REAL - NASDAQ

Hello, and welcome to the RealReal Q3 Earnings Call. [Operator Instructions] Also as a reminder, this conference is being recorded. If you have any objections, please disconnect at this time. With that, I would like to turn the call over to Caitlin Howe, Senior Vice President of Finance.

Thank you, operator. Joining me today to discuss our results for the period ended September 30, 2025, are Chief Executive Officer and President, Rati Levesque; and Chief Financial Officer, Ajay Gopal. Before we begin, I would like to remind you that during today's call, we will make forward-looking statements, which involve known and unknown risks and uncertainties. Our actual results may differ materially from those suggested in such statements. You can find more information about these risks, uncertainties and other factors that could affect our operating results in the company's most recent Form 10-K and subsequent quarterly reports on Form 10-Q. Today's presentation will also include certain non-GAAP financial measures, both historical and forward-looking. We have provided reconciliations for historical non-GAAP financial measures to the most comparable GAAP measures in our earnings press release, which is available on our Investor Relations website. I would now like to turn the call over to Rati Levesque, Chief Executive Officer of the RealReal.

Thank you, Caitlin. Good afternoon, everyone, and welcome to the RealReal's Third Quarter Earnings Conference Call. Our strong third quarter results and our full year outlook for GMV of over $2 billion are a testament to our long-term strategy, which has solidified our position as the market leader in luxury resale. We are changing the way people shop, making resale a primary option. 58% of shoppers prefer the secondary market outright and 47% of shoppers now consider resale value before buying something new. Resale is no longer reacting to the fashion industry but driving it. In fact, Vogue use search on the RealReal as a key metric for brand heat in their coverage of the new Creative Director debuts during the fall fashion shows. Our proprietary data allows us to identify and respond to what buyers want ahead of cycles. Insights from our recent resale report, which analyzes shopping and consignment behaviors across our community of over 40 million members include the following: Fine jewelry has been our fastest-growing category. First-time watch buyers increased 46% with heritage brands leading the way. Customers are turning to us for major life milestones, evidenced by search volume up 247% for wedding dresses. In handbags, shoppers are embracing the lived-in look with searches for fair condition handbags up 32%. And finally, rising acceptance of luxury resale is fueling the adoption of secondhand and holiday gifting. Turning to Q3 results. We delivered accelerating growth and expanded margins. We set a new record on quarterly GMV with third quarter GMV of $520 million, up 20% versus Q3 of last year. And we delivered adjusted EBITDA of $9.3 million or 5.4% of total revenue, up 380 basis points year-over-year. Let's discuss how our 3 strategic pillars, growth playbook, operational efficiency and obsess over service are fueling these strong results. Diving into the growth playbook, our sales team is unlocking high-quality supply through data and deep consignor relationships. Q3 2025 was the first full quarter with our new compensation plan rolled out to the entire sales team. The plan's design focuses on value over unit volume. In addition, tools like smart sales are enabling our sales team to unlock supply using AI and data. Productivity increased with supply value per existing luxury manager up 12% year-over-year. Sales team tenure reached an all-time high in Q3 with more than half of the sales team in place for over 2 years. And we added top talent to the ranks of our sales team, laying the foundation for deeper relationships with our sellers. With a total addressable market of over $200 billion of untapped supply in U.S. closets, we see a long runway ahead to drive top line growth. Through sales, real partners, our affiliate program, Real Friends, which is our referral program and the continued expansion of drop ship, we will continue to unlock supply in the coming years. Turning to marketing. Our efforts are focused on scaling our active consignor base and reinforcing our brand authority. In Q3, we