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Operator: Good day, and thank you for standing by. Welcome to the CCC Intelligent Solutions First Quarter Fiscal 2026 Earnings Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Warmington, Vice President of Investor Relations. Please go ahead. William Warmington: Thank you, operator. Good morning, and thank you all for joining us today to review CCC's first quarter 2026 financial results, which we announced in the press release issued earlier this morning. Joining me on the call are Githesh Ramamurthy, CCC's Chairman and CEO; Brian Herb, CCC's CFO; and Tim Welsh, CCC's President. The forward-looking statements that we make today about the company's results and plans are subject to risks and uncertainties that may cause the actual results and the implementation of the company's plans to vary materially. These risks are discussed in the earnings releases available on our Investor Relations website and under the heading Risk Factors in our 2025 annual report on Form 10-K filed with the SEC. Further, these comments and the Q&A that follows are copyrighted today by CCC Intelligent Solutions Holdings Inc. Any recording, retransmission or reproduction or other use of the same for profit or otherwise without prior consent of CCC is prohibited and a violation of the United States copyright and other laws. Additionally, while we will provide a transcript of portions of this call, and we've approved the publishing of a transcript of this call by a third party, we take no responsibility for inaccuracies that may appear in the transcripts. Please note that the discussion on today's call includes certain non-GAAP financial measures as defined by the SEC. The company believes these non-GAAP financial measures provide useful information to management and investors regarding certain financial and business trends relating to the company's financial condition and the results of operations. A reconciliation of GAAP to non-GAAP measures is available in our earnings release that is available on our Investor Relations website. Thank you. And now I'll turn the call over to Githesh. Githesh Ramamurthy: Thank you, Bill, and thanks to all of you for joining us today. We had a strong start to 2026 driven by continued customer demand and adoption. The first quarter total revenue grew 12% to $281 million, above the high end of our guidance. Adjusted EBITDA was $120 million, also above the high end of our guidance and adjusted EBITDA margin expanded approximately 300 basis points year-over-year to 43%. We are now more than a year past the acquisition of EvolutionIQ, and we continue to see strong momentum across the combined business. Today, I want to focus on 3 themes that frame both our near-term momentum and our long-term opportunity. First, why CCC is positioned to thrive in an AI-driven world; second, how the positioning is translating into strong tangible revenue momentum with several of the biggest companies in the world increasing their commitments to both our core and AI solutions; and third, while solving the problems caused by rising complexity for our customers, in the insurance economy is a durable long-term growth driver for CCC. Let me start with why CCC's position to thrive in an AI-driven world, we can do this by first understanding the work our customers need to get done. The insurance economy spans many thousands of companies conducting hundreds of billions of dollars in commerce across tens of millions of unique claim events every year. They operate in a complex, highly regulated industry and may interact with dozens of other companies for any given claim. And the work they need CCC to help them get done are the things that directly drive the operating performance of their business. Take auto insurers, for example, who, on average, pay out about 75% of their revenues on claims. They use the decision engines built into our solutions uniquely configured for their specific needs to help them pay what they owe. They use the CCC network to activate the tens of thousands of companies they need to integrate with to get consumers back to their lives and they use the CCC platform to manage that work end to end. And in fact, they rely on CCC to manage the most complex mission-critical and consequential work they do. This is true not only across our auto insurance customers, but also each of the more than 35,000 businesses we work with. That translates to CCC's economic model. We price our products on the measurable value we provide typically on a 5:1 ROI basis. We have cumulatively invested billions of dollars in our platform and have deep industry-leading functionality, but customers buy our technology because of the real-world outcomes they're able to achieve only by using our solutions to impact the hundreds of billions of dollars we help them process annually. CCC's data is unique in its combination of scale, depth and recency. We have over $2 trillion of historical data that simply does not exist anywhere else. The data is broad, deep and continuously updated in real-time, allowing us to provide benchmarks customers use to assess their operations and to provide hyper-local up to the minute inputs that inform hundreds of billions of dollars in individual payouts and repairs. We also take special pride in the trust our customers, placing us as partners in their business. Our role connecting the ecosystem has been built on decades of consistent, high-quality execution where each participant can feel confident in being able to deliver the best outcome for them and the consumer. Importantly, the outputs generated using our solutions are already accepted and embedded in the core operations of their trading partners. It is, therefore, no surprise that customers are increasingly looking to accelerate their AI ambitions by leveraging the CCC Intelligent Experience Cloud. Our AI solutions have been the fastest-growing part of our portfolio for some time, with the scale that has few equals in vertical software. In Q1, our AI-based solutions drove approximately 1/3 of our overall year-over-year growth, growing at roughly 3.5x the total company growth rate. AI solutions are now approximately 10% of revenue or about $120 million in run rate. These solutions are entirely incremental to our core products with discrete value propositions and ROI that customers validate through intense piloting and testing, demonstrating both the durability of our core solutions and the rapid adoption of our AI tools. While we are tremendously excited about the growth in our AI products, the benefits of marrying AI with deterministic software are becoming increasingly evident to customers. It's not an either/or. It is an end. Governance and trust, our bedrock principles in our industry and the efficiency of the CCC platform is particularly well suited to helping customers manage AI at scale. Our systems efficiently process almost 6 billion transactions per day, giving customers a battle-tested platform that flexibly handles volume spikes and constant adjustments to their operating rules. To summarize our first theme, CCC is positioned to thrive in an AI-driven world because we combine unique, real-time data, embedded workflows and a trusted scale platform that allows customers to deploy AI safely, govern it effectively and realize measurable economic value. My second theme is the strong tangible revenue momentum across the business as several of the biggest companies in the world increased their commitments to both our traditional and AI products. CCC's customer base includes 27 of the top 30 auto insurers in the U.S. by 2024 Direct Written Premium as well as multibillion-dollar repair facility chains. These are some of the largest and most discerning companies in the world with incredible access to leading-edge technology capabilities. We are thrilled that 1 of the top 5 auto insurers in the U.S. by Direct Written Premium renewed and extended its partnership with CCC through a new multiyear enterprise agreement. This agreement covers our entire auto physical damage suite as well as our entire portfolio of AI solutions related to auto physical damage following an extensive 2-year test of those capabilities. The insurer consolidated its APD business on to CCC several years ago, and this new agreement, both renews the core software relationship and adds the full AI layer, resulting in a meaningful step-up in the value of the partnership. Our largest and most sophisticated customers are also deepening their commitment to the CCC platform by expanding the scope of their relationship into casualty. Casualty remains one of the largest growth opportunities for CCC. Our acquisition of EvolutionIQ expanded our capabilities in this area through the creation of MedHub for auto casualty and AI documents insight solution now embedded within the CCC platform. MedHub adds meaningful new functionality that is helping customers manage complex casualty workflows and is helping to advance our pipeline. Last quarter, we announced that Liberty Mutual, the sixth largest auto insurer in the United States and one of the largest P&C insurers globally selected us. They have since begun deploying a significant portion of their casualty business on the CCC platform. In April, we signed a multiyear agreement with Allstate for their third-party casualty business. All of these wins are validation of large customers increasingly recognizing that CCC's platform and comprehensive suite of solutions represent their best path to embracing an AI-driven future. This dynamic is playing out across our entire business, including on the repair facility side. Adoption of our core and AI solutions in the market continues to grow with more than 6,500 repair facilities now using our AI estimating capability. At our industry conference next month, we plan to introduce even more exciting innovations for the repair facilities. In summary, we are seeing this differentiated positioning translate into tangible revenue momentum as some of the largest insurers and repair organizations in the world, deepen and expand their relationships with CCC across both our core software and AI solutions. My third theme is how solving for rising complexity is expanding CCC's value proposition and driving long-term growth. The most important structural trend in the insurance economy is rising complexity. Vehicles are most sophisticated; medical and casualty claims are more involved. Regulatory requirements continue to increase. Every claim requires more decisions, more coordination and more judgment all the time. We see advancing vehicle technology as a significant tailwind for CCC over time with many new product possibilities on the horizon. The multi-decade trend in advancing vehicle safety technology has shown a repeated pattern of frequency reductions being more than offset by increases in severity to fix these systems when they're damaged. That causes claim dollars and complexity to rise, which grows the industry and creates additional growth opportunities for CCC. Over the past decade, personal auto claim counts declined by less than 1% annually while average dollars per claim grew approximately 6% per year, driving about 5% annual growth in total claims dollars paid. We believe that going forward, claims cost growth is going to outpace claim frequency moderation, and our insurance customers will be managing an increasing level of total claims spent. That means our software and AI capabilities remain mission-critical as customers manage growing claim complexity and spend over time. The rising complexity inherent in our industry, combined with the growing appetite across our customer base to adopt both our core and AI solutions, gives us confidence in our long-term growth outlook. Stepping back, the common trend across all 3 themes is rising complexity. As claims become more complex, and customer appetite for AI increases, CCC's platform data and workflows become even more essential giving us confidence in our long-term growth opportunity. To help us navigate towards that future, we have added another experienced technology leader to our Board of Directors, John Schweitzer. John brings more than 3 decades of leadership experience across enterprise technology and global go-to-market organizations, including senior roles at Salesforce, Informatica, SAP and Oracle. With the addition of John, Neil de Crescenzo and Barak Eilam over the last 18 months, we have deliberately strengthened our Board to support platform strength, AI innovation and durable value creation while preserving neutrality across the ecosystem we serve. We are pleased with our strong start to the year and continue to be incredibly excited by our near-term momentum and the long-term opportunity in front of us. With that, I'll turn the call over to Brian, who will walk you through our results in more detail. Brian Herb: Thanks, Githesh. As Githesh outlined, Q1 was a strong start to the year with revenue growth and profitability ahead of expectations, increasing adoption of our AI solutions across our largest and most sophisticated clients and continued execution on our capital allocation priorities, including return of capital to shareholders. Now let's turn to the numbers. I'll review our first quarter 2026 results and then provide guidance for the second