Genasys (GNSS) Q3 2026 Earnings Call Transcript - AOL

Motley Fool Transcribing, The Motley Fool

Aug 20, 2026

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DATE

Thursday, Aug. 13, 2026 at 4:30 p.m. ET

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SUMMARY

Genasys Inc. (NASDAQ:GNSS) reported quarterly results impacted by timing-related delays in its hardware segment and a temporary work suspension in Puerto Rico. Management indicated that supply chain constraints for the CROWS program have been resolved and production is proceeding to complete an initial $9 million order. The software segment reported growth in revenue and bookings, while a higher concentration of software sales contributed to an expansion in gross margin to 57.1%. Management confirmed expectations for record fiscal year revenue and profitability based on current backlog levels and the resumption of cash collections from Puerto Rican customers.

INDUSTRY GLOSSARY

Full Conference Call Transcript

Operator: Ladies and gentlemen, thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to Genasys Third Quarter 26 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star, then the number 1 on your telephone keypad. And if you would like to withdraw your question, again, star 1. Thank you. Would now like to turn the conference over to Clay Liolios, Investor Relations. Please go ahead.

Clay Liolios: Good afternoon, everyone. Thank you for participating in today's conference call to discuss Genasys Inc. Fiscal third quarter 2026 results. Ended 06/30/2026. Joining us on today's call are the company's chief executive officer, Richard S. Danforth and chief financial officer, Cassandra Hernandez-Monteon. Before we begin, let me remind everyone of the company's safe harbor disclaimer. Certain portions of our comments today will concern future expectations, plans and prospects of the company that constitute forward looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 2000.

Forward looking statements include all statements containing verbs such as aims, anticipates, estimates, expects, believes, intends, plans, predicts, will, may, continue, projects, or targets, and negatives of these words and similar words or expressions. Forward looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated by the forward looking statements. Factors that could affect our actual results include, among others, those that are discussed under the heading Risk Factors in our most recently filed reports with the SEC. Including our annual report on Form 10 k our quarterly reports on Form 10 Q, and our current reports on Form 8 k.

In addition, this call includes discussions of certain non GAAP financial measures including adjusted EBITDA, The most directly comparable GAAP measure and reconciliations for non GAAP measures. Are available in the earnings release other documents posted on the company's website under Investor Relations. A replay of the webcast will be made available approximately 4 hours after the presentation through the conference call link on the Events and Presentations page of the company's website. With that, I would like to turn the call over to Genasys CEO, Richard S. Danforth.

Richard S. Danforth: Thank you, Clay and welcome everyone. Revenue for the fiscal third quarter was $7.3 million compared to $9.9 million in the prior year period. The decrease was driven by 2 timing related factors. The first was a supply chain constraint associated with the CROWS program. Constraint has now been resolved Production on this initial $9 million order is underway. And we expect to complete delivery within the fiscal year. Importantly, this was a timing issue rather than a demand issue. The second factor was a deliberate pause in our work in Puerto Rico. Elected to suspend work until customer payments resumed. Following quarter end, collections began flowing again, and we since remobilized project activities on the island.

Even with the temporary pause, we expect the work scheduled for the fiscal year to remain unchanged. With both of these timing factors now moving in the right direction, and with gross margins remaining above 50%, we continue to expect fiscal 2026 to be a record year for both revenue and profitability. Staying on the top line, we are seeing meaningful progress in growing demand for our software offerings. Recent wins include a large multiyear Genasys Protect contract with ADA County, Idaho. Home to more than 550 thousand residents and over 3 million annual visitors. Ada County is the second Idaho county to replace its incumbent emergency alert provider with our platform. That displacement trend is encouraging.

Agencies are moving away from legacy providers because Genasys delivers better outcomes when it really matters. We also continued to expand our platform. In June, we announced a partnership with Entara and Cal Fire to connect the CalFire Aware platform and Genasys Protect. This connection gives the public another trusted source for real time emergency updates. Now any alert issued through Genasys Protect instantly spreads across the state. Separately, we integrated Genasys Evertel with the public safety data and analytics platform called Peregrine. They are a leading crime data and intelligence software used by real time crime centers and fusion centers today. This was tested and verified by the Vacaville, California Police Department.

Pushing real time crime center intelligence directly to offices in the field rather than through manual distribution. It is worth noting that there are approximately 80 fusion centers and 800 real time crime centers across the U.S. Integrations like these accomplish 2 important objectives. They extend the reach of our software into the platform agencies already rely on every day, and then make Genasys Protect increasingly difficult to displace. Once it becomes embedded in mission critical workflows. We are seeing steadily increasing interest from strategic partners looking to build similar connections. And we expect that to be a durable contributor to our software growth. Earlier this week, we announced a software milestone. We are especially proud of.

Genasys Protect now covers approximately 15% of the US population and 20% of the country's land area. Making it the nation's leading platform for zone based emergency alerting evacuation management, and secure real time communication. That level of adoption is a testament to our technology, and its ability to help keep people safe and save lives. While we are proud of this milestone, we believe there remains substantial opportunity to expand our footprint across the rest of the country. On the hardware side, momentum continues to build, particularly in critical infrastructure.

Over the past several months, we have seen a steady expanding pipeline for our LRAD 59 NXT systems as a security layer for unmanned sites as electrical substations, dams, ports, and data centers. Last week, we announced a $2.4 million critical infrastructure protection order from 1 of the largest utilities in The United States. The order expands a deployment that began with a single substation installation and was followed by a $2 million order. This is a customer that continues to expand its deployment as it sees the system perform. The 59 NXT's are integrated with the substations physical security infrastructure, and multi sensor perimeter intrusion detection systems.

They address a full range of physical security requirements to detect, assess, communicate, respond, delay, and deter threats. In short, they transform passive monitoring into immediate intervention. Critical infrastructure remains 1 of our strongest growth opportunities. The pipeline continues to build, and we expect the market to be a meaningful driver of our hardware growth going forward. At the same time, our long standing defense and security custom customers remain active. US Army continues to be an important partner and demand from international navies and defense agencies continue to strengthen as government increase spending on force protection, maritime security, and critical infrastructure resilience.

Overall, our pipeline continues to grow across hardware and software, and our focus remains on converting those opportunities into signed contracts and recognized revenue. Turning to the balance sheet. In July, we extended the maturity of our term loan providing additional working capital flexibility and reducing our dependence on the timing of payments from any single customer. We view our lenders' willingness to extend the facility as further validation of the strength of our backlog the opportunities within our pipeline and our long term outlook. Overall, the fiscal third quarter was affected by timing, not by any change in underlying demand.

Our backlog remains strong, our pipeline continues to grow, and the factors that delayed revenue recognition during the quarter are now being resolved. We enter the fourth quarter with improved operating leverage, greater financial flexibility, and a strong visibility into the work ahead. As a result, we remain confident in the delivering a record year of revenue and profitability. With that, I will turn the call over to Cassandra.

Cassandra Hernandez-Monteon: Thank you, Richard, and thank you everyone for joining. For third quarter results. In the third quarter of fiscal 26, Genasys generated $7.3 million in revenue. This included only $1.3 million in contribution from the Puerto Rico project due to our deliberate decision to halt work on the island until customer payment resumes. As Richard mentioned, collections restarted after quarter end, and we have begun remobilizing activities. We expect Puerto Rico to be a meaningful contributor to the fourth quarter revenue as project activities continue to ramp through the remainder of our fiscal year. Total software revenue for fiscal third quarter was $2.7 million, representing a 21% increase year over year and a 12% increase sequentially.

During the quarter, we generated approximately $2.5 million in software bookings, including both new customer wins and contract renewals. We exited the quarter with 12-month backlog of approximately $69 million compared to $58.2 million at the end of the second quarter. While the increase reflects both continued order activity and the timing of certain programs, the back provides meaningful revenue visibility and supports our view that the third quarter revenue shortfall was primarily a timing rather than a reduction in customer demand. Gross profit margin in the quarter was 57.1% compared to 26.3% in the fiscal third quarter of 2025. This improvement was driven primarily by the revenue mix.

The prior year period included a large contribution from the Puerto Rico project which carried lower margins under the percentage of completion revenue recognition methodology. While the current quarter benefited from higher portions of software revenue. Operating expenses decreased 3.8% to $8.2 million from $8.5 million in the prior year period. Selling, general, and administrative expenses decreased 4.6% to $6.1 million while research and development expenses decreased 1.2% year over year to $2.1 million. These reductions reflect action taken during the quarter to better align spending with the company's cash flow profile and near term operating priorities. GAAP net loss for the quarter was $4.7 million or a loss of $0.10 per share, basic and diluted.

Compared with a GAAP net loss of $6.5 million or a negative $0.14 per share in the third quarter of fiscal 2025. Adjusted EBITDA improved to a loss of $3.1 million from a loss of $84.8 million in the prior year period. Primarily reflecting improvement gross margins, and disciplined expense management. Now on to the balance sheet. Cash, cash equivalents, and marketable securities totaled $3.1 million as of 06/30/2026, compared to $8 million at 9/30/2025. As Richard mentioned earlier, in July, we completed the third amendment to our term loan and security agreement, extending the maturity date to July 2027, and providing additional financial flexibility as we execute against our backlog and pipeline.

We believe the revised structure is better aligned with the operating cash flow profile of the business imports and supports execution of our growth strategy. In summary, while a meaningful portion of revenue shifted beyond the third quarter, the underlying business fundamentals remain solid. Gross margins exceeded 57%. 12-month backlog increased to approximately $69 million and collections in Puerto Rico resumed following the quarter end. We also took action during the quarter to better align spending with our cash flow profile while improving financial flexibility through the extension of our term loan. We remain focused on executing against our backlog generating cash flow, and improving flexibility. With that, Richard, back to you.

Richard S. Danforth: Thank you, Cassandra. We sit in a strong position. Our software products are beginning to get the recognition they deserve, and our hardware business is bringing in a steady flow of new orders. The demand environment across both sides of our business are as robust as they have ever been. And the work we have done this year has put us in a position to meet it. With the progress we have made on the balance sheet and the cost structure, we enter the fourth quarter with real momentum. The term loan extension gives us working capital flexibility and reduces our dependencies on the timing of customer payments.

We remain on pace for a record year in both revenue and profitability, backed by our $69 million backlog and pipeline that continues to grow. I want to thank our employees for their work this quarter and our shareholders for their continued support. With that, we would like to open it up for Q&A. Operator?

Operator: Thank you. We will now begin the question and answer session. Your first question comes from the line of Edward Woo with Ascendiant Capital. Please go ahead.

Ed Woo: Yeah. Congratulations on the progress, in the despite the Q3, glad that there is momentum. Heading into Q4. My question is on the Idaho win. You said you displaced legacy systems. Have you seen any big changes out in competition out there or do you feel that it is easier that you guys are gaining momentum to be able to displace with more of your other systems and competitors out there?

Richard S. Danforth: And I think the Ada County is an evacuation customer. And they love it. And they would like to simplicity and the intuitiveness of it. And our communication software or alert software is equally the same. So they like the easier use of the platform. And I think when the contract runs out with their existing supplier, not only in Ada but in counties all across the country, they will switch to Genasys.

Ed Woo: And you mentioned I think you said that was a second county in Idaho to do that. Is it much easier now for you to spread to the rest of the state and, obviously, to other counties in other states. Okay.

Richard S. Danforth: Ada is the largest county in the state with the over half a million people. But yes. So we already cover more people--most of the people in the state, and our intention is to land the whole state.

Ed Woo: Great. Then my last question is back on the Puerto Rico contract. You mentioned that you had a pause for a little bit, but then you were restarting now as collection is going. Does that impact the overall timing of when you are going to complete the project? And, also, does that affect your overall profitability as well?

Richard S. Danforth: Second 1 first. No. It does not have anything to do with our profitability in Puerto Rico remains to be very good. And I think you know this, Edward, but we had not scheduled any work on the island for our fiscal fourth quarter when we came into this calendar this fiscal year. Principally to stay away from hurricane season. So we have now going to be doing work in the fourth quarter in Puerto Rico. There will be some challenges based on weather I am sure. But right now, we have begun and yeah, we are going to get as much done on the island as possible in this fourth quarter.

Ed Woo: Great. Well, thanks for my questions, and I wish you guys good luck.

Richard S. Danforth: Thank you. You too.

Operator: Thank you. Your next question comes from the line of Luke Fingerson with Lake Street Capital Markets. Please go ahead.

Luke Fingerson: Hey, guys. Luke Fingerson on for Jaeson Schmidt here. Congrats on a good quarter. Obviously, some big contracts coming in. Just going to start on the collection of payments from Puerto Rico. Just curious kind of how that is progressing. And how we should think about the timing of collections.

Richard S. Danforth: In the last 4 weeks, Luke, we have collected $2.99 million, like, every other Friday.

Luke Fingerson: Okay.

Richard S. Danforth: And they are paying against specific invoices, so it could be higher or it could be slightly lower. But the important thing is that the cash is finally flowing.

