, very specific. I have this number of journey cases I want to improve it. I have this veterinary clinic I want to increase the throughput. I want to, as you know, pets don't speak. So there's a lot of things we go around that. Some clients say, look, we would like to have a lot more bundle inventory. And a wealth management system, we are revolutionizing the conversational AIs, basically, video search assistance and putting the data together. So it's a lot more with the fewer capabilities, but people would like to have a repetitive. So those drips, now has a mainstream of the new larger implementations, where this big world of dreamers are doing more as a proof of concepts. But both are important, because the impact of the of the dreamers is significantly larger over time and we talked about our investment into it, we can compare with the big guys. But there's certain areas where we believe it's fundamental. And we're going to continue to hone and shift the offering for the future, because it's not traditional, it's not only that particular software development skill. And if we need to cannibalize some of the business, we will. But right now, the revenue comes from the applications and a future business positioning comes from the -- those tectonic shifts. Cary Savas: Ladies and gentlemen, this concludes the Q&A session for today. And I'll turn it over to Leonard for closing statements. Give me one second. Leonard Livschitz: Thank you, everybody, for joining us on the call today. Today's results reinforce our strengths and unique position within the AI digital transformation industry. Grid Dynamics approaches the end of 2024 with strong momentum across our business and we are set up well for a solid 2025. There are many reasons to be optimistic of our future and I'm confident of Grid Dynamics solid execution. I'm looking forward to updating you all during our next earnings call. Thank you.

Criteo (CRTO) Q3 2024 Earnings Call Transcript | The Motley Fool

Good morning, and welcome to Criteo's third quarter 2024 earnings call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Melanie Dambre, vice president of investor relations. Please go ahead. Melanie Dambre -- Vice President, Investor Relations Good morning, everyone, and welcome to Criteo's third quarter 2024 earnings call. Joining us on the call today, chief executive officer, Megan Clarken; and chief financial officer, Sarah Glickman. I'm going to share some prepared remarks. Todd Parsons, our chief product officer, will join us for the Q&A session. As usual, you will find our investor presentation on our IR website now, as well as our prepared remarks and transcript after the call. Before we get started, I would like to remind you that our remarks will include forward-looking statements which reflect Criteo's judgments, assumptions and analysis only as of today. Our actual results may differ materially from current expectations based on a number of factors affecting Criteo's business. Except as required by law, we do not undertake any obligation to update any forward-looking statements discussed today. For more information, please refer to the risk factors discussed in our earnings release, as well as our most recent Forms 10-K and 10-Q filed with the SEC. We will also discuss non-GAAP measures of our performance. definitions and reconciliations to the most directly comparable GAAP metrics are included in our earnings release published today. Finally, unless otherwise stated, all growth comparisons made during this call are against the same period in the prior year. Thanks, Melanie, and good morning, everyone. Thank you all for joining us today. As two months ago, I announced my plan to retire from my role as CEO of Criteo. This was a tough decision for me, especially given the positive momentum of our journey and the enjoyment that I find in being part of this winning Criteo team, serving our clients, shareholders and the industry. The new CEO will inherit the transformed, strong and vibrant company with the biggest and brightest future ahead. The board is conducting a thorough search, which is progressing well. And meanwhile, I'm fired up and ready to bring you this quarter's update and results. Our ongoing momentum is a testament to our team's hard work, organizational alignment to the plan and the trust that our clients place in us. I couldn't be prouder of our senior leadership team who continues to be the driving force behind the successful execution of our strategy. Together, we have turned Criteo into a Commerce Media powerhouse with retail media at the core and cemented our position as a global leader in ad tech. Looking back on our company's transformation over the past five years, we've strategically repositioned ourselves for sustainable growth and margin expansion. We're set to achieve new heights as we're on track to deliver our third consecutive year of double-digit growth. Over the years and throughout our transformation, we've demonstrated strong resilience and maintained a high saving ratio. We no longer plan our business around the demise of third-party cookies. We've brought our Commerce Media platform vision to life, and we're now positioned at the forefront of the changes in our industry, capitalizing on the next wave of digital advertising. We are the leading independent ad tech company for Commerce Media and the platform of choice for the buying and selling of Commerce Media, the fastest-growing sector of advertising. We came into the sector for seeing the seismic shift in the digital landscape and the rise of Commerce Media overtaking linear TV and now taking share from search and social media. The most recent quarterly SKY data showed growth surging to 28% in Retail Media in Q3, while paid search growth slowed to 3% and social growth slowed to 5%. The future of Commerce Media is incredibly exciting. It's fueled by several key trends, the global growth of e-commerce, and consumers engaging with more content and devices than ever before as they shop from discovery through the purchase and beyond. Retailers are looking to capitalize on this by selling advertising on their digital stores, while advertisers are focused on optimizing their spend to increase sales. Today, Criteo operates two growing global segments: Retail Media and Performance Media. Retail Media facilitates the targeting of high-intent shoppers by brands primarily on retailer sites and extending reach across the open web. Performance Media focuses on targeting high-intent shoppers for direct-to-consumer brands, primarily on the open web and social platforms. In other words, our solutions have a hyper focus on addressing or advertising to consumers who are on their buyer journey. Our Commerce Media platform represents the convergence of these opportunities that Criteo is uniquely positioned to address. With 19 years of commerce-driven AI and rich data from our supply and demand side relationships, we predict outcomes and deliver targeted ads throughout the buyer journey from discovery to purchase. Our vision and platform innovation center around a unified commerce experience. Our goal is to empower advertisers to build full funnel strategies more efficiently targeting commerce audiences with multichannel reach, AI-driven optimization and seamless third-party data integration to enhance personalization and improve ad performance. As our platform ensures we introduced capabilities that enhance efficiency and create growth opportunities. One such example is our latest work in automation tools and streamline workflows to make clients set up easier, enhance performance and improved efficiency. We refer to this as Commerce Go. Our next-generation tool set allows advertisers to create and launch an optimally configured campaign and as few as five clicks. Clients have reported that setting up campaigns on other services can take 10 times longer than using Criteo's Commerce Go. Our advanced AI streamlined campaign creation and management and automate decisions and audiences targeting and ad formats to maximize results. Our recently completed beta testing has shown a low cost to serve, lower client churn and most importantly, an increase in activated media spend with stronger performance. For example, Fashion Brand's Arena achieved a 23% increase in ROE at comparable spending while also benefiting from streamlined campaign setup and activation through Commerce Go. We're excited to keep moving on this path. Now, turning to Q3 results. I'm pleased to report that we delivered a strong quarter with robust top line growth despite tougher year-over-year comparisons, showing our ability to achieve operating leverage as we grow. Starting with Retail Media. We delivered strong growth in the third quarter and continued to gain market share. We've successfully doubled both our brand count and activated media spend over the past two years. Our brands have increased to 3,100 and our activated media spend reached $1.5 billion on a trailing 12-month basis. We're seeing continued adoption of Commerce Max by our agencies. Now, as a reminder, this is our Commerce Media demand site platform. We achieved another record quarter with over $130 million in agency spend governed through Commerce Max in the U.S. -- sorry, in the U.S. HoldCo agency spend growth accelerated in Q3 compared to Q2, exceeding 60% with three HoldCos experiencing triple-digit growth in the U.S. This continued increase in demand from brands and agencies remains a critical element of the Criteo flywheel. And we're confident in maintaining the growth momentum. We recently secured significant new retail partnerships worldwide. In the U.S., we're thrilled to team up with large retailers like JCPenney expanding our footprint in fashion department stores. We're also thrilled to welcome Office Depot and ODP Business Solutions, broadening our presence in the office supply category. In Europe, we're proud to work with Metro AG, Flaschenpost and Rohlik, and we added two new retailers in the APAC region. These retailers choose Criteo for our global reach, rapid scalability, comprehensive offering, AI-powered performance and unparalleled sales and product expertise. We're also expanding our lead in the Commerce Media more broadly. We're excited to partner with United Airlines, who chose Criteo to help power and scale its off-site monetization. Our Commerce Grid SSP allows connected media by United Airlines to curate its first-party audiences and make them available for broad access through any DSP. Costco is another client partnering with Criteo for off-site monetization. Costco has recently deepened its partnership with us, enabling Criteo to leverage its data to reach existing potential consumers across the open web. And while this tactic has been slow and gaining traction in the U.S., it's still very early days, and we do see more offsite interest ahead and in other markets. We also doubled -- we've almost doubled our Retail Media offsite campaigns in APAC, and we're seeing top brand expansion and significant growth in retailers in India. More broadly, our existing retailers continue to trust Criteo with more ad formats and first-party data than ever before. Among others, we've more than doubled our number of retailers leveraging our on-site display offering in North America compared to a year ago. Using Criteo's display format, these retailers are attracting strong demand as brands typically see a 30% average lift in share of sales within two weeks of starting on-site display. Incrementality results show a revenue lift per user of 135% from our on-site display campaigns. We're obsessively focused on performance and we increasingly leverage in-store data to enrich our Retail Media strategy. We've seen a fivefold increase in retailers sharing their in-store sales data with us. We match offline customer conversion data with the customer behavior and ad exposure that we see online. This contributes to more relevant targeting better campaign performance and a seamless shopping experience. And we see this move as an important catalyst to the growth of Commerce Media, bringing alignment between online and in-store advertising performance with closed-loop measurement. We also have put brands to fully leverage our measurements and insights to boost sales growth. For instance, in partnership with Flywheel, Danone's Oikos brand achieved a 21% increase in product page visits, an 18% boost in daily sales and a 13% overall sales lift on Albertsons. Turning to Microsoft. We continue to map out our exciting strategic collaboration with Microsoft advertising which we'll talk about during our retail media investor update on November 18. We already expect to transition several retailers to our stack in 2025 across regions and RFPs for other Microsoft advertising retail media clients are well underway. The design of our demand integration and ROI collaboration are all progressing and more to come. Lastly, we're proud of our work and that our leadership in Retail Media continues to be recognized, including the most recently by Market Intelligence from IDC, which has named us as a Leader in worldwide Retail Media Network Service Providers. Turning to Performance Media. Our momentum remains driven by Commerce Audiences up 30% as we leverage our large-scale commerce data and AI-powered audience modeling technology defined in-market shoppers. Today, 80% of our media spend is from clients using both Commerce Audiences and retargeting to reach consumers across the entire buyer journey. Our AI innovation is driving our growth and setting the stage for future success. We've unlocked additional budgets across our entire portfolio, thanks to our continuous AI-driven performance enhancements. We're also leveraging GenAI creative technology to enhance product images with AI-generated backgrounds and tips to showing promising increases in click-through rates. Our advertisers are also seeing benefits when they plan, buy and optimize across multiple channels, including open web and social. For example, Electrolux achieved a close to threefold increase in revenue when including Facebook and Instagram for their retargeting campaigns. They saw a 100%-plus increase in click-through rates and were able to lower their cost of sales by 17% within only a month after the activation. For us, this is just the beginning and part of our strategy to bring comments, recommendations into any environment where consumers are. To that end, we plan to integrate with more social environment and to continuously make sure that our supply sources are providing access to relevant in-market consumers. This comes at a time when we continue to move full steam ahead to shape the future of digital advertising. We believe our AI optimizes across several addressability solutions and the many signals we have access to are on the buyer journey. As part of our transformation, our focus has shifted from people-based signals to unlocking the full potential of commerce and product-related data. Commerce and shopping experiences are truly everywhere across every environment and format and we believe we're able to recognize shopping intent without relying on identity. Our deep learning models are taking advantage of product intent signals to recognize patterns across shopper types, shopper journeys and touch points. This approach sets us apart and is more relevant than ever before to drive superior performance in any environment. To conclude, we're confident in continuing our positive momentum, and we remain laser focused on the execution of our strategy to create the world's leading commerce media platform and drive shareholder value. With that, I'll hand the call over to Sarah, who will provide more details on our financial results and our outlook. Sarah Glickman -- Chief Financial Officer Thank you, Megan, and good morning, everyone. We delivered strong Q3 results with operating leverage enabled by top line growth and disciplined cost management again this quarter. Revenue was $459 million, and contribution ex-TAC increased to $266 million, including year-over-year headwinds from foreign currencies of $1 million. At constant currency, Q3 contribution ex-TAC grew by 9% on top of 8% organic growth in Q3 2023. This was driven by strong performance in Retail Media, up 23% and continued growth in Performance Media, up 5%. During the back-to-school season, we observed a year-over-year increase in advertising spend across all categories. Notably, there was significant growth in an unconventional back-to-school category, animals and pet supplies increased by over 200% year over year, followed by strong gains in apparel and health and beauty. Overall, we continue to shift and rebalance our top line mix with our new solutions representing 53% of our business in Q3. Starting with Retail Media, revenue was $61 million. Contribution ex-TAC grew 23% at constant currency to $60 million, on top of 29% in Q3 last year. Our Q3 growth was primarily driven by our client base in the U.S., Germany and the U.K. Growth from existing clients remain strong, with same retail contribution ex-TAC retention at 120%, and we benefited from the ramp-up of newly signed retailers. As previously communicated, our Q3 results also include the expected transition of our largest retailer client to their direct sales model. On the supply side, we have global scale, strong client retention, and we continue to expand our footprint. We are on track to start in transitioning some Microsoft advertising on-site retailers to our monetization technology stack in early 2025. On the demand side, we now partner with 3,100 global brands after onboarding about 200 new brands quarter. In the third quarter, our activated media spend grew 29% year over year worldwide outpacing the market. We saw strong growth from our agency partners and robust brand bookings, namely in CPG as Retail Media continues to gain share from other channels. In Performance Media, revenue was $398 million, and contribution ex-TAC was $207 million, up 5% at constant currency. We continue to see strong growth in Commerce Audience targeting, up 30% year-on-year on top of 31% growth in the same quarter last year. We're targeting GroupM for the third consecutive quarter, up 2%. We are pleased to see that the combination of multiple tactics typically drive better performance and larger budgets. Our latest AI-driven performance optimization also drove a contribution ex-TAC uplift in the double-digit million range again this quarter. This is despite lapping the benefits of our initial AI-driven performance enhancements from the integration of our deep learning algorithms and advanced vector database technology into our recommendation engine a year ago. Strong growth in Commerce Audiences and increased demand for retargeting were partially offset by lower AdTech services and supply down 16%, primarily due to lower spend from one large AdTech clients in our media trading marketplace. We exited the quarter with stabilized trends. Travel remains our fastest-growing vertical, up 31% followed by classified and retail. We saw lower spend in fashion and department stores in the U.S. late in the quarter, notably from two U.S. enterprise clients reframing their business strategies and reducing their marketing budget. We have a broad and diversified client base and client retention remains high at close to 90%. In recent months, we have intentionally expanded our roster of Performance Media reseller partners in select small regions to combine local market knowledge with operational efficiencies. This resulted in a lower client counts. We delivered adjusted EBITDA of $82 million in Q3 2024, up 20% year over year, resulting in adjusted EBITDA margin of 31%, up 300 basis points year over year. Our top line growth resulted in strong operational leverage. We also benefited from some hiring shifts from Q3 to Q4 and lower bad debt expense. Non-GAAP operating expenses increased 7% year over year, reflecting planned targeted growth investments, partially offset by continued rigor on resource allocation. As we've said before, we are driving our transformation by investing in growth areas and optimizing our operating model for scalability and efficiency. We are also enhancing our operational effectiveness with streamlined processes and the deployment of AI-powered productivity tools. Moving down the P&L. Depreciation and amortization was $26 million in Q3 2024. Share-based compensation expense was $35 million, including $16 million related to shares granted to IPONWEB's founder as part of the acquisition. Our income from operations were $10 million, and our net income amounted to $6 million in Q3 2024. Our weighted average diluted share count was 58.4 million, which resulted in diluted earnings per share of $0.11 per share. Our adjusted diluted EPS was $0.96 in Q3 2024, up 35% year over year. We continue to benefit from a strong financial position and robust balance sheet with solid cash generation and no long-term debt. We had $711 million in total liquidity at the end of September, which gives us significant financial flexibility to execute our growth strategy and disciplined and balanced capital allocation. Operating cash flow was $58 million and free cash flow was $39 million in Q3, reflecting seasonality and planned capex investments. We are confident in our strategy and financial strength. Our key priority is to continue to invest in our Commerce Media platform to enable sustainable organic growth alongside value-enhancing acquisitions and to continue to return capital to shareholders via our share buyback program. We have a long-standing record of returning significant capital to our shareholders and we have already repurchased $157 million of stock in the first nine months of 2024, including $55 million deployed in Q3. We now intend to repurchase about $180 million in 2024, underscoring our conviction in the long term of opportunities ahead and our commitment to delivering shareholder value. At the end of September, we had $111 million remaining in our board share buyback authorization. Turning to our financial outlook, which reflects our expectations as of today, October 30, 2024. Despite the macroeconomic uncertainties, we entered the holiday season, we're confident to deliver double-digit growth and margin expansion for this year. For 2024, we tightened our guidance range and we now expect contribution ex-TAC to grow 10% to 11% year over year at constant currency with growth in both segments. This is a meaningful acceleration compared to our organic growth of 4% in 2023. In Retail Media, given our year-to-date performance and ongoing strong momentum, we are now confident in our ability to grow contribution ex-TAC toward the high end of our 20% to 22% range at constant currency in 2024. And as a reminder, we have tough comparisons in Q4, which is our largest quarter. In Performance Media, we now expect to grow mid- to high single digits in 2024. Our projected adjusted EBITDA margin for 2024 has been increased to a range of 32% to 33%. This reflects our confidence in operating leverage from top line growth, strong expense discipline and the transformation of our operating model as we continue to invest in areas of growth. For 2024, we expect a normalized tax rate of 25% to 30%. Our overall capex is now expected to be between $80 million and $100 million as we continue to invest and optimize our leading AI infrastructure. Lastly, we expect a free cash flow conversion rate of approximately 45% of adjusted EBITDA before any nonrecurring items. The Q4 2024, our last and largest quarter of the year, we expect contribution ex-TAC of $327 million to $333 million, growing by 3% to 5% at constant sub currency, as we continue to drive superior performance for advertisers across our product portfolio. As you know, we have softer comparisons in Q4, and we have a shorter holiday season this year. It is also important to note that Criteo, as a Commerce Media platform, has no political advertising spend. Our team is ready to -- for our clients to deliver during Cyber Week and the holiday season. We estimate ForEx changes to have a minimal year-over-year impact from contribution of TAC in Q4. We expect adjusted EBITDA between $114 million and $120 million. This includes planned investments and the timing shift of certain hires from the third quarter to the fourth quarter. In closing, we have strong conviction in our strategy and a resilient business model. We are well positioned for continued success, and we are committed to maximizing shareholder value. We look forward to our retail media investor update on November 18 and meeting with many of you on the road in our conferences this quarter. And with that, I'll turn it over to the operator to begin the Q&A session. Operator [Operator instructions] And your first question comes from the line of Mark Zgutowicz with Benchmark Company. Please go ahead. Mark Zgutowicz -- Analyst Thanks so much. A couple of questions just around Microsoft progression. I know you're going to talk about that a bit more on your Retail Media update. But just curious if there's any incremental opex that you're incurring there as you sort of get yourself set up to address that demand? And then, a separate question on Retail Media. Nice Retail Media take rate, certainly above our expectations in 3Q. Just curious if you could maybe talk about variables here next 12 months, particularly as your anniversary -- your largest clients transition to in-house demand, I believe you'll anniversary that in 1Q, so sort of what we can expect for take rate following that transition? Megan Clarken -- Chief Executive Officer I'll take the Microsoft to kick us off here, Mark. Good to hear from you. We don't anticipate any significant operating expenses as we move clients across. I'm sure the team who are doing it would cringe if I say, lift