OFS Capital's Q3 2025 Earnings Call: Contradictions in Blackwell Production, Gross Margins, and Portfolio Stability

Date of Call: October 31, 2025

Financials Results

• Revenue: $10.6M total investment income, up ~1% quarter-over-quarter
• EPS: $0.22 per share net investment income, down $0.03 sequentially from $0.25 in prior quarter

Guidance:

• Q4 2025 quarterly distribution reduced to $0.17 per share (implied 8.8% annualized yield as of Sept 30).
• Expect net interest margin compression due to Fed rate cuts and potential future reductions, which may reduce yields on predominantly floating-rate loan portfolio.
• Anticipate higher interest costs from recent refinancing; intend to repay remaining $31M of Feb 2026 notes ahead of maturity.
• Focus on deleveraging, preserving capital and exploring monetization of Pfanstiehl equity to improve net investment income and reduce concentration risk.

Business Commentary:

• Decline in Net Investment Income:
• OFS Capital reported net investment income of $2.9 million or $0.22 per share for Q3 2025, down $0.03 per share from the previous quarter.

• The decline was primarily due to higher interest costs, which were part of their ongoing initiative to refinance existing bonds and extend debt maturities.

• Reduced Net Asset Value and Equity Investment Depreciation:

• The company's net asset value at September 30 was $10.17 per share, a decrease from $10.91 per share in the prior quarter.

• The decrease was largely driven by a markdown on equity investments, particularly in Pfanstiehl Holdings, and unrealized depreciation on CLO equity investments due to underlying loan spread tightening.

• Bond Refinancing and Capital Position Strengthening:

• OFS Capital refinanced its $125 million unsecured notes due in February 2026, issuing $69 million in public bonds maturing in July 2028 and $25 million in private notes maturing in August 2029.

• These transactions were part of a leverage-neutral refinancing strategy, extending debt maturities and enhancing operational flexibility.

• Distribution Reduction and Capital Preservation:

• The company announced a reduction in the quarterly distribution to $0.17 per share for the fourth quarter of 2025, representing an implied 8.8% annualized yield.
• This reduction was in response to ongoing interest rate cuts and increased cost of financing, aiming to preserve capital and strengthen the balance sheet during uncertain economic conditions.

Sentiment Analysis:

Overall Tone: Neutral

• Management reduced the quarterly distribution to $0.17 and NAV fell to $10.17 from $10.91, signaling caution, but described the credit portfolio as “stable,” emphasized refinancing to extend maturities and deleveraging, and warned of expected net interest margin compression from Fed rate cuts and higher refinancing costs.

Contradiction Point 1

Blackwell Production Status

It involves the status of Blackwell production, which directly impacts expectations regarding the production timeline and delivery capabilities, potentially influencing company revenue and investor expectations.

How will supply constraints impact your ability to execute the roadmap with Ultra's release in 2024 and Rubin's transition in 2026? - Toshiya Hari (Goldman Sachs)

2025Q3: Blackwell production is in full steam, and more Blackwells will be delivered this quarter than previously estimated. - Jensen Huang(CEO)

What are the incremental changes in the Blackwell GPU, and how do they impact revenue and customer reactions? - Vivek Arya (Bank of America Securities)

2025Q2: The change to the Blackwell GPU mask is complete without functional changes. Production is expected in Q4. - Jensen Huang(CEO)

Contradiction Point 2

Gross Margin Expectations

It involves changes in financial forecasts, specifically regarding gross margin expectations, which are critical indicators for investors.

What is the trajectory for Blackwell's ramp this year and its impact on gross margins? - Timothy Arcuri (UBS)

2025Q3: Gross margins may initially dip to low 70s due to the Blackwell ramp but are expected to recover to mid-70s quickly. - Jensen Huang（CEO）, Colette M. Kress(CFO)

Will Blackwell's Q4 revenue be additive, and what is the expected exit rate for gross margins? - Stacy Rasgon (Bernstein Research)

2025Q2: Gross margins for Q3 are expected around 75%, with full-year guidance in the mid-70s. - Colette M. Kress(CFO)

Contradiction Point 3

Economic Activity and Portfolio Stability

It involves differing perspectives on economic activity and portfolio stability, which are crucial for assessing the company's strategic positioning and risk management.

Not specified in the transcript? - Steve Altebrando(Head of Investor Relations)

2025Q3: There was no material change in the credit profiles of our portfolio companies... The general stability of our portfolio has been striking. - Bilal Rashid(CEO)

Not specified in the transcript. - Steve Altebrando(Head of Investor Relations)

2025Q1: We believe that the chances of a slowdown in economic activity have increased... We are encouraged by the general stability of our portfolio. - Bilal Rashid(CEO)

Contradiction Point 4

Portfolio Performance and Interest Rate Impact

It involves the impact of interest rate cuts on the company's portfolio performance and loan yields, which are crucial for understanding the company's financial health and strategic direction.

What is the company's revenue growth outlook for the next quarter? - Steve Altebrando (Investor Relations)

2025Q3: Despite the lower interest income of $1 million from a decline in interest income, there was a decline in interest income attributed to the impact of interest rate cuts on reference rates. - [Responder's Name](CFO)

How have Fed rate cuts impacted portfolio companies? - Steve Altebrando (Investor Relations)

2024Q4: We believe the Fed rate cuts during the second half of 2024 have had a positive impact on our portfolio companies by reducing interest costs. - Bilal Rashid(CEO)