quarter and the full year. Total revenue in the first quarter was $281 million, up 12% from the prior year period and above the high end of our revenue range. Please note that all of this growth is organic. Of the 12% growth, 9% was driven by cross-sell, upsell and the adoption of solutions across our existing client base, approximately 3 points of growth came from new logos. Within this position, we did see more than 1 point of impact from a combination of timing and onetime items, including true-ups on subscription contracts and transactional strength in casualty. In the quarter, emerging solutions contributed about 4 points of growth, primarily driven by EvolutionIQ, our AI-based APD solutions, diagnostics and build sheets. Emerging solutions continue to represent an important and expanding part of the portfolio, accounting for approximately 11% of the total revenue in the first quarter of 2026 and growing approximately 50% year-over-year with the largest contribution from our AI solutions. Turning to our key metrics of software gross dollar retention, or GDR, and software net dollar retention or NDR. GDR captures the amount of revenue retained from our client base compared to the prior year period. In Q1 2026, our GDR was 98%, down from 99% last quarter. Please note that since we started reporting this metric, GDR has been between 98% and 99% and is either rounded up or down primarily by repair shop industry churn. We believe the consistency is evidence of the value we deliver and the benefit of participating in the CCC network. Our strong GDR is a core tenet of our predictable and resilient revenue model. Net dollar retention captures the amount of cross-sell and upsell from our existing client base compared to the prior year period as well as volume movements in our auto physical damage client base. In Q1 2026, our NDR was 107%, up compared to our full year NDR in 2025 of 106%. Now I'd like to turn to the income statement in more detail. As a reminder, unless otherwise noted, all metrics are non-GAAP. We provide a reconciliation of GAAP to non-GAAP metrics in our press release. Adjusted gross profit was $216 million for the quarter with an adjusted gross profit margin of 77%, which is up sequentially from 76% and flat year-over-year. The underlying economics of the business continue to demonstrate leverage and scalability, and we remain confident in our ability to progress towards our long-term target of approximately 80% as our newer solutions revenue scale and offsets the impact of higher depreciation from recent investments. In terms of expenses, adjusted operating expense in Q1 2026 was $109 million, which is up 2% year-over-year, reflecting strong cost discipline, nearly flat year-over-year headcount and some phasing benefits of costs that moved into Q2. Adjusted EBITDA for the quarter was $120 million, up 20% year-over-year with an adjusted EBITDA margin of 43%. This was above the high end of the range, reflecting cost efficiencies, some phasing benefits and the flow-through from revenue overperformance in the quarter. Q1 adjusted EBITDA margin expanded over 300 basis points year-over-year. Stock-based compensation as a percent of revenue was 11% in Q1 of 2026. That's consistent with Q4 2025. We expect full-year stock-based compensation in 2026 to be approximately 13% of revenue with a path to single digits as we move into 2027. Now let's turn to the balance sheet and cash flow. We ended the quarter with $37 million in cash and cash equivalents and $1.3 billion of debt. At the end of the quarter, net leverage was 2.7x adjusted EBITDA. We continue to deliver strong free cash flow generation and return the capital to shareholders through share repurchases. Free cash flow in Q1 was $42 million compared to $44 million in the prior year period. Free cash flow on a trailing 12-month basis was $252 million, which is up 7% year-over-year and a trailing 12-month free cash flow margin as of Q1 2026 was 23%, down modestly from 24% as of Q1 2025. We are committed to a disciplined capital allocation framework, which balances investment in the business and capital return to shareholders to deliver long-term shareholder value. In December 2025, we announced a $500 million share repurchase authorization and a $300 million accelerated share repurchase program under that authorization. During Q1, we completed the ASR under which we purchased a total of approximately 43 million shares. Following the completion of the ASR, we repurchased an additional $100 million of stock in the open market during Q1. At the end of Q1, we have returned more than $1 billion to shareholders through repurchases over the last 2.5 years and have $100 million remaining available under the current $500 million Board authorization. I'll now turn to guidance. For Q2 2026, we expect revenue between $283 million to $285 million, representing 9% year-over-year growth at the midpoint. We expect adjusted EBITDA of $111 million to $113 million, a 39% adjusted EBITDA margin at the midpoint. For the full year 2026, we expect total revenue of $1.155 billion to $1.163 billion, which represents approximately 10% year-over-year growth at the midpoint. For adjusted EBITDA, we expect between $484 million to $490 million, which implies a 42% adjusted EBITDA margin at the midpoint. So 3 points to keep in mind as you think about the Q2 and full year guide. First, we have raised the full year revenue guidance from $8.5 million to $9.5 million to now 9% to 10% growth on the back of Q1 strong results and the momentum that we're seeing across the business. Second, in terms of the cascade of revenue growth through 2026, Q1 included more than 1 point of impact from a combination of onetime items and transactional strength in casualty. In addition, in the second half, we're expecting approximately a 1 point revenue headwind as an insurance carrier transitions away their legacy first-party casualty business from us. Third, we remain confident in our ability to drive margin expansion in 2026, consistent with our demonstrated track record. As we've stated on our Q4 call, we expected adjusted EBITDA margin to decline sequentially in Q2 due to phasing of spend and then resume year-over-year margin expansion in the second half of the year. We manage our adjusted EBITDA margin on an annual basis, and the progression is driven by continued cost discipline and the operating leverage in the business. The high end of the guide reflects approximately 100 basis points of margin expansion in both the first and second half of the year. In closing, we feel very good about the financial position of the business and the durability of our operating model. We delivered strong revenue growth, margin expansion and free cash flow, enabling meaningful capital return to shareholders through repurchases, while maintaining a prudent leverage profile. Our capital allocation framework remains disciplined, prioritizing organic investment, balance sheet strength and return of excess capital to shareholders, while remaining highly selective on M&A. Taken together, our predictable operating model, strong cash generation and margin discipline positions us well as we move through 2026. I'll now turn the call back over to Githesh for some additional comments before we begin with Q&A. Thanks. Githesh Ramamurthy: Before we move into Q&A, I'd like to share one update. As you saw this morning from our announcement, Brian Herb, after more than 6 years with the company, has decided to pursue another opportunity outside of CCC and will be stepping down as our CFO at the end of May. We will certainly miss Brian. And as you know, during his tenure, Brian played a critical role in our evolution, including helping take the company public and serving as a key leader through a period of significant growth and transformation. His leadership helped scale our organization and especially as we advance the commercialization of our AI capabilities, positioning us really well for the future. So on behalf of our Board and the entire CCC team, I want to thank Brian for his many contributions and wish him continued success. I know I speak for Brian as well when I say that he remains a strong believer in the business, a shareholder and a close friend. Rod Christo, Senior Vice President of Finance and Chief Accounting Officer and a 30-year veteran of CCC will become Interim CFO upon Brian's departure. To ensure a smooth transition, Brian will also continue to support the company as an adviser following his departure. And on today's Q&A, we are joined by our President, Tim Welsh. As you will remember, Tim joined about a year ago and his positive impact on our go-to-market execution is evident in the momentum we're seeing across the business today. Operator, we are now ready to take questions. Thank you. Operator: [Operator Instructions] Our first question comes from Saket Kalia with Barclays. Alyssa Lee: This is Alyssa on for Saket. Great start to the year and congratulations, Brian. We'll miss working with you. Githesh, maybe for you. You called out some nice casualty wins. Can you dig into that business a little bit and talk about who you're replacing here? Githesh Ramamurthy: Yes. I would say the thing that I can talk about is what we do exceptionally well, which is that our third-party solution replaced an incumbent that they had -- that the customer was using. And we have been working very deeply and closely with the customer and the impact and the investments that we've been talking about for the last several years are truly coming through on the differentiation of our product and our solutions. And after a fair amount of testing, the customer has moved forward with us, and we're truly excited about it. Tim, I don't know if you wanted to add anything to that. Timothy Welsh: Yes. I would just add a couple of things. First of all, this is an area of long-term strategic focus for us. As Githesh just alluded to, we've been making investments in the casualty business broadly and specifically the third-party business for some time. And we've been paying very close attention to customer needs. And so we've just -- given that strategic focus over a long period, the combination of our tools with the EIQ tools and the consistent listening to customers and adopting our products accordingly has really helped us have this continued success. We're excited about what we've seen so far and look forward to more continued momentum. Alyssa Lee: Very helpful. And maybe, Brian, my follow-up for you. Just to stay on the theme of casualty here. You mentioned there was some element of volume-based benefit. Can you remind us how the pricing there works and maybe refresh us on how big that business is as a percentage of total? Brian Herb: Yes, happy to. So casualty represents about 10% of total revenue. It's important to note, it is one of the fastest-growing parts of the portfolio as we've talked about the investment that we've put in that product and also just the momentum that's building. As far as the revenue mix, it is a combination of subscription deals, but we also have some deals that are transactional and some deals will have true-ups as well. So what we saw in Q1 on some parts of the transactional business, we saw strength that we highlighted. From a pricing perspective, it's similar to our other products that we do price on an ROI basis and show the value of the client -- show value to clients as we roll those products out. Operator: Our next question comes from Dylan Becker with William Blair. Dylan Becker: Appreciated really nice job here. Maybe, Githesh, I appreciate all the color on kind of the industry drivers and the secular drivers supporting kind of the long-term growth outlook. But I was wondering if you could maybe delineate a little bit further. I mean, what's driving kind of the outsized adoption from the larger carriers relative to maybe their preference and need and seeing everything that's going on with AI and needing a viable solution, maybe paired with your maturity of the platform and kind of conviction in your solution delivering value and resonating alongside maybe even the final factor of the industry not being able to lean in the price and the lever of kind of claims efficiency and supporting profitability. Maybe all 3 kind of coming together as one, but would love your take there as well. Githesh Ramamurthy: Sure, Dylan. Thank you. I would say, first and foremost, as you know, we have been working on building our AI capabilities for well over a decade. And what this has done is allowed us to really deeply build highly accurate models, which are only possible when you have $2 trillion of historical data. And the other thing, as you know, our customers -- the customers that we've announced today are some of the largest and the most sophisticated customers in the world, and they are the largest buyers of technology in the world. And so in other words, they've also had access to all of the LLMs and all of the tools. And what they are seeing is that over the last few years, they've also worked very closely with us in seeing the accuracy, the performance and specifically the ROI of our solutions. And the differentiation we have is that not only are these highly accurate AI solutions, but they're deeply embedded into the existing workflows where literally thousands of decisions