and shift, but really if you step back and take a look at the fact that their client who's looking for -- their are a set of clients who are looking for the types of services that we provide as a replacement to what they have been getting from Microsoft. It is about moving them on to the platform. And we have all of the platform in place for the delivery or acceptance of the demand coming through from the Microsoft advertising demand side of things as well. So we have the platform built. We don't anticipate having any kind of heavy operating expenses involved with this work. Sarah Glickman -- Chief Financial Officer Yes, I can take Retail Media. Yes, Retail Media is doing really well for us. So a 29% increase in the activated media spend and all clients contributing. So we've seen a lot of traction there. In terms of the -- our largest client, we, of course, continue to work very closely with them, and they are having a good year. And that will, as you say, transition more into Q1 '25. That was a slow transition at the beginning of the year now starting to kind of move ahead at the pace we would expect coming into Q3 and Q4. In terms of take rate for 2025, we're not giving guidance for '25, but we have renegotiated most of our contracts, and we have continue to retain and bring in new contracts as well. My anticipation is that as we continue to scale, we will continue to see some move down of the take rate with the scale, and that would be expected and has always been expected. But we are expecting to continue to scale year on year-on-year in Retail Media and to have the take rate that reflects the performance that we're delivering. And we're very excited to talk more in the coming weeks. So we look forward to chatting to you all on the November 18th at our retail media day. Your next question comes from the line of Mark Kelley with Stifel. Please go ahead. Mark Kelley -- Analyst Great. Thank you very much. Good morning, everyone. Can you maybe expand on the AdTech services comments a bit? I think you said one client, in particular, drove that down 16%. I guess can you maybe help us with the moving pieces there? I think you said it stabilized. I guess, what does that look like from here? And then, the second question is another quarter of growth in retargeting and your comp in Q3 was significantly tougher than the first half of the year, I guess. Is that something that we can maybe expect going forward? And I guess, what are your conversations with clients just around retargeting as a strategy at this point? Megan Clarken -- Chief Executive Officer Let me just start with the AdTech services question, and then I'll pass it across to Sarah. It's -- within AdTech services, there's a couple of products and a couple of those products we brought across from IPONWEB when we made that acquisition. And you'll remember or may remember, when we made that acquisition, we were primarily after two or three their biggest capabilities. But of course, we brought on board all of IPONWEB. So it centers now around this one product, which is in the IPONWEB web mix, which is not strategic to Criteo, and we have a plan in place to and make sure that we can bring it in line that we can normalize the -- or take away the issues that we're seeing with it, in particular, its susceptibility to one client. And so, that is -- that's what we're doing, and that's the explanation of the particular miss there and AdTech services. I'll pass across to Sarah for more detail. Sarah Glickman -- Chief Financial Officer Yes. I mean, just a couple of specifics. So what we did -- I talked about this, I think in the Q2 call, we started to see lower spend from our largest AdTech partner, and that has continued to impact us, as you can see, quite significantly in Q3. I would agree that's isolated to that large partner, and we did exit coming out with the stronger trend. In addition to that, we did have one SSP partner. Also, I think we've discussed in prior calls that we -- that had an impact on ad tech services and supply and that we're not getting revenue related to that SSP anymore. In terms of retargeting, just a reminder that we were at 4% increase in Q2 to coming into Q3 at 2%. So very good about that. But I think Todd is probably the best person to talk about the retargeting as a strategy. Todd Parsons -- Chief Product Officer Yes. Mark, the story here is a good one. Re targeting is resilient. Obviously, our addressability strategy enables our customers to continue to use it as part of their overall marketing mix. And you heard Megan talk about the initial success we've had with Commerce Go and our beta, which exposes customers to an easier way to get that tactic and more, obviously, Commerce Audiences being a headliner there. And we're seeing some really interesting early signs of success in the beta on organic growth on not just the retargeting tactics, but also in audience acquisition which is a partly customer acquisition, which is a really important sign for us as we progress the business. So a mix of tactics with retargeting being resilient at the core. Your next question comes from the line of Ygal Arounian with Citi Group. Please go ahead. Ygal Arounian -- Analyst Hey, good morning, everyone. Just first on the guidance. I think that's where a lot of the focus from investors this morning. If you look at the guidance for 4Q, it does imply a little bit of a step down in the contribution ex-TAC. You did lower the high end of the full year guidance by a little bit. I know, Sarah, you called out certain things like a shorter holiday season, no political spending. And I'm not sure exactly how much impact the IPONWEB revenue has with that single customer? Can you unpack the guidance, what you're seeing in the macro, what's driving that kind of sequential -- sequentially lower growth rate 4Q? Sarah Glickman -- Chief Financial Officer Yes, I see. I mean, first of all, just a reminder that we have very tough comps in Q4 2023. So last year, we were up significantly on Retail Media and Commerce Audience comps in particular, plus we are lapping the AI enhancements from Q4 last year. But just to unpack, I would say the tightening of the range, it does come back to the isolated impact of AdTech and services. That's definitely the key reason, and we saw that experience in Q3 more significantly and Q4 is by far the largest quarter in that area. So that's the key reason. I think the point on the political spend is an important one because what we are seeing is, I would say, some crowding out on supply right now, and we're seeing retailers waiting until the political cycle is over, which I think is not surprising. But as we said, the team are ready to go for the holiday season. Macy's has their wreaths out already. So we're really expecting to just do a terrific job during the holiday season. But those are the key reasons why we tightened the range. The other piece, which we talked about with Americas, a couple of larger enterprise U.S. clients in the news that have gone through changes in their own structures including CEO changes. And it's just -- we expect that to rebound, but there are some temporary, I would say, change in marketing strategies as they go through those transitions. So all in, we feel really good about the future, feel really good about Q4 and very excited also for the uplift not only in the retail media to the top end of the range, but also in the adjusted EBITDA range as well. So we're excited to continue to focus year out strong. Ygal Arounian -- Analyst OK. And then, maybe on Retail Media, again, like others, I know we're going to get a lot more color in a few weeks here. On site, as you called out, has driven so much of the growth. Meg's comments called out Costco and off-site partnership with United Airlines, I felt like maybe a little bit more than you have in the past? And maybe just help us frame what the offsite opportunity could be, how it drives growth and how you think about kind of the growth in offsite overall? Megan Clarken -- Chief Executive Officer Yes. Let me start by saying that a 39% growth in Q3 for the U.S. is very encouraging for us. It's very encouraging. And speaking to the fact that we're winning in this space. And when the price is as large as it is against the spend that's going into search and social and the share that's moving across into Commerce Media, we're right where we're hoping we would be. In fact, we're probably a little bit ahead. So very, very excited about the progress there. Within the Commerce Media, and in particular, in Retail Media, there are a lot of use cases to bring to life. There are a lot that we do already, some that we've just started to roll out and some that have been available for some time, but our clients have just seen the benefits of them as they move to them, off-site is one of them. Off-site, we've had capabilities for a while, as you know, and we're starting to see some very big clients come across and utilize that as part of their strategy -- their whole Retail Media strategy. So we're excited about that move. We also are excited about what we're seeing in display. So today, we dominate the sponsored ads and display is another format, if you like, on retail hedges that we're starting to see some good traction. And so, more to come there. And then, there's other elements of taking retail -- sorry, brands data and producing better results for them on-site and off-site that we start out here today as well. So just a lot of use cases still to unpack and which speaks to growth opportunities for us. Your next question comes from the line of Doug Anmuth with J.P. Morgan. Please go ahead. Brian Smilek -- Analyst Great. Thanks for taking my questions. It's Brian Smilek on for Doug. Just to start, I think you guys have mentioned AI driven performance enhancements drove a contribution ex-TAC increase in the double-digit million range within Performance Media in 3Q. So can you just talk about the monetization curve of AI? And I guess as we enter 2025, which investments are critical to continuing to drive a compelling and differentiated product as other competitors lead into their AI strategies? Yes, sorry, Todd, yes, I was just thinking through the answer, but give it to Todd. Todd Parsons -- Chief Product Officer That's great. And there are a few different really important factors in our investment strategy on AI and one goes to targeting and activation across a very fragmented space and using deep learning as a way to do that more effectively to drive performance for the company. Obviously, we sell performance. We don't just sell any one of these tactics, whether retargeting or on-site. And AI sits at the center of doing that with efficiency in spite of the fragmented space that we're operating in, the addressability challenges that we all talk about. So that's the core of our investing. Beyond that, there are a couple of other really important dimensions. One is making sure that the experiences that we deliver to consumers that are buying advertising or exposed to advertising rather on-site with retail media or off-site on the open web are optimized for that experience so that ultimately, a commerce outcome is achieved. That goes to AI-generated creatives, it goes to dynamically changing those creatives to be responding to the stage of a person is in and their buying journey as they're discovering or researching or on-site choosing between brands. So there are two very important things. And the third one is really how we operate as a company internally changing the way that we get to strategies for clients more quickly respond to their requests or service more quickly. Indeed, the way we build our products itself from a coding perspective, are all impacted by our investments in AI. Yes. And just in terms of, I would say, if we're thinking as well on dollars of investments, our teams already established. It's well established, it's in the core of our platform we've gone through our data center transitions over the last couple of years and invested heavily in kind of more -- well, I wouldn't say heavily compared to our peers, but we've invested smartly in terms of our infrastructure to ensure that we're optimized. We will continue to optimize our structure. But ultimately, I would say the investments you would expect would continue to be incremental to do everything that Todd just spoke about from an incredibly solid and very talented base of AI engineers. Your next question comes from the line of Alec Brondolo with Wells Fargo. Please go ahead. Alec Brondolo -- Analyst Hey. Thanks so much. I appreciate the feedback on the supply side of the Microsoft relationship. I would love to ask about the demand side. I think pretty exciting that being in Zander customers might end up purchasing Retail Media inventory sometime in 2025. Could you maybe just give us an update on the time line and functionally how that's going to work at least as best as you know today? Megan Clarken -- Chief Executive Officer Well, we -- so this is Megan. Thanks for the question. We don't want to kill joy. I hope you're coming to our investor day. We will take you through more detail about that on November 18. So I don't want to get ahead of that. But the team are working pretty hard with Microsoft to establish that connection between their demand side clients and our SSP or other channels into our Retail Media supply. It's an exciting opportunity in as much as there are 0.5 million advertisers across there. And the opportunity to bring that demand into -- onto our Retail Media stack, is a critical part of the Criteo's Flywheel. I talked about that during the prepared comments. But demand to us is so critical to the network of retailers that we have and so the retailers are excited by the prospects of more demand coming their way. And it will come that way because the returns from Retail Media spend for an advertiser speak for themselves. And so, this sort of flywheel is going to come in motion as soon as we start to get things rolling with Microsoft. The implementation -- I'm looking at Tood -- all things implementation. Todd Parsons -- Chief Product Officer Implementation is underway. I should say, implementation is being carefully thought through and underway. So that's about architecture and design to Megan's point, we want to make sure that we're matching those 500,000 advertisers from the Microsoft side, which represent about $10 billion of demand into not just our whole Retail Media footprint but also in places where there are unsold opportunities. So there are different considerations in the design that we're going through to make sure that's as seamless as possible and we want to get it right. That's very actively being done right now with an eye to getting it right and starting to roll it out in 2025. Megan Clarken -- Chief Executive Officer Just to finish that point is that as we've started to express in the dialogue, there is a slew of opportunities. There is an end-to-end shopper capability that we have that we will make available to those demand side advertisers as well, not just to get access to supply on Retail Media, on retailer sites, but also to use everything that we have to get advertising in front of shoppers on their buying journey. So this is a big deal. Your next question comes from the line of Brian Pitz with BMO Capital Markets. Please go ahead. Brian Pitz -- Analyst Thank you. Maybe some additional color on verticals. We're hearing some broader category softness in consumer discretionary, whether it's tech, entertainment, retail, CPG, although kind of offset by stronger lower funnel. Are you seeing this maybe any broader thoughts on CPG and retail specifically into Q4 and '25? And then, separately, maybe a quick update on Albertsons, how is that scaling and when do you think it should be a meaningful contributor to your earnings? Sarah Glickman -- Chief Financial Officer Yes. Thanks for the question, Brian. I would say it's a bit early to tell on the consumer categories for Q4. We definitely have seen some wait and see, which I spoke about earlier. That being said, we have a terrific discussions with all our retailers, and we would expect to see a good holiday season. So I would say no additional color, but I'm paying very, very close attention to the brands as they continue to post their earnings. And of course, the retailers coming in next quarter, there is obviously some, I would say, broader pumps related to Q4 consumer sentiment. And I think we'll keep track of that closely. But to your point, we have -- we in two key areas, one in Retail Media, where we know we have a strong perspective for Q4. And then, in Performance Media, where that's really -- we continue to see a strong spend, especially during the holiday season going into ensuring that they convert to a sale. And just a quick reminder as well that we announced a couple of new verticals this quarter. So Office Depot is a terrific new add. And then, also United Airlines. So for -- as we move away kind of -- or I would say, expand out from Retail Media to Commerce Media, we're seeing terrific traction across multiple verticals, and we expect that to continue going into 2025. On Albersons in particular, I mean, I would say, as expected, a terrific relationship, strong -- they definitely were contributed to our growth. And I think more to come there, we'll take that question and address that maybe in the Retail Media Day. Your next question comes from the line of Tim Nollen with Macquarie. Please go ahead. Tim Nollen -- Analyst Hi, everyone. Thanks. I'd like to come back to the topic of retargeting, which I think has now grown at least three quarters in a row. And we have almost gotten through this call without talking about cookies. I don't know if you've got an update you'd be willing to give us today on impact from cookies next year? I know it's probably very difficult to give. But just my question really is how dependent is your retargeting business on cookies at this point? Or is it almost not relevant anymore because you're using so much for first-party data? Megan Clarken -- Chief Executive Officer Yes. Look, I said in the opening remarks, we no longer run our business based on the demise of cookies, we've moved on. That's not to say we don't continue to work with Google as they work through their Privacy Sandbox because we think that works important. But our strategy, our multipronged approach to -- and dealing with the signal loss has all but gone away -- sorry, has all but come to life, I should say, through the work of Todd and his team, our R&D team, and our product teams to make that front and center in the way in which we find consumers on the buying journey. Yes. So there's a couple of things that are pretty encouraging there to Megan's point about Privacy Sandbox. You may have seen recently that Google actually came around to addressing a couple of our key requests of them to make Privacy Sandbox itself function better. So just knowing that that product is actually being improved. So as part of our overall addressability strategy and functions is very encouraging. Further, we have been working toward influencing Google as a partner and the CMA on the upcoming user choice implementation that is anticipated this next year, all for the purpose of making sure that consumers have a better view of what keeping a cookie means to a personalized advertising experience. And in the net more cookies around is a good thing to our strategy, but our strategy doesn't tie to it directly anymore, as Megan said, it's part of a bigger picture of addressability. And importantly, it's not just for retargeting. It's for the entire buyer journey that Megan was laying out that we're able to address consumers and this is very important because retargeting is still just one tactic in the mix that our advertisers are using to reach consumers and to drive commerce outcomes. Tim Nollen -- Analyst OK. You had previously given a number for the impact of cookie deprecation next year, which I think last call, you basically pulled back and said it won't be that hot. So I'm just wondering if there's any update to that number? Sarah Glickman -- Chief Financial Officer I mean, I think we don't know what Google's latest plan is. And so, I think, ultimately, we were not giving 2025 guidance now. But to Todd's point, we feel confident in our overall strategy. And of course, as and when we get update on exactly what they're doing, will update our assumptions in our model and in our guidance. Next question comes from the line of Tom White with D.A. Davidson. Please go ahead. Tom White, your line is open. OK. A quick one on Commerce Max. You guys mentioned some of the growth that you're seeing in some of the HoldCos. Curious whether you guys think you're kind of displacing any existing DSP tools at those agencies with Commerce Max or whether the spend is maybe coming from different budgets? And can you maybe just talk about over the next, say, three, four quarters? What's the main driver of growth in Commerce Max? Is it just kind of deeper penetration of these big HoldCos that are using it now? Is it adding more agencies? Any color there? Megan Clarken -- Chief Executive Officer Yes. A couple of things. Firstly, it's incredibly encouraging. Getting demand come through agencies is a very big part of this Flywheel and that is going, as well as it possibly could be at this point in time. This is very new for agencies and they've been asking for a long time, which is a good thing. We're giving -- delivering to them what they're looking for. It's now a matter of momentum, and we are building momentum incredibly well at 60% this quarter. I think for agencies, they have got a shift to make, which is to see Commerce Media spend and Retail Media spend on a network of retailers, a viable proposition, in fact, a better performing proposition for their advertisers. So that they move more and more dollars across into Retail Media. And they have a couple of choices. They can go to Amazon. They can go to Walmart or they can go to Criteo. And Criteo has a network of most of the other top retailers sitting there waiting with really strong demand -- sorry, supply proposition for those advertisers. So it is about momentum, Tom, just building that momentum, making sure the tools are doing everything that encourages an agency buyer to use them and produce the results and the data that they need to show that it's an effective buy. You want to add? Todd Parsons -- Chief Product Officer Yes, Tom, I'd just add something to what Megan said. Obviously, we're building on a very strong moat here. And what is important to spur the momentum that Megan talked about with agencies that we have relationships with and partnerships already built. From a product perspective, it's making sure that budgets are easy to plan and allocate across the retail media mix that we sit on top of. So you can imagine it's a little bit more challenging to get that done, which place to our advantage because we're looking across 225-plus retailers rather than just Walmart or Amazon. So you can imagine if you make it easier for allocations and activations to happen for HoldCos across those 225 and growing, then those budgets will ultimately come into the space through Commerce Max. Sarah Glickman -- Chief Financial Officer And I would just close by encouraging everyone to listen to the retail media investor day on November 18. I think we have one more question. Operator Question comes from the line of Justin Patterson with KeyBanc. Please go ahead. Justin Patterson -- Analyst Great. Thank you very much. Good morning. This is more of a theoretical question around Google and regulation. If Google is forced to divest AD and/or double-click for publishers, how do you think that could access or change your access to supply and winning bids in the market? Thank you. Megan Clarken -- Chief Executive Officer Yes. It's a good question, Justin. I'll start and maybe Todd can weigh in as well. Firstly, it's just incredibly hard to speculate as to what could happen here. The options are in with the timeline to actually get any kind of resolution here if the resolution comes is way out into the future in which the landscape could have changed considerably. So we tend to -- firstly, we do support a level playing field. So we do support anything that makes sure that the industry remains strong and that the ecosystem is a vibrant one, which is not dominated by one or two players. And of course, if there are changes to some of the AdTech properties that are owned by Google, then it will be interesting to see what happens from there. I think Todd if you've got any kind of speculation, we'll be careful, but for the fun of it? Todd Parsons -- Chief Product Officer Yes. I think I'll hold back on the speculation. What we are doing is continuing to work more deeply with the different parts of Google. I think we all know that Google is a very strong partner of ours. So whether there is a breakup or not that we're well prepared for what's on the other side of that. But I do think you can say that while the speculation ranges about what might happen, more attention from our customers is coming back to us. They're -- and that's really helpful. It's blue sky for Criteo while people are confused about what might happen elsewhere. So just an observation, not an empirical one, but one that's really important because as these changes happen, and as the market seems to be equalizing, there's great opportunity for this company. Megan Clarken -- Chief Executive Officer Thank you. Great questions. All good questions. Thank you very much, everybody. Melanie Dambre -- Vice President, Investor Relations Thank you, Megan, Sarah and Todd. This now concludes our call for today. Thanks, everyone, for joining. The investor relations team is available for any additional questions.