Luke Fingerson: Gotcha. Is that kind of in line with how you expect it, or is it going to accelerate here? I guess there is a backup for not being paid for so long.

Richard S. Danforth: Yep. So they are working through that backlog and then as we continue to finish things in Puerto Rico, we will invoice them for that work.

Luke Fingerson: Gotcha. That makes sense. And then kind of with the US Army, you got the utility order. And then the Ada County order. I mean, obviously, these opportunities are just kind of flowing in here. A lot of them follow ons. So as these opportunities continue to develop, many of them being follow on orders, kind of curious where you see the address and serviceable markets of these opportunities in the next few years.

Richard S. Danforth: Oh, I do not think I have ever put a number out on that, Luke, but it is large. You know, our bookings in the hardware side of business non military will be higher this year than I think it is ever been. And we will generate about $9 million in revenue off the CROWS program this fiscal year. I mentioned a bit in my remarks regarding CIT market and vertical. That 1 utility company I referenced bought $4.4 million worth of NXT's this fiscal year. And last fiscal year, it was about $1 million. So it is over $5 million for 1 utility here in California. And the pipeline on that unit is very robust. And growing.

My remarks, I told you that the not only is the power stations, but it is it is dams. it is data centers. it is all over the all over the map. Yeah. No, I mean, good to hear. Obviously, the market's broad and booming.

Luke Fingerson: So thanks for taking my question.

Richard S. Danforth: I have mentioned this in the past. Luke, but we have sold those units to the French Navy, Spanish Navy, Canadian Navy, United States Navy, some mega yachts, and in the process of bidding other countries' navies.

Luke Fingerson: Yeah. I really appreciate the clarity on that, and thanks for taking my questions.

Richard S. Danforth: Okay. Thank you.

Operator: And that does conclude our question and answer session. And ladies and gentlemen, that does conclude today's conference call. Thank you for your participation and you may now disconnect.

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Motley Fool Transcribing, The Motley Fool

Wed, September 9, 2026 at 10:59 PM EDT

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Image source: The Motley Fool.

DATE

Wednesday, Sept. 9, 2026 at 8:30 a.m. ET

CALL PARTICIPANTS

TAKEAWAYS

Need a quote from a Motley Fool analyst? Email pr@fool.com

RISKS

SUMMARY

Cognyte Software Ltd.(NASDAQ:CGNT) reported a shift toward higher-margin software and recurring revenue as government agencies prioritize sovereign intelligence platforms and integrated AI capabilities. Management stated that software revenue now accounts for more than 92% of total revenue, reflecting a strategic move away from lower-margin professional services. The company is focusing its global expansion on NATO member nations and the United States, where it expects to reach $20 million in signed deals this fiscal year. While short-term performance indicators like RPO and billings reflected contract timing and multiyear consumption, management confirmed its long-term revenue targets for fiscal 2027 and fiscal 2028 based on strong visibility and high demand for investigative analytics.

INDUSTRY GLOSSARY

Full Conference Call Transcript

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Cognite's Second Quarter Fiscal Year 27 Earnings Conference Call. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press 1-1 on your telephone. You will then hear an automated message advising your hand is raised. Please note that today's conference may be recorded. I will now hand the conference over to your speaker host, Dean Ridlon, Head of Investor Relations. Please go ahead.

Dean Ridlon: Thank you, operator. Hello, everyone. I am Dean Ridlon, Cognite's Head of Investor Relations. Thank you for joining us today. I am here with Elad Sharon, Cognite's CEO and David Abadi, Cognite's CFO. Before getting started, I would like to mention that accompanying our call today is a presentation. If you would like to view these slides in real time during the call, please visit the Investors section of our website at cognite.com. Click on Upcoming Events, then the webcast link for today's conference call. I would also like to draw your attention to the fact that certain matters discussed on this call may contain forward-looking statements.

Within the meaning of the Private Securities Litigation Reform Act of 2000 and other provisions of the federal securities laws. These forward-looking statements are based on management's current expectations and are not guarantees of future performance. Actual results could differ materially from those expressed in or implied by these forward-looking statements. The forward-looking statements are made as of the date of this call and except as required by law, Cognite assumes no obligation to update or revise them. Investors are cautioned not to place undue reliance on these forward-looking statements. For a more detailed discussion of how these and other risks and uncertainties could cause Cognyte's actual results to differ materially from those indicated in these forward-looking statements.

Please see our annual report on Form 20 F for the fiscal year ended January 31, 2026, and other filings we make with the SEC. The financial measures discussed today include non GAAP measures, We believe investors focus on non GAAP financial measures in comparing results between periods, and among our peer companies that publish similar non GAAP measures. Please see today's presentation slides our earnings release and the Investors section of our website at cognite.com for a reconciliation of non GAAP financial measures to GAAP measures. Non GAAP financial information should not be considered in isolation from, as a substitute for, or superior to GAAP financial information.

But is included because management believes it provides meaningful information about the financial performance of our business, and is useful to investors for informational and comparative purposes. The non GAAP financial measures that the company uses have limitations and may differ from those used by other companies. Now I would like to turn the call over to Elad.

Elad Sharon: Thank you, Dean, and hello, everyone. Q2 was a strong quarter for Cognite. We are growing, executing the best of our operating plan, and strengthening the business as we scale. Total software revenue grew 21% year over year, and recurring revenue grew 18% both meaningfully faster than total revenue. Profitability expanded significantly faster than revenue, reflecting the leverage we have built into the model. Beyond the performance is a healthy environment across the markets we serve. Governments in our market are prioritizing national security, military intelligence, border security, and public safety and they are investing to build their intelligence capabilities these missions now require.

Threats are moving faster, data volumes are growing, and agencies need technology they can trust, explain, and control. That is why AI and sovereignty are now the center of customer discussions. First, AI is reshaping how intelligence work is done transforming both the threat and the opportunity. As investigative environments become more data intensive and time sensitive, customers are looking for AI and agentic capabilities embedded directly within their operational workflows. AI helps agencies not only work faster, but differently. uncovering hidden connections, surfacing insights that would otherwise be missed, taking the routine work off analysts, so their expertise goes where it counts.

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

And the reason it is hard is the nature of the work. Intelligence work is not made of common cases. It is the rare the obscure, and the deliberately hidden. A general purpose model handles the common well. That is not where our customers' investigations live. Second, sovereignty. Agencies want their intelligence capabilities under their own control. Their data their infrastructure, their operations. Security agencies cannot afford to depend on systems they do not own and control. They want the data to stay with their data, the systems to run with their data, and the ability to keep operating whatever happens around them.

Putting AI and sovereignty together with what we shared with you before, the growth in the volume and complexity of data and how fragmented most agencies' environments have become, you can see why the Cognite platform is such a strong fit. Agencies need to work with more data than ever, faster than ever, with AI they can trust and explain and on infrastructure they control. This is the environment our platform is built to serve. We win for a few reasons. Agencies choose us because we cover the whole spectrum. From the field to the decision. They can run it under their own control in the environment they are actually operating. And we bring domain expertise.

Built from working with government customers around the world which we then keep feeding back into our solutions. These advantages are helping us win against competitors, including in house-built systems, and we saw that translate into strong commercial traction across expansions, upgrades, and new logos. New logo activity remains strong. Across geographies with 14 new customers in H1, compared to 31 in the same period last year. 1 of them is a tier 1 national security agency in a NATO member nation who referred to us by another agency we serve. We extended within our customer base. Among our expansion this quarter, 2 in Asia Pacific stand out.

1, to expand its network intelligence capabilities another, to secure its borders, including mitigating unmanned aerial threats. In The US, we made progress across all priority segments. In federal, several opportunities have moved into procurement following strong proof of concepts and operational demonstration. And in state and local, we won with both new and existing customers. We are on target to achieve $20 million of signed deals in The US this year. That momentum across our growth pillars has continued since quarter-end with several additional significant agreement signed. We will provide more details on these wins in the coming weeks. The takeaway is simple. Our growth strategy is working, and the momentum is broad and global.

We took part in major events across 4 continents. These events span the range of intelligence missions including law enforcement, military intel, and national security. In The US, the largest law enforcement event, ATIA, inbound interest was high. In addition, agencies are approaching us directly after reading about Cognite in the trade and business press. Or on referrals from other agencies, or from industry experts. In this market, agencies rely on what their peers have already deployed. And that works in our favor. Reputation is key. What we hear from prospects and customers in these engagements is the same thing we have been describing to you for several quarters.

Agencies are drowning in data they already hold, The environment is fragmented. They are under pressure to move faster than their systems allow. And now on top of that, they have to decide how to bring AI into work where every conclusion has to be defensible, on infrastructure they control. These are the problems we are built to address. Customers are bringing us into strategic conversations early, as they shape the future plans and think through what a next-generation intelligence solution should look like. That engagement works both ways. They look to us for perspective and innovative solutions and we listen closely to their priorities using that insight to help shape where we invest. Those relationships take years to build.

And the trust behind them is what lets us keep growing with customers as their missions evolve. On the organization, Adam Philpott joined us as chief revenue officer early last month to lead our global commercial organization. Adam brings deep experience building go-to-market teams in the security industry globally. And he joins Cognite at an important time. Strong customer momentum and a healthy demand environment that presents a significant opportunity. His priorities are the same 3 growth drivers. Expanding with existing customers, winning new agencies, and accelerating our growth in The United States. I am excited to have Adam on the team and look forward to working with him as we build on the momentum across the business.

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

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

David Abadi: Thank you, Elad, and hello, everyone. Elad talked about the quality of the business improving. That is exactly what our financial model is designed to deliver. We drive profitable growth by increasing the contribution from software and recurring revenue. Expanding gross margins and maintaining discipline around operating expenses. That model is working. Revenue was $109 million up 12% year over year. Total software revenue grew 20.9% to $100.8 million and represent more than 92% of total revenue in Q2. Recurring revenue grew 18.4% year over year, to $56.2 million and represented 51.4% of total revenue. Professional services represented less than 8% of total revenue. Compared with approximately 15% a year ago. Reflecting the increasing software content of our business.

This ongoing mix shift supports higher quality revenue stronger margins, and greater scalability. Put simply, software revenue grew at nearly twice the company's overall growth rate. But recurring revenue also grew significantly faster. The result, both are becoming larger contributors to our overall revenue mix. A point to note about recurring revenue is that our model is different from a traditional SaaS model. A portion of our recurring revenue comes from term-based licensing arrangements that are recognized at a point in time rather than ratably over the life of the contract. As a result, recurring revenue is not the same as ARR. And can fluctuate between quarters based on the timing of revenue recognition.

What matters strategically is that recurring revenue is going faster than the company overall and becoming a larger part of our business. Enhancing revenue visibility and supporting long term growth. Now, I will review the results in more detail. Breaking down the revenue mix, software revenue grew 34.5% year over year to $49.2 million Total revenue is comprised of perpetual licenses, appliances, and term-based subscription licenses. Software services revenue grew by $4.8 million or 10.3% year over year to $51.6 million coming mainly from support contracts and to a lesser extent cloud based SaaS subscriptions. Total software revenue was $100.8 million up 20.9% growing significantly faster than total revenue. And up by $17.5 million year over year.

Software revenue now represents more than 92% of total revenue. Versus approximately 86% 1 year ago. Professional services revenue was $8.4 million in Q2. Compared to $14.2 million last year. Recurring revenue increased by 18.4% to $56.2 million representing 51.4% of total revenue. On gross margin and profit, we continue to improve year over year Q2 non-GAAP gross margin was 73.7%, An expansion of 154 basis points. Non GAAP gross profit grew 14.4% or $10.1 million to a total of $80.5 million. Again, faster than revenue. Our model continues to deliver strong financial leverage. And profitability is expanding significantly faster than revenue. The majority of the year over year increase in operating expenses reflected foreign exchange movements.

Primarily the weaker US dollar against the Israeli shekel. We continue to partially hedge future periods. We partially offset that impact through ongoing efficiency initiatives across the organization, including increased use of enterprise AI. Despite the FX headwinds, operating expenses grew more slowly than revenue. Allowing profitability to grow significantly faster Q2 non-GAAP operating expenses were $68.2 million. GAAP operating income increased 69.7% year over year to $4.7 million against revenue growth of 12%. Non GAAP operating income increased 52.5% to $12.2 million Adjusted EBITDA increased 35.7% to $14.9 million Non GAAP EPS was $0.15 nearly double the $0.08 we generated last year. GAAP diluted EPS was $0.06 compared with $0.02 a year ago.

Reflecting the significant improvement in our profitability. These results demonstrate the operating leverage we have been working to build. Revenue grew 12%, while non GAAP operating income grew more than 4 times as fast Looking at the first half, the same trends are evident. H1 revenue was $214.7 million up 11.2%. Total software revenue was $198.1 million up 19.8%. Recurring revenue was $108.1 million up 14.2%. GAAP operating income was $9.1 million up 85.1% year over year. Non GAAP operating income was $22.9 million up 47.2%. Importantly, we achieved these results despite approximately $7 million of net unfavorable foreign exchange impact on operating profitability in the first half of the year.