are made by thousands of people, and then those workflows extend across the network. So this combination of world-class AI that works with very sophisticated data and also think about the feedback loop, right? On a daily basis, we're able to manage drift and the accuracy based on the feedback that we get on a real-time basis as we touch 20 million cars a year. And then connecting that into embedded workflows in a very regulatory -- regulated environment. And also, a lot of this has to be hyperlocal decisions. That means a national average number or a solution is not going to work. It's got to be very specific to ZIP codes and geography. So I would say the combination of all of these things has helped. But the single most important thing I would say is after 2, 3 years, in some instances, of work, after people have tested, evaluated and then made the decisions to go forward on a multiyear basis. So I would say that is the single most important thing is the testing, the evaluations. It has taken a little longer than we thought, but that's why we saw the momentum in Q4, and then we saw increased momentum in Q1. Dylan Becker: That's very helpful. And then maybe, Brian, one for you, too. I think you kind of called it out at the end, but it's very clear that momentum, to Githesh's point, is resonating. On the casualty side, I know we saw some kind of true-ups in the first quarter, but I think you also called out a first-party 1-point headwind throughout the balance of the year. So maybe the core slightly being masked by that. But can you kind of dive into the segmentation between kind of third-party, first party, maybe a little bit of kind of the puts and takes there as well? Brian Herb: Yes. We haven't broken out the -- from a revenue mix perspective, third-party and first party. I think as Githesh has highlighted, we've talked about third party where we put a lot of investment in. We're seeing a lot of momentum, not only the Allstate win that we had in the quarter. Last time, we talked about Liberty Mutual coming on board. So we're seeing really good momentum. We continue to invest in first-party as well and feel good about that product position. So yes, we're feeling really good overall on the momentum we're seeing in casualty and the growth, not only in the quarter, but how it's setting up for the balance of the year and going forward from there. Dylan Becker: Very helpful. Congrats, Brian. Brian Herb: Appreciate it. Operator: Our next question comes from Tyler Radke with Citi. Tyler Radke: Brian. It's been a pleasure working with you. Best of luck going forward. I wanted to just dive in a little bit on some of the true-ups dynamics that you saw in Q1, and I appreciate the clarification on the financial impact. But can you just remind us like the sort of contracting dynamics that drive that? Was it sort of outsized renewals? And did customers kind of undercommit on volumes or products that drove that? And just help us understand if there's anything to read through in terms of folks signing up and expanding post that true-up event? Brian Herb: Yes. Thanks for the kind words, Tyler, as well. So just as a reminder, 85% of our revenue is subscription, so largely subscription-based. In some of our subscriptions, and again, they will vary the deals. But in some subscriptions, they will commit to a certain level of volume. And if they trip that level of volume, we will true them up and take that true-up in the period. And so what we saw in the dynamic that played through in Q1 is they exceeded the minimum of the contract. They had some additional volumes and we trued that up. That doesn't necessarily mean it's a new contract as they go into the next part of their year or they go to the next year, that level of commitment will reset. So we highlighted the phasing and the impact in the quarter because it played through the 12%, but it is kind of a natural point of how the deals are structured. And as I said, this is kind of a specific deal. We have other flavors of subscription deals, but this one led to the true-up in the quarter. Tyler Radke: Got it. And Githesh, I believe you talked about a pretty large top 5 insurer renewal that took a step-up kind of adding -- I don't know if it was a full suite of AI, but it sounds like they took on a lot of the AI capabilities. Can you just talk about sort of what that did to that contract in terms of the expansion? And is that something that you think you can replicate as you look across your other major renewals coming up? Githesh Ramamurthy: Yes. The short answer to the last part of your question is we absolutely believe we will see this going forward, this approach. Again, as a reminder, this customer not only renewed all of our core suite, which is all our traditional core products, but they've also been deeply testing over the last couple of years in all our different AI solutions. And what was really unique about this was that they felt that getting an enterprise license across the board for a full suite of AI that then sits in addition to the core was really important because there was an ROI for the core solutions, and there was an incremental significant additional ROI for the AI solutions. And both of these work really well together. And that's what they saw and tested. And we believe this is an indication of how we are starting to see customers move forward. And then... Timothy Welsh: Yes. Just to build on, Githesh, your comments there that this -- what we're seeing across the organizations, our customers is that they are trying to adopt AI as quickly as possible in lots of different venues. And as Githesh alluded to, they have been working closely with us for years to help develop and test these solutions. And so we are certainly optimistic that the enthusiasm we're seeing in this particular case that you highlighted will continue across because we've been working with many of our customers in a similar kind of manner. Tyler Radke: And sorry, just to clarify, like can you frame just what type of expansion that drove in the APD as they adopted the AI solutions? Brian Herb: Yes, Tyler, it's back to Brian. We don't talk about specific deal dynamics, but we have said in the past as a rule of thumb to think about our AI solutions within APD that it would add on about 50% of what they're paying us incrementally for the core software. So think about it as a 50% uplift on pricing. Operator: Our next question comes from Kirk Materne with Evercore ISI. S. Kirk Materne: I was wondering, actually, if I could just build on that last question from Tyler. Tim, in your comments, I'm sure every single one of your customers is getting inundated by new call -- phone calls from AI native companies and maybe the large labs. Has any of just the groundswell of interest in AI slowed any of the pilots down? Or are they getting distracted at all? Or do you feel like things are moving ahead at a cadence? I mean, it seems like at least in that case, it is. But I was just kind of curious on a more holistic basis, if any of just sort of the AI noise and frankly, the progression of the labs has sort of slowed things down or helped. I would just love just a broader view on that, too. Timothy Welsh: Yes, Kirk, thanks so much for the question. And what we're seeing is that customers are, in fact, the news about AI, the AI native companies, all of that sort of thing is just creating lots and lots of questions and enthusiasm and interest, as you alluded to, right? So that's what's happening in the market. What we have, and I just want to go back to something Githesh hit on, we have years of relationships and trust built up with these folks. So while everybody is interested in new innovations, you also want new innovations from someone that you've worked with for decades that is deeply embedded in your workflow, has helped you achieve all of your regulatory and compliance requirements. That really -- that years of credibility really helps us in this. So the fact that we have terrific AI solutions, coupled with a long period of working closely with these carriers, building enormous trust, that positions us really, really well. I hope that's helpful, Kirk. S. Kirk Materne: That is. And then just, Brian, maybe on the -- one for you. Just on the new casualty wins, when you guys announced sort of a new win with some of these bigger carriers, what's the phasing of sort of bringing on or starting the revenue? I assume these projects take a little while to get ramped up. So how should we think about sort of an announcement relative to when that announcement or win starts to impact you guys from a top line perspective? Brian Herb: Yes. No, it's a really good point, and you picked it up right. I mean this will phase in as we go through the year. So once we sign it and close it, it doesn't just turn into run rate out of the gate. It will -- they'll transition into it and they'll build up on volume as well. So it will build as we go through the year and get to full run rate kind of in the second half of the year. S. Kirk Materne: And Brian, congrats on the new endeavor. Brian Herb: Yes, Kirk. Thanks. It's been great working with you. Operator: Our next question comes from Josh Baer with Morgan Stanley. Josh Baer: And Brian, congrats on the opportunity. I wanted to ask one on the pricing model and sort of this idea of it tied to value that you deliver. I mean, with increasing complexity, higher cost of claims, you're in a position to provide more value to your customers. So I'm wondering how this plays out in reality? Like how do you capture the value? Is it -- are we talking about your ability to sell new products and monetize additional products? Or is it even like in the time of a contract renewal that you can actually renegotiate pricing and capture pricing at renewal, if you could walk through how that plays out? Githesh Ramamurthy: Josh, let me just start out with structurally how to think about the business, and then Brian will actually go into the math a little bit more. So when you look at it on a structural basis, over the years, we have an auto physical damage suite. We keep adding enhancements, functionality to the auto physical damage suite. So that has an ongoing ROI that people are managing, renewing. Then on top of that, there is a full layer of AI solutions that range from the front end of the claim where we are starting with our photo AI capabilities and along all the way through different steps in the claims process. That's true both for the insurance market. It's also true for the repair market, where we have a broad suite of AI solutions that go across on top of the core. That has its own ROI, which is incremental to the core, and that is another structural component. Then independent of that, we have solutions like subrogation, which apply even more broadly, and those are new products and completely separate from auto fiscal damage and the AI on top. And then casualty is yet another component. So does that structurally -- and same thing on the automotive side as we add solutions like Diagnostics, Build Sheets and others, those go into additional packages. So that's how to think about it on a structural basis. And then, Brian, if you want to add. Brian Herb: Yes. The only thing incrementally I'd add to what Githesh said is you're right, we sell on ROI. Typically, we think about a 5:1 ROI, and that's kind of how the products are priced. Your question on does that happen through new solutions being embedded into the bundle, it absolutely does. So as we bring new solutions out, prove the ROI with those new solutions, we're selling them on an ROI basis. Your other part of the question, does it allow opportunities through renewals? It can as well. We provide a tremendous amount of value as clients scale and roll out our software, the AI, but also our core solutions. So it does allow opportunities through renewal depending on where that client is priced at to have price impact through renewals. Operator: Our next question comes from Adam Hotchkiss with Goldman Sachs. Adam Hotchkiss: Githesh, you've alluded quite a bit to the evaluation customers do ahead of taking on the emerging solutions. And I'm sure you've learned a lot based on the path by which some of these deals have converted recently. How should we think about from a magnitude perspective, what portion of your base are testing with high intent today, especially across AI? Is that the entire base? Or is that segmented to a certain portion of your base? Any color there would be helpful. Githesh Ramamurthy: Sure. So first, I would start off with that our most complex and our largest and most sophisticated customers, they have a lot of edge cases, right? They're operating in every jurisdiction, every area, and they have a lot of edge cases. So there's a lot more complexity. And so there is a fair amount of testing. And the beauty for us is that we benefit from having just amazing customers who have this level of complexity, and it allows us to really tune, hone, get all the edge cases right, get the AI right, get all the nuances, the drift, the accuracy, all of that right. And this is also -- and I know I've had the benefit of seeing this over the last 2, 3 decades that once these solutions are truly working at that scale, then for the entire industry, this becomes easier and easier and easier