grew new and repeat consignors double digits year-over-year. Trailing 12-month active buyers increased to reach an all-time high of over 1 million. And new buyer LTV is trending higher with average order value and 12-month lifetime value expanding. From a strategic perspective, we're focused on attracting flywheelers or customers who participate in both sides of our marketplace. These flywheelers are 2 to 3x more valuable and transact with us more frequently, accelerating the network effects of our platform. Looking forward to 2026, we are seeing green shoots in our marketing efforts. Our focus is on pursuing an AI-fueled smart engine to increase our LTV. Our smart prospecting engine aims to enhance targeting of new consignors. Building on our success in social, we are developing a 360-degree presence that combines organic and paid social media to propel brand relevance and digital performance. Early test results are positive. Our retail stores and high-value events work in concert with our marketing and sales team, generating desirable supply and new consignors. In fact, 25% of new consignors come from our stores. Consignors can interact with our in-store experts, gemologists, virologists and handbag experts who provide specialized valuations that build trust with prospective sellers. We are seeing success with introducing high-value experiential events in our retail stores. Q3 set new records. Newport Beach and Tysons Corner unlocked $2.6 million of supply over just a couple of days. We currently have 18 brick-and-mortar locations, and we plan to add 1 to 3 stores per year, giving us a 10-year runway of growth from new stores. Moving to our next strategic pillar, driving operational efficiencies. Athena, our proprietary AI-enabled product intake process is delivering efficiency and reducing costs while improving speed and accuracy. As of the end of Q3, the Athena intake process touched 27% of all items, and we are on track for 30% to 40% by year-end. Our future vision is to achieve full listing automation and reduce our processing time from 14 days to our goal of 7 days. In the next phase of Athena, we plan to expand into mid- and high-value items with the opportunity to save millions of dollars while delivering superior service and speed for our sellers. Turning to our third strategic pillar. Obsessing over service is the secret sauce that reinforces our deep customer loyalty. In Q3, our customer trust metric increased 8 points year-over-year. The customer is evolving rapidly, and we are listening. When I think about our strategic vision, I think of this as an adviser to our customers, a real partnership built on trust, transparency and personalized communication. By helping our customer manage the luxury assets in their closet, this partnership is not just transactional, but is defined by a deep understanding of our customers' financial motivations, fashion sense and individual style. We look to accompany them on their journey through the primary and secondary market. Last quarter, we introduced the concept of My Closet through Reconsign, which allows our consignors to resell items they've purchased on the RealReal in one click. Looking to the future, My Closet is creating additional customer tools to help catalog closet inventory, enhance access to product insights and provide personalized advising. We see flywheel behavior becoming the norm as our service moves past simply buying and selling, offering ways to optimize and manage the content of the fashion portfolio. In closing, Q3 was a strong quarter. Our performance across all key metrics and the trends we are seeing in the business gives us confidence to raise our full year guidance. As I reflect in the last year, 4 quarters of progress since I stepped into the CEO role, I am incredibly proud of the RealReal team and the significant transformation we've achieved. We believe we have proven that our growth playbook works. Our model is scalable and the superior service drives our powerful flywheel. I want to thank the entire RealReal team for their unwavering commitment to our customers and for executing with excellence this quarter. I couldn't be more excited about where the RealReal is headed. We've built a strong foundation. We're seeing great momentum, and I believe the best is yet to come. I will now turn the call over to Ajay for a more detailed review of our financial performance.