Earnings call: Palantir reports robust Q3 growth with AI demand surge By Investing.com

Palantir Technologies Inc . (NYSE: NYSE:PLTR) has reported a significant 30% year-over-year revenue growth for the third quarter of 2024, driven by an increased demand for artificial intelligence (AI). The company's U.S. business saw a 44% growth, with the U.S. government sector and commercial sector growing by 40% and 54% respectively. Palantir's financial performance remained strong with a cash flow from operations of $420 million and an adjusted free cash flow of $435 million. The company has also raised its full-year revenue guidance to $2.807 billion, indicating a 26% year-over-year growth rate. Palantir's inclusion in the S&P 500 in September 2024 underscores its market leadership and profitability. In summary, Palantir Technologies continues to exhibit strong financial growth and strategic focus on AI technology, with significant contract gains and operational efficiency. The company's emphasis on deep customer relationships and rapid adoption of its AI solutions positions it favorably in the evolving tech landscape. Despite some challenges in international commercial revenue, Palantir's leadership remains optimistic about future growth and the company's role in national security and innovation. Palantir Technologies Inc.'s impressive financial performance, as reported in its Q3 2024 results, is further substantiated by key metrics and insights from InvestingPro. The company's robust revenue growth of 30% year-over-year aligns with InvestingPro data showing a 21.22% revenue growth over the last twelve months as of Q2 2024, with quarterly revenue growth accelerating to 27.15% in Q2 2024. InvestingPro Tips highlight Palantir's strong financial position, noting that the company "holds more cash than debt on its balance sheet" and "liquid assets exceed short term obligations." This financial stability supports Palantir's ability to invest in AI technology and expand its operations, as discussed in the earnings report. The company's profitability, a key factor in its inclusion in the S&P 500, is reflected in InvestingPro data showing an impressive gross profit margin of 81.39% for the last twelve months. This aligns with an InvestingPro Tip stating that Palantir has "impressive gross profit margins," which underscores the company's efficiency in delivering its AI-driven solutions. While the article mentions Palantir's strong cash flow, InvestingPro adds that "cash flows can sufficiently cover interest payments," further emphasizing the company's solid financial footing. This is particularly relevant given Palantir's projection of over $1 billion in adjusted free cash flow for 2024. It's worth noting that InvestingPro offers 21 additional tips for Palantir, providing investors with a comprehensive analysis of the company's financial health and market position. These insights can be valuable for those looking to delve deeper into Palantir's investment potential amid its growing role in AI and data analytics. Ana Soro: Good afternoon. I'm Ana Soro from Palantir's finance team, and I'd like to welcome you to our Third Quarter 2024 Earnings Call. We'll be discussing the results announced in our press release issued after the market closed and posted on our investor relations website. During the call, we will make statements regarding our business that may be considered forward-looking within applicable securities laws, including statements regarding our fourth quarter and fiscal 2024 results, management's expectations for our future financial and operational performance, and other statements regarding our plans, prospects, and expectations. These statements are not promises or guarantees and are subject to risks and uncertainties, which could cause them to differ materially from actual results. Information concerning those risks is available in our earnings press release distributed after the market closed today and in our SEC filings. We undertake no obligation to update forward-looking statements except as required by law. Further, during the course of today's call, we will refer to certain adjusted financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from GAAP measures. Additional information about these non-GAAP measures, including reconciliation of non-GAAP to comparable GAAP measures, is included in our press release and investor presentation provided today. Our press release, investor presentation, and other earnings materials are available on our investor relations website at investors.palantir.com. Over the course of the call, we will refer to various growth rates when discussing our business. These rates reflect year-over-year comparisons unless otherwise stated. Joining me on today's call are Alex Karp, Chief Executive Officer; Shyam Sankar, Chief Technology Officer; Dave Glazer, Chief Financial Officer; and Ryan Taylor, Chief Revenue Officer and Chief Legal Officer. I'll now turn it over to Ryan to start the call. Ryan Taylor: Our results are exceptionally strong. Revenue grew 30% year-over-year in Q3, driven by an intensifying AI revolution that the U.S. is rapidly driving. Our U.S. business achieved 44% year-over-year and 14% sequential revenue growth. We are focused on deploying AI models in production, amidst the commoditization of cognition caused by the rapid advancement in AI models. Our U.S. government business revenue growth accelerated to 40% year-over-year and 15% sequentially, while our U.S. commercial business momentum continued with 54% year-over-year and 13% sequential revenue growth. This AI revolution that is transforming industry, as well as government is also transforming markets. In September, the S&P 500 added Palantir to its index, a testament to our exceptional growth, profitability and market leadership amidst this singular era of accelerating technological progress. We're witnessing the commoditization of cognition with the rapid advancement of AI models. Almost all investment in the AI space has been focused on supplying and improving these models. What will differentiate the AI haves from the have nots, is the ability to maximally leverage these models in production by capitalizing upon the rich context within the enterprise. This is Palantir's focus. We see this in the results we're delivering for our customers. Those who embrace quantified exceptionalism through AIP are able to take advantage of the commoditized cognition in a levered way to advance their differentiation. In this winner take all AI economy, the divide is widening between those who are leveraging AIP and those who are not. At a leading global insurance organization, AIP has helped automate key underwriting workflows, reducing the typical underwriting response time from over two weeks to 3 hours. We implemented over 10 business use cases in just nine months at Associated Materials, increasing its on time in full delivery rates from 40% to 90%. At Trinity Rail, it took just three months to get to a functional workflow with a $30 million impact to its bottom line. Last quarter, we closed 104 deals, over $1 million. The evolving deal cycle as we take customers from prototype to production is having a particularly phenomenal effect on the growth of our U.S. Commercial business, which continues to see AIP driven momentum both in expansions and new customer acquisitions. In U.S. Commercial, we closed nearly $300 million of TCV and customer count grew 77% year-over-year compared to 37% year-over-year in Q3 2023. To highlight a few notable deal cycles, a large American equipment rental company expanded its work with us less than eight months after converting to an enterprise agreement, increasing the account ARR 12 fold. A bottled water manufacturer, a specialty pharmaceutical company and an agricultural software provider all signed seven figure ACV deals less than two months after their initial boot camps. In our U.S. Government business, we are outfitting our warfighters with advantages over our adversaries. Last quarter marked our U.S. government businesses continued strength through the end of the U.S. government fiscal year. It was our strongest sequential growth in 15 quarters, driven largely by our DoD businesses 21% quarter-over-quarter growth. We remain proud of our progress delivering the next generation Targeting Node through Titan with our efforts fully ramping throughout Q3. Palantir is also delivering AI through Maven Smart System, allowing customers like the 18th Airborne to match the performance of what used to be a 2,000 staff targeting cell during Operation Iraqi Freedom to a targeting cell of roughly only 20 people today. Last quarter, Palantir signed a new five year contract to expand these Maven Smart system AI ML capabilities across the U.S. military services including the Army, Air Force, Space force, Navy and U.S. Marine Corps. As Vice Admiral Frank Whitworth recently said, this partnership is tantamount to ensuring that we keep America safe and ready. The AI revolution is underway now. The chasm between the AI haves and have nots is rapidly widening and the whole world is watching. I'll now turn it over to Shyam. Shyam Sankar: Thanks, Ryan. The divide between AI haves and have nots is rapidly accelerating in this winner take all AI economy. What will differentiate the AI haves from the have nots is the ability to maximally leverage these models in production by capitalizing upon the rich context within the enterprise. That's why our focus on delivering proof, not proof of concepts continues to pay-off. Years of foundational investments in our infrastructure and in on ontology have positioned us uniquely to harness and deliver on AI demand. This is Palantir's focus. The market has been focused on AI supply the models. We see this clearly in the progress, but also in the capital sunk into these models. Indeed, the models continue to improve, but more importantly, the models across both open and closed source are becoming more similar. They are converging, all while pricing for inference is dropping like a rock. This only strengthens our conviction that the value is in the application and workflow layer, which is where we excel. Tapping into this rapidly expanding pool of leverage from AI labor means more than just saving money. It means a massive acceleration of results for our customers. As Ryan mentioned, we have automated the insurance underwriting process for one of America's largest and most well-known insurers with 78 AI agents, taking a process that took two weeks to 3 hours. More than the labor savings, this presents the customer with an asymmetrical advantage in the marketplace to bind contracts before the competition has even gotten through 15% of their process. In U.S. government, we automated the foreign disclosure process for sharing critical and timely intelligent with allies from three days to 3 hours. The center for Security and Emerging Technologies at Georgetown published a study on Maven that showed how the entire targeting and fires process can be done in Maven with 20 people it used to take 2,000. There is a huge opportunity for our customers to automate the tail and liberate capital to reinvest in the tooth across government and commercial, we see enterprise autonomy as a key theme in our proof. Our deep investments in CJADC2 Combined Joint All Domain Command & Control continue to meet their moments. First and foremost, Maven has powered responses to real world events across the globe. This past quarter the army was the first military department or MILDEP to adopt Maven. We're happy with the progress that we continue to make with Army Titan and AIDP and Palantir's role as the application integrator in the Joint Fires Network (LON:NETW). Maven is our military's fight tonight solution at a time when North Korean troops are in Ukraine, Russia is providing satellite intelligence to the Houthis and Iran is launching ballistic missiles at allies. We are investing aggressively to expand the perimeter to give our warfighters the unfair advantage they deserve, advanced multi-INT sensor fusion, integrated logistics into fires and large scale command and control of swarms of autonomous systems. We announced warp speed last quarter, our modern American manufacturing operating system. We as a nation must reindustrialize to prevent escalating conflict and regain deterrence. Before the fall of the Berlin Wall, only 6% of major weapons systems spend went to defense specialists, the so called primes. 94% went to dual purpose companies who were invested in both freedom and prosperity. Chrysler built cars and missiles, Ford (NYSE:F) built satellites until 1990 and General Mills (NYSE:GIS), the serial company made weapons. Today, that 6% has become 86% when including firms whose only commercial exposure is in aerospace. We won World War II and the Cold War with an American industrial base, not a defense industrial base and we need to bring that back at warp speed. And in addition to working with new champions like Anduril and Shield AI, we're also working with L3Harris and two other of the big primes to help them bend atoms better with bits. Lastly, we continue to invest in AIP as a developer platform. Green suitors at the 18th Airborne Corp built 15 applications in our developer environment for their August warfighter exercise. Army Software Factory is cranking out software at units in Europe and even for the Vice Chief of Staff of the army. The 101st built their search and rescue common operating picture to power Hurricane Helene response, built entirely by uniformed service members. We have released our JADC2 SDK including examples and documentation for government and third-party developers to start building [email protected]/defense/sdk and we have DevCon this month, our first gathering specifically for AIP platform developers across commercial and government, where we will be releasing a ton of new product investments, an enhanced OSDK, more ergonomic compute modules, the multimodal data plane and much more. I'll turn it over to Dave to talk us through the financials. David Glazer: Thanks, Shyam. Q3 was an exceptionally strong quarter, as revenue growth accelerated to 30% year-over-year, exceeding the high end of our prior guidance by nearly 450 basis points. As America rapidly embraces the AI revolution, this increase in AI demand has driven the outperformance in our U.S. business, which grew 44% year-over-year. Our U.S. commercial business grew 54% year-over-year and 13% sequentially. Our U.S. government business grew 40% year-over-year and 15% sequentially, a seven fold increase compared to the prior year period growth rate and the strongest growth we've seen in 15 quarters. On the back of this strength, we are increasing our full year revenue guidance midpoint to $2.807 billion representing a 26% year-over-year growth rate. We delivered these outstanding top line results, while expanding adjusted operating margin to 38%, highlighting the strong unit economics of our business. Our revenue and profitability drove a 4 point sequential increase to our Rule of 40 score from 64 in the second quarter to 68 in the third quarter. We had an exceptional cash flow quarter with cash from operations of $420 million and adjusted free cash flow of $435 million representing margins of 58% and 60% respectively. On a trailing 12-month basis, we generated over $1 billion in adjusted free cash flow for the first time in the company's history. We are also proud to have joined the S&P 500 last quarter, underscoring our sustained profitability and growth. Turning to our global top line results, revenue continues to accelerate, as we see continued momentum from AIP. We generated $726 million in revenue, up 30% year-over-year and 7% sequentially. Excluding the impact of revenue from strategic commercial contracts, third quarter revenue grew 32% year-over-year and 7% sequentially. Customer count grew 39% year-over-year and 6% sequentially to 629 customers. Revenue from our largest customers continues to expand. Third quarter trailing 12 month revenue from our top 20 customers increased 12% year-over-year to $60 million per customer. Now moving to our Commercial segment. Third quarter Commercial revenue grew 27% year-over-year and 3% sequentially to $317 million. Excluding the impact from strategic commercial contracts, Commercial revenue grew 30% year-over-year and 3% sequentially. Third quarter Commercial TCV booked was $612 million, representing 52% growth year-over-year and 62% growth sequentially. Our U.S. Commercial business continues to see unprecedented demand with AIP driving both new customer conversions and existing customer expansions in the U.S., as we continue to deploy AI models in production. Third quarter U.S. Commercial revenue grew 54% year-over-year and 13% sequentially to $179 million. Excluding revenue from strategic commercial contracts, U.S. Commercial revenue grew 59% year-over-year and 12% sequentially. In the third quarter, we booked $297 million of U.S. commercial TCV, representing 13% growth sequentially. Total remaining deal value in our U.S. commercial business grew 73% year-over-year and 7% sequentially. Our U.S. commercial customer count grew to 321 customers, reflecting 77% growth year-over-year and 9% growth sequentially. We generated $138 million in international commercial revenue in the third quarter representing 3% growth year-over-year, but a 7% sequential decline as a result of continued headwinds in Europe and a step down in revenue from a government sponsored enterprise in the Middle East. Despite those headwinds, we continue to build on our transformational work with some of our largest international customers, including signing a multi-year renewal with BP. We also continue to capitalize on targeted growth opportunities in Asia, the Middle east and beyond. Revenue from strategic commercial contracts was $9.6 million for the quarter. We anticipate fourth quarter 2024 revenue from these customers to decline to between $6 million to $7.5 million compared to $20 million in the fourth quarter of 2023. We continue to anticipate 2024 revenue from these customers to be less than 2% of full year revenue. Shifting to our Government segment. Third quarter Government revenue grew 33% year-over-year and 10% sequentially to $408 million. Third quarter U.S. government revenue accelerated to $320 million, representing 40% growth year-over-year and 15% growth sequentially. This acceleration was driven by continued execution in existing programs, new awards reflecting the growing demand for AI in our government software offerings and favorable deal timing in the quarter, coupled with government year-end cycle. Third quarter international government revenue was $89 million, representing 13% growth year-over-year, but a 5% sequential decline as a result of revenue catch up in Q2 that we noted last quarter and less favorable deal timing. Third quarter TCV booked was $1.1 billion, up 33% year-over-year and 16% sequentially. Net dollar retention was 118%, an increase of 400 basis points from last quarter. The increase was driven both by expansions at existing customers and new customers acquired in Q3 of last year, as we see the effect of the AI revolution in both industry and government. As net dollar retention does not include revenue from new customers that were acquired in the past 12 months, it does not yet fully capture the acceleration and velocity in our U.S. business over the past year. We ended the third quarter with $4.5 billion in total remaining [Technical Difficulty] yield value, an increase of 22% year-over-year and 4% sequentially and $1.6 billion in remaining performance obligations, an increase of 59% year-over-year and 15% sequentially. As a reminder, RPO is primarily comprised of our commercial business, as it does not take into account contracts within an initial term of less than 12 months and contractual obligations that fall beyond termination for convenience clauses, both of which are common in most of our government business. Turning to margin and expense, adjusted gross margin, which excludes stock-based compensation expense was 82% for the quarter. Adjusted income from operations, which excludes stock-based compensation expense and related employer payroll taxes was $276 million, representing adjusted operating margin of 38% and marking the eighth consecutive quarter of expanding adjusted operating margins. Q3 adjusted expense was $450 million, up 6% sequentially and 14% year-over-year, primarily driven by our continued investment in AIP and technical talent. We continue to expect expenses to ramp through the fourth quarter as we invest in the product pipeline and accelerate the journey from AI prototype to production. In the third quarter, we generated GAAP operating income of $113 million, representing a 16% margin. We generated GAAP net income of $144 million, representing a 20% margin. Third quarter adjusted earnings per share was $0.10 and GAAP earnings per share was $0.06. As previously communicated, we've aligned our compensation program with the performance of the company's goals, including its stock price. On the back of the company's strong performance, our inclusion in the S&P 500 and the increase in our stock price, we will continue to monitor if we become required to accelerate stock-based compensation expenses if certain market based vesting criteria are achieved earlier than expected. Additionally, our combined revenue growth and adjusted operating margin accelerated to 68% in the third quarter, a 4 point increase to our Rule of 40 score from the prior quarter. Turning to our cash flow. In the third quarter, we generated $420 million in cash from operations and $435 million in adjusted free cash flow, representing a margin of 58% and 60% respectively. For the first time ever, on a trailing twelve month basis, we generated over $1 billion in adjusted free cash flow representing a margin of 39%. Through the end of the third quarter, we repurchased approximately 1.8 million shares, as part of our share repurchase program. As of the end of the quarter, we have 954 million remaining of the original authorization. We ended the quarter with $4.6 billion in cash, cash equivalents and short-term U.S. treasury securities. Now