to adopt and scale. And so that is really how this thing really starts to move through. And we've learned an awful lot in this process. But the references we get are phenomenal out of this. And Tim, if you want to add to this? Timothy Welsh: Yes. I just would build on Githesh, what you said, which is we really do work very intensively, as Githesh alluded to, with those largest clients. And what we're now seeing is that because the solutions are well tested in many different places, we're seeing a rapid interest in lots of discussions about these across the board from a whole range of clients. And so while you can never exactly predict how fast adoption will occur, we're certainly seeing a very wide range of discussions because of the long testing that we've been doing with these products. Adam Hotchkiss: Okay. Great. That's really helpful. And then, Brian, echoing well wishes to you going forward. I think you mentioned emerging solutions generated 4 points of growth. How did that contribution come in versus your expectations? I think the beat was a bit of a surprise in the quarter, and I understand there's some onetime dynamics, but even backing those out, it does feel like things were better than you had expected. How should we think about that 4% through the rest of the year and going forward? Brian Herb: Yes. Thanks, Adam, for the kind words. Yes, we were really happy in the quarter overall. We're happy with the 12% growth. We are happy with the beat. Emerging delivered 4 points of growth, and we're seeing a lot of momentum as we've been highlighting in the call. About 1 point in the emerging solutions was the impact of EvolutionIQ. So that was in there. We continue to see emerging as a category as one of our biggest areas of growth opportunities. So we do continue to expect that to grow in line and potentially have further opportunities as we go forward, both in this year and over the long term. So we're feeling really good on the momentum as we talked about the AI solutions and the pace that they're growing as well. Operator: [Operator Instructions] Our next question comes from Alexei Gogolev with JPMorgan. Alexei Gogolev: Githesh, if I may ask about the recent strong appointments that you made to Chief Product Officer. If you think about some of the road map targets that Josh will focus on, can you maybe talk about those? Is it going to be helping customers deploy more AI at scale or more like expanding into adjacent markets of casualty? Githesh Ramamurthy: Yes. Let's say, first and foremost, we're really excited to have Josh on board. He has come up to speed very quickly, which is fantastic. And so we are really looking at the work we're doing in really 2 dimensions. So dimension #1 is that as we've AI-enabled every part of our product segment, like all the different flows within our insurance solutions, the solutions that we deliver to repair facilities to parts providers, OEMs. So there's a deepening of the product suite and additional components of the area that we can address. So that is one area. And that's -- and in that same -- think of that as a 1A, a 1B would be the additional expansions like a subrogation, and there are several other products and things that are in the road map that we'll be sharing with our customers at the upcoming NX customer conference. The second dimension, which is extraordinarily important that we are focused on and Josh, in particular, is focused on, is that we have an incredibly unique ecosystem of customers where the decisions and information flowing out of insurance going into a repair facility, going into a parts provider, going to a tower, going to a salvage yard, the ability to connect IX Cloud and the AI capabilities with an event management framework that goes across all of these things where the AI really drives the decision engines across all of the ecosystem. Our customers are coming back and telling us that is like -- that is super exciting. And so those are the 2 dimensions in which we are very focused. Alexei Gogolev: Brian, thank you very much for all the years. I appreciate and I enjoyed working with you. If I may ask a quick question about international demand. Very often in vertical SaaS, we see international expansion being driven by customers themselves. Is this something that you're seeing among your clients? How does that inform your international expansion appetite maybe in Europe? Githesh Ramamurthy: Yes. I'll take the first part of that, and then I will have Tim jump in for the second part because, as you know, Tim has served this industry on a global basis for many decades. And so I would say, first and foremost, we're seeing tremendous opportunity in terms of the TAM expansion that we have seen. So the TAM expansion in our core, our AI solutions, solutions like subrogation, casualty, disability, workers' comp, where -- even in workers' compensation through the acquisition of EIQ, we've landed some of the largest private employers in the country for some of the EIQ solutions. So we are not seeing any shortage of opportunity across the country, and many of our customers tend to be here. But the opportunity internationally is substantial, and we will get to it at some point. And Tim, maybe you could share some perspective. Tim has a global perspective. Timothy Welsh: A couple of thoughts on this. First, I would just highlight, Githesh, or underscore what you just said, which is there's enormous TAM expansion in the U.S. So that's a huge opportunity. And second, Alexei, as you're aware, many are -- many of the companies we serve, the insurers and the repair facilities are primarily U.S. companies. They may have small operations outside the U.S., but that is primarily our U.S. companies. And so as we think about international, it would be thinking about what is the TAM and then where would be companies that may be interested in our solutions, but don't necessarily have a domestic U.S. presence just given that that's the nature of the industry. So you want to think about the industry structure as well as the total TAM. I hope that helps a little bit. Operator: And I'm not showing any further questions at this time. I'd like to turn the call back over to Githesh for any further remarks. Githesh Ramamurthy: Well, thanks, everybody, and really appreciate the thoughtful questions. I would say that we are truly encouraged by the strong operating momentum across the business, and we saw this first at the end of 2025. And what we're really excited about is that this momentum continues to carry into the first quarter of 2026 and beyond. And as complexity continues to increase in the insurance economy, we are truly, truly grateful that our customers are truly turning to CCC to manage mission-critical workflows, apply AI that are trusted and scalable. And we think our unique data, the embedded workflows we have, the depth and breadth of our network really positions us well to support our customers and continue -- and we believe that will translate into sustained growth at some of the largest insurers, repairs and other parts of our customer base. And we're excited to deepen those relationships. And again, very focused on very disciplined execution. And I'd like to take this opportunity to thank our employees, our customers and our shareholders for the deep trust everybody places in us. And we'll wrap up by saying a huge thank you, Brian, to you for all the years and the amazing partner that you've been. Brian Herb: Thanks, Githesh. It's been a true pleasure. Operator: Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.
Operator: Good day, and thank you for standing by. Welcome to the Indivior Pharmaceuticals Q1 2026 Financial Results Conference Call and Webcast. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to hand the conference over to our first speaker today, Jason Thompson. Please go ahead. Jason Thompson: Thanks, Nadia, and welcome to Indivior's First Quarter 2026 Results Conference Call. I'm joined today by Joe Ciaffoni, Chief Executive Officer; Pat Barry, Chief Commercial Officer; Ryan Preblick, Chief Financial Officer; and Christian Heidbreder, our Chief Scientific Officer. Before we begin, I need to remind everyone that on today's call, we may make forward-looking statements that are subject to risks and uncertainties, and that actual results may differ materially. We list the factors that may cause our results to be materially different here on Slide 2 of this presentation. We also may refer to non-GAAP measures, the reconciliations for which may also be found in the appendix of this presentation that is now posted on our website at indivior.com. I'll now turn the call over to Joe Ciaffoni, our CEO. Joseph Ciaffoni: Thanks, Jason. Good morning, and thank you for joining us on today's call to review our first quarter results. I will begin with an overview of our performance and summarize our progress against Phase II - Accelerate of the Indivior Action Agenda. Pat will discuss SUBLOCADE performance, Christian will provide an update on the pipeline, and Ryan will review the financials. In the first quarter, we made significant progress in Phase II of the Indivior Action Agenda and executed key elements of our capital deployment strategy. Specifically in the quarter, we grew total net revenue 19% year-over-year to $317 million, primarily driven by strong U.S. SUBLOCADE performance. We grew total SUBLOCADE net revenue 32% year-over-year to $232 million, reflecting strong year-over-year dispense unit growth of 20%. The acceleration in SUBLOCADE dispense unit growth was driven by improved commercial execution and the early impact that our new consumer campaign, Move Forward in Recovery, is having on patient activation. Importantly, SUBLOCADE category share was stable in the quarter, and we had record new patient starts. We delivered adjusted EBITDA of $164 million, up 112% year-over-year, and margin improvement of 23 percentage points. We successfully executed our capital deployment strategy, improving our debt profile through the issuance of $500 million of convertible notes and returned value to our shareholders by repurchasing $125 million of our shares at an average price of $31.45. Our strong first quarter performance and the underlying strength of SUBLOCADE across key metrics, along with a more favorable outlook for SUBOXONE, enabled us to meaningfully raise our 2026 financial guidance. I want to thank the Indivior team for their contributions to our progress against the Indivior Action Agenda and for their commitment to making a positive difference in the lives of people living with opioid use disorder and the communities we serve. In Phase II - Accelerate, we are focused on accelerating U.S. SUBLOCADE dispense unit growth and net revenue throughout 2026 and growing adjusted EBITDA and cash flow at an even faster rate. In the first quarter, we achieved a major milestone. Over 500,000 patients in the U.S. have been prescribed SUBLOCADE since its launch in 2018. Nearly 1/4 of those patients were added in the last 5 quarters, underscoring SUBLOCADE's strong growth trajectory. SUBLOCADE is the first and #1 prescribed long-acting injectable for the treatment of moderate-to-severe opioid use disorder. It is the only monthly long-acting injectable with an indication for rapid initiation. Looking forward, we believe continuous improvement in commercial execution and our commitment to significant and sustained investment in our new direct-to-consumer campaign will accelerate U.S. SUBLOCADE dispense unit growth to the mid-teens in 2026, up from 7% in 2025. We now expect total SUBLOCADE net revenue to grow 13% year-over-year to $970 million at the midpoint of our guidance. As expected, our new operating model established in Phase I - Generate Momentum of the Indivior Action Agenda is accelerating the growth of adjusted EBITDA and cash flow at a significantly faster rate than net revenue. We now expect to generate $640 million of adjusted EBITDA in 2026 at the midpoint of our guidance, up 50% versus the previous year, which equates to a 51% margin, up 16 percentage points versus 2025. Our increased cash flow and improved financial flexibility position us to strategically deploy capital to create value for our shareholders. With the completion of our debt refinancing, our capital deployment priorities are focused on opportunistically utilizing the remaining $270 million of our share repurchase program and evaluating commercial stage business development opportunities to enhance and diversify Indivior's growth profile. We are on track to enter Phase III of the Indivior Action Agenda - Breakout in the second half of this year. Next, I want to briefly touch on the decisions we made on the INDV-6001 and INDV-2000 programs. We do not intend to pursue Phase III development of INDV-6001 and have amended our license agreement with Alar Pharmaceuticals. Pursuant to these amendments, Alar will regain development rights to the asset and commercialization rights outside of the U.S. Indivior will maintain commercial rights in the U.S. Regarding INDV-2000, it did not meet the primary endpoint in the Phase II trial, and additional work is needed to further explore the initial signals we observed. We will not be progressing the program internally for opioid use disorder, and we will pursue external business development