Thank you, Rati. Good afternoon, everyone. I am pleased to review our financial results for the third quarter, which highlight a period of decisive acceleration and strong execution against our strategic priorities. We delivered robust top line growth with GMV increasing 20% and revenue up 17% year-over-year. Our approach to unlocking supply and driving efficiency is paying off with adjusted EBITDA of $9.3 million or 5.4% of total revenue, expanding 380 basis points and free cash flow of $14 million for the quarter. Now turning to our detailed third quarter results, beginning with the top line. Q3 GMV of $520 million increased 20% compared to last year. Growth was driven roughly evenly by unit volume and higher average selling prices. Q3 revenue of $174 million increased 17% with consignment revenue up 15% year-over-year. Direct revenue increased 47% compared to Q3 of 2024 and represented 13% of total revenue in the quarter. Average order value of $584 increased 12% versus last year. Q3 take rate of 37.9% declined 70 basis points year-over-year due to a mix into higher-value items and categories. Our active buyer base accelerated sequentially. On a trailing 12-month basis, it increased 7% year-over-year to more than 1 million active buyers, marking a new all-time high. Continuing with our third quarter results. Third quarter gross profit of $129 million increased 16% year-over-year. Gross margin was 74.3% in Q3, which was consistent with Q2 of this year and down 60 basis points compared to the prior year period due to a higher mix of direct revenue this year. In the third quarter, consignment gross margin was 89.3%, an improvement of 70 basis points year-over-year and direct gross margin was 20.9%, an increase of 370 basis points versus prior year. Third quarter operating expenses of $136 million leveraged 620 basis points year-over-year as a percent of revenue. Excluding stock-based compensation, operating expenses leveraged by 470 basis points, driven by our focus on operating efficiencies, continued gains from AI and automation and leverage on fixed costs. Third quarter adjusted EBITDA of $9.3 million or 5.4% of total revenue increased $7 million versus prior year. Adjusted EBITDA margins increased 380 basis points year-over-year. We ended the quarter with $123 million in cash, cash equivalents and restricted cash. Our operating cash flow in the third quarter was $19 million, a $10 million improvement year-over-year. Free cash flow was $14 million in the third quarter, a $12 million improvement year-over-year, demonstrating our business model's favorable cash dynamics as we grow. As a reminder, we reduced our debt by $6 million through the strategic debt exchange transaction we announced in August. Since the beginning of 2024, we have reduced our total indebtedness by over $86 million while extending our debt maturity profile, reinforcing our commitment to delevering and strengthening our balance sheet. Capital expenditures on property, plant and equipment for the third quarter were $6 million, and we continue to anticipate full year CapEx, PP&E, to remain within 2% to 3% of total revenue. Turning to our P&L outlook for the fourth quarter and full year. We sustained healthy supply trends throughout the third quarter and into the fourth and are raising our outlook for 2025. Fourth quarter GMV is expected in the range of $585 million to $595 million, which represents 17% growth compared to the prior year period at the midpoint of our guidance range. Fourth quarter revenue is expected in the range of $188 million to $191 million. This reflects 16% growth compared to last year at the midpoint of our guidance range. Fourth quarter adjusted EBITDA is expected to be between $17.5 million and $18.5 million, approximately 9.5% of total revenue and over 275 basis points of margin expansion year-over-year at the midpoint of our range. Moving to our outlook for the full year. We now expect full year GMV in the range of $2.10 billion to $2.11 billion, up 15% at the midpoint of our guidance range. We expect revenue in the range of $687 million to $690 million, up 15% at the midpoint of our guidance. And we now expect adjusted EBITDA in the range of $37.7 million to $38.7 million with an adjusted EBITDA margin of 5.5%, reflecting 400 basis points of improvement versus 2024. In closing, we believe our third quarter performance provides compelling evidence that our growth playbook is working to unlock high-quality supply. And our progress on AI initiatives and automation is driving strong unit economics. The momentum we are building is clear. As the premier authority in luxury resale, we believe we are poised for sustained profitable growth and consistent cash flow generation. Thank you to the entire RealReal team for your dedication and for driving strong third quarter results. With that, I will now turn the call back over to the operator for Q&A. Operator?