So across both the quarter and the first half, we are seeing consistent execution against our financial model. Compared with a year ago, Cognite is generating more revenue with higher quality. More software revenue higher recurring revenue, higher gross margins, and meaningfully greater profitability. Turning to RPO. Total RPO at quarter end was $470.2 million including $313.4 million of short term RPO. As we have discussed previously, RPO remains an indicator of future contracted revenue. But movement in the metric can also reflect contract structure duration, renewals, and consumption of large multi year agreements. Reported RPO excludes the cancelable portion of subscription contract.

At July 31, approximately $42 million of future revenue associated with those arrangements would therefore not included in reported RPO. In addition, approximately $30 million of the change in the RPO reflected the consumption of large multiyear support contracts as we delivered against those agreements and recognized the associated revenue. Short term RPO is an important component of our revenue visibility, but it does not capture the full picture. When we combine short term RPO, with expected renewals, of recurring business, and contracts signed since quarter end. We have visibility into approximately 85% of the revenue required to support our plan over the next 12 months.

The remaining approximately 15% is expected to come primarily from normal book and ship activity. That level is well within our historical execution range, and supports our confidence in our growth objectives. This level of visibility is 1 of the reasons we believe we remain on track to achieve our FY 2027 outlook And FY 2028 revenue target of $500 million Q2 billings were $76.3 million As billing can vary significantly quarter-to-quarter based on contract trends, we believe the trailing 12 months measure is more informative. On that basis, billings were approximately 95% of revenue, which we believe reflects the underlying strength of the business. Turning to cash flow.

We generated $1.1 million of positive cash flow from operations in Q2. Compared to net cash used in operating activity of $6.3 million in Q2 last year. This improvement reflects stronger collections and profitability. As well as disciplined working capital management. The second quarter also includes our annual incentive payments and other seasonal working capital uses. Turning to our balance sheet. Our financial position remains strong. We ended the quarter with $102.2 million in cash and no debt. Providing us with significant flexibility. During the first 6 months of fiscal 27, we repurchased approximately 1.5 million ordinary shares for $13.5 million.

Since launching our first repurchase program in November 2024, we have repurchased approximately $40.2 million of shares through the end of Q2 FY27, Out of the $60 million authorized across the company's repurchase programs. Our capital allocation priorities remain unchanged. We will continue investing organically to support growth, evaluate strategic M&A opportunities, where we see the potential to create returns significantly in excess of our cost of capital. And use share repurchases opportunistically when we believe they represent a compelling use of capital. Turning to our outlook. Our first half performance remained strong, and the demand environment is healthy.

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

While this can affect reported growth in a particular period, we believe the continued shift towards recurring arrangement strengthens the long term visibility and durability of our revenue base. Total software represented a particularly high percentage of revenue in Q2. We expect quarterly mix to continue to fluctuate based on the timing and composition of customer activity. And our full year outlook does not assume the Q2 mix persists throughout the second half. From a quarterly cadence perspective, we currently expect Q3 revenue to be slightly higher than Q2. Followed by sequential growth in Q4. Consistent with the seasonality reflected in our full year outlook. We also remained confident in our profitability outlook.

We expect non GAAP gross margin of approximately 73.5% for the year. An improvement of 50 basis points from last year. We continue to expect non GAAP operating income to be about $56 million, growth of more than 50% year over year. And adjusted EBITDA of approximately $68 million growth of about 40%. We continue to expect annual non GAAP EPS of $0.47 at the midpoint of the range. On cash flow, we continue to expect significant positive operating cash flow for the full year. Given the customer demand and future growth opportunities, we are making targeted inventory investment to support expected customer deliveries.

As a result, the timing and the level of cash generation this year is expected to be affected. It reflects a deliberate working capital investment rather than any change in the underlying performance of the business. To close, the progress we are making reflects the strength of our strategy and the discipline of our execution. We are building a higher quality business, 1 with a greater contribution from software a growing recurring revenue base, stronger margins, and increasing operating leverage as we scale. This is not only about the first half. Or even the fiscal year. it is about building a more durable, more predictable, and more profitable Cognite for the long term.

With healthy demand, strong customer momentum, and clear visibility into the opportunities ahead, we remain confident in our FY 27 outlook. And on track to achieve our FY 2028 targets. Operator, we are ready to take questions.

Operator: Thank you. As a reminder, Please stand by while we compile the Q&A roster. First question in queue coming from the line of Eric Martinuzzi with Lake Street Capital Markets. Your line is now open.

Eric Martinuzzi: Yes. A couple of questions. First off, Elad, for The U. S. Federal pipeline, you talked about there is good success there. You have got some transactions that are in the procurement phase. Just curious to know if these are transactions that you expect to be awarded during the current fiscal year, the government fiscal year ended September 30 or if that is something that is further out on the horizon.

Elad Sharon: Hi. Good morning, Thanks for the question. Yes. Actually, we have a few posted federal agents. We had the POCs with few local and fed agencies. Very successful results. Very good feedback from customers. And I do expect some deals already in this fiscal year.

Eric Martinuzzi: Okay. And then for David, the RPO number that you gave, that $470 million total RPO number, that was down versus the April quarter, which was down versus the January quarter. Is there are we expecting that to trough and recover here? Can you give me a little bit more insight on the total RPO number?

Elad Sharon: Yeah. Sure. So, first of all, it is important to say that demand is very strong. And it aligns with our strategy. I think it is reflected in the strong customer expansion we discussed and we shared with you and also with new logos that we have acquired. We also see growing customer preference for subscription based arrangements. This also improves the quality and visibility of the business. But has some shifts affecting the reported RPO. You know, RPO is important indicator for visibility. But given the market, you know, the business dynamics today, it does not set the full story by its own. And you need to look at it in a wider perspective.

This includes the RPO that excludes the cancelable portion of subscription contracts, as David mentioned earlier. That remains subject to cancellation. And About $42 million by the end of Q2. You have a large multiyear contract that I recognize on consumer over time. We shared a few times before that we have very large, renewals for 3 years. So every year we consume 1-third of it. So you see that the consumption takes the RPO down. And if you look at it specifically for this quarter of this year, it is about $30 million. The other 2 indicators that are related to RPO are the renewals. Renewals are not included in RPO until they are contractually committed.

So it is important to understand that it does not really matter whether the customers are buying perpetual or buying subscription. Still, the solutions that we deliver to them are integrated in their in their environment. Deliver a lot of value, so there will be renewal. But until it is committed by the contract, it is not part of the RPO. And, the timing of large deals, impact the quarter and the balance. So if you look at the visibility more broadly, you should take the RPO the expected renewals, the customer activity, the strong start we have seen in Q3 that we will share more color in the next few weeks.

We believe we have very strong visibility, over the next 12 months. And as David mentioned before, it is about 85% coverage for the next 12 months revenues, and we remain confident in our outlook for this year and also our fiscal 2028 target. So we are seeing a very healthy demand very strong market, and a very strong execution into this market.

Eric Martinuzzi: Understand. I appreciate the insight from the questions and congrats on the quarter. Thank you, Eric.

Elad Sharon: Thank you.

Operator: Our next question coming from the line of Taz Kajolgi with Roth Capital. Your line is now open.

Taz Kajolgi: A couple of clarification. So number 1 for David. If I look at the CRPO bookings, I think you made, David, it accelerated was strong this quarter again, similar to last quarter, I think. If I am doing my math right, your CRP bookings grew 16%. You are guiding to revenues growth of percent this year and 12% next year. We know typically that CRPO bookings are a good leading indicator of revenues. So given the gap between your revenue guide and CRPO bookings that we have seen for the last 2 quarters, Are you just being conservative, or there is something else that we should be mindful of? Given, you know, the CRPO bookings are growing at 60%?

But you are guiding to revenues, revenue growth of only 12% for this year and for next year. David Abadi: Thank you, Taz.

David Abadi: So, actually, we are seeing a few things that are happening in the business, and we are actually very pleased with that. So we are still doing the call about the quality of the revenue. You see that we have more and more subscription revenue that is coming and much more software. If you look at the overall mix, software is becoming very significant portion, and we have the growth of 21%, and it is a consistent growth that we see over the last few periods. So, this is something that we see as a trend.

As for the demand and what we have in our hand, it gives us lots of confidence into the end of this year and, and, also, when we enter into the next year. The visibility is high. You know, you mentioned percentage, 1.22 thousand%. The way that we look at that is that we are working with our customer to see deployment and what can be done. And based on that, we think our guidance. And we are feeling comfortable with the guidance, and if we need to update, we will be more than happy to do it.

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

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

David Abadi: Yeah. Thank you, Taz. So cash flow in Q2 was strong. What we see in Q2 that we were able to generate the positive cash flow from operation and actually, at least from the quarter Q1 to Q2, actually, is the quarter that we had some specific expenses that are related to annual bonus and stuff like that. it is taking place usually in Q2. And although these seasonal expenses and seasonal payments, we were able we were able to drive a strong cash conversion. Actually, if you look at this, we were generating $1.5 million cash from operation last year. Q2 was negative 6.3.

So, actually, if you look at Q2 versus q 2 last year, you are seeing a strong cash from operations. On that perspective, given the trends that we have seen in the business and given what we see in hardware and the need for inventory and supply chain that required the planning and different planning, we are making a deliberate decision to increase the level of inventory and mainly to support what we see as customer demands and deliveries. And we do not want to have any risk related to execution. And deliver those.

So, we made a decision to increase the levels of the inventory So that also impacted the way that we are looking into this year cash flow. We think that the right thing that is to make the right decision in the short term of increasing the inventory level to support future growth and execution and customer delivery.

Taz Kajolgi: So just to clarify, so we are still expecting cash flow of $45 million for the year?

David Abadi: So in this case, what we are planning is that, we would like to increase the inventory level. We as you can see, the balance is in the end of Q2, and we will continue to be with this kind of decision. We believe that this is the right thing to do in this time of the year. It allow us to better plan, better support the future demand. We see a significant demand in front of us, and we want to be able to deliver to our customer on time.

And that is great for us to direct now what we view as the right decision to increase inventory and we will, you know, we will not know, we will invest in the right thing to make the growth into the future.

Taz Kajolgi: Okay. Yeah. Thanks. 1 last 1. I think about last quarter, you had expected you mentioned that you expect about $20 million of bookings from US for fiscal 27. Are we still on track for that, or is that -- you know, could we be slightly better than what you had expected last quarter? for The US.

Elad Sharon: Actually, yeah, we are on track. Yeah. We are on track to achieve the $20 million signed deal this year. I expect this to come from State Local and also from federal, contracts should land there this fiscal year. Yeah. We are doing good progress in The US. Thanks, guys.

Taz Kajolgi: Elad Sharon: Thanks, Taz.

Operator: Thank you. And as a reminder, to ask a question, please press 1-1 on your touch tone telephone. Our next question in the queue coming from the line of Matthew Calitri with Needham and Company. Your line is now open.

Matthew Calitri: Hey, guys. This is Matthew Calitri over at Needham. Thank you for taking our questions. David, I want to stay on the cash flow for a second there. So I understood what the inventory purchases and, obviously, that is a prudent decision by you guys, so credit there. But there was a slight change in language there from significant positive operating cash flow versus the $45 million? Like, how should we think about the impact of that level of inventory purchasing?

David Abadi: Matt, I will start, and then I will let David continue.

Elad Sharon: I think it is important to understand that we want to be in a position to be able to grow, as the demand is growing. And for that reason, we want to be able to invest in inventory for 2 reasons, actually. The first 1 is related to demand, and the second 1 is related to the supply environment. Supply environment today, the delivery times are long, and the prices are going up. We want to be in a position that we are able to fulfill the demand, the growing demand of the customer.

So that is the rationale behind it, and it is quite difficult to predict how far we will go with inventory increase, but, we will do it, of course, in a cautious manner in a way that balances the cost, the level of inventory we have in stock, but also the ability to fulfill the demand on time and to fulfill the and to be able to deliver to customers as contracted. So that is the logic behind the rationale behind it. Now I will let David do the answers specifically to the question.

David Abadi: So given that we cannot quantify in this phase the impact of incremental inventory and what we see changing in this area and taking into consideration that we are seeing much more subscription, we are not quantifying what would be the cash flow from operations. But overall, we think that the it will be significant and positive. And the question of, you know, how much exactly will we invest in the inventory level It will be based on what we see in the market. And, currently, what we see in the market we see strong demand and can see that we already increased the level of inventory in the first half of the year significantly.

And against this inventory, we had actually a strong demand, and we have the customer planning to, to be delivered for this inventory. So, actually, we are in a very good situation that allow us to satisfy our customers to plan ahead and avoid disruptions that are related to the supply chain that is not in our control.