turning to our outlook, for Q4 2024, we expect revenue of between $767 million and $771 million and adjusted income from operations of between $298 million and $302 million. For full year 2024, we are raising our revenue guidance to between $2.805 billion and $2.809 billion. We are raising our U.S. Commercial revenue guidance to an excess of $687 million, representing a growth rate of at least 50%. We are raising our adjusted income from operations guidance to between $1.054 billion and $1.058 billion. We are raising our adjusted free cash flow guidance to an excess of $1 billion and we continue to expect GAAP operating income and net income in each quarter of this year. With that, I'll turn it over to Alex for a few remarks and then Ana will kick off the Q&A. Alex Karp: Given how strong our results are, I almost feel like we should just go home. But we -- we made -- we've been saying since we went public in a DPO that we would build infrastructure to make America and its allies the dominant force in the world. We claimed to too much skepticism that this would be done in a software product, that defense and commercial industry would be driven by software, hardware, hybrid technologies that there were very few companies in the world that could actually do that, that these companies are basically only built in America that the companies that have tried to do this that aren't Palantir are built by ex-Palantirians. That the financials of Palantir would flow from our products and our culture and our way of implementing that we would bring violence and death to our enemies, while making targeting and general issues of safety better for our allies and for Americans, that we would stand by our values in thick and thin, including that the west and America are superior ways of organizing and that this is a great country and historically anomalous in its greatness and that we would build a company with the best people from all over the world, but primarily from America to power America and its allies. And even we are shocked by the 44% growth in the U.S. off of a $2 billion base. So this is not some speculative small base 44% growth. Even we are happy to see that we grew 30% to see the real reacceleration in U.S. G to 40% and to see the very, very strong results in U.S. commercial. Also allied countries that have begun to realize that AI is the way to wait in which to make their defenses superior in the face of brutal, heinous, immoral and often terroristic enemies where you need a superior form of fighting that's both safer for you and more dangerous for the adversary and controls how you hit them and when and where and allows you to maximize your results. It is also just jarring to see how America adopts the most important, most agile and most impactful technology, independent of who the purveyor and builder of that. We are building this company and we are -- we believe we're at the beginning and watching American adoption both in Government and Commercial, while not forcing us to change, while accepting that many of the ideas of how we have of how to make your enterprise better, whether it's insurance has been mentioned, oil and gas, any kind of complicated manufacturing, supply chain, healthcare, obviously defense and Intel (NASDAQ:INTC) that that a new and different way of building software and implementing it, meaning the infrastructure is where the value is. Despite the fact that as we, you may have noticed, many have noticed that the experts that write about these things seem to believe the commodity i.e. the LLM is the valuable aspect of this and that the actual asset, meaning how you manage the commodity is the actual value despite great skepticism about our view of how to do this, the market seems to have decided what works, no matter how theoretically appealing the idea is of building software around how you may have learned to build it in business school is to you as the person not buying the software. The people buying the software who are allowing our market to grow at 30% in aggregate, 44% in America, 40% in U.S. Com and dramatically 40 in U.S. Government and dramatically in U.S. Com are, are, have, are speaking with their feet and their implementations and we're very, very proud of that. And I'm particularly proud to see the warfighter adoption of this. You see every part of U.S. government, including the White House, Congress, Defense, intel, beginning to embrace the application of large language models in infrastructure, obviously something that Palantir is particularly specialized in. And we just, we are really, I think as a company enjoying this phase. When you build a company over long period of time, there are good and bad phases. But to see in fact, our view of what it makes to make enterprises stronger and better show up in these dramatic results is super gratifying and we plan to continue. Ana Soro: Thanks, Alex. We'll now turn to a few questions from our shareholders before opening up the call. We received a few questions on AI. How will Palantir differentiate its AI offerings from others, including the model creators? And how is AIP different? And how will Palantir maintain its competitive edge? Shyam Sankar: Well, Alex talked about how the models yellow arms are commoditized, but if you look at the models, you see that they're getting better, which is awesome. But they're also getting more similar across both closed and open source models, while they're improving, they're converging upon each other, all while the price of inference is dropping precipitously. And that's, so if you even look at these model companies, they have to build applications around these models to extract value. That's where we have a decade long head start. We've been building the forge to create and implement AI applications at scale throughout the enterprise. And that differentiation starts with the ontology. Using the ontology to drive AIP across these applications. When you look at the legacy software companies, I'm not sure they understand it yet, but when you look at the innovative Silicon Valley companies, they recognize the wall of tech investments this implies that's in front of them that's going to act like a great filter. Alex Karp: I would say kind of an addendum to that, it's, it's. Well, first of all, I think people are beginning to recognize we were right and these numbers show it. So that, that creates a dynamic of, okay, well, if you can actually extract value from large language models in any context, then clearly the company that does it is very valuable and a lot of our customers, even a year ago, they were kind of skeptical of can you make these things useful? I would say most of the customers I deal with are pretty skeptical, you can make large language models do anything, but do a science experiment. And in a weird way, even though the models are improving, they're meeting up against greater skepticism among clients because clients have tried them and it's just a high school experiment. And then if you get to -- so it's like there's the market and analyst seem to have put a lot of credibility into the models and we do too. We think they're very valuable when managed correctly, when used in a way that an enterprise can understand. And one of the problems that people have is if you're not involved in enterprise software, it's very hard to understand how an enterprise actually works. You cannot take a large language model that gives you an ELO score of 1200 and use it on targeting on the battlefield. There's a security model. There's a way in which the data is understood. There's certain things you can't share. There's places you would use certain models, but not others. How do you bring that back to your corpus of truth to understand, in a lethal context who dies and who doesn't? And you have very similar use cases in underwriting and in healthcare. And so understanding the actual way, technically Enterprise is driven as embodied by Foundry, as embodied by our abstraction layer on top of Foundry, which includes all those new launches which we call in ontology as powered by AIP are all sorts of things that our clients are being beginning to discover every day. Of course, the main way they're discovering it is, holy shit, (ph) I can do this in an hour that used to take 5 hours or 50 hours or I could have 2,000 people or 20 and 10. And by the way, on the targeting on the battlefield, we've talked about basically two orders of magnitude and reduction of people, but it's also in many cases two orders of magnitude in the production of your ability to do things in efficacious manner. There are whole global events now that would be very different without these, without our ability to manage these things in our infrastructure. And that's obviously generating a lot of excitement internally that spills into our earnings. Ana Soro: Thank you. Our next question is from Ryan, who asks, as Palantir continues to invest in new AI technologies and expand globally, how are you balancing these investments with maintaining or improving profitability and operating margins, especially given the current macroeconomic challenges? David Glazer: We aren't just bouncing, we're excelling. Revenue grew 30% year-over-year in Q3, 44% in the U.S. in the quarter. And you couple that with our expanding margins in the quarter. We did 38% adjusted operating margin, our eighth consecutive quarter of expanding margins and we posted 68 in, 68 in the Rule of 40 score. At the same time, we had an outstanding adjusted free cash flow margin in the quarter, 60%. And so looking forward, we're raising guidance. We're raising guidance for adjusted free cash flow to an excess of $1 billion for full year 2024. We're raising adjusted operating income guidance to an excess of $1 billion, well over that actually, which represents a 39% margin in Q4. And we're doing all this while we're continuing to invest at the beginning of the AI revolution that is -- there is an incredible amount of demand there and we're investing in technical talent and we're continuing to build out world class product. Alex Karp: There's a steel man version of this, which is given how well you're doing, given you've really accelerated to 30%, given the U.S. is growing 44%, why don't you blow up your Rule of 68, which by the way, to my knowledge is the single best in of comparable companies in the world and significantly better than many very strong companies. So an average normal way of looking at Palantir be like, great, you have a 44% growth on $2 billion base in the U.S. and you have a Rule of 68. Get that 68 down to 50 and maybe you can grow. But in fact, that way of looking at a business misunderstands the way in which Palantir builds. We believe that by investing and we know at this point, instead of trying to have 10,000 clients, all of whom hate you, that's kind of what people want, 10,000 clients that hate you, but they can't give you a product. We want a smaller number of the world's best partners that, quite frankly are dominating with our product. And the way you do that is by having by not blowing up your margin and getting 10,000 sales people, it's actually by going deeper on the product. And in fact, what we see is the deeper and the better the product, the more we drive sales, the more we have our cultural singular advantage as Palantir, not as a commodity product. It's like we are not a commodity. We do not want our customers to be commodities, we want them to be individual Titans that are dominating their industry or the battlefield. And we reflect that in how we do things. We are not trying to be your average Harvard Business School preferred company with like that, that crush that reduces the margins, has a thin product and then has a lower rule of 40 and presumably higher growth. By the way, I don't think you get higher growth than what we had, honestly, although we of course are always pushing and want even higher growth. The people who tend to ask these questions are, tend to be modeling companies with 20% growth and lower margins. We have 44% growth in the most important market in the world, arguably not the only, but by far the most valuable market in the world, while having a Rule of 68 i.e. the best in the world. And we are going to maintain the contradiction of having both high margins and high growth. It's not one or the other. They're actually interplayed and they're not a contradiction. They power each other. That's how you have world class products. That's what you see in your numbers. A - Ana Soro: Thank you both. Our next question is from Dan with Wedbush. Dan, please turn on your camera and then you'll receive a prompt to unmute your line. Daniel Ives: A great quarter and congrats to you and the team. So my question is with boot camp conversions, has it even surprised you just how quickly from a customer coming into a boot camp, potential customer to conversion to megadeals, what you're seeing and what do you think that says about your process and where we are in this AI revolution where Palantir year sits? David Glazer: Yeah. I think obviously the most indicative of what we're seeing and the impact is the results, 44% year-over-year growth in U.S. Commercial. 54, sorry, 44% year-over-year growth in U.S., 54% in U.S. Commercial the sequential growth we're seeing. I think, I gave examples of boot camps where we're seeing multiple different customers across different industries that are going from, from the initial boot camp to a seven figure ACV deal within a matter of less than two months. We're seeing that, we're feeling that in the conversations we have with customers and then our push to go from prototype to production and the expansions we're seeing at customers. And I'm seeing that, in the conversations, as we said, really, it's going to be, it's going to be the AI haves and the have nots. The haves are moving quickly, making decisions quickly and adopting quickly and I'm feeling that in the conversations we have with them, in the conversions we're seeing. Alex Karp: I would just say that the most surprising thing is just how there's a small number of increasingly large number of customers, meaning that get this and they are just moving really quickly and anyone who's involved in the enterprise. So if you take company XYZ and then five people go to a different company, the first thing they do is pick up the phone and call us. And then and so it just the way in which this just expands in the U.S. quite and in some other countries, but especially in the U.S. from anyone who touch this wants to use it in any part of anything they're doing. And it goes from one person. And then there's this transience in America where people really are moving to different companies a lot and they're talking to each other. And there's just a willingness to take business metrics and use those business metrics against technology. That's not ideological. And if you look at even 10 years ago, there was no form of software that had this kind of adoption and this kind of readiness. And also it was conversely just not possible to show this kind of results this quickly. And we tend to focus on the results on the outside, but in, AI and large language models also allow us to scale our product on the inside. So one of the unfair things about this revolution is if you have business acumen and you have a product that is good or stellar, in my humble opinion, you can make it even better internally and externally. And so that allows us to also scale many, many more people to many, many organizations with the same number of people, as long as they're the best in the world. And so it's really this from touch to expansion. However we do it, some of its boot camps, but some of it's just like, hey, I used to work at a company, I heard really good things about your product, I want it tomorrow. How quickly can you get here? What is the first use case you could do? And then the first thing that they always ask is, well, show me some of the things that you've done in other places like I even cross fertilization between government and non-government, I was at an important government entity a couple of weeks ago and they obviously Maven would be very useful for them. But then they start asking, well, what are you doing for hospitals? Could you use this on FOIA requirements? Could you use the same thing for managing our people? How could you make sure that our people are safe and happy? How do you move parts? How do we do procurement? A lot of the things shams, so there's like a massive cost fertilization even between verticals that otherwise would never talk. In the past, government use cases did not, non-government use cases were just not things we were doing in government and certainly from industry to industry, we did not have this from real estate to supply chain to large hospital things, the use cases that they're doing inside our product, they are technically basically the same for us. Ana Soro: Thank you. Our next question is from Mariana with Bank of America (NYSE:BAC). Mariana, please turn on your camera and then you'll receive a prompt to unmute your line. Mariana Perez Mora: So on government, U.S. government is up like 40% and this is in line with what we saw at USA L3Harris, Andrea, Chile, but others were advertising Palantir logos and they were like advertising partnership with you. What change for them to actually want a partner? That's the first one. And then Dave, if you don't mind giving an update on the strategic commercial contracts and how are you thinking about the remaining deal value as we see news about Lilium, but also a recent pickup of some like stock awards as a form of payment from these companies. Thank you. Ryan Taylor: On the first bit here, there's really two dimensions to what we're seeing is acceleration in partnerships on the U.S. government side. The first is something I've talked about earlier, which is mission manager, really how do we take not our software, but our software infrastructure, Rubik's and Apollo as radical accelerants for these companies to get to revenue, to service their existing revenue in a more profitable way and expand their market access. So that's been just a clear win across the board, that's good for the government, it's good for these partners and it's good for us. David Glazer: I don't think Shyam is taking enough credit here or Shyam, Ake and others. So we -- one of our biggest issues in the U.S. Government would be just simply a friction coefficient. And we had the problem that although we are completely focused on helping the U.S. government allies first and our self-second and that's been, that's one of the reasons most of us at the table are still here. There was a general perception a couple of years ago that basically and you see it in our numbers Palantir wins and maybe we win too much and we keep winning and people are like the Palantir makes all this money, someone else has got to make money. And one of the thing Shyam and I would say Ake and others did a tremendous job of it's like look, we're in this for the supremacy of U.S., U.S. and its allies and we're going to prove this by opening up part of our products and allowing you to sit on government data, which is, laypeople assume you could just put a product on government data. You can't do that. There's all these tech products we've built that allow you to safely and securely work directly with the U.S. government. And we begun offering that to all sorts of defense tech start-ups and begun partnering with more established large integrators like L3 and many others actually. And the strategy there was, look, if we actually believe what we believe, let's show it. And this strategy, which, Shyam led and Ake empowered and also kind of spent, did incredible work on has led to a situation where most people involved in tech innovation now view Palantir as their ally. And so instead of going into every meeting saying oh yeah, Palantir is great, but their fearless leader is bad shit, crazy and he might go off to his commune in New Hampshire and whatever they were saying, it's now like, yeah, the products are the best and we have great products. And so that, that's a really important shift and that was a business strategy and it really was done by others and that has shifted our ability to get to market because most people don't want to resist. They don't, they're not hating the player, they're playing with us. Shyam Sankar: Alex, is always a tough act to follow, but the second part of that I'll just close out with is really helping these companies with their production. In the same way that we help Airbus build every plane or Chrysler build every car, how do we help L3 and roll and shield and all of these new entrants and existing primes build their weapon systems better and in particular where they have fixed price drive margin expansion as a consequence of doing that. David Glazer: And then on the strategic commercial contracts, they're a tiny part of the business, right, basically 1% of revenue in Q3, on the forward looking metrics which is even like it's quite de minimis and the program ended three years ago. So we can still answer the question, it's basically not relevant anymore. Ana Soro: Thank you. Alex, we have a lot of individual investors on the line. Is there anything you'd like to say before we end the call? Alex Karp: As usual, we're in it together with you. Besides making America even stronger and better and our allies stronger, better and all of us more lethal, besides protecting Palantirians and most ex-Palantirians that the -- our individual investors are near and dear to our and certainly my heart and I love it that you guys are winning. There always be ups and downs in building a business, but we're definitely fighting for you guys. And the decision to do a DPO where we which is essentially a, was a decision to make sure that individuals got to participate and your willingness to spend time and look at what we're doing and actually look at the facts on the ground and not just to read theory has been crucial to Palantir as a business and it's part of what makes Palantir great and also our nation so great. So thank you and thank you for your support. Ana Soro: Thank you. That concludes Q&A for today's call.