opportunities for this asset. Christian will provide more detail. I want to recognize and thank our R&D colleagues for leading with science and for the hard work they put into the INDV-6001 and INDV-2000 programs. Their efforts greatly advanced our understanding of these assets and their work was high quality and conducted with integrity. To conclude, we are encouraged by our progress so far in 2026. Our results strongly position us to achieve our financial and operational objectives in Phase II - Accelerate and to enter Phase III - Breakout in the second half of 2026. I'll now turn the call over to Pat. Patrick Barry: Thanks, Joe. Our commercial teams are executing well against Phase II of the Indivior Action Agenda - Accelerate. This acceleration is being driven by our commercial execution initiatives and our consumer activation investments, notably our successful DTC campaign, Move Forward in Recovery. We achieved record new patient starts in the first quarter of approximately 31,800, a year-over-year increase of 29%. This brought our total U.S. SUBLOCADE patients treated over the last 12 months to 191,600 at the end of the first quarter. Dispense unit growth in the first quarter was up 20% versus the prior year, reflecting acceleration in U.S. SUBLOCADE versus 2025. Total category share of LAIs in the U.S. for SUBLOCADE remained stable at 76%. We continued our track record of growing the number of SUBLOCADE prescribers, which is an important leading indicator for overall LAI category and SUBLOCADE growth. We exited the first quarter with a record number of active SUBLOCADE prescribers, and those treating 5 or more patients. Total active SUBLOCADE prescribers grew 19% year-over-year, and HCPs treating 5 or more patients grew 20% year-over-year. While we are encouraged by the progress in U.S. SUBLOCADE, we see continued opportunity to drive further acceleration through our commercial improvement, consumer activation, and public policy initiatives. First, SUBLOCADE is the only monthly long-acting injectable with an indication for rapid initiation on day 1 and a second dosing as early as day 8. Our focus on delivering the second dose as early as day 8 is driving increased adoption. Providers' recognition of SUBLOCADE's differentiated label continues to grow, particularly as synthetic opioids remain prevalent in the U.S. Approximately 9% of new patients are receiving the accelerated second dose and 23% of active HCPs have begun prescribing a second dose in line with the expanded SUBLOCADE label. Second, our commercial channel productivity initiative is generating results. We executed 5 enhanced service agreements with key specialty pharmacies and have started to see steady improvement in commercial dispense yields. Third, consumer activation remains strong. We continue to invest behind SUBLOCADE through our DTC campaign, Move Forward in Recovery. Patient engagement stayed elevated throughout the quarter, with more than 1,200 new CRM enrollments each month, bringing total engaged consumers to over 8,300 since launch. Paid search volumes remain above pre-campaign levels, with category-leading share of voice across core search terms. Additionally, over 30,000 people searched for a SUBLOCADE provider with the Find a SUBLOCADE Treatment Provider tool on the SUBLOCADE website in the first quarter. To close, we are encouraged by our start to 2026. We believe that our improved commercial execution focused on sharpened message delivery with higher utilization of SUBLOCADE's core promotional materials on every call, along with our efforts directed at improving specialty pharmacy performance and consumer activation, are having impact on new patient starts, mix, and acceleration in SUBLOCADE dispense units. We are confident that as we continue to get better, SUBLOCADE will do better, and that we are on track to achieve our raised 2026 guidance for SUBLOCADE. I will now turn the call over to Christian. Christian Heidbreder: Thank you, Pat. I will now provide an update on our R&D pipeline, starting with INDV-6001. INDV-6001 delivered meaningful scientific and regulatory progress during the year, achieving its principal Phase II objectives, including a supportive safety profile, predictable pharmacokinetics consistent with modeling, and constructive engagement with the FDA. As part of our portfolio review, we evaluated INDV-6001 in the context of the evolving long-acting injectable buprenorphine landscape. In our view, SUBLOCADE is the only once-monthly long-acting injectable buprenorphine with a rapid initiation pathway in the approved label, continues to set the clinical and commercial standard in this category. SUBLOCADE's ability to achieve and maintain differentiated plasma concentrations without a complex induction regimen represents an important benchmark for future products. While INDV-6001 successfully demonstrated extended dosing intervals, including exploration of dosing up to three months, further analysis identified challenges, specifically achieving clinically meaningful plasma concentration profiles, particularly in a treatment environment shaped by high potency synthetic opioids, was anticipated to require a more complex induction protocol relative to SUBLOCADE's established approach, introducing additional development and implementation considerations. In addition, a comprehensive review of late-stage development and commercialization factors highlighted some remaining challenges, including: one, manufacturing scalability; and two, limited anticipated clinical and commercial differentiation in the payer and prescriber landscape, and the resulting impact on pricing and reimbursement dynamics. As a result, we have decided not to advance INDV-6001 into Phase III clinical development and have amended our license agreement with Alar Pharmaceuticals. Pursuant to these amendments, Alar will regain development rights to the asset and commercialization rights outside of the U.S. Indivior will maintain commercial rights in the U.S. Turning to INDV-2000. In a Phase II proof-of-concept study, our selective orexin-1 receptor antagonist under evaluation as a novel nonopioid treatment for opioid use disorder did not meet the prespecified primary endpoint of no treatment failure over 12 weeks when evaluated across the full dose range, 100, 200, and 400 milligram versus placebo. Interpretation of the overall dose response was confounded by unanticipated underperformance at the 400 milligram dose and a higher-than-anticipated placebo response. While this Phase II study does not support advancing INDV-2000 internally in opioid use disorder, we are encouraged by the broader body of data that emerged from the trial. Importantly, prospectively planned sensitivity analysis, together with converging supportive findings, identified a credible and biologically coherent signal at the 200 milligram dose. At that dose, we observed a higher abstinence rates over time versus placebo across cocaine and broader polysubstance use, including cocaine, methamphetamine, amphetamine, benzodiazepine, and opioid in combination. While these findings are exploratory, they are directionally consistent with the underlying orexin-1 mechanism and its potential role in cue-driven drug seeking, stress reactivity, and relapse vulnerability. We also saw supportive directional improvements in anxiety symptoms as well as exploratory functional MRI findings that aligned with the clinical observations and further supported the biological activity of INDV-2000. Taken together, these results strengthen our confidence that the molecule is engaging relevant relapse-related pathways. Importantly, INDV-2000 demonstrated a favorable safety and tolerability profile with no major drug-related safety signal identified. So while we do not plan to pursue development internally in opioid use disorder, we believe these findings support continued evaluation of 200 milligrams as the lead dose and position INDV-2000 as a credible business development opportunity while we continue to strengthen the data package through additional analysis, including exposure response work and further evaluation of supportive clinical and mechanistic findings. These decisions are expected to have a significant impact on the R&D organization. However, it does not reflect the quality of the underlying science or the team's execution. We are grateful for the rigor, dedication, and high-quality work of our R&D team, whose efforts advanced these programs and generated valuable scientific and regulatory insights that will inform future innovation. I will now turn the call over to Ryan. Ryan Preblick: Thanks, Christian. We are encouraged by our overall financial performance this quarter, which includes strong year-over-year total SUBLOCADE net revenue growth and even stronger adjusted EBITDA growth. Looking at our results in more detail, starting with the top line. Total net revenue of $317 million for the first quarter increased 19% versus the prior year period. The increase was driven by strong SUBLOCADE net revenue growth in the U.S. Total SUBLOCADE net revenue of $232 million for the quarter increased 32% versus the prior year period. U.S. SUBLOCADE net revenue increased 33% versus the prior year to $218 million. Q1 net revenue growth was primarily driven by dispense unit volume growth of 20% and favorable price/mix. The first quarter included a gross-to-net benefit of $14 million. Turning to SUBOXONE Film net revenue. In the first quarter, we benefited from continued generic price stability in the U.S., moderated share decline, and favorable gross-to-net adjustments. As we said in February, we expect gross-to-net adjustments to serve as a headwind in 2026 for both SUBLOCADE and SUBOXONE. Total non-GAAP operating expenses were $116 million for the first quarter, down 21% versus the prior year. The decrease was primarily driven by reductions in headcount, the restructuring of the R&D and medical affairs organizations, and footprint consolidations as part of Phase I of the Indivior Action Agenda -- Generate Momentum. Looking at the bottom line, we generated record adjusted EBITDA of $164 million, an increase of 112% year-over-year, representing margin improvement of 23 percentage points. Our strong first quarter results and performance trends year-to-date led us to raise our 2026 financial guidance. We now expect total net revenue in the range of $1.215 billion to $1.285 billion, an increase of 1% compared to 2025 at the midpoint of our guidance range. This is primarily driven by stronger SUBLOCADE net revenue, which we now expect to be in the range of $950 million to $990 million, up 13% year-over-year at the midpoint. The increase in SUBLOCADE guidance reflects an improved outlook from an acceleration in dispense units based on strong trends year-to-date and favorable mix related to our progress on increasing commercial dispense yields. Our total net revenue guidance also reflects higher U.S. SUBOXONE Film net revenue based on year-to-date results, where we saw stable pricing and moderation in share decline. Our outlook for operating expenses remains unchanged at $430 million to $450 million. We now expect adjusted EBITDA for 2026 to be in the range of $620 million to $660 million, a year-over-year increase of 50% at the midpoint. This would represent an improvement of 16 percentage points in our adjusted EBITDA margin to 51% compared to 2025. We ended the quarter with gross cash and investments of $201 million, and we are projecting forward leverage of 0.8x based on the midpoint of our 2026 adjusted EBITDA guidance. In 2026, we expect to generate approximately $340 million in cash flow from operations, enabling us to strategically deploy capital. Our capital deployment priorities include managing our debt, returning value to shareholders through opportunistic share repurchases, and evaluating business development opportunities as we earn our way to Phase III of the Indivior Action Agenda - Breakout. In the first quarter, we managed our debt by completing an upsized $500 million senior convertible notes offering due in 2031. Most of the proceeds were used to repay the remaining $333 million balance on the previous term loan. This both increases our financial flexibility and significantly reduces our interest rate to 0.625% from 9.5%. We also returned capital to our shareholders through opportunistic share repurchases in the first quarter. We repurchased 4 million shares at an average price of $31.45 for a total of $125 million. We have $275 million remaining on the $400 million program through mid-2027. In total, over the past 5 years, we have bought back $525 million of our shares at an average price of $16.74. As we earn our way to Phase III - Breakout, we will evaluate business development opportunities, specifically focused on commercial stage assets that have the potential to enhance and diversify our growth profile. I'll now turn the call back to Joe for concluding remarks. Joseph Ciaffoni: Thanks, Ryan. The first quarter reflects our significant progress against Phase II of the Indivior Action Agenda - Accelerate. We delivered strong top and bottom line growth driven by SUBLOCADE's performance in the U.S. and leverage from our simplified operating model, enabling us to meaningfully raise our 2026 financial guidance. We also executed on our capital