Matthew Calitri: Got it. Okay. That makes sense. And then the other parts of that is obviously the impact from the subscription recognition and great to see the continued adoption of subscription. Like, is there a way to think about what growth might look like had we not have that sort of revenue recognition headwind? And more than anything, I am just trying to square away, like, the strong results and underlying currents here with and the visibility with you guys keeping the guide and some of this RPO and billings. Dynamics that you spoke about earlier.

Elad Sharon: Yes. So, Matthew, I will first of all, I am sure why some customers want the subscription, and then I will give you our view of how it would be different if it would be perpetual. So first, moving quickly, we said that earlier in the call, agencies need the latest capabilities. When a government goes to perpetual license and buy a solution, later on to upgrade, it is another new cycle of purchasing. Which is a headache for them. So, actually, the fact that some of them are moving to subscription gives them the flexibility to get the latest and greatest technology and expand, without being required to go through the entire process.

And we see it happening gradually, but faster than expected. This is 1. Second, We continue to sell both perpetual and subscription, and perpetual is still the dominant portion. Okay? So we are pulling to subscription faster than expected, but we have heavy portion that is still perpetual. it is also important to understand that regardless of contract structure, whether it is subscription or perpetual, our solutions are deeply integrated and embedded into customer's operational environment.

If you heard earlier in the call I mentioned AI and sovereignty, some of it means that customers want on prem deployment So it could be that they will go for a subscription agreement, but still it will be on prem. that is usually what happens. So subscription is something that gives the customers flexibility while being able to run faster in terms of technology. And make sure that they maintain advantages versus the adversary. So that is the rationale of moving to subscription for the customer.

Our view is that if we would be in the same pace as last year, for example, selling perpetual versus subscription or mix is not changing, we would see a few percentage more in growth rate. So I think that it is great news. That we, maintain the top line growth outlook while more of the revenue is coming from recurring. And this is, I think, a good indication that the market is growing faster than it looks in the numbers. And the predictability and the visibility are improving over time. it is reflected in the recurring. it is reflected in the software and it is also reflected in the profitability levels. So I think that the business is improving.

Matthew Calitri: Great. Thank you, guys. Thanks, Matt.

Operator: Thank you. And I am showing there are no further questions in the Q&A queue at this time. I will now turn the call back over to Dean for any closing remarks.

Dean Ridlon: Thank you, Olivia, and thank you all for participating in today's call. Should you have any questions, please feel free to reach out to me. And we look forward to speaking with you again next quarter.

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

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Motley Fool Transcribing, The Motley Fool

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Thursday, Sept. 3, 2026 at 9:00 a.m. ET

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TAKEAWAYS

SUMMARY

Management at VersaBank(NASDAQ:VBNK) reported record total assets and revenue for the third quarter, attributed to the scaling of U.S. digital banking operations and steady performance in Canada. The company stated that expansion in the U.S. Structured Receivable Program (SRP) remains the primary driver of growth, with the segment now contributing nearly 25% of digital banking revenue. Management reported that the institution surpassed CAD 7 billion in total assets shortly after the quarter ended, marking a compounded annual growth rate of more than 25% over the past five years. The company indicated it is transitioning toward a standard U.S. bank holding company structure, with a shareholder vote scheduled for mid-September and a target completion date of Oct. 31, 2026. Management stated that fiscal 2027 is expected to be a period of significant growth and operating leverage as new AI-enabled product enhancements and U.S. market expansion further scale the business.

INDUSTRY GLOSSARY

Full Conference Call Transcript

Operator: Good morning, ladies and gentlemen. Welcome to VersaBank's third quarter fiscal 2026 financial results conference call. This morning, VersaBank issued a news release reporting its financial results for the third quarter ended July 31st, 2026. That news release, along with the bank's financial statements, MD&A, and supplemental financial information, are available on the bank's website in the investor relations section, as well as on SEDAR+ and EDGAR. Please note, in addition to the telephone dial-in, VersaBank is webcasting this morning's conference call. The webcast is listen only. If you are listening to the webcast but wish to ask a question in the Q&A session following Mr.

Taylor's presentation, please dial into the conference line, the details of which are included in this morning's news release and on the bank's website. For those participating in today's call by telephone, the accompanying slide presentation is available on the bank's website. Also, today's call will be archived for replay both by telephone and via the internet, beginning approximately one hour following completion of the call. Details on how to access the replays are available in this morning's news release. I would like to remind our listeners that statements about future events made on this call are forward-looking in nature and are based on certain assumptions and analysis made by VersaBank's management.

Actual results could differ materially from our expectations due to various material risks and uncertainties associated with VersaBank's businesses. Please refer to VersaBank's forward-looking statement advisory in today's presentation. I would now like to turn the call over to David Taylor, founder and President of VersaBank. Please go ahead, Mr. Taylor.

David Taylor: Good morning, everyone, and thank you for joining us for today's call. With me again is our Global Chief Financial Officer, Nicolas Ospina, and for the first time, Lawrence Chamberlain, our new Global Senior Vice President, investor and stakeholder relations, who joined us full-time in August after working for us on a consulting basis for the last six years or so. As expected, fiscal 2026 has continued to be a breakout year in terms of top-line growth. The third quarter once again saw new records for credit assets, revenue, and net interest income with a very strong year-over-year growth. This was once again driven mainly by the momentum in our Structured Receivable Program in the U.S.

In fact, our U.S. operations generated nearly 25% of Q3 digital banking revenue. But notably, we have continued to see steady growth in Canada as we continue to increase business with our existing partners and expand our market share. I am very pleased to report that subsequent to quarter end, for the first time, we surpassed CAD 7 billion in total assets. In fact, as of yesterday, we were at CAD 7.2 billion. That's up nearly CAD 5 billion over the past five years for a compounded annual growth rate of more than 25%.

With this year's strong growth, we are increasingly realizing the operating leverage of our cloud-based branchless business-to-business model with year-over-year increases in net income and adjusted or core net income of 53% and 27% respectively. I will once again note that we achieved these metrics with significantly higher than typical levels of liquidity at this early point to our expansion in the U.S. Although these are steadily moving back to more historic levels. That said, it was another noisy quarter in terms of costs with a number of items which total over CAD 4.6 million that are not part of our go-forward cost structure in 2027.

These included non-core costs of CAD 3.1 million, which was composed mainly of an additional CAD 2.5 million in reorganization costs that we noted on our last call. There were also CAD 1.5 million in transitory core costs, that is costs that we did not adjust for, but that were specific to Q3, as well as CAD 0.8 million related to share compensation resulting from the increase in share value. Nico will go into these in more detail in a few minutes. Looking ahead, as I will discuss in a little bit, we expect the broader implementation of AI throughout our organization will not only increase our efficiency but create significant opportunities for meaningful cost savings going forward.

Finally, on the Q3 results, as I have discussed in the past, our net interest margin can vary from quarter to quarter, and we saw that somewhat in the third quarter. Much of this is due to the higher than typical liquidity levels, and we therefore expect NIM to trend back to the 2.3% range going forward. Of course, we will continue to benefit from more cheaper deposits through increased activity in our insolvency professional business. In Canada, we recently saw that deposit base reach CAD 1 billion for the first time as we both expand that business and insolvencies in Canada continue to increase. More specifically, the SRP business in the United States.

We continued to steadily build momentum during Q3 with increased business from our existing U.S. partners and the addition of new partners. Q3 saw another CAD 220 million in new fundings with a subsequent CAD 127 million since the end of Q3. That brings us to more than CAD 720 million in new fundings year to date as of today. Q3 saw the initial contribution from our most recently added SRP partner in the United States, another wholly owned subsidiary of ECN Capital. This latest partner is expected to contribute at least $300 million in additional U.S. SRP fundings annually. But both we and our partner believe the program could grow well beyond $500 million per year in fundings.

I will note again, this quarter, the vast majority of additional fundings in the U.S. were through our original, more profitable SRP as demand for our core solutions continues to exceed our expectations. Our growth in the United States continues to prove out the efficiency of our U.S. operations with an efficiency ratio, excluding non-core write-off associated with the branch sale for Q3 of 37%. And we continue to remain on track for our year-end goal to be in the low 20s. Clearly, as expected, SRP has rapidly taken its rightful place as a uniquely attractive alternative funding option for point-of-sale finance companies in the United States. Reliable, efficient, economical, all benefits of our proprietary technology.

During the quarter, we took the value proposition of our SRP to an entirely new level with the launch of an AI-enabled Real-Time SRP, which enable our partners to finance their loans with even more efficiency, cost-effectiveness with lower risk. Instead of our partners having to accumulate, warehouse, and batch their loans over a period of time, typically as much as 30 days or more, these loans can now be funded individually as they are made. This effectively eliminates the need for our partners to warehouse multiple receivables over a period of time. That is, they can finance individual loans within just hours, reducing the overall financing cost and the need for warehouse financing.

The cost savings and lower equity requirements are significant, and it eliminates the interest rate risk that our partners are exposed to during the warehousing period. During the quarter, following a successful pilot program, one of our largest SRP partners, Financeit, became the first to implement our Real-Time SRP in Canada. I am pleased to report that earlier this week, ECN Capital, one of our first U.S. SRP partners, became the first to implement real-time program in the United States.

Feedback on our real-time solution has been overwhelmingly positive, and we are seeing considerable incremental demand from both existing and prospective new partners, including in Canada, where we believe it will generate significant incremental growth to the solid performance we are achieving this year. To ensure we are fully maximizing this opportunity and doing so rapidly as possible, we are privileged to have point-of-sale financing industry veteran, Moe Danis, rejoin VersaBank as part of our SRP team with a particular focus on specialized large partner opportunities for our Real-Time SRP in the United States market. Moe has had a very busy first month and a half and has initiated discussions with numerous new prospect partners.

With that, I would now like to turn the call over to Nico to review our financial results in detail. Nico?

Nicolas Ospina: Thanks, David. Before I begin, I will remind you that our full financial statements and MD&A for the third quarter are available in our website under the investor section, as well as on SEDAR and EDGAR. All the following numbers are reported in CAD as per our financial statements, unless otherwise noted. Starting with our balance sheet. Total asset at the end of the third quarter of fiscal 2026 grew 26% year-over-year and 7% sequentially to a new high of just under CAD 6.9 billion. Cash and securities was CAD 624 million or 9% of total assets, down slightly compared to the end of Q2 2026.

I will reiterate here David's earlier comment about this number still being higher than our historical levels of around 7% as a result of our entering to the United States. Book value per share increased to another record of CAD 17.45. Our CET1 ratio was 11.5% and our leverage ratio was 7.6%, both down meaningfully year-over-year and remaining comfortably above our internal targets. The year-over-year change is mainly due to putting capital to work for growth in the U.S. SRP portfolio following our capital raise in December 2024. Our strong growth in assets drove total consolidated revenue to a record of CAD 38.8 million, up 23% year-over-year and 1% sequentially. Non-interest expenses, or NIEs, for Q3 were CAD 25.2 million.

As David noted, NIEs for Q3 included CAD 3.1 million in non-core expenses, CAD 2.5 million of additional costs related to a reorganization project, and CAD 0.6 million for the write-off of capitalized software costs following the sale of our sole physical branch on May 1st of this year. Consolidated NIEs, excluding the one-time cost, were CAD 22.1 million, compared to CAD 17.4 million in Q3 last year and CAD 20.8 million for Q2. As David also noted, Q3 included approximately CAD 2.3 million pre-tax in additional transitory costs that are now a part of our run rate cost structure.

This was composed of CAD 0.8 million in share-based long-term incentive award, driven by the bank's strong share price performance during the quarter, as well as CAD 1.5 million in other transitory costs that were specific to the quarter and the bank does not expect to recur. As a reminder, DRTC cyber expenses are included in the consolidated NIEs and totaled CAD 2.6 million in Q3, more or less in line with last year. Reported net income was CAD 10.1 million, a year-over-year increase of 53% from CAD 6.6 million for the third quarter last year. Consolidated earnings per share was CAD 0.31 compared to CAD 0.20 last year.

Excluding the CAD 3.1 million non-core NIEs I mentioned earlier, consolidated adjusted net income was CAD 12.3 million, or CAD 0.38 per share, with adjusted net income increasing 27% year-over-year. Again, that number includes CAD 0.8 million pre-tax in share-based compensation resulting from our share appreciation and other transitory cost of CAD 1.5 million pre-tax. Looking at our income statement on a segmented basis, revenue for the Canadian digital banking operation was CAD 27.6 million, up 4% year-over-year. I will remind you that our bank corporate expenses flow to our Canadian banking segment and, as a result, reported net income include those reorganizational costs. Canadian banking net income for Q3 was CAD 6.6 million.

However, that number is dampened by the CAD 1.8 million after-tax impact of the one-time cost associated with the reorganization. Revenue for our U.S. banking operations was CAD 9.3 million, up 18% sequentially and 199% year-over-year, primarily due to a ramp up in the U.S. SRP. That drove a 10% increase in net income sequentially and an 803% increase year-over-year to CAD 3.9 million as we see the U.S. operating leverage take effect. Q3 net income was impacted by CAD 400,000 after-tax costs related to a software write-off resulting from the sale of the branch I described earlier.