Meta Platforms (META) Q3 2024 Earnings Call Transcript | The Motley Fool

Good afternoon. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Meta third-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. [Operator instructions] This call will be recorded. Thank you very much. Kenneth Dorell, Meta's director of investor relations, you may begin. Ken Dorell -- Director, Investor Relations Thank you. Good afternoon, and welcome to Meta Platform's third quarter 2024 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; and Susan Li, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's earnings press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The earnings press release and an accompanying investor presentation are available on our website at investor.fb.com. And now, I'd like to turn the call over to Mark. Mark Elliot Zuckerberg -- Founder, Chair, and Chief Executive Officer All right. Thanks, Ken. This was a good quarter with strong product and business momentum and with parts of our long-term vision around AI and the future of computing coming into sharper focus. We estimate that there are now more than 3.2 billion people using at least one of our apps each day, and we're seeing rapid adoption of Meta AI and Llama, which is quickly becoming a standard across the industry. So, let's start with some highlights from the apps. For WhatsApp, the U.S. remains one of our fastest-growing countries, and we just passed a milestone of 2 billion calls made globally every day. On Facebook, we continue to see positive trends with young adults, especially in the U.S. On Instagram, global growth remains strong. We also launched teen accounts this quarter, which add built-in protections that limit who teens are messaging and what content they can see. On Threads, the community now has almost 275 million monthly actives. It has been growing more than 1 million sign-ups per day. Engagement is growing, too. So, we continue to be on track toward this becoming our next major social app. We are making a lot of progress with our AI efforts, too. And we're seeing AI have a positive impact on nearly all aspects of our work from our core business engagement and monetization to our long-term road maps for new services and computing platforms. And I think that this partially comes from having a vision and road map that is aligned with the direction that technology is heading, but even more importantly, from our teams doing some really excellent work on execution on so many fronts. Meta AI now has more than 500 million monthly actives. Improvements to our AI-driven feed and video recommendations have led to an 8% increase in time spent on Facebook and a 6% increase on Instagram this year alone. More than 1 million advertisers used our gen AI tools to create more than 15 million ads in the last month. And we estimate that businesses using image generation are seeing a 7% increase in conversions, and we believe that there's a lot more upside here. We are also seeing great momentum with Llama. Llama token usage has grown exponentially this year. And the more widely that Llama gets adopted and becomes the industry standard, the more that the improvements to its quality and efficiency will flow back to all of our products. This quarter, we released Llama 3.2, including the leading small models that run on device and open-source multimodal models. We are working with enterprises to make it easier to use. And now we're also working with the public sector to adopt Llama across the U.S. government. The Llama 3 models have been something of an inflection point in the industry. But I'm even more excited about Llama 4, which is now well into its development. We're training the Llama 4 models on a cluster that is bigger than 100,000 H100s or bigger than anything that I've seen reported for what others are doing. I expect that the smaller Llama 4 models will be ready first, and they'll be ready, we expect, sometime early next year. And I think that they're going to be a big deal on several fronts, new modalities, capabilities, stronger reasoning, and much faster. It seems pretty clear to me that open source will be the most cost-effective, customizable, trustworthy, performant, and easiest-to-use option that is available to developers. And I am proud that Llama is leading the way on this. All right. Now, it's the time of the year at Meta when we plan our budget for the next year, and that's still in progress. But I wanted to share a few things that have stood out to me as we've gone through this process so far. First, it's clear that there are a lot of new opportunities to use new AI advances to accelerate our core business that should have strong ROI over the next few years. So, I think we should invest more there. And second, our AI investments continue to require serious infrastructure, and I expect to continue investing significantly there too. We haven't decided on the final budget yet, but those are some of the directional trends that I'm seeing. Now, moving on. This quarter, we also had several milestones around Reality Labs and the integration of AI in wearables. Ray-Ban Meta glasses are the prime example here. They're great-looking glasses that let you take photos and videos, listen to music, and take calls. But what makes them really special is the Meta AI integration. With our new updates, it will be able to not only answer your questions throughout the day, but also help you remember things, give you suggestions as you're doing things using real-time multimodal AI, and even translate other languages right in your ear for you. I continue to think that glasses are the ideal form factor for AI because you can let your AI see what you see, hear what you hear, and talk to you. Demand for the glasses continues to be very strong. The new clear edition that we released at Connect sold out almost immediately and has been trading online for over $1,000. We've deepened our partnership with EssilorLuxottica to build future generations of smart eyewear that deliver both cutting-edge technology and style. At Connect, we also showed Orion, our first full holographic AR glasses. We've been working on this one for about a decade, and it gives you a sense of where this is all going. We're not too far off from being able to deliver great-looking glasses to let you seamlessly blend the physical and digital worlds, so you can feel present with anyone no matter where they are. And we're starting to see the next computing platform come together and it's pretty exciting. All right. We also released our newest mixed-reality headset, Quest 3S. It brings the best capabilities of Quest 3, high-quality color pass-through, a new chipset, and more, at the much more accessible price point of $300. Reviews are great so far, and I'm looking forward to seeing how well it does this holiday season as more people get their hands on it. So, overall, this has been a good quarter. I'm pretty amped about all the work that we're doing right now. This may be the most dynamic moment that I've seen in our industry, and I am focused on making sure that we build some awesome things and make the most of the opportunities ahead. And if we do this well, then the potential for Meta and everyone building with us will be massive. As always, I'm grateful for everyone who is on this journey with us, our teams, our partners, and our investors. And now, here's Susan. Susan Li -- Chief Financial Officer Thanks, Mark, and good afternoon, everyone. Let's begin with our consolidated results. All comparisons are on a year-over-year basis unless otherwise noted. Q3 total revenue was $40.6 billion, up 19% or 20% on a constant-currency basis. Q3 total expenses were $23.2 billion, up 14% compared to last year. In terms of the specific line items, cost of revenue increased 19%, driven primarily by higher infrastructure costs. R&D increased 21%, mostly driven by higher headcount-related expenses and infrastructure costs. Marketing and sales decreased 2%, driven primarily by lower restructuring costs. G&A decreased 10%, driven primarily by lower legal-related expenses. We ended the third quarter with over 72,400 employees, up 9% year over year, with growth primarily driven by hiring in our priority areas of monetization, infrastructure, Reality Labs, generative AI, as well as regulation, and compliance. Third-quarter operating income was $17.4 billion, representing a 43% operating margin. Our tax rate for the quarter was 12%. Net income was $15.7 billion or $6.03 per share. Capital expenditures, including principal payments on finance leases, were $9.2 billion, driven by investments in servers, data centers, and network infrastructure. Our capital expenditures were impacted in part by the timing of third-quarter server deliveries, which will be paid for in the fourth quarter. Free cash flow was $15.5 billion. In Q3, we completed a debt offering of $10.5 billion, repurchased $8.9 billion of our Class A common stock, and paid $1.3 billion in dividends to shareholders, ending the quarter with $70.9 billion in cash and marketable securities and $28.8 billion in debt. Moving now to our segment results. I'll begin with our Family of Apps segment. Our community across the Family of Apps continues to grow, with more than 3.2 billion people using at least one of our Family of Apps on a daily basis in September. Q3 total Family of Apps revenue was $40.3 billion, up 19% year over year. Q3 Family of Apps ad revenue was $39.9 billion, up 19% or 20% on a constant-currency basis. Within ad revenue, the online commerce vertical was the largest contributor to year-over-year growth, followed by healthcare and entertainment, and media. On a user geography basis, ad revenue growth was strongest in Rest of World and Europe at 23% and 21%, respectively. Asia Pacific grew 18% and North America grew 16%. On an advertiser geography basis, total revenue growth was strongest in North America and Europe at 21%. Rest of World was up 17%, while Asia Pacific was the slowest-growing region at 15%, decelerating from our second-quarter growth rate of 28% due mainly to lapping a period of stronger demand from China-based advertisers. In Q3, the total number of ad impressions served across our services increased 7% and the average price per ad increased 11%. Impression growth was mainly driven by Asia Pacific and Rest of World. Pricing growth was driven by increased advertiser demand, in part due to improved ad performance. This was partially offset by impression growth, particularly from lower monetizing regions and services. Family of Apps other revenue was $434 million, up 48%, driven primarily by business messaging revenue growth from our WhatsApp Business platform. We continue to direct the majority of our investments for the development and operation of our Family of Apps. In Q3, Family of Apps expenses were $18.5 billion, representing approximately 80% of our overall expenses. Family of Apps expenses were up 13%, primarily due to higher infrastructure and headcount-related expenses, partially offset by lower legal-related expenses. Family of Apps operating income was $21.8 billion, representing a 54% operating margin. Within our Reality Labs segment, Q3 revenue was $270 million, up 29%, driven by hardware sales. Reality Labs expenses were $4.7 billion, up 19% year over year, driven primarily by higher headcount-related expenses and infrastructure costs. Reality Labs operating loss was $4.4 billion. Turning now to the business outlook. There are two primary factors that drive our revenue performance: our ability to deliver engaging experiences for our community and our effectiveness at monetizing that engagement over time. On the first, we are focused on both improving people's experiences within our apps today and investing in longer-term initiatives that have the potential to contribute to engagement in the years ahead. We expect our content recommendations road map will span both of these time frames as we have nearer-term work streams focused on improving recommendations as well as multiyear initiatives to develop innovative new approaches. I'll focus first on the near term. In the third quarter, we continue to see daily usage grow year over year across Facebook and Instagram, both globally and in the U.S. On Facebook, we're seeing strong results from the global rollout of our unified video player in June. Since introducing the new experience and prediction systems that power it, we've seen a 10% increase in time spent within the Facebook video player. This month, we've entered the next phase of Facebook's video product evolution. Starting in the U.S. and Canada, we are updating the stand-alone video tab to a full-screen viewing experience, which will allow people to seamlessly watch videos in a more immersive experience. We expect to complete this global rollout in early 2025. On Instagram, Reels continues to see good traction, and we're making ongoing progress with our focus on promoting original content, with more than 60% of recommendations now coming from original posts in the U.S. This is helping people find unique and differentiated content on Instagram while also helping earlier-stage creators get discovered. Next, let me talk more about our multiyear road map for recommendations. Previously, we operated separate ranking and recommendation systems for each of our products because we found that performance did not scale if we expanded the model size and compute power beyond a certain point. However, inspired by the scaling laws we were observing with our large language models, last year, we developed new ranking model architectures capable of learning more effectively from significantly larger data sets. To start, we have been deploying these new architectures to our Facebook ranking -- video ranking models, which has enabled us to deliver more relevant recommendations and unlock meaningful gains in watch time. Now, we're exploring whether these new models can unlock similar improvements to recommendations on other services. After that, we will look to introduce cross-surface data to these models, so our systems can learn from what is interesting to someone on one surface of our apps and use it to improve their recommendations on another. This will take time to execute and there are other explorations that we will pursue in parallel. However, over time, we are optimistic that this will unlock more relevant recommendations while also leading to higher engineering efficiency as we operate a smaller number of recommendations. Beyond recommendations, we're making progress with our other longer-term engagement priorities, including generative AI and Threads. Meta AI usage continues to scale as we make it available in more countries and languages. We're seeing lifts in usage as we improve our models and have introduced a number of enhancements in recent months to make Meta AI more helpful and engaging. Last month, we began introducing voice, so you can speak with Meta AI more naturally, and it's now fully available in English to people in the U.S., Australia, Canada, and New Zealand. In the U.S., people can now also upload photos to Meta AI to learn more about them, write captions for posts, and add, remove, or change things about their images with a simple text prompt. These are all built with our first multimodal foundation model, Llama 3.2. Threads remains another area where we see exciting potential. We are bringing on an increasing number of new users each quarter, while depth of engagement also continues to grow. Looking ahead, we plan to introduce more features to make it even easier for people to stay up to date on topics they care about. Now, to the second driver of our revenue performance, increasing monetization efficiency. There are two parts to this work. The first is optimizing the level of ads within organic engagement. We continue to see opportunities to grow ad supply on lower-monetizing surfaces like video. Within Facebook, video engagement continues to shift to short form following the unification of our video player, and we expect this to continue with the transition of the video tab to a full-screen format. This is resulting in organic video impressions growing more quickly than overall video time on Facebook, which provides more opportunities to serve ads. Across both Facebook and Instagram, we're also continuing our broader work to optimize when and where we should show ads within a person's session. This is enabling us to drive revenue and conversion growth without increasing the number of ads. The second part of improving monetization efficiency is enhancing marketing performance. Similar to organic content ranking, we are finding opportunities to achieve meaningful ads performance gains by adopting new approaches to modeling. For example, we recently deployed new learning and modeling techniques that enable our ad systems to consider the sequence of actions a person takes before and after seeing an ad. Previously, our ad system could only aggregate those actions together, without mapping the sequence. This new approach allows our systems to better anticipate how audiences will respond to specific ads. Since we adopted the new models in the first half of this year, we've already seen a 2% to 4% increase in conversions based on testing within selected segments. We're also evolving our ads platform to ensure that the results we drive are customized to each business' objectives and to the way they measure value. In Q3, we introduced changes to our ads ranking and optimization models to take more of the cross-publisher journey into account, which we expect to increase the Meta-attributed conversions that advertisers see in their third-party analytics tools. We're also testing new features and settings for advertisers that will allow them to optimize their campaigns for what they value most, such as driving incremental conversions rather than absolute conversions. Finally, there is continued momentum with our Advantage+ solutions, including our ad creative tools. We're seeing strong retention with advertisers using our generative AI-powered image expansion, background generation, and text generation tools, and they're already driving improved performance for advertisers even at this early stage. Earlier this month, we began testing our first video generation features, video expansion, and image animation. We expect to make them more broadly available by early next year. Next, I'd like to discuss our approach to capital allocation. We continue to take a long-term view in running the business, which involves investing in a portfolio of opportunities that we expect will generate returns over different time periods. We are very optimistic about the set of opportunities in front of us and believe that investing now in both infrastructure and talent will not only accelerate our progress but increase the likelihood of maximizing returns within each area. This includes investing in both near-term initiatives to deliver continued healthy revenue growth within our core business as well as longer-term opportunities that have the scale to deliver compelling returns over time. Given the lead time of our longer-term investments, we also continue to maximize our flexibility so that we can react to market developments. Within Reality Labs, this has benefited us as we've evolved our road map to respond to the earlier-than-expected success of smart glasses. Within generative AI, we expect significantly scaling up our infrastructure capacity now while also prioritizing its fungibility will similarly position us well to respond to how the technology and market develop in the years ahead. Moving now to our financial outlook. We expect fourth quarter 2024 total revenue to be in the range of $45 billion to $48 billion. Our guidance assumes foreign currency is approximately neutral to year-over-year total revenue growth based on current exchange rates. Turning now to the expense outlook. We expect full-year 2024 total expenses to be in the range of $96 billion to $98 billion, updated from our prior range of $96 billion to $99 billion. For Reality Labs, we continue to expect 2024 operating losses to increase meaningfully year over year due to our ongoing product development efforts and investments to further scale our ecosystem. Turning now to the capex outlook. We anticipate our full-year 2024 capital expenditures will be in the range of $38 billion to $40 billion, updated from our prior range of $37 billion to $40 billion. We continue to expect significant capital expenditure growth in 2025. Given this, along with the back-end-weighted nature of our 2024 capex, we expect a significant acceleration in infrastructure expense growth next year as we recognize higher growth in depreciation and operating expenses of our expanded infrastructure fleet. On to tax. Absent any changes to our tax landscape, we expect our fourth quarter 2024 tax rate to be in the low teens. In addition, we continue to monitor an active regulatory landscape, including the increasing legal and regulatory headwinds in the EU and the U.S. that could significantly impact our business and our financial results. In closing, this was another good quarter for our business. Our global community continues to grow. We're seeing ongoing momentum across our core priorities, and we have exciting opportunities ahead of us to drive further growth in our core business in 2025 and capitalize on the longer-term opportunities ahead. With that, Krista, let's open up the call for questions. Operator Thank you. We will now open the lines for question-and-answer session. [Operator instructions] And your first question comes from Brian Nowak with Morgan Stanley. Please go ahead. Brian Nowak -- Analyst Thanks for taking my questions. I have two, one for Mark and one for Susan. Mark, I wanted to sort of ask you about Meta AI a little bit. Can you help us understand some of the more recurring types of interactions or query types you're seeing with this product and whether they have commercial intent? And then just over time, how do you think about building your own in-house search offering as opposed to partnering and having another player partner those queries? And then Susan, I wanted to ask you about sort of headcount because you talked a lot about sort of infrastructure investment in '25. How do we sort of think about relative headcount investments into '25 to sort of support all that infrastructure versus what you've been doing in 2024? Thanks. Susan Li -- Chief Financial Officer Brian, thanks for the question. This is Susan. So, your first question was around what kinds of recurring interactions that we see between people and their usage of Meta AI. And we're seeing -- first of all, I think, as Mark mentioned, just we're excited about the progress of Meta AI. It's obviously very early in its journey, but it continues to be on track to be the most used AI assistant in the world by end of year, and it has over 500 million monthly actives. And people are using it for many things. A number of the frequent use cases we're seeing include information gathering, help with how-to tasks, which is the largest use case. But we also see people using it to go deeper on interests, to look for content on our services, for image generation. That's also been another pretty popular use case so far. And I would say that in the near term, our focus is really on making Meta AI increasingly valuable for people. And if we're successful, we think there will be a broadening set of queries that people use it for, including more monetizable queries over time. The second part of your question, Meta AI draws from content across the web to address timely questions from users, and it provides sources for those results from our search engine partners. We've integrated with Bing and Google, both of whom offer great search experiences. Like other companies, we also train our gen AI models on content that is publicly available online, and we crawl the web for a variety of purposes. Your second question was really, I think, around maybe how we're thinking about headcount in 2025. And we are still working through our budgeting processes for '25. That's in part why we changed our forward-looking guidance approach to give guidance in the next call. But as we're working through this, we are looking at where there are opportunities for us to invest in our strategic priorities. And that includes monetization, infrastructure, Reality Labs, gen AI, our ongoing investments in regulation and compliance. And we're really evaluating each of those opportunities with an eye toward what either the measurable ROI looks like or what the strategic opportunity looks like, depending on what the area is. And we're supporting that by continuing to really focus on streamlining our operations elsewhere. So, we don't have specifics to share about headcount growth in 2025, but that gives you a little bit of the flavor of where we are in the budgeting process. Operator Your next question comes from the line of Eric Sheridan with Goldman Sachs. Please go ahead. Eric Sheridan -- Analyst Thanks so much for taking the question. Maybe just one, building on that question from Brian and going back to Mark's comments about the learnings as you do go through the business planning process. Mark, I wanted to understand better what you continue to learn about what the biggest opportunity sets are to apply AI to when you think about your platform, your product portfolio, and your internal processes because you sound quite optimistic about key learnings and how they continue to ramp and maybe even accelerate in terms of the potential for return profile. I just want to go a little bit deeper into what your key learnings are as you go through that process. I think the main point here is just