[Operator Instructions] Our first question will come from Ike Boruchow with Wells Fargo.

Can you hear me?

Yes, we can hear you, Ike.

Great. I have one question and one follow-up. I guess, a solid quarter. I guess I'm more impressed by the 4Q GMV growth guide, pretty impressive growth rates you're guiding to. Maybe just could you speak to the confidence you have in that plan? And maybe what are you seeing quarter-to-date that helps inform your targets?

Yes. Thank you for the question. As far as our Q4 guide and the confidence in the business, a couple of different things. We're seeing 17%. I think we guided to about 17% in the midrange on growth rates. As you know, we're a supply-focused business. And we're seeing our growth playbook work. We're seeing sales, marketing, retail really coming together. The compensation structure that we launched in Q3 is now accelerated to our entire sales organization. Smart sales is driving conversion. Our team is really focused on relationships that art and science coming together. And then we're seeing some early signs of the referral and affiliate programs. Early results are good as we test our way into that. The AI smart scoring and prospecting to drive new sellers, we're seeing double-digit new seller growth there. I talked a little bit about my -- the high-value pop-up events in my prepared remarks, that's strengthening our relationship with sellers. So as the market leader is definitely seeing great momentum. The market is shifting. It's great to see more attention to resale as we change the way people shop.

Great. And then just one more question about the growth rates you guys have put up this year are pretty phenomenal. You have to lap that, which is a good problem to have. Are there any guardrails you can maybe put around next year? I mean, not looking for anything specific, but how should we think about your algo, maybe flow-through rates Ajay, as you typically will give us? Just some guardrails on how to think about next year and how you plan to lap these robust results.

Yes. Thanks for the question. We're really pleased with the results we're seeing right now. Q3 was up 20%. We're guiding to 17% for Q4 at the midpoint. You've heard us talk about how we see a growth rate in between high single digits to low double digits as being the right balance, the optimal balance between growing our top line and expanding our EBITDA margins. We continue to think that is the right range for us in the medium term. That said, I would say, given the momentum we are experiencing today, we think that in the short term, so let's say, first half of 2026, we're probably indexing closer to the high end of that range, so closer to low double-digit growth rates.

Your next question will come from Robert Brooks with Northland Securities.

Looking back at my notes, I believe you guys began to expand the drop shipping initiatives last quarter in fine jewelry. So I was curious to hear how that went and maybe looking forward, what are sort of the next milestones to be watching for as drop shipping is further tested and validated before a more full-scale rollout?

Bobby, thanks for the question. On drop ship, this year was really about testing and learning. I've mentioned that in the past and building the capabilities, starting with watches, handbags and more recently, jewelry. At the end of the day, it's really one tactic to bring on incremental supply. I also see it as a way to onboard international partners in the future. So we do think after testing, learning, kind of tweaking the models, we think it can be a meaningful contribution, but I'd say in the medium term.

Got it. That's helpful. And then maybe just stepping back to the revenue growth. It was great this quarter. And as I said earlier, it's been great this year. And I just wanted to get a sense of like, obviously, you guys are a supply-constrained business, but -- and how much of this supply -- how much of the revenue growth maybe is product, is your ability to process the supply you have coming in quicker and therefore, getting those items on the site quicker versus how much of it is just overall more supply coming through the door?

Yes. So thanks, Bobby. I mean it's really around how much supply is coming through the door. That's really where we're focused. So that's why we talk about the growth playbook. And again, that's sales, marketing, retail coming together. We're also seeing some success in social and seeing some green shoots there and kind of strengthening that relationship with the seller. So really focused on the supply side of things. And at the end of the day, the cool thing is, like I mentioned, 58% of shoppers prefer or now prefer the secondary market. And then we're seeing it in the consignor growth numbers, now double-digit consignor growth numbers. So seeing that strong willingness to spend because of the trust we built and because of the strategic moats that we've built along the way.

Got it. And then just last question for me is just a year in the seat, you mentioned it in the prepared remarks, Rati. I was just curious if you could speak to the lessons maybe learned so far or stuff that maybe has exceeded expectations. Just curious to get kind of a high-level thought there.

Yes, sure. Definitely been an exciting year, and we're definitely seeing the market shift. Like I said, it's great to see more attention to resale. But I think 1 year ago, we laid out our foundation for our 3 strategic pillars: profitable growth, operational efficiencies and obsessing over service. And so we're really seeing that work. I'm proud of the progress that we're making, right? The 20% growth, the EBITDA margin at 5% now and expanding. I'd say trust is up 8 points year-over-year and are active, both sellers and buyers are accelerating. We also, less than a year ago, now talked about Athena and launched Athena. And now by the end of the year, it's going to be about 30% to 40% of our inventory. So really, at the end of the day, continuing to become the trusted advisers to our sellers, enriching that data for the seller experience and closing $2 billion in GMV in our history. So building that strong foundation, seeing the momentum. And we really do believe the best is yet to come.

Our next question will come from Ashley Owens with KeyBanc.

Congrats as well. So maybe broadly, just to start, I want to ask about the competitive dynamics. I know you've provided some good metrics around your flywheel and acquisition. Just curious with secondary and retail becoming a bigger choice among consumers, how are you seeing the competitive environment evolve, particularly around new entrants, supply acquisition and then pricing? And then additionally, have you observed any change in competitive or discounting intensity from peers?