Digital Meteor net income was CAD 114,000 compared with net income of CAD 23,000 for the third quarter last year and net income of CAD 351,000 for the second quarter of 2026. Within DRTC, the cybersecurity service component generated revenue of CAD 1.9 million with net loss of CAD 578,000, pretty much in line with last quarter. Our credit asset portfolio grew a new record just shy of CAD 6.2 billion at the end of Q3, driven once again by our Structured Receivable Program, which increased 40% year-over-year and 11% sequentially to CAD 5.2 billion. Our SRP portfolio represented 85% of our total credit assets at the end of Q3, up from 82% in Q2.

Our multifamily residential loans and other portfolio decreased 10% year-over-year and 5% sequentially to CAD 934 million as we continue to strategically transition some of our higher yield, higher risk-weighted uninsured loans to lower yield, lower risk-weighted insured loans. As a reminder, our MRO portfolio is primary business-to-business mortgages and construction loans for residential properties. We have almost no exposure to commercial use properties. Turning to the income statement for our digital banking operations, net interest margin on credit assets, that is excluding cash and securities, was 2.44%. That represented a decrease of 11 basis points year-over-year and 27 basis points sequentially.

I will remind you that our Q2 NIM is typically the highest of the year due to normal seasonality. The increase in NIM reflect higher than typical GIC term deposit rates relative to Government of Canada bond yields, the replacement of retail deposit with broker deposit resulting from the sale of the bank only physical branch in the U.S., as well as our decision to maintain greater liquidity amidst a challenging Canadian economy. It also reflects lower credit asset yields in Canada due to a shift in our credit asset mix, resulting from the continued growth in our SRP portfolio, as well as our strategic shift in our MRO loans I just mentioned.

Overall NIM, including the impact of cash, securities, and other assets, was 2.19%, a decrease of six basis points year-over-year and 14 basis points sequentially for the same reason I noted above. Our NIM still remains amongst the highest of the publicly traded Canadian federally licensed banks. Finally, our provision for credit losses in Q3 continued to be de minimis as a percentage of our credit assets, and in fact, was negative at 0.02%, meaning we had a recovery of credit losses during the quarter.

This compares to a positive 0.03% from Q2, with the recovery primarily due to a sale of the branch assets to Stearns Bank National Association and updates in the forward-looking information used by the bank in its credit risk models. I would now like to turn the call back to David for some closing remarks. David?

David Taylor: Thanks, Nico. As I noted earlier, fiscal 2026 has been a breakout year in terms of top-line growth, which is expected to further accelerate next year based on both the continued expansion of our SRP in the United States, as well as this year's introduction of our revolutionary Real-Time SRP. Fiscal 2027, however, will be the year when the true power of our model in terms of both growth and operating leverage comes into focus for our investors. In fact, we are seeing so much near-term demand for our core SRP that during the third quarter, we made the decision to, at least in the short term, limit the amount of fundings through our lower spread purchased securitized SRP.

It is simply a more efficient and more profitable use of capital. You'll recall that on the fourth quarter call last year, we estimated that fiscal 2026 SRP fundings in the U.S. would be composed of roughly 60% of our profitable core SRP and 40% would be of our lower spread purchased securitized SRP. As of today, that ratio stands at 90% core SRP and just 10% securitized SRP. That translates to around CAD 650 million in core SRP year to date, with well in excess of the CAD 600 million represented by our 60% of our target CAD 1 billion.

As a result of limiting our purchased securitized SRP, we now anticipate that we will reach our CAD 1 billion target of additional fundings since October of last year, sometime before the calendar year end. This positions us very well for our new U.S. SRP target, at least US$3 billion in additional fundings in the U.S. in fiscal 2027. That's the equivalent of more than CAD 4 billion and alone represents 60% growth in our credit asset portfolio. Two important points here. One, we believe there is significant potential upside to our target of US$3 billion in additional U.S. fundings. The demand there, especially with the addition of our Real-Time SRP enhancement.

Two, we believe our Real-Time SRP enhancement will accelerate growth in Canada through both additional business with our existing partners and the addition of new partners. In fact, we believe that the growth in our Canadian operations will continue to lead the Canadian banking industry and significantly outpace growth this year. The operating leverage benefits of this growth are enormous, of course. The other side of the operating leverage equation is cost. Like Q3, fiscal 2026 on whole has been a noisy year in this respect. Not only have we had costs associated with the reorganization, as I noted earlier, we have incurred significant costs during the transition that we do not expect to repeat going forward.

Even with this expected growth at most, we think our core non-interest expenses will be in line with this year, excluding the CAD 10 million cost associated with the portion of DRTC we plan to divest. To even further capitalize on our operating leverage, we are undertaking numerous AI-based initiatives across the broader organizations to drive even greater efficiency as we grow while further strengthening our risk profile. As a fully digital bank with our own proprietary core banking software, we are well-positioned to realize significant benefits from increased implementation of AI. Our opportunities in the rapidly developing digital asset industry continue to come into focus.

Both stablecoins and bank-issued tokenized deposits are gaining widespread acceptance, and the ecosystem is taking shape. At this early stage for the industry, we are being deliberately thoughtful and prudent in our approach to these opportunities with a focus on long-term value. With our unique and proprietary technology that has been consistently validated by other leaders in the industry, further strengthened by our status as a federally licensed bank in both the U.S. and Canada, we are very well-positioned to capitalize on this revolution in the banking and payment systems. Before I open the call to questions, a quick update on our reorganization.

The week after next, we will hold a special meeting of our shareholders to vote on and approve the reorg, for which our board has unanimously recommended shareholders vote in favor. The materials associated with the special meeting are available on our website. In parallel, we are preparing to request the requisite regulatory approvals, specifically from the Fed in the U.S. and the Department of Finance Canada. Our target, subject to these approvals, is to have the reorganization completed by the end of October 2026. I will note here that we expect to incur an additional roughly CAD 4 million in non-core costs related to the reorganization in the fourth quarter of this year.

We expect the realignment of our corporate structure to a standard U.S. bank framework to drive meaningful additional value for our shareholders as we align our structure and financial reporting to those with which global investment community are more familiar. Potential future stock index inclusion and improved access to capital if needed to further accelerate our growth as well as significant cost savings. Finally, on the topic of divestiture of cybersecurity business, we had been looking at some additional potential alternatives to meet the Fed's requirement that we divest this business by September of this year.

Last quarter, we asked the Fed for an extension that was granted last week, such that we have now until August 30th of next year to exit. We are proceeding accordingly. With that, I would like to open the call to questions. Operator?

Operator: If you would like to ask a question, please press star followed by the number 1 on your telephone keypad. To withdraw any questions, please press star 1 again. Our first question comes from Joseph Yanchunis from Raymond James. Please go ahead. Your line is open.

Joe Yanchunis: Good morning.

David Taylor: Good morning, Joe.

Nicolas Ospina: Good morning, Joe.

Joe Yanchunis: In your prepared remarks, you said the NIM should trend back towards 2.3% kind of range as liquidity normalizes. What do you need to have happen for that to occur, and how much of that recovery is driven by lower liquidity, better deposit mix, or stronger SRP yields? Are you expecting the NIM to return to those levels in the fourth quarter?

David Taylor: Yes, Joe, the liquidity we've been maintaining, of course, was partly due to beginning operations in the U.S., so we just thought prudent to maintain a lot more cash. With some anomaly happening in Canada, with our deposit rates increasing to about 70 basis points over the same term Government of Canada bond, that means the liquidity actually costs us a few basis points, maybe 10, 15 negative. Now that we're well established in the U.S., we can bring our liquidity levels back down to around 5%-5.5%, which means we won't be losing money on liquidity. In the past, we didn't actually lose money on liquidity. We actually made a few basis points.

It's important for us to get it down. With respect to timing, gee, we're growing so rapidly now. We put on about CAD 300 million since the end of the quarter, July 31st. We are up to CAD 7.2 billion right now from what it was CAD 6.9 or so, Nico?

Nicolas Ospina: That is right.

David Taylor: It is coming on fast and furious. Those are high yielding traditional SRP rather than the purchased ones where we only made maybe 80, 90 basis points. On our homegrown SRPs, we make about 250 or so. I would say NIM will get back to around 230 for next quarter and the rest of the year. For the Canadian listeners, we are still about 50% better NIM than the entire banking industry in Canada, and it is even better than that in that most of the banking industry, well, all the banking industry is providing extraordinary expected loss provisions. You might note that ours is averaging close to zero. I think it was 2 basis points the last quarter.

Not only do we have the widest margin in the country by far, but we give nothing back for loan losses either. While we are obsessing on NIM, a space that we are incredible at in the country where most of our assets are situated. It gets better in the States because that anomaly over risk-free rate in the States is only 10, 15 basis points over U.S. Treasuries. As we start booking assets in the States, as we are predicting at least US$3 billion more going on soon, gee whiz, it just gets better and better. It is sort of amazing.

One of the markets kind of missed it, but we have revolutionized the US$1 trillion asset-backed security market by bringing out this Real-Time SRP, where not only do our clients get their money back right away, not have to wait 60, 90 days to package up and pay accountants and investment bankers and lawyers. They also run a huge interest rate risk while they are doing this. Rates move up, that means their portfolio dropped. With us, they get to lock the rate in virtually in 10 minutes.

One big firm said to me, "Once a day would be great, Dave." I kind of find it odd that we're obsessing on a few basis points in March, and we just brought something out that renders the traditional asset-backed security method obsolete. Interesting that seems to be missed. However, it's always the case where you're an innovator, you bring something out brand new and folks take a while to catch on. When I came out with a branchless bank model in 1993, everybody told me that was impossible and couldn't be done and everything else.

Here we are again with the adoption of AI to this traditional ABS market and revolutionizing it, which you'd think that's what people would be looking at. I guess it's when the horse and buggy came out. Horse and buggies were means of transportation. Someone came out with an automobile. It was still folks that needed to have horses and buy hay and stuff like that to keep going until it caught on. Sorry about the long-winded one there, Joe, but, you're-

Joe Yanchunis: That's all right. I appreciate the color there. I just wanted to drill down on the expected growth in fiscal 2027. So you're expecting at least US$3 billion of growth in the U.S., which would effectively take you to US$4 billion exiting the next fiscal year. So how much of that target is already effectively spoken for through existing partners like Financeit and ECN, and how much is still dependent on signing new partners?

David Taylor: I'd say about half through the existing and the other half are prospects that we're already talking to. I've doubled the size of the team in the U.S., the SRP team, with the addition of Moe Danis and Luke. So, more hands at the pump. I may add another two to it. Also, it's a huge market in the U.S., and the sooner we get on the books, the better. But if you look at US$3 billion to, say, 250 basis point spread and use an effective tax rate of about 25%, that's about a US$1.75 a share increase in U.S. dollars that we just put out there.

Joe Yanchunis: Yeah.

David Taylor: That's just the U.S. And Canada might be able to do the same. Let's hedge my bet, call it CAD, because our existing partners in Canada, including Financeit and some of the huge ones, they're signing up as fast as they can to get Real-Time SRP working for them. They're saying they don't want to run interest rate risk. Why should you? They like to get their money back right away. Because they're not borrowing, they don't have to have an onerous debt to equity ratio to contend with. They can get their capital back faster. Their ROE goes through the roof. They eliminate interest rates.

When I say revolutionary, that's what Moe Danis said when I was receiving this undeserved award for Canadian Financial Executive of the Year. Moe said, "This is a revolution to the industry." I say, "Yeah, you're coming back on board, right, Moe?" Yeah, it's great. I may bring another team in too. Mark in $3 billion in the U.S. additional and maybe another CAD 3 billion, just from our existing partners. There's a few more just signed up. I think two or three more just signed up in Canada, too.

Joe Yanchunis: You're talking about truly explosive growth here. At what point does additional capital become necessary to support this runway?

David Taylor: Well, if we get our dream come true, we'll be risk weighting our homegrown asset-backed securities, the same as if we had purchased them under the new Basel III rules, which is 20%. If we can get that done, I've hired a guy to make that happen. Chiaki used to be with Bank of Canada, so KBW has come on board for that mission. If we can get that put to bed, which is quite realistic, considering Basel III allows for it, why would your homegrown ABSs be risk weighted different than the ones you just purchased from somebody else or the ones we sold to somebody else?

Then we're at 20% risk weighted, and then there's no need for any more capital. At that point, we're generating capital at a fast and furious rate, and we'd self-fund. Sorry, investment bankers. Although, it is a trillion-CAD market, so even with that, maybe we will be back. We are only looking at 1% of a trillion-CAD market in the near future with CAD 10 billion. I cannot see anybody using anything else other than what we have got on the table. Why run those monster risks with interest rates? Why not get your money back in your pocket? Why not give your shareholders some of their money back?