that it seems broadly applicable to a very wide variety of products. So, there are areas that are more part of our core business from making Feed more relevant and Reels more relevant, to making ads more relevant, to helping advertisers generate better ads, to helping people create the content that they want, helping our integrity operations and compliance and the work that we do there. That's important. It's very valuable across all these aspects of the core business. But then it also is going to enable completely new types of services, like we didn't have something like Meta AI before. We didn't have something like the Ray-Ban Meta glasses before, and AI is going to be a really important ingredient of all of these things. There are also other new products like that, things around AI Studio. This year, we really focused on rolling out Meta AI as kind of our kind of single assistant that people can ask any question to. But I think there's a lot of opportunities that I think we'll see ramp more over the next year in terms of both consumer and business use cases, for people interacting with a wide variety of different AI agents, consumer ones with AI Studio around whether it's different creators or kind of different agents that people create for entertainment. Or on the business side, we do want to continue making progress on this vision of making it so that any small business or any business over time can, with a few clicks, stand up an AI agent that can help do customer service and sell things to all of their customers around the world, and I think that's a huge opportunity. So, it's very broad. And I think part of what we're seeing is that there are a lot of opportunities. Some of the longer-term ones are on Meta AI or AI Studio. Those aren't necessarily a next few years' massive profit opportunity. But there are a lot of things in the core business around engagement and monetization, which I think will be over the next few years. So, I think we're trying to make sure that we get the right people working on this and that we have the right amount of investment that's just going toward what we view as a very, very large opportunity. Operator Your next question comes from the line of Doug Anmuth with JPMorgan. Please go ahead. Doug Anmuth -- Analyst Great. Thanks for taking the questions. Maybe just a follow-up first on Meta AI, Mark. I mean, helpful context certainly to understand how people are using the platform today. Maybe you can just talk more about some of that functionality over time as agents are introduced, just how you really expect use cases to expand beyond just longer and more complex queries? And then, Susan, on capex, just trying to understand your comment on 4Q a little bit more. It sounds like some of the payments pushed into 4Q, with the guidance suggesting $15 billion to $17 billion in capex in the quarter. And is that something we should think about as run rate into 2025? Thank you. Mark Elliot Zuckerberg -- Founder, Chair, and Chief Executive Officer Yeah. I mean, I can take the Meta AI question, although I'm sort of intentionally now not saying too much about the new capabilities and modalities that we're launching with Llama 4 that are coming to Meta AI. I mean, I noted in the comments upfront that there -- with each major generational update, I expect that there will be large new capacities that get added. But I think that that's just going to be -- that's partially what I'm excited about, and we'll talk more about that next year when we're ready to. One of the trends that I do think we're going to see though is having the models not just power Meta AI, our single assistant, but across AI Studio and business agents, have that grow. I mean, this year, if you look back to where we were about a year ago, we were starting to roll out Meta AI. This year, we have really so far succeeded in having that grow and having a lot of people use that. There's obviously a lot more depth of engagement and new use cases that we want to add over time. But I'd say that we're -- today, with AI Studio and business AI is about where we were with Meta AI about a year ago. So, I think in the next year, our goal around that is going to be to try to make those pretty widespread use cases, even though there's going to be a multiyear path to getting kind of the depth of usage and the business results around that that we want. So, there's a lot to do here though, and I'm excited to talk about that starting earlier next year. Susan Li -- Chief Financial Officer Thanks, Doug. So, your second question was about Q4 capex. The expected step-up in Q4 capex from Q3 is the -- part of that comes from increases in server spend and, to a lesser extent, data center capex. But with servers, there are these timing dynamics at play that you referred to because we had these server deliveries that landed late in Q3. And so, the cash doesn't go out the door basically until Q4, and that's when you'll see the capex show up. And given the nature of capital expenditures, generally, there is some -- actually, quite a bit of lumpiness quarter to quarter. So, it's a little bit hard to sort of extrapolate from any particular quarter. Overall, I'd say we're growing our infrastructure investments significantly this year, and we expect significant growth again in 2025. Operator Your next question comes from the line of Justin Post with Bank of America. Please go ahead. Justin Post -- Analyst Great. I think I'll ask a cost question this time. Just thinking about use of AI and employee productivity, how are you able to utilize AI internally? And are you seeing big productivity gains in your R&D group? And second, I know I'll go after the headcount one more time. But Susan, how flexible is your headcount as you think about cost growth in other areas? Thanks. Susan Li -- Chief Financial Officer Justin, so I'll take a crack at both of those. On the use of AI and employee productivity, it's certainly something that we're very excited about. I don't know that we have anything particularly quantitative that we're sharing right now. I think there are different efficiency opportunities with AI that we've been focused on in terms of where we can reduce costs over time and generate savings through increasing internal productivity in areas like coding. For example, it's early, but we're seeing a lot of adoption internally of our internal assistant and coding agent, and we continue to make Llama more effective at coding, which should also make this use case increasingly valuable to developers over time. There are also places where we hope over time that we'll be able to deploy these tools against a lot of our content moderation efforts to help make the big body of content moderation work that we undertake to help it make it more efficient and effective for us to do so. And there are lots of other places around the company where I would say we're relatively early in exploring the way that we can use LLM-based tools to make different types of work streams more efficient. So, all that is to say it's something we're pretty excited about. We have lots of teams focused on it. There are sort of small opportunities in G&A functions to what we hope will be big opportunities in areas like content moderation and coding productivity over time. On your second question about headcount, we're really -- again, we're still mid-budget. So, there's -- we don't have very much that is definitive to share about this at the time. But as we're evaluating where there are opportunities for us to make good investments, we really think about there is a bucket of very ROI-driven headcount opportunities. We're very rigorous about the way we think about returns there and what the return opportunity is and how -- what we think is the likelihood of those returns and what is the aggregate incrementality of those investments. And those are all things that sort of we're evaluating when we think about where to invest in the core business and where we think we can deliver sort of ROI on a nearer-term basis. And then at the same time, we're also assessing what the opportunities look like in some of the more medium- and long-term strategic areas of investment. And that includes our efforts in gen AI and the infrastructure needed to support it. It includes our investments in Reality Labs. And so, those are all things that we're kind of assessing in kind of a portfolio of what we could -- of what we think we would do in 2025, with a couple of thoughts. One is, again, where can we sort of build the most flexibility into the way that we're thinking about either infrastructure or headcount plans? And the second is we're really focused across the company on our efficiency efforts broadly and making sure that we feel like we're continuing to push the whole company, including areas in which we expect that we will be making additional headcount investments to think about how they can be more efficient in '25 than they were in '24. Operator Your next question comes from the line of Ross Sandler with Barclays. Please go ahead. Ross Sandler -- Analyst Great. Just two quick ones, Mark. You said something along the lines of the more standardized Llama becomes the more improvements will flow back to the core Meta business. And I guess, could you just dig in a little bit more on that? So, the series of Llama models that are being used by lots of developers building different things in AI, I guess, how are you using that vantage point to incubate new ideas inside Meta? And then second question is, you mentioned on one of the podcasts after the Meta Connect that assuming scaling laws hold up, we may need hundreds of billions of compute capex to kind of reach our goals around gen AI. So, I guess, how quickly could you conceivably stand up that much infrastructure given some of the constraints around energy or custom ASICs or other factors? Just any more color on the speed by which we could get that amount of compute online at Meta? Thank you. Mark Elliot Zuckerberg -- Founder, Chair, and Chief Executive Officer Yeah. I can try to give some more color on this. I mean, the improvements to Llama, I'd say, come in a couple of flavors. There's sort of the quality flavor and the efficiency flavor. There are a lot of researchers and independent developers who do work and because Llama is available, they do the work on Llama and they make improvements and then they publish it and it becomes -- it's very easy for us to then incorporate that both back into Llama and into our Meta products like Meta AI or AI Studio or business AIs because the work -- the examples that are being shown are people doing it on our stack. Perhaps more importantly is just the efficiency and cost. I mean, this stuff is obviously very expensive. When someone figures out a way to run this better, if that -- if they can run it 20% more effectively, then that will save us a huge amount of money. And that was sort of the experience that we had with Open Compute and why -- part of why we are leaning so much into open source here in the first place is that we found counterintuitively with Open Compute that by publishing and sharing the architectures and designs that we had for our compute, the industry standardized around it a bit more. We got some suggestions also that helped us save costs, and that just ended up being really valuable for us. Here, one of the big costs is chips. In a lot of the infrastructure there, what we're seeing is that as Llama gets adopted more, you're seeing folks like NVIDIA and AMD optimize their chips more to run Llama specifically well, which clearly benefits us. So, it benefits everyone who's using Llama, but it makes our products better, right, rather than if we were just on an island building a model that no one was kind of standardizing around in the industry. So, that's some of what we're seeing around Llama and why I think it's good business for us to do this in an open way. In terms of scaling infra, I mean, when I talk about our teams executing well, some of that goes toward delivering more engaging products and some of it goes toward delivering more revenue. On the infra side, it goes toward building out the expenses faster, right? So, I think part of what we're seeing this year is the infra team is executing quite well. And I think that's why, over the course of the year, we've been able to build out more capacity. I mean, going into the year, we had a range for what we thought we could potentially do. And we have been able to do, I think, more than I think we'd kind of hoped and expected at the beginning of the year. And while that reflects as higher expenses, it's actually something that I'm quite happy that the team is executing well on. And I think that will -- so that execution makes me somewhat more optimistic that we're going to be able to keep on building this out at a good pace, but that's part of this whole thing is this is -- this part of the formula around kind of building out the infrastructure is maybe not what investors want to hear in the near term that we're growing that. But I just think that the opportunities here are really big. We're going to continue investing significantly in this. And I'm proud of the teams that are doing great work to stand up a large amount of capacity so that way, we can deliver world-class models and world-class products. Operator Your next question comes from the line of Ron Josey with Citi. Please go ahead. Ronald Josey -- Analyst Great. Thanks for taking the question. Maybe a bigger picture one as well, Mark, just this time on Threads, now one of the core apps and on its way to becoming the next major social app and 275 million MAUs. I wanted to hear your thoughts on how this product evolves over time, specifically from a monetization perspective but also next steps on users. And then, Susan, with pricing up 11% in the quarter, I wanted to hear more about the pricing dynamics on the platform. I think you talked about just pricing increasing due to greater advertising demand and improved ad performance. So, help us understand that a little bit more. Thank you. Susan Li -- Chief Financial Officer Thanks, Ron. So, your first question was about Threads. We're making good progress there. We are continuing to launch more features and make improvements to our ranking stack. We feel very good about the continued user growth on Threads. We're bringing on an increasing number of users each quarter, and depth of engagement also continues to grow. And in Q3, we saw especially strong user growth in key markets like the U.S., Taiwan, and Japan. And we've added a number of new features over the course of Q3, including account insights for businesses and creators to see how their posts perform, the ability to save multiple drafts, continuing to deliver on our commitment to integrate Threads with the metaverse. And basically, we're very focused on continuing to build out the sort of functionality of Threads over time and being responsive to what users tell us that they're interested in. Specifically, as it pertains to monetization, we don't expect Threads to be a meaningful driver of 2025 revenue at this time. We've been just pleased with the growth trajectory and again are really focused on introducing features that the community finds valuable and working to deepen growth and engagement. Your second question was about the increase in average price per ad. So, that grew 11% year over year, driven by strong advertiser demand and part of that is because of better ad performance over time also. And we saw that CPM growth accelerate slightly from 10% in Q2, in part because we experienced lower impression growth in Q3. But more broadly, as we think about pricing growth and this metric, the year-over-year growth in reported price per ad, there's a lot that goes into that, including the auction dynamics resulting from fluctuations in impression growth. And one of the things that we feel like we're very focused on is really the input metrics. What are the conversions that we are delivering to advertisers? Are they getting more value over time? The sort of blended reported price per ad is complicated because all of those things get rolled up into it. There are so many different objectives the advertisers are optimizing for. Those objectives have very different values that make them hard to compare on an apples-to-apples basis. But we care a lot about conversion growth, which is growing, continues to grow faster than impression growth. And are we seeing healthy cost per action or cost per conversion trends, which we are. And as long as we continue to get better at driving conversions for advertisers, that should have the effect of lifting CPMs over time because we're delivering more conversions per impression served, and that will result in higher-value impressions. Operator Your next question comes from the line of Ken Gawrelski with Wells Fargo. Please go ahead. Ken Gawrelski -- Analyst Thanks. Thanks for the opportunity. I appreciate that. I have a bigger picture kind of like ecosystem question here. Is -- when we think -- I'm curious, how far do you think we are from seeing a proliferation of third-party AI applications, specifically on the kind of the consumer side? I know we're seeing more and more on the enterprise side, agents, etc. But when do we see -- how far out until we see a proliferation of consumer applications in the AI space? And how would you think about and how does Meta think of itself as one of those key -- it was one of those key applications in the mobile internet and the desktop internet? But now you're also seemingly an infrastructure player as well. So, I'd love to hear your thoughts there. Thank you. Mark Elliot Zuckerberg -- Founder, Chair, and Chief Executive Officer Yeah. I mean, there are a lot of consumer products that we're working on. And with Llama, I would expect that app developers will be able to build a lot of really good things, too. I've touched on Meta AI and AI Studio and business AIs a bunch, and I expect those to be important parts of the consumer experience. Another part that I haven't talked about quite as much yet is the opportunity for AI to help people create content that just makes people's feed experiences better. But if you look at the big trends in feeds over the history of the company, it started off as -- it's friends, right? So, all the updates that were in there were basically from your friends posting things. And then we went into this era where we added in creator content too where now, a very large percent of the content on Instagram and Facebook is not from your friends. It may not even be from people that you're following directly. It could just be recommended content from creators that we can algorithmically determine is going to be interesting and engaging and valuable to you. And I think we're going to add a whole new category of content, which is AI-generated or AI-summarized content or kind of existing content pulled together by AI in some way. And I think that that's going to be just very exciting for the -- for Facebook and Instagram and maybe Threads or other kind of feed experiences over time. It's something that we're starting to test different things around this. I don't know if we know exactly what's going to work really well yet. Some things are promising. I don't know that -- this isn't going to be a big impact on the business in '25 would be my guess. But I think that there is -- I have high confidence that over the next several years, this is going to be an important trend and one of the important applications. But you're going to get that, you're going to get Meta AI, AI Studio, business AIs, and a whole lot of things that developers would do with Llama 2. Operator Your next question comes from the line of Youssef Squali with Truist Securities. Please go ahead. Youssef Squali -- Analyst Yeah. Thank you very much. Mark, it appears that Meta AI now crawls the web and provides conversational answers about pretty much anything, including current events. And so, with over 10 million advertisers and one of the best ROAS offerings out there in your core business, just wondering if there are any plans to start maybe testing ads on commercial queries and move Meta AI closer to becoming a real answer engine for the billions of queries that you guys are already seeing? And then, Susan, one of the biggest areas of pushback we get is around Reality Labs and the ongoing losses there. I think $16 billion last year, probably north of $20 billion this year. The question is, are we getting any closer to peak losses there? Or alternatively, what products do you think have the biggest potential there over the next couple of years? Thanks. Susan Li -- Chief Financial Officer I'm happy to take both of these, Youssef. So, your first question was on plans to provide ads on commercial queries. I think I alluded to this maybe in a much earlier question. Right now, we're really focused on making Meta AI as engaging and valuable a consumer experience as possible. Over time, we think there will be a broadening set of queries that people use it for. And I think that the monetization opportunities will exist when -- over time as we get there. But right now, I would say we are really focused on the consumer experience above all. And this is sort of a playbook for us with products that we put out in the world, where we really dial in the consumer experience before we focus on what the monetization could look like. The second part of your question is about Reality Labs. We aren't sharing expectations beyond 2024 at this point. And we are certainly -- as we think about the 2025 budgeting process for Reality Labs, we're certainly thinking about where we want to make sure we're putting our sort of focus and energy. We are very excited, again, about the progress that we've seen with our smart glasses as well as the sort of strong consumer interest in them. And so, we're kind of thinking about where we want to make sure that we are investing appropriately behind the consumer momentum that we see. Overall, I'd say Reality Labs is clearly one of our strategic long-term priorities, and we expect it will be an area of significant investment in -- as we build out toward the very ambitious product road map that we have there. Your last question comes from the line of Mark Mahaney with Evercore ISI. Please go ahead. Mark Mahaney -- Analyst Let me throw out two questions, please. One, this is a year in which we've had a lot of unusual events that could be driving ad revenue, major elections in not just the U.S. but Europe and in India, and major sports events like World Cup, and I know there's some other things. Is there any -- just in thinking about comps for next year and maybe in the future, anything, Susan, you would call out? Like how much of an impact there may have come from these one in every four- or five-year events? And then secondly, could you just talk a little bit more about WhatsApp monetization and where you are with that now? It sounds like that's -- the business messaging part is really feeding in nicely into other revenue. But help us think about where the monetization levels of WhatsApp are now versus where they can be two or three years down the road, how far away we are from optimization. Thank you. Susan Li -- Chief Financial Officer Thanks, Mark. So, your first question was about sort of the revenue backdrop in 2024. You mentioned events that occur once every four or five years, so I imagine we're talking about the Olympics. We historically have not seen meaningful incremental contribution from events like the Olympics. We believe that was largely the case this year. So, when we think about the Q4 outlook and when we think about going into next year, we generally expect growth to continue to benefit from the healthy global advertising demand that we've seen. We think that our investments in improving our ads performance will continue to accrue benefits to advertisers. But obviously, there's a big range of possible macro backdrops, and that's something that we try to reflect in the range of revenue guidance that we give. But I don't know that there are a lot of specific events that we would say had a material sort of idiosyncratic to 2024 type of revenue impact. Your second question was around WhatsApp monetization and where we are. And right now, what I would say again is click-to-message is really the big focus area for us here. We're seeing continued traction in this area. And in particular, growth in click-to-WhatsApp ads remain particularly strong. And so, we're continuing to focus both on scaling click-to-WhatsApp ads in more markets where WhatsApp has strong user adoption like Brazil, for example. It's obviously earlier in the U.S., but we're seeing good growth in click-to-WhatsApp ads and are continuing to invest in scaling and consumer adoption of WhatsApp in the U.S. also, which will create bigger opportunities down the line. And then, of course, a lot of work that we're doing to make the click-to-messaging ads more effective and helping to focus for the particular -- helping advertisers optimize, sorry, for the particular conversion events that they care about. The other element of revenue on WhatsApp, I would say, is paid messaging. That continues to grow at a strong pace again this quarter. It remains, in fact, the primary driver of growth in our Family of Apps other revenue line, which was up 48% in Q3. And we're seeing generally a strong increase in the volume of paid conversations, driven both by growth in the number of businesses adopting paid messaging as well as in the conversational volume per business. Ken Dorell -- Director, Investor Relations Great. Thank you for joining us today. We appreciate your time, and we look forward to speaking with you again soon.