Yes. Thanks, Ashley, for the question. A couple of different things. First, again, the market shift has been great to see. All attention to resale is helpful. The $200 billion TAM is great, and we're able to capitalize on it because we are the market leader. And then really focused on our moat and our strategic moats at the end of the day around expertise, data, our sales team, all the insights that we have, the diverse product offering is really important. And that's how we built trust, right, with our community of now over 40 million members. The sales piece, relationships to unlock supply driven by insights that, again, art and science, the infrastructure and data we built to process one of one items, single SKU items is hard to replicate. And at this point, 14, 15 years ahead of the curve. So resale is no longer reacting to the fashion industry, but driving it. And I think at the end of the day, we're able to capitalize that being the leaders here.

Okay. Got it. And then just a follow-up. So for the fourth quarter EBITDA, could you just help us unpack what's embedded in the bridge, particularly within G&A and other OpEx buckets and what dynamics do you expect to carry through 4Q? I know ops and techs have been leveraging at a really strong rate for the past several quarters and accelerated with some of the further automation initiatives you've been working on. So just any color there would be helpful.

Ashley, thanks for the question. Yes. So on Q4, as it relates to EBITDA, I would say we expect a continuation of our focus on operating efficiencies. You've seen this translate into strong operating expense leverage in Q3. We leveraged -- we saw leverage in our operations and tech line of 370 basis points as well as on SG&A of 150 basis points. Going forward, ops and tech will continue to be where we see most OpEx leverage coming from, and this is where we bring the power of our AI-driven initiatives like Athena to bear on improving margins. We will also continue to see similar levels in SG&A. We're investing in helping our sales team be more efficient. You heard Rati talk about how the value of supply increased by 12% for existing luxury manager. We think trends like that will continue as we build on these investments and will be a source of leverage for us going forward as well.

Our next question will come from Marvin Fong with BTIG.

Can you hear me?

Yes.

Sorry about that. Congratulations on the strong results. Maybe I could start, you mentioned half the benefit in AOV coming from units as well as the other half from ASP. So I think that's 6 and 6 and both improved versus last quarter. So just maybe a finer point on each of those. With ASP, I think there was a mix benefit there. Was there anything beneficial coming from the tariff side that you call out as well? And then on the units, would just kind of love to unpack what you think is kind of driving that other than just the fact that it looks like buyers are enjoying the site, but anything you're doing there to drive that or category-wise that people might be purchasing more of and adding to their baskets?

Thanks, Marvin. I'll take this question. We're seeing a healthy balance in how our growth is split into price and unit volume. If you unpack our growth rate in Q3 of 20%, we see a pretty even split. So roughly half of it came from growth in ASP and half of it came from growth in volume. Going deeper into ASP, this is largely driven by the things we've been focused on. And a few that I would highlight. You heard us talk about our new sales compensation plan. That plan rewards our luxury managers for bringing in value over volume, and we're seeing that translate into our mix shifting into higher-value items. The other thing that's helping on the ASP side is our pricing algorithm. So our AI-driven pricing algorithm has been in place for a while, but we've been steadily expanding coverage and expanding it to cover more and more items. And every time we do that, we see how the model, given its precision, is able to capture incremental price on behalf of our sellers. The last thing I would point to on that aspect is just how our investments in authentication and building customer trust have allowed us to capitalize on the growing interest in fine jewelry. We've been able to bring in more supply, and we've been able to move that supply very effectively, which gives us -- which obviously changes the mix of our business into higher-priced items. At the end of the day, trends are going to come and go. The beauty of our marketplace is just how quickly we can respond to them and capitalize on the way consumer preferences are shifting.

That's great. And my follow-up question, direct revenue, very strong growth, north of 46% growth about. Could you just kind of unpack that a little bit in this environment? Is the get paid now product gaining a lot of traction? Or was it mostly out of policy or vendor contracts? Or was it all kind of across the board?

Yes. Thanks for that question. Direct revenues were up 47% year-on-year. But as we've indicated in the past, we expect this to be between 10% to 15% of our total revenues, and it came in at 13%. So right in that range of where we expect it to be. The outsized growth is really explained by what happened last year as we comp a quarter last year where it was a much smaller proportion of our business. So going forward, we would expect this to stay within that range. We feel really good about that revenue stream. To your point on what's behind it. Gross margins have expanded nicely. They were up 370 basis points at 21% in Q3. So we feel good about what's moving through that channel and our ability to drive strong profitable growth through that channel.