You do not need all the equity that you got supporting a business anymore. That would be dreaming in Technicolor, but I have hired the guy, and we are underway with that. Basel III did change that and did allow for it. It makes sense. Why would a regulator let you risk weight your asset at 20% just because you bought it from somebody else when it is identical to the one you have homegrown?

Joe Yanchunis: All right. Well, I appreciate the color and thank you for those thorough answers. I will hop back in the queue.

David Taylor: All righty. Well, thanks, Joe.

Operator: Our next question comes from Tim Switzer from KBW. Please go ahead. Your line is open.

Tim Switzer: Hey, good morning. Thank you for taking my questions.

David Taylor: Well, go ahead, Tim. We are here in the fog in Canada here. I have Nico beside me here. He traveled all the way up from St. Pete to find it just as foggy and steamy and hot here in Canada.

Tim Switzer: Lucky you, Nico. A quick follow-up on your comment about the risk weighting here. What is the process like for getting a lower risk weighting on your SRP loans? Is there any timeline on when you think you can get approval for that?

David Taylor: Well, I am guessing sometime mid-2027 our sort of Dime Went to Heaven program would be in place. That would be the assets that we have are risk-weighted the same as those that we would purchase. It would go through, we would make a presentation to OCC to have our assets risk-weighted in that fashion. So, I am hedging my bet a bit mid-2027. There are some phases in between where we could probably get most of that effect done a lot sooner. There are methods in Canada in particular to employ kind of an insurance policy on your assets and get a much lower risk weighting.

Other banks have already done and used, so the regulators are familiar with it. Then there are some companies who have approached us that would take the B tranche on their own books, and that has already gone through the regulatory frameworks and been approved. The Dime went to heaven, the holy grail, is maybe mid-2027. I would hope it is sooner because I have a real good guy on the job. Keenan, are you listening? The other phase is the first one with the insurance. Maybe I will get that in a bit sooner, like a month or two from now.

Tim Switzer: Okay. Interesting. Your comment about 2027 core expenses should be in line with this year. Just given all the one-timers and transitory costs, what is the base we should be using for 2027? If you can provide a CAD range, that would be helpful.

David Taylor: Nico is sitting beside me in the room. CAD 19.8 or something like that.

Nicolas Ospina: CAD 19.8 is kind of like the run rate that we have right now, Tim.

Tim Switzer: Can you repeat that?

David Taylor: 19.

Nicolas Ospina: 19.8.

David Taylor: 19.8, Tim. Tim, the other thing to keep in the back of your mind as we put it out there, we fully endorsed AI in this bank. Of course, it was real easy for us because we're all tech anyways. There's a lot of savings coming. I mean, obviously just demonstrating what we can do with AI on the Real-Time SRP, that's phenomenal. There's lots of other areas in our bank that our team is looking to using AI to make themselves much more efficient. I'll put it out there. It might take a week in the past to compose a credit application for a new SRP customer, say a week. Now that would be pushing it.

That'd be our guys really working hard on that. That could be done now in less than a day with AI.

Tim Switzer: Okay. If I heard you correctly, you said 19.8, so it'd be about CAD 70 million annualized?

David Taylor: Yeah, that's what we're looking at. Without any improvements with AI that we have well underway here, we have what we call an aquarium, Microsoft Aquarium. All the data at the bank sits nicely, securely, and safely in this aquarium. But our staff has access to company AI to manipulate data and do statistical analysis. It's so cool. We have a data warehouse that's part of our core banking system that I invented many years ago. It gives our staff the ability to, say, ask, "How many motorcycle loans do we have in Alberta?" Not only does it give it to you, but it'll actually put in a PowerPoint presentation for you. It's fantastic.

Maybe the reason why I'm so bullish on this as opposed to maybe my fellow bankers, maybe this has been missed by the market. We own our core. We created our core. It's the VersaBank core. We're not beholding to some other core provider that you may have to go into a queue and wait maybe three or four years to have some sort of innovation put through. VersaBank's core banking system was conceived to never constrain what our lenders could think of. If they put a loan together that had uneven cash flows, maybe paying some summer, not the winter, anything they could think of, different bases for Bank of Montreal Prime, CIBC Prime, bankers' acceptances, whatever.

That core banking system that we put together gives a huge advantage. This is why we can do this stuff. How could you invent a Real-Time SRP and launch it? What are we doing? We announced about 60 days ago. It's now fully functional, and we're assigning our customers. I mean, just imagine if you had to contend with the rest of the banking industry with one of these archaic core providers that's struggling through it. Geez. There's no comparison.

Lawrence Chamberlain: Tim- Warren here. Let me just jump in and remind that of that CAD 80 million, CAD 10 million is directly attributable to the cybersecurity business. When that gets divested, that goes away.

Tim Switzer: Yep. Okay. All right. That's helpful. One last one for me. Just given the extension on the divestment there, could you provide some color on where we are in the process of a potential sale here? Is there anything else being considered, like a spinoff? In terms of a sale, there's been some nice movement upwards in cyber stocks lately. Should that help speed this process along maybe, and help with the valuation you could receive?

David Taylor: Yeah, it definitely should. I mean, obviously, we live in a terrible world where cybercriminals abound. There's no end in sight to that, unfortunately. We were just thankful the Fed gave us a little longer to divest a bit. We haven't mind divesting a lot sooner than the one-year extension. It just takes the heat off us, and it's more of a human thing. We were fully deployed with this Project Optimize. It's a big project and everybody's really busy doing that. The divesture DRTC was a bit of a distraction. So now we've got a bit of time. We're engaged with a few likely purchasers, and I'm sure somebody will become the new proud owner.

But we're thankful the Fed cut us a bit of slack. As they say in negotiations, he who wants it the most loses. As we certainly didn't want to be in any hurry while we've got all this other Project Optimize distracting us.

Tim Switzer: Okay, great. Thank you, David.

Operator: Our next question comes from.

David Taylor: All right. Thanks, Tim.

Operator: Andrew Scutt from ROTH Capital. Please go ahead. Your line is open.

Andrew Scutt: Hey, good morning, guys. Congrats on the continued progress, and thanks for taking my questions. Just one quick two-parter for me on the expected 2027 U.S. SRP growth. Firstly, can you kind of remind us where you're funding these deposits, specifically for the U.S. business, and help us quantify any incremental spread you may be picking up growing in the U.S. versus Canada? Secondly, on the expected US$3 billion in growth in 2027, did you guys target a number in which you will keep on your balance sheet versus securitize?

David Taylor: We'll keep the whole work center balance sheet, Andrew, just for a quick answer. I think it'll happen fairly quickly in that with the new team out there marketing it should go rather rapidly.

Andrew Scutt: Understood. Just the first part on the NIMs across the borders.

David Taylor: Oh, okay. The NIM in Canada has been unusually compressed by the margin over the risk-free rate going to a historic high of 70 basis points. In the States, it's running around 10, 15 basis points over the same term, U.S. Treasury. Our method of gathering deposits on both sides for us is the same. We go exclusively to broker deposits. We're a drop in the bucket and have no issue whatsoever raising as much money as we need, virtually instantaneously from our deposit broker partners. So that's what we've done since the beginning, 1993.

I created that industry by telephone modems and IBM PCs, putting them in the offices of what I call deposit brokers, so they weren't called that then. They were financial service providers and investment bankers and such. Now, dream in Technicolor, as you know, we have got the world's first tokenized deposit up and running, ready to roll. Sooner or later, we'll roll that out. That puts FDIC-insured CDs viciously represented, as we call them, tokenized deposits, out throughout the entire United States and serves as a beautiful payment vehicle, too. With FDIC stamp of approval on it's virtually risk-free. That's coming. I think the entire banking industry is waking up to that.

In the newspaper almost every day, you see some group of banks. The banks talking about stablecoins. Stablecoins, I think, are a little bit of thing of the past. They'll evolve into tokenized deposits. When my dream comes true, we'll be raising our deposits through the tokenized deposit networks and paying a lot less because our competition right now is stablecoins, which so far aren't able to pay any yields. That's the dream come true. In the meantime, it's just the traditional deposit brokers that are sending us money as we no issue whatsoever. Part of that is because we're a drop in the bucket. I think it's what, a CAD 10 trillion deposit market.

Our aspiration is maybe CAD 10 billion, CAD 15 billion, CAD 20 billion. That's still a drop in the bucket.

Andrew Scutt: Understood. Well, appreciate the color and congrats again on the continued progress.

David Taylor: Well, thanks, Andrew. Exciting times.

Operator: Our next question comes from Eli Rodney from Bullpen Research. Please go ahead. Your line is open.

Eli Rodney: Morning, guys. Niko, I hope you didn't fly in yesterday with the storm we had here.

David Taylor: Yeah. No, I came early in the week.

Eli Rodney: Good. Starting off on that CAD 3 billion target. Given the attractiveness of the Real-Time SRP, you guys have talked about 90/10 split this year on funded volumes. I'm wondering, should we be thinking the same split for CAD 3 billion in fiscal 2027?

David Taylor: Yeah. Eli, I guess right now I don't think there's any need to purchase any more. We've got so much demand for the on-balance sheet securitization that I can't see buying any more. They come in a much thinner spread, and even though they are 20% risk-weighted, now we're well underway with the homegrown SRP used in real time way. I go 100% on the homegrown. When we got the Canadian side, too, Eli, of course, because I just threw that out there for the U.S. growth. But our Canadian business is well-established, and we have 20, 25 or so partners, and every one of them would rather get their money sooner rather than later.

So I expect, let's just say CAD 3 billion Canadian on our side of the border here. That's pretty realistic. We have maybe half of Financeit's business, and they have CAD 3 billion already on the books. There's a bunch more lined up. It's so attractive. It's one of those ones you don't have to market. I get all my money back right away. Theoretically, it's 10 minutes it takes us to turn it over. If it's just once a day they do a batch, comes in, that's the money back in the till, can be lent out the next day to some other guy that wants to buy a Ducati motorcycle.

How much equity does the point-of-sale finance company have to have? Well, theoretically, nothing. They're just a supply chain for us. We're holding back sufficient cash to soak up what we think would be the delinquencies. Theoretically, for those who are mathematically inclined, the holdback we have is what some other lender might have in their expected loss provision. It's the same math. As long as we hold back enough, what you see hit our bottom line, our ECL, is next to nothing, and that's what you've seen over the decades, like plus or minus 2 or 3 basis points. It's a good model.

We proved it out kind of doing it a clunky way by buying batches, and now we just adapted the program to AI and we built it ourselves downstairs in the tech facility here. It was constructed by our guys and put into play, and of course, as you'd expect, everybody sort of said, "Where do I sign? How come I can't have that?" That's what we hear. Geez, well, of course.

Eli Rodney: Yeah. No. I imagine it's a pretty easy sales process for you guys. Maybe on that, specifically on the rollout of the Real-Time SRP, maybe a more qualitative question than anything, but could you give a sense for maybe Financeit, for example, how much of their volumes are running through the real-time versus the traditional program? I assume the idea is that everything goes over there at some point, but is it already there or is there kind of a ramp-up period to get to that point?

David Taylor: I think their entire flow henceforth is going through the real-time program. As it should. Rather than send it to us and have it batched up and maybe take a month to process it, why not get it done every day? Yeah, the system's up and running well, and thankfully, our partners in the States, ECN Capital, decided to try it out too. We say, "Try it, you'll love it." I have a terrible analogy for that. It's like getting hooked. You're hooked on it. Once you're used to getting your money every day, are you going to go back to waiting for months and months and running interest rate risk?

Man, that is a big deal with these point-of-sale finance companies while they are batching up, is that some central bank moves the rates up a little bit and they just lost, maybe they lost their entire profit on that batch of loans that they were batching up for a securitization. Interest rates go up a few basis points. Whoops. There goes my profit. Our system prices it immediately. This is AI doing it. Just takes the Government of Canada bond rate, click. Okay, you got it. There you are. Rate is done, like instantaneously purchased.

Eli Rodney: Yeah. No, it seems, as you have described, it is a game changer for your partners. On the ECN Capital subsidiary, I feel like that is a good transition in there. If they are getting all this value from the Real-Time SRP, would you expect that I know CAD 300 million was the original target, and there is confidence in getting over CAD 500 million a year there. How quickly is this one ramping up relative to maybe some partners in the past that you have signed? Is this a type of thing where, as you said, they kind of get a taste for this program and now they are trying to push as much volume through as they can?

David Taylor: Yeah, absolutely. We are up CAD 300 million in the last 30 days or so, right? We went from 6.9 to 7.2. On our daily dashboard, it showed 7.2 yesterday. Yeah, and that is just the thin edge of the wedge. Everybody is quite- For 30 years, they have been using the traditional asset-backed securities way of funding themselves, and they have got friends that are investment bankers, and they have got friends they play golf with that are accountants and lawyers. It is a traditional way of doing it, and a lot of mouths being fed in that industry. We are basically saying, "Forget those guys.