deployment strategy by successfully managing our debt and opportunistically utilizing our share repurchase program. We are on track to accelerate SUBLOCADE throughout 2026 and adjusted EBITDA and cash flow at an even faster rate as we earn our way to Phase III of the Indivior Action - Breakout in the second half of 2026. We will now open the call for questions. Operator? Operator: [Operator Instructions] And now we're going to take our first question, and it comes from the line of David Amsellem, Piper Sandler. David Amsellem: So I have a few. First, on the gross margins, there's some improvement here. And with the manufacturing transition, should we take that to mean that you could see manufacturing at even better gross margins going forward? So help us just understand how to think about gross margins going forward. That's number one. Number two, business development and M&A, I know, Joe, you've talked about a beachhead in another therapeutic category. I was wondering if you could elaborate on that and what therapeutic categories, broadly speaking, are of interest. And then lastly, on the accelerated second dosing, can you talk about how getting patients to receive that accelerated second dose is correlated with this overall persistence and how important that is? And if you had color on that earlier in your prepared remarks, sorry, I missed that. But would love to get your thoughts on how that accelerated second dose plays a role in patient persistence. Joseph Ciaffoni: Thanks, David. We'll let Ryan kick it off with the gross margins. Ryan Preblick: Hey, David. Good morning. Thanks for the question. So for the gross margins, I would still guide you to the full mid-80% guide. Q1 did benefit from a couple of things. One, we had the prior year releases; and two, we had positive manufacturing variances built in there as well. And then in regards to the plant, the primary focus on the manufacturing facility is to secure product security. So again, I would guide you to the mid-80s for margins for the year. Joseph Ciaffoni: Okay. And Pat, on the accelerated second dose? Patrick Barry: Yes. Thank you for the question, David. On the accelerated second dose, that's an important differentiator for us because we are the only LAI with that accelerated second dose. The benefit there is, is that you're achieving peak plasma levels early, as early as day 8. And so that's an important component to be able to get the patient doing well in the very early treatment. And so peak plasma levels is particularly important in the era of synthetic opioids. And so if they're doing better early and they're stabilized early, we believe that over time, that could help with persistency. But that's certainly something we'll continue to look at. Joseph Ciaffoni: And then from a BD perspective, David, as we earn our way to the breakout phase, which we believe we're on track to do in the second half of this year, we're I would say, therapeutically agnostic, although there are certainly areas we don't think we would go into, for example, like oncology, and we're more focused on the fundamentals of what we would acquire. So we are focused on commercial stage only. We're looking for assets that have greater than $200 million peak sales potential. We think that's relevant relative to the size of our revenue base as we seek to enhance and diversify our growth profile. Differentiated assets are important from our perspective, both from a patient value perspective and importantly, from a reimbursement perspective, which we think is critical to commercial success. And then the final thing I would highlight, because I think it's one of the real strong parts of the Indivior story, is that with SUBLOCADE, we have a durable growth driver. And so the third thing that will be important in anything we acquire is that those assets also have runway. From there, post-integration of an acquisition, we then would be looking to identify individual products that could leverage the new commercial infrastructure that we have in place. Operator: Now we're going to take our next question, and it comes from the line of Chase Knickerbocker from Craig-Hallum. Chase Knickerbocker: Congrats on another nice quarter here. Maybe just first for Ryan. There's been some continued gross-to-net benefit on a year-over-year basis. Maybe just focusing on SUBLOCADE. Can you just give us a sense for how you -- can you characterize that gross-to-net benefit a little bit more and then give us a sense for how you expect it to kind of roll off through the year? Ryan Preblick: Yes, Chase, good morning. Thanks for the question. Yes, in Q1, we did book $14 million of a prior year release as we continue to true up our accruals. But as we mentioned earlier, in totality, we still expect the prior year releases to serve as a headwind for the balance of 2026. And the plan is to continue to provide you an update each quarter. Chase Knickerbocker: Could you just maybe give us a sense for the cadence of that headwind through the year? And if there's any benefit you expect in Q2 as well? And then just a second from me, guys, maybe just taking a step back for Joe. If you look at INDV-6001 here, again, maybe just taking a step back, with the potential for Brixadi generics before SUBLOCADE LOE, how do you see this market, I guess, developing? And how are you thinking about franchise expansion and life cycle management as you think about your long-acting buprenorphine franchise, and just how you see the market developing, Joe? Ryan Preblick: Sure. Chase, so at this point, there will be adjustments for the balance of the year. I don't know the phasing at this point, but I will continue to tell you, in the aggregate, the prior year releases will serve as a headwind in 2026. Joseph Ciaffoni: And Chase, with regards to your question around the evolution of the marketplace, look, we're very confident in SUBLOCADE's differentiated profile. Importantly, when you look at SUBLOCADE, the 300 milligram dose continues to grow. It's now 63% of overall SUBLOCADE utilization. So we're very confident that SUBLOCADE has a durable growth profile, and it's an asset that we're committed to for the long term. As it pertains to further opportunity within this space, we're obviously always looking and are aware of what's out there. There's nothing candidly that we're interested in that we don't have. And to the degree that Alar is successful in the development and manufacturing of INDV-6001 to a level that meets what we believe would make it commercially viable, we retain 100% of the commercial rights to that asset in the U.S. So we certainly wish them well in their pursuit. Operator: Now we're going to take our next question, and the question comes from the line of Dennis Ding from Jefferies. Yuchen Ding: Congrats on a very good quarter. So if I can ask on Lilly's brenipatide, they sound fairly excited about it and its potential in substance use disorders, and they started Phase II in OUD on a background of buprenorphine, which I'm assuming is SUBOXONE. But I'm curious how you're thinking about the design of that study, the read out in 2028. And importantly, if that impacts durability of SUBLOCADE's growth through the long term, which I'm assuming goes off patent in the 2035 to 2038 time frame. Joseph Ciaffoni: So Dennis, before I hand it off to Christian to comment, the one thing I want to emphasize is we very strongly believe that SUBLOCADE has a long and durable runway in front of it with 12 Orange Book-listed patents that go from 2031 to 2038. We also are in the process of trying to pull through additional patent applications that have the potential to extend out to 2044 to 2046. And Christian, any comments? Christian Heidbreder: Yes, certainly. So there are several trials that are currently ongoing using GLP-1 for substance use disorder. The one that you mentioned in opioid use disorder, this is actually as an add-on therapy to transmucosal buprenorphine. There are a couple of other trials in alcohol use disorder. I must say that so far, the evidence has been primarily anecdotal. So it's the first time that there will be more formal clinical trials, and we shall see what the outcome is. But please do remember that these trials so far for opioid use disorder have been designed as add-on therapy to buprenorphine. Yuchen Ding: And if I can ask a follow-up on DTC. So the campaign is, obviously driving increased category growth, which we're seeing in the numbers. But I'm also surprised that SUBLOCADE's share continues to be generally stable. So my question is, do you expect to pick up incremental share this year as DTC continues? And if there's any leading indicators that you can disclose around initial share capture? Joseph Ciaffoni: Yes. So Dennis, I'll take that one. I appreciate the question. As we've been clear, our focus is on net revenue, new patient starts, and driving long-acting injectable market growth. We're very proud of the fact that share is stable at 76%. Whether it goes up a little bit, down a little bit in terms of the overall performance of SUBLOCADE, both in this year and as we go forward, in our view, is really not material. It's more about just the competitiveness within the space. So we're very confident in our commercial team. We're very confident in the differentiated profile that SUBLOCADE brings to the market as the first and #1 prescribed long-acting injectable. Operator: Now we're going to take our next question, and the question comes from the line of Christian Glennie from Stifel. Christian Glennie: Just starting then, I guess, on the outlook for SUBLOCADE and particularly on the dispense growth. So you did 20% in the first quarter, but the guidance for the full year seems to be still around the mid-teens level. So just trying to understand initially around that. Is it just a prudence thing? Or is there some reason why that dispense growth might imply a slowdown through the rest of the year? That's my first question. Joseph Ciaffoni: Yes. So Christian, thanks for the question. Remember, in the first quarter of 2025, that serves as a really low bar from a comparable perspective. So what we're confident in is on a full-year basis that we're going to be able to achieve mid-teen dispense unit growth, which is double what it is that we achieved in 2025. Importantly, and what I would focus you to, is the 13% increase in revenue, which is driven by the strong dispense unit growth, but also now the favorable outlook that we have in terms of mix. And what I mean by that is the percent that commercial will account for versus what we planned. And realize even incremental movement on a brand of this size, one point improvement of commercial mix relative to what we had planned is worth about $8 million. And that's certainly a key driver of the positive outlook that we have moving forward. And we've put a lot of effort, which is a real tribute to Pat and his team, Susan Neff, who heads up trade and our work with specialty pharmacy in trying to improve the dispense yield, in particular, with the SPs that skew to commercial. Christian Glennie: Second would be just any comment around the overall growth in LAI category overall and the share of LAI as a percentage of the overall buprenorphine market? Patrick Barry: Yes, thanks for the question. We saw really nice growth, slightly above 20% -- approaching 23% on LAI category. So we feel like our efforts from a direct-to-consumer perspective are fueling that. And again, we continue to maintain that category share dominance at plus 76%. Joseph Ciaffoni: And Christian, the only thing that I would add, and I think it's another interesting thing that gets to the impact that we believe the consumer campaign is having, in the first quarter, the oral buprenorphine market grew significantly relative to the rate it had consistently been growing. And the reason that's important is the start point of long-acting injectable patients are predominantly people that transition from a transmucosal buprenorphine. So from a big picture, as a company that has a long-term commitment to this space that, first and foremost, is focused on patients getting treatment to improve the outcome and their recovery journey, we're very encouraged by that. And that also is a positive over time, in our view, to long-acting injectable utilization. Christian Glennie: Sorry, just on the percentage -- the rough percentage share of LAIs overall as a percentage of orals. Patrick Barry: Yes, we're right at about 8.5% from an overall LAI category share perspective. Sorry, I missed on that. Christian Glennie: No worries. And then, sorry, finally, just on guidance on OpEx, unchanged there, but at the same time, not progressing the 2 Phase II assets. I think previously you had implied that the guidance assumed those roll on. So just trying to understand on OpEx and whether there's something I'm missing there, why potentially the OpEx wouldn't be a bit lower given you implied a bit of restructuring of R&D and the impact that, that would have. Joseph Ciaffoni: Yes, so I'll take that one. I appreciate the question. Look, we're focused and have been clear on making every possible investment to maximize the SUBLOCADE opportunity in the U.S. market. The way to think of our guidance in 2026 is as we derive savings from the restructuring in R&D and as we continue to relentlessly