Your next question will come from Matt Koranda with ROTH Capital Partners.

So it sounds like the luxury managers are getting more efficient at procuring supply, and it sounds like maybe the incentive changes were a big part of helping them with that. Maybe just wanted to hear about the next unlocks ahead for helping the sales team procure more supply as we head into '26. And should we think about that as sort of the main channel of supply growth into '26? Or are there other levers to pull on the retailer marketing side?

Yes, sure. Matt, thanks for the question. I want to be really clear, the growth playbook, we're a supply-focused business, like I said, but the growth playbook and the unlock in supply wasn't just sales, right? It was sales, marketing and retail coming together, deepening and strengthening our relationship with sellers. The compensation structure was one tactic. We've also really been focused on flywheelers in marketing, and they're 2 to 3x more valuable for us, and that's starting to work. We're getting early days, but I talked a little bit about the referral and affiliate programs. And there's much supply to unlock there, that sales and marketing working together. AI smart scoring and prospecting to bring on new sellers, again, really early days there, and we're testing our way into that, but seeing some green shoots, success in social, our influencer campaigns. I talked about these high-value events again, and we're seeing just over -- these events are 2 to 3 days and bringing in sometimes $1 million -- over $1 million over just a couple of days. So it's another way to kind of, like I said, strengthen our relationship with sellers. So that, along with resale becoming more mainstream or the market shifting and the great momentum that we're seeing around, like I mentioned before, 58% of shoppers prefer the secondary market out right now and almost 50% look to resale pricing before they even buy in the primary market. So all of this gives us a lot of confidence go forward.

Okay. Very helpful, Rati. And then curious on Athena. I just wondering if you're willing to quantify any of the cost savings that flowed through. I would assume most of the cost savings are flowing through O&T in the third quarter. And then maybe just what's built into the fourth quarter outlook in terms of cost savings on the O&T line?

Matt, thanks for the question. You're right, Athena is a key driver behind the efficiencies that we're seeing in operations and tech. We got about 370 basis points of leverage on that line. And most of that is coming from efficiencies in our operations center. When we think about Athena, at the end of Q3, it was processing about 27% of the items. And we started with introducing the model to primarily lower-value items. We are going to continue to expand on that number. We expect to end the year with Athena touching 30% to 40% of total items. And as it scales and also as we expand it towards touching mid-value and high-value items, we see it as continuing to be a source of productivity for us going forward. We think that Athena can save us a couple of dollars per item as we continue rolling it out. And it will take time, but it's a source of leverage going forward.

Your next question will come from Anna Glaessgen with B. Riley Securities.

Really nice to see the GMV growth notably ahead of the longer-term range you gave of high single digit to low double digit. Just curious if you could maybe share some perspective on the degree to which this is being driven by wider consumer acceptance of resale and overall market growth versus relative share gains with the concept.

Yes. So thanks, Anna, for the question. When we look at piece a part our growth rate, we can map it all of it back to our growth playbook. So this is, like I said, sales, marketing and retail and some of the tactics that we're working through there. So that's a nice shift. And of course, we have some of the tailwinds around the market shift, right, around shoppers preferring the secondary market. So we do feel like it's both things there. And then as we obsess over service and our growth playbook and really up-leveling the experience for the consumer, listening to what they need, really thinking about how to create less friction in the experience, making sure that we're being very transparent on pricing and building that trust with the consumer, that's -- we're also seeing that directly tie back to our GMV growth as far as more value coming out of each consignor.

Got it. And one follow-up on the events or the high-value events you talked about. Maybe you could share what inning are we in, in rolling this out to the fleet and maybe how many do you think could be supported per store? Just anything there.

Yes. So these high-value events, they're a nice way to test the market as well. We're seeing 1/4 of our new sellers coming from our retail strategy. And of course, they build the Halo Trust seeing much more high value come in through there. Really early there as far as how many events that we're having right now, and we kind of are testing our way into that as well this year. But given the progress that we're seeing and the results there, we'll kind of launch that every month to every major market. And this is a low-cost kind of way for us to bring in incremental supply.