They are going to go hungry." It takes a while for humans to sort of move. I use the horse and buggy thing. You got the horses out there. People liked horses. They like hay. They have their kids working in the barn, taking care of it. It was an industry. All of a sudden comes out Henry Ford with the automobile and say, "Those things are smelly, and they make a lot of noise and whatever." Well, you know it is going to change. It has to change because of the factors, that we talked about, fixing your rate, getting your money back early, dropping your equity requirement. Jesus. Of course, they are going to do it.

Eli Rodney: Yeah, correct.

David Taylor: It is just the stickiness of our fellow humans who take a while to adopt to things. I lived that in Canada when I came up with this branchless banking model. I was the first guy in 18 years to get a federal bank license. People lectured me that I needed buildings. One guy, a senior federal government guy in Canada, told me, "It has to have pillars, too." I said, "Things are" I will not say his name. He knows who he is. I said, "Things are going to change. This is a different way of doing business." "Oh, no.

People like to walk down to a branch and wait in line to get the loan to buy their motorcycle." I said, "No, they do not. The new generation does not want to do that. They want to throw their leg over that bike right now and drive away with a Ducati." Like me, it is a Ducati. Anyway, Eli, yeah, it is exciting times. I have staffed up a little bit. I got Moe Danis and Luke on the job, too, so it is double in the U.S. We could probably do more. In banking, it is kind of more hands at the pump, the more deals you get.

Eli Rodney: Yes.

David Taylor: There is still a human factor, even though we are using AI. You make the phone calls. You got to see the people. It is still a fair amount of human interaction to get somebody on board. So I might need a few more humans interface.

Eli Rodney: Makes sense. Given the CAD 3 billion target, if I heard you correctly earlier, half of that would be coming from potential new partner wins.

David Taylor: Yes.

Eli Rodney: So maybe on that piece specifically, what you guys are seeing in your pipeline there, I do not know if you can quantify, but you look at the CAD 300 million from the ECN deal, potential for CAD 500 million. As far as size of what is in your pipeline, in terms of funding potential, I am sure it varies, but are there more chunky ones like that? Are there more deals that could be a real step change in volumes as soon as they are signed, or is it a larger number of smaller deals?

David Taylor: No, they are all big ones. That is the difference between the Canadian and U.S. market, that they are all big. Every one of them is as big as Financeit in the States. They all use the asset-backed securities as their traditional, their go-to way of funding. Whereas in Canada, they are all kind of small, and they were not using ABS. So ABS was not a competition for us in Canada. But in the States, it is. So when we came up with this change, being able to buy instantly, that hit the ABS market right in the heart. So yeah, they are all big guys. There is nobody little in the States. Everybody is as big as Financeit.

They are all using ABS, and our new product is aimed right at the heart of ABS. It renders ABS obsolete. Whereas in Canada, they are little ones. So yeah, they like the idea to get their money back faster. But if they did not have that wait time like the big guys do in the States to get their money, they are borrowing a line of credit or something. Some Canadian bank gave him a line of credit margined against the receivables. So it is a way bigger market in the States. I would say every single one of the ones we are talking to are at least as big as Financeit.

Eli Rodney: Wow, okay. Somewhere you got CAD 300 million-CAD 500 million a pop, CAD 1.5 billion coming from new deals. It really only takes 3-5 deals to get there. Okay, great.

David Taylor: Yeah.

Eli Rodney: The last one for me, just on maybe framing up 2027, is obviously some non-core costs coming through 2026 that should largely be in the rearview for 2027. Then you are talking about some really large numbers on the asset growth side. Internally, do you guys have a frame for how you are thinking about ROE targets for 2027, or is it just a range that you are expecting to land in?

David Taylor: I think we have it on our website. At CAD 10 billion, do not we get about 20% already? Something like that, maybe? We have got a model up on our website, Eli.

Eli Rodney: Okay.

David Taylor: It goes 10, 20, 30 or something in asset size and shows it. Bottom line is, it seems being quite aggressive saying this, but I do not see any increase in NIEs with the volume increase because even though we may be adding some more humans, we are making a lot of savings using AI in every aspect of our business now. That is the offset. We will need some more specialized help, maybe more account managers in this space, like I say, maybe another team, but the processing of the credit applications is so much faster than it used to be, and the analysis is so much better. You can ask Claude.

In Canada, we call it Claude, of course, not Claude. Claude can do the stats. Back in the early days when I used to be doing analysis for fish populations using Fortran, that could have been a good afternoon trying to do the stats on the population. You can ask Claude to do the stats, give it all the data, and say, "I would like to be 95% confident that we've taken enough cash holdback to offset the inevitable delinquencies." I think you talk in a minute to analyze the data, and this is the entire data stream. Make 10 years through the cycle. We've signed up for the huge database that the U.S., all the lenders use.

Holy smokes, we're way more precise in what we're holding back, and we're getting the math done super fast. Yeah, it's a new world. I'm just looking at incremental revenue from the assets. I use rough math, 250 basis points, CAD 3.075 billion of incremental pre-tax earnings, and we got about a 25% tax rate. You got a buck 75 a share right there, USD. And incremental.

Eli Rodney: Yeah. Exciting times. I'll pass the line.

David Taylor: Thank you. Thank you, Eli. Good luck in the fog. You're in Toronto right now, right?

Operator: For additional questions, please press star followed by one. We have no further questions. I would like to turn the call back to David Taylor for closing remarks.

David Taylor: Well, thank you, operator, and thanks again for everybody for joining us today. I look forward to speaking to you at the time of our third quarter results. If you have any other questions that come to mind, do not hesitate to give me a call. We are familiar with Teams. We use Teams regularly here and can answer further questions should you have any. It is certainly exciting times VersaBank. I have been doing it for almost half a century. Started when posting machines were humanly powered with great huge levers.

Then thankfully, seeing the industry evolve and evolve and evolve to where we are today, where, holy smokes, it is just wonderful to be able to analyze our portfolios with such precision using the AI and to be able to deliver these new products to our clients, which in effect, trickles down to consumers. This is the altruistic, Dave, that maybe most bankers you do not hear say. Bottom line is, what it means is the consumers and small businesses that rely on these point-of-sale finance companies for their capital, so they can do their thing, well, they should theoretically be able to provide those services at better rates because we are going to give their money cheaper, better, faster.

That should trickle down to the economy and help folks out. Thank you again, ladies and gentlemen.

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

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Motley Fool Transcribing, The Motley Fool

Wed, September 9, 2026 at 6:43 PM EDT

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DATE

Tuesday, Sept. 8, 2026 at 8:00 a.m. ET

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TAKEAWAYS

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SUMMARY

Gamehaus Holdings Inc.(NASDAQ:GMHS) reported its fiscal year 2026 results and announced a strategic transformation focused on the production and distribution of AI-generated content. Management stated the company is transitioning from its legacy casual game publishing model due to structural shifts in user acquisition economics and the weakening of platform targeting capabilities. The company indicated it will manage its existing mobile game portfolio primarily for cash flow and profitability to fund the development of new AI-driven growth drivers. As part of this evolution, Gamehaus has deployed internal AI agent systems and is evaluating product formats with a recently invested AI generation studio. Management expressed confidence in the company's financial foundation, noting that cash reserves increased despite revenue pressure during the fiscal year.

INDUSTRY GLOSSARY

Full Conference Call Transcript

Operator: Good day, ladies and gentlemen. Thank you for standing by, and welcome to Gamehaus' fourth quarter and full year of fiscal 2026 earnings conference call. Currently, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. I will now turn the call over to today's speaker host, Ms. Ally Wang. Ally, please proceed.

Ally Wang: Thank you, operator. Hello, everyone. Thank you all for joining us on today's conference call to discuss the financial results of Gamehaus for the fourth quarter and full year of fiscal 2026. We released our earnings results earlier today. The press release is available on the company's website as well as from Newswire services. On the call with me today are Mr. Brian Xie Feng, Chairman of the Board, Mr. Carl Cai Yimin, Chief Executive Officer, and Mr. Shawn Zhang, Head of Capital Markets and Investor Relations. Brian will review business operations and company highlights, followed by Shawn, who will discuss detailed financial results. They will all be available to answer your questions during the Q&A session.

Before we proceed, I would like to remind you that this call may contain forward-looking statements, which are inherently subject to risks and uncertainties that may cause actual results to differ from our current expectations. For detailed discussions of the risks and uncertainties, please refer to our filings with the SEC. Also, please note that unless otherwise stated, all figures mentioned during the conference call are in U.S. dollars. With that, I would like to introduce our chairman, Brian. Brian will deliver his remarks in Chinese, and I will follow up with corresponding English translations. Please go ahead, Brian.

Brian Feng Xie: [Non-English content]

Ally Wang: Good day everyone, and thank you for joining Gamehaus conference call for the fourth quarter and full year of fiscal 2026. Fiscal year 2026 was Gamehaus' last full fiscal year under its previous business model. Earlier in August, we announced a strategic transformation for the company. This quarter marks the beginning of the execution phase of that transformation. As a result, today's discussion covers both our operating performance before the decision was made and the initial financial implications of the transformation. For the full fiscal year 2026, total revenue was $104.7 million, and net income was $3.9 million.

In the fourth quarter, total revenue was $24.3 million, within our previously announced outlook range of $23 million-$26 million, and net income was $0.9 million. Against the current industry backdrop, we have seen a structural shift in the economics of user acquisition for casual games. The player base in mature markets has remained stagnant for an extended period, while platform attribution and targeting capabilities have continued to weaken. At the same time, competition for user acquisition has increasingly become a zero-sum game within a largely fixed pool of users. Together, these factors have continued to compress margins in game publishing. We do not view this as an issue with any single title or any particular quarter.

Rather, we believe it reflects a longer-term change in the environment surrounding this business model. Based on this assessment, we decided to proactively adjust our resource allocation and redirect more resources toward new opportunities opened up by generative AI.

Brian Feng Xie: [Non-English content]

Ally Wang: In terms of execution, beginning this quarter, we have changed the way we manage our existing portfolio of casual and social casino mobile games, with a greater focus on cash flow and profitability. User acquisition spending will also be reallocated across titles based on expected returns. We began implementing these changes in July, so their impact is not yet reflected in the period we are reporting today. We expect revenue from our existing portfolio to gradually decline, and this is reflected in the outlook we will provide later for the next quarter.

Brian Feng Xie: [Non-English content]

Ally Wang: Our operating metrics this quarter already reflect this shift in focus. While both DAUs and MAUs declined year-over-year in the fourth quarter, ARPDAU increased 11.6% to $0.577 from $0.517. Average daily payer conversion improved to 2.5% from 2.3%. As we execute this strategic transformation, we will remain focused on improving the quality of our operations, maximizing the value of our existing player base, and maintaining a strong player experience.

Brian Feng Xie: [Non-English content]

Ally Wang: At the same time, our financial position and cash reserves remain solid. As of June 30, 2026, we had $17.6 million in cash and cash equivalents, up from $15.2 million at the end of the prior fiscal year. During the fiscal year, we remained profitable, increased our cash reserves, and continued executing our share repurchase program. We believe our current financial position provides a solid foundation for executing this strategic transformation.

Brian Feng Xie: [Non-English content]

Ally Wang: As we manage our existing business under this new approach, we are also continuing to increase our DTC penetration. By the end of the fiscal quarter, our company-wide DTC revenue mix had reached 16.2%, up further from the previous quarter. DTC reduces platform commissions and directly improves gross margin for our gains, driving the year-over-year improvement in gross margin this quarter. Importantly, this improvement does not depend on the level of our user acquisition spending. It is structural in nature and should become more meaningful as DTC penetration continues to increase. DTC remains one of the few areas where we continue to invest across our existing portfolio.

Our goal is to increase overall DTC penetration to more than 20% by December 31, 2026.

Brian Feng Xie: [Non-English content]

Ally Wang: Let me also briefly update you on the new direction I mentioned earlier. During the fiscal year, we made a minority investment in an early-stage AI game generation studio. Since June, we have worked with the team to validate the end-to-end production process and identified areas that current generative capabilities cannot yet handle. Our current focus is on determining the right product format to bring to market. This work is still at an early stage, and we are not providing specific product targets or timelines at this point. We will share an update when we have meaningful progress.

At the same time, we are closely evaluating opportunities for AI-generated content in other areas of our business, with the goal of developing new growth drivers as quickly as possible and over time becoming an AI-driven global content production and distribution platform.

Brian Feng Xie: [Non-English content]

Ally Wang: In parallel, we are building the internal AI capabilities needed to support this transformation. At the end of June 2026, we officially launched the Gamehaus AI agent system. This is a company-wide AI access and governance platform deployed on our own servers. It provides employees with centralized access to high-quality AI models, tiered usage limits, and end-to-end monitoring, and currently integrates more than 10 domestic and international models. As of July 16, adoption of the new system had reached 70% of employees across the company. G&A expenses declined 6.6% year-over-year this quarter, partly reflecting efficiency gains from the use of AI tools across our administrative functions.