Palantir Technologies (PLTR) Q3 2024 Earnings Call Transcript | The Motley Fool

Good afternoon. I'm Ana Soro from Palantir's finance team, and I'd like to welcome you to our third quarter 2024 earnings call. We'll be discussing the results announced in our press release issued after the market closed and posted on our Investor Relations website. During the call, we will make statements regarding our business that may be considered forward-looking within applicable securities laws, including statements regarding our fourth quarter and fiscal 2024 results, management's expectations for our future financial and operational performance, and other statements regarding our plans, prospects, and expectations. These statements are not promises or guarantees and are subject to risks and uncertainties, which could cause them to differ materially from actual results. Information concerning those risks is available in our earnings press release distributed after the market closed today and in our SEC filings. We undertake no obligation to update forward-looking statements, except as required by law. Further, during the course of today's call, we will refer to certain adjusted financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, GAAP measures. Additional information about these non-GAAP measures, including reconciliation of non-GAAP to comparable GAAP measures, is included in our press release and investor presentation provided today. Our press release, investor presentation, and other earnings materials are available on our Investor Relations website. and [email protected]. Over the course of the call, we will refer to various growth rates when discussing our business. These rates reflect year-over-year comparisons unless otherwise stated. Joining me on today's call are Alex Karp, chief executive officer; Shyam Sankar, chief technology officer; Dave Glazer, chief financial officer; and Ryan Taylor, chief revenue officer and chief legal officer. I'll now turn it over to Ryan to start the call. Ryan Taylor -- Chief Revenue Officer and Chief Legal Officer Our results are exceptionally strong. Revenue grew 30% year over year in Q3 driven by an intensifying AI revolution that the U.S. is rapidly driving. Our U.S. business achieved 44% year over year and 14% sequential revenue growth. We are focused on deploying AI models in production amid the commoditization of cognition caused by the rapid advancement in AI models. Our U.S. government business revenue growth accelerated to 40% year over year and 15% sequentially, while our U.S. commercial business momentum continued with 54% year over year and 13% sequential revenue growth. This AI revolution that is transforming industry as well as government is also transforming markets. In September, the S&P 500 added Palantir to its index, a testament to our exceptional growth, profitability, and market leadership amid the singular era of accelerating technological progress. We're witnessing the commoditization of cognition with the rapid advancement of AI models. Almost all investment in the AI space has been focused on supplying and improving these models. What will differentiate the AI haves from the have-nots is the ability to maximally leverage these models in production by capitalizing upon the rich context within the enterprise. This is Palantir's focus. We see this in the results we're delivering for our customers. Those who embrace quantified exceptionalism through AIP are able to take advantage of the commoditized cognition in a levered way to advance their differentiation. In this winner-take-all AI economy, the divide is widening between those who are leveraging AIP and those who are not. At a leading global insurance organization, AIP has helped automate key underwriting workflows, reducing the typical underwriting response time from over two weeks to three hours. We implemented over 10 business use cases in just nine months at Associated Materials, increasing its on-time in-full delivery rates from 40% to 90%. At Trinity Rail, it took just three months to get to a functional workflow with a $30 million impact to its bottom line. Last quarter, we closed 104 deals over $1 million. The evolving deal cycle as we take customers from prototype to production is having a particularly phenomenal effect on the growth of our U.S. commercial business, which continues to see AIP-driven momentum both in expansions and new customer acquisitions. In U.S. commercial, we closed nearly $300 million of TCV, and customer count grew 77% year over year compared to 37% year over year in Q3 2023. To highlight a few notable deal cycles: a large American equipment rental company expanded its work with us less than eight months after converting to an enterprise agreement, increasing the account ARR twelvefold; a bottled water manufacturer, a specialty pharmaceutical company, and an agricultural software provider, all signed seven-figure ACV deals less than two months after their initial boot camps. In our U.S. government business, we are outfitting our warfighters with advantages over our adversaries. Last quarter marked our U.S. government business' continued strength through the end of the U.S. government fiscal year. It was our strongest sequential growth in 15 quarters driven largely by our DoD business' 21% quarter-over-quarter growth. We remain proud of our progress delivering the next-generation targeting node through TITAN, with our efforts fully ramping throughout Q3. Palantir is also delivering AI through Maven Smart System, allowing customers like the 18th Airborne to match the performance of what used to be a 2,000-staff targeting cell during Operation Iraqi Freedom to a targeting cell of roughly only 20 people today. Last quarter, Palantir signed a new five-year contract to expand these Maven Smart System AI/ML capabilities across the U.S. military services, including the Army, Air Force, Space Force, Navy, and U.S. Marine Corps. As Vice Admiral Frank Whitworth recently said, "This partnership is tantamount to ensuring that we keep America safe and ready." The AI revolution is underway now. The chasm between the AI haves and have-nots is rapidly widening and the whole world is watching. Thanks, Ryan. The divide between AI haves and have-nots is rapidly accelerating in this winner-take-all AI economy. What will differentiate the AI haves from the have-nots is the ability to maximally leverage these models in production by capitalizing upon the rich context within the enterprise. That's why our focus on delivering proof, not proof of concepts, continues to pay off. Years of foundational investments in our infrastructure and in ontology have positioned us uniquely to harness and deliver on AI demand. This is Palantir's focus. The market has been focused on AI supply, the models. We see this clearly in the progress but also in the capital sunk into these models. Indeed, the models continue to improve. But more importantly, the models across both open and closed source are becoming more similar. They are converging, all while pricing for inference is dropping like a rock. This only strengthens our conviction that the value is in the application and workflow layer, which is where we excel. Tapping into this rapidly expanding pool of leverage from AI labor means more than just saving money, it means a massive acceleration of results for our customers. As Ryan mentioned, we have automated the insurance underwriting process for one of America's largest and most well-known insurers with 78 AI agents, taking a process that took two weeks to three hours. More than the labor savings, this presents the customer with an asymmetrical advantage in the marketplace to buying contracts before the competition has even gotten through 15% of their process. In U.S. government, we automated the form disclosure process for sharing critical and timely intelligence with allies from three days to three hours. The Center for Security and Emerging Technologies at Georgetown published a study on Maven that showed how the entire targeting and fires process can be done in Maven with 20 people. It used to take 2,000. There is a huge opportunity for our customers to automate the tail and liberate capital to reinvest in the tooth across government and commercial. We see enterprise autonomy as a key theme in our proof. Our deep investments in CJADC2, Combined Joint All Domain Command & Control, continue to meet their moments. First and foremost, Maven has powered responses to real-world events across the globe. This past quarter, the Army was the first military department, or MILDEP, to adopt Maven. We're happy with the progress that we continue to make with Army TITAN and AIDP and Palantir's role as the application integrator in the Joint Fires Network. Maven is our military's fight tonight solution. At a time when North Korean troops are in Ukraine, Russia is providing satellite intelligence to the Houthis and Iran is launching ballistic missiles at allies. We are investing aggressively to expand the perimeter to give our warfighters the unfair advantage they deserve, advanced multi in-sensor fusion, integrated logistics into fires, and large-scale command and control of swarms of autonomous systems. We announced Warp Speed last quarter, our modern American manufacturing operating system. We, as a nation, must reindustrialize to prevent escalating conflict and regain deterrence. Before the fall of the Berlin Wall, only 6% of major weapon system spend went to defense specialists, the so-called primes. 94% went to dual-purpose companies who were invested in both freedom and prosperity. Chrysler built cars and missiles; Ford built satellites until 1990; and General Mills, the cereal company, made weapons. Today, that 6% has become 86% when including firms whose only commercial exposure is in aerospace. We won World War II and the Cold War with an American industrial base, not a defense industrial base. And we need to bring that back at Warp Speed. And in addition to working with new champions, like Anduril and Shield AI, we're also working with L3Harris and two other of the big primes to help them bend Adams better with bits. Lastly, we continue to invest in AIP as a developer platform. Green Suitors at the 18th Airborne Corps built 15 applications in our developer environment for their August warfighter exercise. Army Software Factory is cranking out software at units in Europe and even for the vice chief of staff of the Army. The 101st built their search and rescue common operating picture to power Hurricane Helene response built entirely by uniform service members. We have released our JADC2 SDK, including examples and documentation for government and third-party developers to start building on at palantir.com/defense/sdk. And we have DevCon this month, our first gathering specifically for AIP platform developers across commercial and government, where we will be releasing a ton of new product investments, an enhanced OSDK, more ergonomic compute modules, the multimodal data plane, and much more. I'll turn it over to Dave to talk us through the financials. Dave Glazer -- Chief Financial Officer Thanks, Shyam. Q3 was an exceptionally strong quarter as revenue growth accelerated to 30% year over year, exceeding the high end of our prior guidance by nearly 450 basis points. As America rapidly embraces the AI revolution, this increase in AI demand has driven the outperformance in our U.S. business, which grew 44% year over year. Our U.S. commercial business grew 54% year over year and 13% sequentially. Our U.S. government business grew 40% year over year and 15% sequentially, a sevenfold increase compared to the prior year period growth rate, and the strongest growth we've seen in 15 quarters. On the back of this strength, we are increasing our full-year revenue guidance midpoint to $2.807 billion, representing a 26% year-over-year growth rate. We delivered these outstanding top-line results while expanding adjusted operating margin to 38%, highlighting the strong unit economics of our business. Our revenue and profitability drove a four-point sequential increase to our Rule of 40 score from 64 in the second quarter to 68 in the third quarter. We had an exceptional cash flow quarter with cash from operations of $420 million and adjusted free cash flow of $435 million, representing margins of 58% and 60%, respectively. On a trailing 12-month basis, we generated over $1 billion in adjusted free cash flow for the first time in the company's history. We're also proud to have joined the S&P 500 last quarter, underscoring our sustained profitability and growth. Turning to our global top-line results. Revenue continues to accelerate as we see continued momentum from AIP. We generated $726 million in revenue, up 30% year over year and 7% sequentially. Excluding the impact of revenue from strategic commercial contracts, third-quarter revenue grew 32% year over year and 7% sequentially. Customer count grew 39% year over year and 6% sequentially to 629 customers. Revenue from our largest customers continues to expand. Third quarter trailing 12-month revenue from our top 20 customers increased 12% year over year to $60 million per customer. Now, moving to our commercial segment. Third-quarter commercial revenue grew 27% year over year and 3% sequentially to $317 million. Excluding the impact from strategic commercial contracts, commercial revenue grew 30% year over year and 3% sequentially. Third quarter commercial TCV booked was $612 million, representing 52% growth year over year and 62% growth sequentially. Our U.S. commercial business continues to see unprecedented demand, with AIP driving both new customer conversions and existing customer expansions in the U.S. as we continue to deploy AM models in production. Third quarter U.S. commercial revenue grew 54% year over year and 13% sequentially to $179 million. Excluding revenue from strategic commercial contracts, U.S. commercial revenue grew 59% year over year and 12% sequentially. In the third quarter, we booked $297 million of U.S. commercial TCV representing 13% growth sequentially. Total remaining deal value in our U.S. commercial business grew 73% year over year and 7% sequentially. Our U.S. commercial customer count grew to 321 customers, reflecting 77% growth year over year and 9% growth sequentially. We generated $138 million in international commercial revenue in the third quarter, representing 3% growth year over year but a 7% sequential decline as a result of continued headwinds in Europe and a step down in revenue from a government-sponsored enterprise in the Middle East. Despite those headwinds, we continue to build on our transformational work with some of our largest international customers, including signing a multiyear renewal with BP. We also continue to capitalize on targeted growth opportunities in Asia, the Middle East, and beyond. Revenue from strategic commercial contracts was $9.6 million for the quarter. We anticipate fourth quarter 2024 revenue from these customers to decline to between $6 million to $7.5 million compared to $20 million in the fourth quarter of 2023. We continue to anticipate 2024 revenue from these customers to be less than 2% of full-year revenue. Shifting to our government segment. Third quarter government revenue grew 33% year over year and 10% sequentially to $408 million. Third quarter U.S. government revenue accelerated $320 million, representing 40% growth year over year and 15% growth sequentially. This acceleration was driven by continued execution in existing programs, new awards reflecting the growing demand for AI in our government software offerings and favorable deal timing in the quarter, coupled with the government year-end cycle. Third quarter international government revenue was $89 million, representing 13% growth year over year but a 5% sequential decline as a result of revenue catch-up in Q2 that we noted last quarter and less favorable deal timing. Third quarter TCV booked was $1.1 billion, up 33% year over year and 16% sequentially. Net dollar retention was 118%, an increase of 400 basis points from last quarter. The increase was driven both by expansions at existing customers and new customers acquired in Q3 of last year as we see the effect of the AI revolution in both industry and government. As net dollar retention does not include revenue from new customers that were acquired in the past 12 months, it does not yet fully capture the acceleration in velocity in our U.S. business over the past year. We ended the third quarter with $4.5 billion in total remaining deal value, an increase of 22% year over year and 4% sequentially; and $1.6 billion in the remaining performance obligations, an increase of 59% year over year and 15% sequentially. As a reminder, RPO is primarily comprised of our commercial business as it does not take into account contracts with an initial term of less than 12 months and contractual obligations that fall beyond termination for convenience clauses, both of which are common in most of our government business. Turning to margin and expense. Adjusted gross margin, which excludes stock-based compensation expense, was 82% for the quarter. Adjusted income from operations, which excludes stock-based compensation expense and related employer payroll taxes was $276 million, representing an adjusted operating margin of 38%, and marking the eighth consecutive quarter of expanding adjusted operating margins. Q3 adjusted expense was $450 million, up 6% sequentially and 14% year over year, primarily driven by our continued investment in AIP and technical talent. We continue to expect expenses to ramp through the fourth quarter as we invest in the product pipeline and accelerate the journey from AI prototype to production. In the third quarter, we generated GAAP operating income of $113 million, representing a 16% margin. We generated GAAP net income of $144 million, representing a 20% margin. Third-quarter adjusted earnings per share was $0.10 and GAAP earnings per share was $0.06. As previously communicated, we've aligned our compensation program with the performance of the company's goals, including its stock price. On the back of the company's strong performance, our inclusion in the S&P 500, and the increase in our stock price, we will continue to monitor if we become required to accelerate stock-based compensation expenses if certain market-based vesting criteria are achieved earlier than expected. Additionally, our combined revenue growth and adjusted operating margin accelerated to 68% in the third quarter, a four-point increase to our Rule of 40 score from the prior quarter. Turning to our cash flow. In the third quarter, we generated $420 million in cash from operations and $435 million in adjusted free cash flow, representing a margin of 58% and 60%, respectively. For the first time ever, on a trailing 12-month basis, we generated over $1 billion in adjusted free cash flow, representing a margin of 39%. Through the end of the third quarter, we repurchased approximately 1.8 million shares as part of our share repurchase program. As of the end of the quarter, we have $954 million remaining of the original authorization. We ended the quarter with $4.6 billion in cash, cash equivalents, and short-term U.S. Treasury securities. Now, turning to our outlook. For Q4 2024, we expect revenue of between $767 million and $771 million and adjusted income from operations of between $298 million and $302 million. For full year 2024, we are raising our revenue guidance to between 2.805 billion and $2.809 billion. We are raising our U.S. commercial revenue guidance to an excess of $687 million, representing a growth rate of at least 50%. We are raising our adjusted income from operations guidance to between $1.054 billion and $1.058 billion. We are raising our adjusted free cash flow guidance to an excess of $1 billion, and we continue to expect GAAP operating income and net income in each quarter of this year. With that, I'll turn it over to Alex for a few remarks, and then Ana will kick off the Q&A. Alex Karp -- Chief Executive Officer Given how strong our results are, I almost feel like we should just go home. But we've been saying since we went public in a DPO that we would build infrastructure to make America and its allies a dominant force in the world. We claimed, to much skepticism, that this would be done in the software product; that defense and commercial industry would be driven by software, hardware, hybrid technologies; that there were very few companies in the world that could actually do that; that these companies are basically only built in America; that the companies that have tried to do this that aren't Palantir are built by ex-Palantirians; that the financials of Palantir would flow from our products and our culture and our way of