Your next question will come from Jay Sole with UBS.

Can you hear me okay?

Yes.

Great. I want to follow up on your comments about the operations and technology line. I know you touched on this before, but can you just talk about what the right rate of growth just in terms of total dollars are for that line? Because it's been pretty steady 6% growth now for about a year. Is that the right way to think about growth in this line going forward?

Yes. Thanks for the question. It has been a pretty consistent source of leverage for us, right? In Q2, we got about 310 basis points of leverage. In Q3, 370 basis points of leverage. The bulk of that is coming from the efficiencies we're driving in the ops center. I think we've got a long runway of opportunities there. Athena is just touching 27% of our items as we continue to scale it, it will continue to be a source of leverage for us. I would say when you -- when I go back to the comment we made earlier on focusing the business on getting to 15% to 20% adjusted EBITDA in the medium term, our ops and tech line is going to be a pretty major contributor to that margin expansion.

I guess maybe if I ask it a different way, like what drives growth in that line? I mean, because the dollars went up sequentially this quarter. I guess based on the guidance for fourth quarter, the dollars go up sequentially again. What -- where are the -- are you investing there? Like can you just tell us about what drives dollar growth in that line?

Yes. Yes. Well, thanks for that clarification. So about 2/3 of that line is tied to our operations. And really, that is driven by unit volume. So while we get more efficient on a per unit basis at processing items as the business grows, you would expect to see an absolute increase in the dollars going through that particular line.

Understood. And I guess just remind us at this point, Athena can touch what percentage of the assortment of things sold once you scale it to where you envision it to be?

I don't know if we put an upper limit on it as we think about it. Today, it's touching 27% of the items. We think we will exit the year at 30% to 40%. Theoretically, there's no reason why it couldn't touch all the items as we continue to get better at running it through our models.

And then at the end of the day, Jay, we're on track for taking outright multiple dollars in cost per unit in the medium term, and that's really where we're focused.

Understood. And then I guess, can you just update us based on the guidance again for 4Q, it looks like the cash flow for 4Q will be pretty solid. What are your plans for cash uses in the balance sheet going forward?

Yes. Thanks for the question. We are a very cash-efficient business. Unlike a traditional retailer, we don't trap any of our cash purchasing inventory in ahead of the season. The primary use of our cash really goes into investments that we make in our fulfillment centers. So it's automation tech or it's implementing technology like Athena, where we can get efficiencies out of it. Q3 was a strong cash performance quarter for us. We generated $19 million in operating cash flows and $14 million in free cash flow. We expect Q4 to be stronger just like you saw last year, and it really showcases how our business model has positive working capital benefits when we grow.

Your next question will come from Mark Altschwager with Baird.

I wanted to follow up on marketing. It looks like it was a bigger investment this quarter. I was hoping you could just give us more color on what you're seeing there in terms of efficiencies and then just how we should think about marketing as a percentage of sales, both in Q4 and the medium term.

Yes. Mark, I'll start with that question there. Yes, definitely made a little bit more of an investment in marketing to drive some of the growth numbers. It's a key lever for us in our growth playbook, drives new sellers, obviously, brand affinity. You are seeing a couple of onetime costs in that number for Q3. But at the end of the day, if we see investment opportunities, we take them. We do have a high confidence in the ROI of our spend, and we're seeing validation of that, obviously, in Q3 and in our Q4 guide, but we make sure to always balance growth and profitability.

Excellent. And just separately, any color you can share on customer behavior by age cohort?

We have not shared customer cohort by age. We are seeing strong willingness to spend, like I said, built by the trust that we've built over the last 15 years, seeing more fine jewelry watches, handbags, more higher value come through. We are seeing this newer cohort has a higher LTV. We do see -- we tend to skew younger, more millennials and Gen

And maybe one thing I would add there. As a platform, I think one of the compelling things about the RealReal is how we have cross-generational appeal. We have customers, younger customers that are entering sort of the earning years of their life, and they look at us as an excellent platform for acquiring items. And then that relationship continues to grow and evolve as they age.