focus on making sure we're only investing in things that are essential, if there are opportunities for us to invest in SUBLOCADE that would have impact this year or in 2027, we would make those investments and come in at the high end of the guidance range to the degree that there aren't areas for us to invest those resources, we would let them drop to the bottom line. The other point I want to emphasize is as you think about the exciting phase we're in of the acceleration of SUBLOCADE, we're also leveraging, not growing, our cost structure on a going-forward basis. So when you think about it moving forward, you should expect to see us staying under that $450 million level, which will result in additional margin improvement. Operator: Now we're going to take our next question, and the question comes from the line of Brandon Folkes from H.C. Wainwright. Brandon Folkes: Congrats on the quarter. Maybe just following up on business development. Can you just talk about the size of the transaction you would consider? Sharing your criteria earlier around minimum peak sales, that sets one end of the range. But just trying to think about how large of a transaction you feel comfortable with. Can you just talk about where you feel comfortable taking leverage up to? And then along the same lines, you talked about a commercial asset, but would you also consider a commercial-ready asset or company which also has a pipeline. Can you just talk about your willingness to bring in or minimize development risk altogether here in business development? Joseph Ciaffoni: Thanks, Brandon. I'll let Ryan take the first question, and I'll take the second. Ryan Preblick: Yes, thanks for the question. So when it comes to the amount of leverage that we would feel comfortable with, with our strong balance sheet, we would be okay going up to 3x, but that is assuming that we are going after a commercial stage asset. Joseph Ciaffoni: And then, Brandon, when you think about our focus from an M&A perspective, we're clearly focused on commercial stage. We want to enhance and diversify the growth profile of the company. We are not anti-pipeline. In fact, we believe the financial strength of the company would enable us -- if we acquire a company that has pipeline that we believe is worth investing in, we would be positioned to do so. But that is not the primary focus as we're assessing opportunities. And then when we ultimately get to Phase III - Breakout and start to try to action around them. Operator: Thank you. Dear speakers, there are no further questions for today. I would now like to hand the conference over to your speaker, Joe Ciaffoni, for any closing remarks. Joseph Ciaffoni: Thank you, operator. And thank you to everyone for joining the call today. We look forward to updating you on our progress as we execute the Indivior Action Agenda. Have a great day. Operator: This concludes today's conference call. Thank you for participating. You may now all disconnect.
Operator: Good afternoon. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to Reddit's First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Jesse Rose, Head of Investor Relations. Jesse, you may begin your conference. George Josh Beck: Thanks, Krista. Hi, everyone. Welcome to Reddit's First Quarter 2026 Earnings Call. Joining me are Steve Huffman, Reddit's Co-Founder and CEO; Jen Wong, Reddit's COO; and Andrew Vollero, Reddit's CFO. I'd like to remind you that our remarks today will include forward-looking statements, and actual results may vary. Information concerning risks and other factors that could cause these results to vary is included in our SEC filings. These forward-looking statements represent our outlook only as of the date of this call. And we undertake no obligation to update any forward-looking statements. During this call, we will discuss both GAAP and non-GAAP financials. Reconciliation of GAAP to non-GAAP financials can be found in our letter to shareholders. Our first quarter letter to shareholders and earnings press release are available on our Investor Relations website and Investor Relations subreddit. And now I'll turn the call over to Steve. Steven Huffman: Thanks, Jesse. Hi, everyone, and thank you for joining us today. We're excited to start the year off with a strong first quarter. As we've been building Reddit over the years, I have often reflected on and been inspired by the unique opportunity in front of us and the fact that Reddit is truly a one-of-one company. That idea came up again and again during Q1 with one of the most tangible proof points in our strong commercial results. This marks our seventh consecutive quarter with revenue growth over 60% and with industry-leading gross margins over 90% and adjusted EBITDA margin of 40% and record cash flow of more than $300 million. At the same time, our capital expenditures remained low as $1 million, underscoring the advantage of Reddit's capital-light model. When you look across the more than 300 publicly traded tech companies, there's only one that combines this type of growth, profitability and efficiency, and that's Reddit. Our commercial success is differentiated because our community product is differentiated. But powers these results are Reddit's raw materials. First, we have deeply engaged users who come to Reddit it for high-intent uses, authentic recommendations and answers to questions like, what should I watch next and what type of stroller is best for 2 kids. Second, we have an ads business that is built on contact, interest and commercial intent. Around 40% of conversations on Reddit are commercial in nature, where people are actively discussing products, services and purchase decisions. And these conversations are uniquely influential. 84% of shoppers say they feel more confident in their decisions after researching on Reddit. When you combine these two things, engage communities and commercial intent you create a powerful environment for advertisers. We see this in the outcomes we're delivering and in the continued scaling of our ads business and ARPU growth. Another reason Reddit stands out today is our position in the AI landscape. Reddit is built on more than 2 decades of human conversation. Over 25 billion posts and comments and every month, our communities generate the equivalent of Wikipedia's entire content library in new content. As AI becomes more prevalent, people increasingly seek out real human perspectives and in turn, AI models rely on these perspectives to train and power their products. Scarce assets tend to become more valuable over time and authentic human conversation at scale is becoming increasingly rare. Reddit's conversations are like oil for the modern Internet, a foundational resources powering the next generation of technology. On the user side, we are making steady progress, but we still have work to do to increase frequency and accelerate growth toward the levels we see on leading platforms. We believe Reddit it has the potential to be one of a handful of scaled global platforms on the Internet. We already have tremendous reach today with nearly 500 million weekly users globally and 200 million in the United States. Now it's about driving both greater reach and greater frequency. In particular, we're focused on growing our daily user base in the U.S. to a size closer to that of the largest platforms. Our goal is to reach 100 million daily U.S. users and are actively executing a strategy to get us there. One thing that has become clear is that product quality leads to growth. I believe our previous ways of working yielded the best results we were capable of, but not the results we aspire to. So to get to the next level, we first had to improve ourselves. Over the last year, we've made and continue to make a number of foundational changes to both our talent and infrastructure that we believe will unlock significantly greater headroom for Reddit's growth. We strengthened our teams with more people who have successfully grown other major platforms, we've added critical machine learning talent to build the capabilities required for today's Internet, and we've improved our processes for data, experiments and shipping more quickly while still improving quality so we can realize our vision. We made advancements across several product areas this quarter that we're encouraged by, including bot verification, improvements in core user engagement, performance gains across the stack and continued success with machine translation. Looking ahead to the remainder of 2026, our priorities include broadening the top of funnel, improving new user retention and making Reddit faster across the board, which remains a meaningful opportunity and can lead to an outsized impact. Our mission to empower communities and make their knowledge accessible to everyone is ambitious, and it won't be achieved in a single quarter, but we're making steady progress, and we won't rest until we get there. As always, thank you for being on this journey with us. With that, I'll hand it over to Jen. Jennifer Wong: Thank you, Steve. Hello, everyone. It was a strong quarter and an excellent start to the year for Reddit. There are a number of encouraging factors contributing to our commercial success and we're also seeing favorable secular trends that support Reddit's it's long-term opportunity. Beyond the raw materials Reddit has for an advertising platform, Reddit is playing a bigger role in the consumer decision journey. While people are using AI summarized information, people are also increasingly wanting to see and incorporate a breadth of perspectives from other people into their decision-making. The value of authentic human perspective is increasing as more information is generated and summarized by models. That's where Reddit stands apart. People are looking for real opinions, real experiences and real product usage from other people. For example, people are coming to Reddit to validate what they read and hear elsewhere, including the responses they get from LLMs. This adds to our billions of conversations and perspectives that help people evaluate products, services and ideas through the lens of genuine human experience. This search for human perspective is embedded in how people make decisions, especially purchase decisions. And as a result, Reddit is becoming more integral to that journey. At the same time, our advertising platform is becoming increasingly effective at converting that growing intent into meaningful business outcomes. Now moving to our results. In Q1, total revenue grew 69% year-over-year to $663 million, and advertising revenue grew 74% year-over-year to $625 million as we saw broad-based strength across the business. Revenue growth in Q1 was driven by a combination of both impressions and pricing growth reflecting the scale of our platform and our investments in the ad stack to deliver strong outcomes and make every impression more valuable. Our investments in the ad stack, including machine learning for signal optimization and ad formats, combined with our go-to-market strategy are delivering meaningful outcomes for advertisers and driving strong growth in new advertisers. In Q1, conversion-driven lower funnel revenue remained an area of strength growing triple digits year-over-year. Performance-oriented revenue represents over 60% of total ad revenue and is well balanced across industry verticals, creating durability and resilience while still leaving significant headroom for growth. In Q1, we saw strength across most of our top verticals, particularly retail CPG, tech and media and entertainment, while the number of active advertisers on the platform grew more than 75% year-over-year. Now I'll discuss the progress in our ad stack and road map where our investments are measurable and our strategy is to make all businesses successful on Reddit by delivering market competitive outcomes across objectives. We're executing this strategy across 3 areas: number one, scaling automation through our ads platform in Reddit Max; number two, delivering advertiser value across all objectives; number three, expanding the Reddit for Business ecosystem. Now starting with automation. Our strategy is to integrate more automation and AI into our ad stack to enable faster adoption of new features, make sure advertisers are set up to get the best performance from Reddit ads and increase the productivity and impact of our sales team. Reddit Max launched to beta in early Q1, and we're seeing strong adoption and performance outcomes for converting mid- and lower funnel advertisers. On average, advertisers are seeing a 17% reduction in cost per action and 25% more conversion outcomes when running Max campaigns. Advertisers are also increasingly adopting AI in their campaign setups with about 50% of Max campaign advertisers using AI-powered creative features to unlock even stronger performance. For example, modern furniture and rug company, Cozy, launched a Max campaign utilizing AI-driven targeting, automated bidding and creative rotation to scale customer acquisition with fewer manual inputs. Max quickly became one of their most efficient levers for acquiring new customers, delivering 35% higher ROAS and 28% lower CPA, while saving the team approximately 2 to 3 hours per week on setup and optimization. Now moving to our progress across all marketing