implementing; that we would bring violence and death to our enemies while making targeting and general issues of safety better for our allies and for Americans; that we would stand by our values in thick and thin, including that the West and America are superior ways of organizing and that this is a great country and historically anomalous in its greatness; and that we would build a company with the best people from all over the world, but primarily from America, to power America and its allies. And even we are shocked by the 44% growth in the U.S. off of a $2 billion base. So, this is not some speculative small base, 44% growth. Even we are happy to see that we grew 30%, to see the reacceleration in USG to 40%, and to see the very, very strong results in U.S. commercial; also, allied countries that have begun to realize that AI is the way in which to make their defenses superior in the face of brutal, heinous, immoral and often terroristic enemies, where you need a superior form of fighting that's both safer for you and more dangerous for the adversary and controls how you hit them and when and where and allows you to maximize your results. It is also just jarring to see how America adopts the most important, most agile, and most impactful technology independent of who the purveyor and builder of that. We are building this company, and we believe we're at the beginning. And watching American adoption, both in government and commercial, while not forcing us to change, while accepting that many of the ideas we have of how to make your enterprise better, whether it's insurance, it has been mentioned, oil and gas, any kind of complicated manufacturing supply chain, healthcare, obviously, defense and intel, that a new and different way of building software and implementing it, meaning the infrastructure, is where the value is despite the fact, you may have noticed, many have noticed, that the experts that write about these things seem to believe the commodity, i.e., the LLM, is the valuable aspect of this and that the actual asset, meaning how you manage the commodity, is the actual value. Despite great skepticism about our view of how to do this, the market seems to have decided what works, works. No matter how theoretically appealing the idea is of building software around how you may have learned to build it in business school is to you as the person not buying the software. The people buying the software who are allowing our market to grow at 30% in aggregate, 44% in America, 40% in U.S. government, and dramatically in U.S. comm are speaking with their feet and their implementations, and we're very, very proud of that. And I'm particularly proud to see the warfighter adoption of this. You see every part of U.S. government, including the White House, Congress, Defense, Intel, beginning to embrace the application of large language models in infrastructure, obviously something that Palantir is particularly specialized in. And we are really, I think, as a company enjoying this phase. When you build a company over a long period of time, there are good and bad phases. But to see, in fact, our view of what it makes to make enterprises stronger and better show up in these dramatic results is super gratifying, and we plan to continue. Ana Soro -- Office of the Chief Financial Officer Thanks, Alex. We'll now turn to a few questions from our shareholders before opening up the call. We received a few questions on AI. How will Palantir differentiate its AI offerings from others, including the model creators? And how is AIP different? And how will Palantir maintain its competitive edge? Shyam Sankar -- Chief Technology Officer Well, Alex talked about how the models, the LLMs are commoditized. But if you look at the models, you see that they're getting better, which is awesome. But they're also getting more similar across both closed and open-source models. While they're improving, they're converging upon each other, all while the price of inference is dropping precipitously. So, if you even look at these model companies, they have to build applications around these models to extract value. That's where we have a decade-long head start. We've been building the forge to create and implement AI applications at scale throughout the enterprise. And that differentiation starts with the ontology, using the ontology to drive AIP across these applications. When you look at the legacy software companies, I'm not sure they understand it yet. But when you look at the innovative Silicon Valley companies, they recognize the wall of tech investments this implies that's in front of them that's going to act like a great filter. Alex Karp -- Chief Executive Officer I would say kind of an addendum to that, first of all, I think people are beginning to recognize we were right, and these numbers show it. So, that creates a dynamic of, OK, well, if you can actually extract value from large language models in any context, then clearly, the company that does it is very valuable. And a lot of our customers, even a year ago, they were kind of skeptical of can you make these things useful. I would say most of the customers I deal with are pretty skeptical. You can make large language models to anything but do a science experiment. And in a weird way, even though the models are improving, they're meeting up against greater skepticism among clients because clients have tried them and it's just a high school experiment. The market and analysts seem to have put a lot of credibility into the models, and we do too. We think they're very valuable when managed correctly when used in a way that an enterprise can understand. And one of the problems that people have is if you're not involved in an enterprise software, it's very hard to understand how an enterprise actually works. You cannot take a large language model that gives you an Elo score of 1,200 and use it on targeting on the battlefield. There's a security model. There's a way in which the data is understood. There are certain things you can't share. There's places you would use certain models, but not others. How do you bring that back to your corpus of truth to understand, in a lethal context, who dies and who doesn't? And you have very similar use cases in underwriting and in healthcare. And so, understanding the actual way technically enterprise is driven as embodied by foundry, as embodied by our abstraction layer on top of foundry, which includes all those nuances, which we call an ontology, as powered by AIP, are all sorts of things that our clients are beginning to discover every day. Of course, the main way they're discovering it is, "Holy s---, I can do this in an hour that used to take five hours or 50 hours," or "I could have 2,000 people or 20 and 10." And by the way, on the targeting on the battlefield, we've talked about basically two orders of magnitude in reduction of people. But it's also, in many cases, two orders of magnitude in the production of your ability to do things in an efficacious manner. There are whole global events now that would be very different without our ability to manage these things in our infrastructure. And that's obviously generating a lot of excitement internally that spills into our earnings. Ana Soro -- Office of the Chief Financial Officer Thank you. Our next question is from Ryan, who asks, as Palantir continues to invest in new AI technologies and expand globally, how are you balancing these investments with maintaining or improving profitability and operating margins, especially given the current macroeconomic challenges? Dave Glazer -- Chief Financial Officer We aren't just balancing, we're excelling. Revenue grew 30% year over year in Q3, 44% in the U.S. in the quarter, and you couple that with our expanding margins in the quarter. We did 38% adjusted operating margin, our eighth consecutive quarter of expanding margins, and we posted 68 in the Rule of 40 score. At the same time, we had an outstanding adjusted free cash flow margin in the quarter, 60%. And so, looking forward, we're raising guidance. We're raising guidance for adjusted free cash flow to an excess of $1 billion for full year 2024. We're raising adjusted operating income guidance to an excess of $1 billion, well over that actually, which represents a 39% margin in Q4. And we're doing all this while we're continuing to invest at the beginning of the AI revolution. There is an incredible amount of demand there, and we're investing in technical talent, and we're continuing to build out world-class product. Alex Karp -- Chief Executive Officer There's a steelman version of this, which is, given how well you're doing, given you've really accelerated to 30%, given the U.S. is growing 44%, why don't you blow up your Rule of 68, which, by the way, to my knowledge, is the single best of comparable companies in the world and significantly better than many very strong companies. So, an average normal way of looking at Palantir would be like, "Oh, great, you have a 44% growth on a $2 billion base in the U.S. and you have a Rule of 68, get that 68 down to 50, and maybe you can grow." But in fact, that way of looking at a business misunderstands the way in which Palantir builds. We believe that by investing, and we know at this point, instead of trying to have 10,000 clients, all of whom hate you, this is kind of what people want, 10,000 clients that hate you, but they can't give you your product. We want a smaller number of the world's best partners that, quite frankly, are dominating with our product. And the way you do that is by not blowing up your margin and getting 10,000 salespeople. It's actually by going deeper on the product. And in fact, what we see is the deeper and better the product, the more we drive sales, the more we have our singular advantage as Palantir, not as a commodity product. We are not a commodity. We do not want our customers to be commodities. We want them to be individual titans that are dominating their industry or the battlefield. And we reflect that in how we do things. We are not trying to be your average Harvard Business School preferred company that reduces the margins has a thin product and then has a lower Rule of 40 and presumably, higher growth. By the way, I don't think you get higher growth than what we have. Honestly, although we, of course, are always pushing and want even higher growth, the people who tend to ask these questions tend to be modeling companies with 20% growth and lower margins. We have 44% growth in the most important market in the world, arguably not the only but by far the most valuable market in the world, while having a rule of 68, i.e., the best in the world. And we're going to maintain the contradiction of having both high margins and high growth. It's not one or the other. They're actually interplayed. And they're not a contradiction, they power each other. That's how you know you have world-class products. That's what you see in your numbers. Ana Soro -- Office of the Chief Financial Officer Thank you both. Our next question is from Dan with Wedbush. Dan, please turn on your camera, and then you'll receive a prompt to unmute your line. Daniel Ives -- Analyst A great quarter, and congrats to you and the team. So, my question is, with boot camp conversions, has it even surprised you just how quickly from a customer coming into a boot camp, potential customer conversion to mega deals, what you're seeing? And what do you think that says about your process and where we are in this AI revolution where Palantir sits? Ryan Taylor -- Chief Revenue Officer and Chief Legal Officer Yeah. I think, obviously, the most indicative of what we're seeing and the impact is the results, the 44% year-over-year growth in U.S., 54% in U.S. commercial, the sequential growth we're seeing. I think I gave examples of boot camps where we're seeing multiple different customers across different industries that are going from the initial boot camp to a seven-figure ACV deal within a matter of less than two months. We're seeing that, and we're feeling that in the conversations we have with customers, and then our push to go from prototype to production and the expansions we're seeing at customers. And I've seen that in the conversations. As we said, really, it's going to be the haves and the have-nots. The AI haves are moving quickly, making decisions quickly, and adopting quickly. And I'm feeling that in the conversations we have with them and the conversions we're seeing. Alex Karp -- Chief Executive Officer I would just say that the most surprising thing is there's a small number of increasingly large number of customers, meaning interested, that get this. And they are just moving really quickly. And anyone who's involved in the enterprise, so if you take a company XYZ, and then five people go to a different company, the first thing they do is pick up the phone and call us. And so, it's just the way in which this just expands in the U.S. and in some other countries, but especially in the U.S., from anyone who touch this wants to use it in any part of anything they're doing. And it goes from one person. And then there's this transient in America where people really are moving to different companies a lot, and they're talking to each other. And there's just a willingness to take business metrics and use those business metrics against technology that's not ideological. And if you look at even 10 years ago, there was no form of software that had this kind of adoption and this kind of readiness. And also, it was conversely just not possible to see this kind of results this quickly. And we tend to focus on the results on the outside. But AI and large language models also allow us to scale our product on the inside. So, one of the unfair things about this revolution is, if you have business acumen and you have a product that is good, or stellar in my humble opinion, you can make it even better internally and externally. And so, that allows us to also scale many, many more people to many, many organizations with the same number of people as long as they're the best in the world. And so, it's really this from touch to expansion however we do it. Some of it's boot camps, but some of it's just like, "Hey, I used to work at a company. I heard really good things about your product. I want it tomorrow. How quickly can you get here? What is the first use case you could do?" And then the first thing that they always ask is, "Well, show me some of the things that you've done in other places." Even cross-fertilization between government and nongovernment. I was at an important government entity a couple of weeks ago, and obviously, it may not even be very useful for them, but then they start asking, "Well, what are you doing for hospitals? Could you use this on employer requirements? Could you use the same thing for managing our people? How could you make sure that our people are safe and happy? How do you move parts? How do we do procurement?" A lot of the things Shyam's said. So, there's like a massive cost fertilization even between verticals that otherwise would never talk. In the past, nongovernment use cases were just not things we were doing in government. And certainly, from industry to industry, we did not have this from real estate to supply chain, to large hospital things, the use cases that they're doing inside our products, they are technically basically the same for us. Ana Soro -- Office of the Chief Financial Officer Our next question is from Mariana with Bank of America. Mariana, please turn on your camera, and then you'll receive a prompt to unmute your line. Mariana Mora -- Bank of America Merrill Lynch -- Analyst Good afternoon, everyone. So, on government, U.S. government is up, what, like 40%, and this is in line with what we thought in the U.S.A. L3Harris, Anduril, Shield AI but others were advertising Palantir logos, and they were like advertising partnership with you. What changed for them to actually want a partner? That's the first one. And then, Dave, if you don't mind giving an update on the strategic commercial contracts and how are you thinking about the remaining deal value as we see news about Lilium but also a recent pickup of some like stock awards as a form of payment from these companies. Thank you. Shyam Sankar -- Chief Technology Officer On the first bit here, there's really two dimensions to what we're seeing is acceleration in partnerships on the U.S. government side. The first is something I've talked about earlier, which is Mission Manager. Really, how do we take not our software but our software infrastructure, Rubix and Apollo, as radical accelerants for these companies to get to revenue, to service their existing revenue in a more profitable way, and expand their market access? So, that's been just a clear win across the board. That's good for the government. It's good for these partners, and it's good for us. Alex Karp -- Chief Executive Officer I mean, I don't think Shyam's taking enough credit here or Shyam, Aki, and others. So, one of our biggest issues in the U.S. government would be just simply a friction coefficient. And we had the problem that, although we are completely focused on helping the U.S. government allies first and ourselves second, and that's one of the reasons most of us at the table are still here, there was a general perception a couple of years ago, and you see it in our numbers, Palantir wins and maybe we win too much and we keep winning and people are like, "Palantir makes all this money, someone else has got to make money." And one of the things, Shyam, and I would say Aki and others, did a tremendous job of is like, look, we're in this for the supremacy of U.S. and its allies. And we're going to prove this by opening up part of our products and allowing you to sit on government data. Laypeople assume you could just put a product on government data, you can't do that. There's all these tech products we've built that allow you to safely and securely work directly with the U.S. government. And we've begun offering that to all sorts of defense tech start-ups and begun partnering with more established large integrators like L3 and many others, actually. The strategy there was, look, if we actually believe what we believe, let's show it. And this strategy, which Shyam led and Aki empowered and also kind of did incredible work on, has led to a situation where most people involved in tech innovation now view Palantir as their ally. And so, instead of going into every meeting saying, "Oh, yes, Palantir is great, but their fearless leader is b------ crazy, and he might go off to his commune in New Hampshire," whatever they were saying, it's now like, yes, the products are the best, and we have great products. And so, that's a really important shift and that was a business strategy, and it really was done by others. And that has shifted our ability to get to market because most people don't want to resist. They're not hating the player. They're playing with us. Shyam Sankar -- Chief Technology Officer Alex is always a tough act to follow. But the second part of that I'll just close out with is really helping these companies with their production. In the same way that we help Airbus build every plane or Chrysler build every car, how do we help L3 and Anduril and Shield and all of these new entrants and existing primes build their weapon systems better and in particular, where they have fixed price, drive margin expansion as a consequence of doing that. Dave Glazer -- Chief Financial Officer And then on the strategic commercial contracts, they're a tiny part of the business, right, basically 1% of revenue in Q3. On a forward-look metrics, like it's quite de minimis, and the program ended three years ago. So, we can still answer the question, it's basically not relevant anymore. Ana Soro -- Office of the Chief Financial Officer Thank you. Alex, we have a lot of individual investors on the line. Is there anything you'd like to say before we end the call? Alex Karp -- Chief Executive Officer You know, as usual, we're in it together with you. Besides making America even stronger and better and our allies stronger, better and all of us more lethal, besides protecting Palantirians and most ex-Palantirians, our individual investors are near and dear to our and certainly my heart, and I love it that you guys are winning. There'll always be ups and downs in building a business but we're definitely fighting for you guys. And the decision to do a DPO, which essentially was a decision to make sure that individuals got to participate, and your willingness to spend time and look at what we're doing and actually look at the facts on the ground and not just to read theory has been crucial to Palantir as a business and it's part of what makes Palantir great and also our nation so great.