For our self-developed tools, throughout the fiscal year, we continued to build out our internal data and shared technology infrastructure, including real-time advertising data systems, internal data interface services, and data warehouse capabilities. We also continued to enhance our AI-powered ad video generation tool and added video evaluation and validation capabilities to improve both the efficiency and quality of creative production. Looking ahead, in line with our strategic transformation, our focus will be on moving from broad AI adoption to deeper usage, turning AI from a collection of individual productivity tools into reusable organizational infrastructure, and extending these capabilities into more specific areas of our operations.

Brian Feng Xie: [Non-English content]

Ally Wang: Turning to shareholder return. As of June 30, 2026, we had repurchased approximately 518,000 Class A ordinary shares for approximately $600,000. On August 27, our Board approved a one-year extension of the existing $5 million share repurchase program through August 28, 2027, with all other terms remaining unchanged. Our decision to continue the program as we enter the execution phase of our strategic transformation reflects our confidence in the company's financial foundation and long-term value.

Brian Feng Xie: [Non-English content]

Ally Wang: Taking into account our new approach to managing the existing business as part of our strategic transformation, we expect total revenue for the first quarter of fiscal year 2027 to be in the range of approximately $20 million-$23 million.

Brian Feng Xie: [Non-English content]

Ally Wang: Now, I will turn the call over to Shawn to walk you through our financial performance.

Shawn Zhang: Thank you, Brian, and hello everyone. I will now walk through our financial results in more detail for the fourth quarter and full fiscal year 2026, which ended June 30, 2026. Please know that all figures are in U.S. dollars, and all comparisons are made on a year-over-year basis unless otherwise stated. Let me start with our fourth quarter revenue performance. Total revenue for the quarter was $24.3 million, a decrease of 20.8% from $30.7 million in the same period last year. As Brian mentioned, during the quarter, we continued to take a disciplined approach to user acquisition spending and adjusted our marketing strategy in response to changes in the market environment.

At the same time, we continued to improve monetization efficiency through ongoing content optimization and targeted live ops initiatives. Revenue remained broadly in line with our expectations. Looking at the revenue breakdown, in-app purchases revenue was $21.7 million, down 22.2% from $27.9 million a year ago. Advertising revenue was $2.6 million, compared with $2.8 million in the prior year period. Improvements in ARPDAU and payer conversion reflected our continued progress in monetization efficiency and helped partially mitigate the impact of lower user volumes. For the full fiscal year 2026, revenue totaled $104.7 million, a decrease of 11.4% from $118 million in the prior fiscal year.

The full-year decline was mainly driven by the same factors we discussed for the quarter as we became more selective in user acquisition spending and continued to refine our marketing approach across our portfolio. In-app purchase revenue was $94.5 million, down 11.2% from $106.3 million in the prior fiscal year, while advertising revenue was $10.2 million, compared with $11.7 million last year. Moving on, expenses. Total operating costs and expenses were $25.1 million, a decrease of 14.4% from $29.3 million in the same period last year, reflecting our continued focus on operating efficiency and disciplined resource allocation.

Cost of revenue decreased 17.4% to $12.0 million, mainly due to lower platform commission expenses and reduced profit-sharing payments to game developers as certain mature titles moved further along in their life cycle. R&D expenses were $1.5 million, compared with $1.4 million a year ago. The modest increase reflected our continuing investment in game development projects already underway and related R&D initiatives. Selling and marketing expenses were $10.2 million, compared with $11.8 million in the prior year period. The decrease was mainly driven by lower advertising spend, reflecting our continued efforts to improve marketing efficiency. G&A expenses were $1.4 million, a decrease of 6.6% from $1.5 million a year ago.

The improvement reflected lower personnel costs and efficiency gains from the increasing adoption of AI-enabled tools across our administrative functions. For the full fiscal year 2026, total operating costs and expenses were $103.3 million, a decrease of 9.9% from $114.7 million in the prior fiscal year. This reflects our disciplined cost management in the challenging environment. Cost of revenue declined 11.4% to $49.5 million, reflecting lower platform commission expenses and reduced profit-sharing payments to game developers as certain mature titles moved further along in their life cycle. R&D expenses were $6.3 million, up 11.4% from $5.7 million, reflecting our continued investment in game development and related R&D initiatives.

Selling and marketing expenses were $41.0 million, down 15.2% from $48.4 million, mainly due to a $7.3 million reduction in advertising spend on player acquisition and retention as we maintained a disciplined approach to marketing investment. G&A expenses were $6.4 million, up 36.5% from $4.7 million in the prior fiscal year. The increase primarily reflected higher personnel costs and continued investment in our public company infrastructure and our organizational capabilities. This increase was partially offset by headcount reductions and efficiency improvements during the fourth quarter. Moving down the income statement, operating loss for the quarter was $0.8 million, compared with operating income of $1.4 million in the same period last year.

Operating margin was -3.1% compared with positive 4.6% a year ago. For the full fiscal year 2026, operating income was $1.4 million, compared with $3.4 million in the prior fiscal year. Operating margin was 1.3% compared with 2.9% last year. Other income net was $1.6 million, compared with $0.1 million in the prior year period. For the full fiscal year 2026, other income net was $2.5 million, compared with $0.6 million in the prior fiscal year. Net income was $0.9 million, compared with $1.5 million a year ago. Net income attributed to Gamehaus shareholder per ordinary share was 0.02, compared with 0.03 in the prior year period.

For the full fiscal year 2026, net income was $3.9 million, compared with $3.8 million in the prior fiscal year. Net income attributed to Gamehaus shareholders per ordinary shares was 0.08 in both fiscal years. We ended fiscal year 2026 with $17.6 million in cash and cash equivalents, compared with $15.2 million as of June 30, 2025. Including short-term and long-term investments, our combined cash and investment balance was approximately $25 million. We believe this provides a solid foundation to support our operation and future initiatives. Turning to capital allocation. As a reminder, our Board approved a one-year extension of the existing $5 million share repurchase program, extending it through August 28, 2027.

As of June 30, 2026, we have repurchased approximately 518,000 Class A ordinary shares for approximately $600,000. Going forward, we will continue to evaluate repurchase activity based on market conditions, share price performance, and our broader capital allocation priorities. Looking ahead, as Brian mentioned earlier, for the first quarter of fiscal year 2027 ending September 30, 2026, we expect total revenue to be in the range of approximately $20 million-$23 million. To wrap up, fiscal year 2026 was a year of disciplined execution and continued investment in our long-term capabilities. While we made deliberate adjustments to our investment approach, we continue to improve monetization efficiency, maintain cost discipline, and strengthen our financial foundation.

As we enter fiscal year 2027, we remain focused on executing our strategic transformation, managing our existing portfolio with greater emphasis on cash flow and profitability, advancing our AI-related initiatives, and maintaining a balanced approach to profitability, capital allocation, and long-term growth. With that, we are happy to take your questions. Operator, proceed.

Operator: We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Additionally, when asking a question, please state your questions in Chinese first, then immediately translate them into English for the convenience of everyone on the call. Again, it is star then one to ask a question. At this time, we will pause momentarily to assemble our roster. The first question comes from [Rong Hua] with Jinyu Asset. Please go ahead.

Rong Hua: Hello, management. I have two questions. Management just noted that the company has completed validation of its end-to-end AI game generation process. What are the key steps that still need to be completed before these products can move into commercialization? My next question is, we note that full-year operating income was $1.4 million, while the net income was $3.9 million, with the difference coming largely from other income. At the same time, the company is directing resources toward a new area that does not yet generate revenue. How long does the company believe its current cash reserves can support this transition? Will the company need to raise external financing? That's my question. Thank you.

Carl Yimin Cai: [Non-English content]

Ally Wang: Thank you for your question. Let me take your first question. We have now fully validated the end-to-end production pipeline for AI-generated games. For casual titles with relatively simple mechanics, a complete game can essentially be produced within one week, which fully demonstrates the efficiency of the pipeline. In the next phase, our focus will shift primarily to refining the player experience, including level design, difficulty curve calibration, and other key elements to ensure that our products are not only produced quickly but produced well. At the same time, identifying gameplay prototypes that the market genuinely embraces is critical. Games ultimately have to win over players, and being fun is the prerequisite for any commercialization.

Discovering gameplay that is truly engaging is therefore one of our most important priorities at this stage. In the second half of the year, the company will continue to test and validate across a range of game genres. On one hand, for established traditional gameplay, we will use AI to bring products to market with greater efficiency and to operate them at lower cost. On the other hand, we will also actively explore AI-native gameplay with the ambition of creating an entirely new game experience for the AI era.

Shawn Zhang: [Non-English content] [Non-English content]

Ally Wang: Thank you. This is Shawn. Let me take your second question. Starting with the absolute level of cash. As of June 30, 2026, the company held cash and cash equivalents of $17.6 million, up from $15.2 million at the end of the prior fiscal year. As you can see, in a year in which revenue declined 11.4%, our cash position increased rather than decreased, and remains at a fairly ample level overall. This reflects the fact that over the past year, while we continued to monitor the changing market conditions facing our legacy business, we maintained a relatively prudent approach to running the company.

Second, our legacy casual and social casino games are a set of mature products with a stable user base and predictable revenue. Managing this portfolio for cash flow and return, which we began this quarter, is precisely intended to make it generate cash on a consistent and stable basis. Much of the investment required during this transition will be funded from that cash, and the company plans to direct its cash reserves primarily toward developing this new direction in AI-generated content. That is also the reason we changed how we manage the legacy portfolio. Operating these mature products as a stable source of cash is what enables that cash to support the build-out of the new direction.

In terms of pacing, we will deploy capital in stages as the direction is validated, rather than committing everything at once. As validation progresses, the scale of investment will increase accordingly, and we will update the market as substantive progress is made. As for financing, the company will continue to evaluate the range of capital market tools available to it and make financing decisions based on the interests of shareholders and the company's broader development needs. We have no financing arrangements to report at this time. This is my answer.

Operator: Thank you. The next question comes from [Jie Li] with Zheshang Securities. Please go ahead.

Jie Li: [Non-English content] Now I'm translating myself. I have two questions. The first one is the management mentioned that the company began managing its existing product profile under a new approach starting July. How is this change expected to affect revenue and profitability over the next several quarters? The second one is the company's first quarter fiscal 2027 revenue guidance is $20 million-$23 million, which implies a further decline at the midpoint from $24.3 million this quarter. With the legacy business continuing to contract and the new direction not yet generating revenue, how should investors think about the company's further revenue level? Thank you.

Carl Yimin Cai: [Non-English content]

Ally Wang: Thank you for your questions. On the revenue side, with a more prudent and disciplined control over marketing spend that we have applied to the existing portfolio since July, we expect revenue from this portfolio to see some degree of moderation over the next one to two quarters. To improve our revenue performance, we are working on two fronts. First, continuing to increase the share of revenue coming from our direct-to-consumer channels in order to optimize our channel cost structure. Second, carrying out more refined operations tailored to the needs of our existing user base, so as to improve retention and monetization depth.

On the cost side, we will continue to exercise strict discipline over the scale of our marketing spend, concentrating on campaigns with shorter payback periods and higher efficiency while steadily advancing the optimization of operating costs. We expect these measures to effectively offset the impact of the revenue moderation, and to drive an overall improvement in profitability.

Shawn Zhang: [Non-English content]

Ally Wang: This is Shawn. I will take your second question. I take the essence of the question to be where this declining curve bottoms out and where the upward momentum comes from. Let me address it in three parts. First, this guidance is fully consistent with the strategic adjustment we are making to legacy business. Carl covered this fairly clearly in his answer to an earlier question. I will not go into further detail here. What we would ask is that the market read the legacy portfolio as an actively managed curve, rather than a passively declining one when assessing our future revenue. Second, I would like to provide some context.

Looking back over the past several quarters, management had already observed mounting pressure on future growth even before any change in business strategy. The player base in mature markets has been contracting. Platform side attribution and targeting capabilities have continued to weaken, and user acquisition has become a zero-sum contest. In other words, it is not that a change in strategy caused the legacy business to contract. Rather, given the objective conditions, it would be quite difficult to deliver sustainable growth by continuing to invest along the prior path. Based on that assessment and out of a sense of responsibility to our investors, the company's priority must be to find the route back to growth.

Third, on where that growth will come from. We can say with confidence that the company's future growth will come from the new momentum of the AI-generated content business. We are currently at the transition point between old and new sources of momentum. We do not shy away from the fact that the legacy business will continue to contract. At present, our primary focus is on laying the groundwork to establish our second growth curve as quickly as possible. That work is underway, and we look forward to reporting related progress to the market in the near future. That's my answer to your second question. Thank you.

Operator: There are no additional questions at this time. I will now hand back to the management team for any closing remarks.

Shawn Zhang: Thank you, operator, and thank you all for participating on today's call, and thank you for your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress.

Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Should you buy stock in Gamehaus right now?

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