objectives. With our reach of nearly 0.5 billion weekly users, Reddit delivers strong outcomes for brand advertisers. In the upper funnel, brand auto bidding is now available to all advertisers, which dynamically adjust bids enabling advertisers to spend more efficiently and simplifying campaign management. Our tests show an average 16% pricing improvement when advertisers adopt auto bidding. And in the lower funnel, our investments in machine learning signals and optimization are continuing to deliver performance and efficiency for advertisers. In Q1, we doubled the number of conversions delivered for advertisers across the platform versus last year, which means advertisers benefit from more conversions on their ad spend at lower cost per action, reflecting the efficiency and performance of our ads platform. As I mentioned earlier, Reddit is deeply ingrained in the consumer shopping experience and we saw the momentum continue with 40% year-over-year growth in high-intent shopping conversations last year. Our shopping products help businesses capture that intent more effectively. And with dynamic product ads or DPA, we're improving relevance in ad formats to drive stronger performance and advertiser value. Recent investments in DPA delivered more than 90% higher ROAS year-over-year on average and brands, including the health and wellness company, Liquid I.V., saw Reddit's DPAs outperformed their conversion -- other conversion campaigns by 40%. We're building on the progress with new shopping app formats designed to improve discovery and conversion including collection ads and Reddit-unique overlays such as Redditor's Top Pick that capture the perspectives of Reddit's communities for specific products. And lastly, I'll touch on our strategy to build an ecosystem of partners around Reddit. At Shoptalk in March, we announced an integration with Shopify, that strengthens our retail and e-commerce partnership ecosystem. The integration expands our reach to advertisers and makes it easier for them to set up and scale lower funnel campaigns on Reddit. The integration is early and in the process of ramping, we're excited about how this can build a deeper presence with mid-market and SMBs. As we scale performance advertising on Reddit, third-party measurement partners are important for validating our impact. In its latest retail commerce study, Fospha found that Reddit improved cost per purchase by 34%, while increasing ROAS and helping advertisers scale spend by 2.5x year-over-year. We have seen growing adoption of Reddit Pro since expanding access to all publishers, giving them self-serve tools through auto import articles receive AI-powered community recommendations on where to share them and measure the reach and engagement of their content on Reddit. Publishers ranging from global outlets to local press like Fortune Media to the SF Chronicle and Dallas Morning News and sports brands like Arsenal FC are now using Reddit Pro. Overall, there's a lot to be excited about this year. And every day, we see more businesses coming to Reddit it to connect with their audience and grow their business. And as the pace of change in the market grows, Reddit's fundamental assets and value proposition built on authenticity, trust and high intent keep us exceptionally well positioned. Thank you for joining us and for your continued support. Now I'll turn the call over to Drew. Andrew Vollero: Thank you, Jen, and good afternoon, everyone. The financial headlines for Q1 was that Reddit's results stand alone in a very positive way. Reddit continues to scale quickly, generating cash flow and profitability results that few companies can match at this scale. Specifically, Reddit's Q1 47% free cash flow margin was a powerful proof point to superior cash flow generation. While Reddit's earnings power was evident in 2 financial milestone achievements. On a GAAP basis, EPS reached triple digits in Q1 at $1.01 a share, up more than 7x from last year. And on a non-GAAP basis, Reddit achieved a 40% adjusted EBITDA margin in Q1, up almost 1,100 basis points from last year, a similar signal of strength and differentiation. This strong starts encouraging, particularly since historically, seasonality has contributed to making Q1 our slowest quarter of the year. I'll now provide more color on our Q1 results. Q1 revenues of $663 million grew 69% year-over-year, driven by a ramp in ad revenue, which grew 74% year-over-year to $625 million as we saw strong advertising demand across the funnel. It's our seventh consecutive quarter by growing more than 60%. Other revenue, which included revenue from our Content Licensing business reached $39 million, up 15% year-over-year. U.S. revenues were up 67%. International revenues were up 76%. Average revenue per user ARPU grew 44% year-over-year to $5.23. Moving to expenses. Our Q1 total adjusted costs, which included both adjusted cost of revenue and adjusted OpEx were $397 million in Q1, up 43% year-over-year, but sequentially lower than Q4. Working our way down the income statement, gross margins were 91.5%, up 97 basis points year-over-year, our seventh consecutive quarter over 90%. Incremental revenues and hosting efficiencies helped to offset increases in cost of revenue, which was $56 million in the quarter, up 52% year-over-year. Those cost of revenue increases reflect volume growth and users and ads served more ML usage and more international investments in speed and reliability. Operating expenses remain a bigger piece of our expense composition, which on an adjusted basis were $341 million in Q1 or about 51% of revenue, down from 61% of revenue last year as we gain operating leverage across the business. For Q1, adjusted operating expenses were about flat sequentially, but did grow 42% year-over-year, slightly elevated from last quarter. These year-over-year increases continue to be driven by investments in 2 key areas: hiring and marketing. On hiring, we added about 32 net people in Q1, up 12% from last year and up about 1% sequentially from Q4. We're selectively hiring talent in key revenue and consumer functions like sales, ad tech and ML engineering. The returns from our investments in these areas are measurable and multiples of the cost within a short period of time. Second, on marketing, our spend was primarily in the U.S., where we prioritize both paid and brand strategies to expand awareness and drive traffic. Total marketing costs in Q1 were in the mid-single digits as a percentage of revenue, but were lower nominally and as a percentage of revenue from Q4 as we benefited from lower seasonal ad pricing in Q1. Overall, user retention remains an opportunity and an important unlocker to improving investment returns and marketing. Our third major cost is stock compensation and dilution, which remains a positive story. Stock-based compensation and related tax expense was $79 million or 12% of revenue in Q1 and down sequentially from Q4. Similarly, dilution remains modest. Total fully diluted shares outstanding was $206.4 million, up 0.1% sequentially and up 0.2% year-over-year. The modest share growth in the quarter reflects the continued tight management of our equity spend. For Q1, there was a slight tailwind for dilution for share repurchase activity, although share repurchase activity was modest in the quarter, about 35,000 shares and about $995 million remains on our $1 billion authorization from February. A few more financial points of interest. The business remains capital-light. CapEx was $1 million, 0.2% of revenue. Net income was $204 million, $1.07 per basic share and $1.01 per diluted share, up more than 7x to $0.14 and $0.13 last year, respectively. We ended Q1 with $2.8 billion in cash and investments and we're well positioned to deploy capital across our 3 priorities, including investing in the core business, M&A and share repurchases. Now turning to the outlook. We'll share our internal thoughts on revenue adjusted EBITDA for the second quarter. In the second quarter of 2026, we estimate revenue in the range of $715 million to $725 million, representing 43% to 45% year-over-year revenue growth with a midpoint of about 44%. Our Q2 revenue guide considers the strong growth and momentum in the business as we exited Q1 and takes into account the lapping of a particularly strong growth period in Q2 2025 where total revenues grew 78% and ad revenue grew 84%. Moving to adjusted EBITDA. We expect Q2 adjusted EBITDA to be in the range of $285 million to $295 million, representing approximately 71% to 77% year-over-year growth and an adjusted EBITDA margin of 40% at the midpoint. The Q2 guide assumes a total adjusted cost basis of $430 million, which implies a growth rate of approximately 29% year-over-year, which is lower than prior quarters as we begin to lap our investments in sales and marketing, which started in Q2 of 2025. I'd also like to make a couple of other points. We anticipate our Q2 stock-based compensation-related tax expense to be sequentially higher than Q1, driven by increased hiring and the timing of our annual stock refresh grant which happens mid-second quarter. That said, for the quarter, we expect to see good cost leverage on SBC expenses with our internal estimates showing that year-over-year stock-based comp expenses could grow about half the rate of revenue for the quarter. Also, as we mentioned on our Q4 call, 2026 will be the last period we disclosed logged in and logged out DAUq metrics. Beginning in Q3 2026 our user disclosures will continue to include U.S. and international DAUq and WAUq as we've done historically. So to summarize, strong fundamentals matter and Reddit's financial model is scaling in a very positive way. Reddit is becoming a leader, a leader in growth, a leader in profitability and a leader in cash flow margin. We're off to a strong financial start in 2026. Reddit's raw materials position us well for growth and our advantaged financial model is turning top line gains into meaningful increases in cash and profitability. That concludes my comments. So let me turn the call back over to the operator. Operator: [Operator Instructions] First question comes from Doug Anmuth with JPMorgan. Douglas Anmuth: One for Steve and one for Jen. Steve, can you just talk about the work you have to do on the user side to increase frequency and accelerate growth and what you think will be most impactful over the next several quarters? And then, Jen, on DPAs, you announced a number of shopping tools to enhance DPAs. Can you just help us understand you're thinking about current adoption and the progress you're seeing with that format? Steven Huffman: Sure. Thanks, Chuck. Okay. On the user side, we've seen some progress in the quarter that we're happy with improvements in onboarding. We had a couple of experiments do well, ramped up to 100%, some contribution from feeds as well. I think as we look over the rest of the year, the biggest drivers will probably be performance. So just the kind of pure speed of both iOS and Android, I still think there's a lot to do on onboarding. And I think the biggest driver long term will be the feed. And so hence, the kind of focus on ML talent for us right now. So I think all of this is in alignment with what we've talked about for a long time, which is make the core product work better. I will say over there, we've seen nice progress on search as well, which is itself a driver. Search WAUqs are up 30% year-over-year. So I think solid progress there as well. The big picture story here is we've been really focused on the team, the processes, the tech, upgrading all of those things over the last year. So I feel the foundation is better than what we've seen in the past to achieve these outcomes. Jennifer Wong: I think the second one on DPA. Look, we launched DPA a year ago. And this is -- in the world of that, I'd say shopping is probably one of the more complicated products. And obviously, folks have been offering DPA for longer than we have. So there's a lot of headroom there to, I think, improve our models and the onboarding process, et cetera. But I think the team has done a really good job in giving, I think, great ROAS improvements to our customers. With the Shopify and WooCommerce partnerships, I think that's an opportunity for us to acquire more sort of mid-market and SMB customers into DPA. So we're excited about that. Again, very early, but we're excited about that opportunity. And because right now, there's still thousands of advertisers that can adopt DPA that haven't adopted yet. I will say, we're still early. We're very focused on retail and retail catalogs in the future that's still ahead of us. Folks use DPA for travel, for auto, for other categories that we haven't even focused on to date. So I think there's a long road map of opportunity here for us. Operator: Your next question comes from the line of Josh Beck with Raymond James. George Josh Beck: Yes. I wanted to maybe double-click on the ML talent, Steve. And maybe if you could kind of give us the short list of maybe some of the projects that the team is working on, what was most important this year? And then also with respect to top of funnel, obviously, that's a goal for you all. I'm just kind of curious what have been maybe some of the most successful strategies and kind of how you're thinking about driving more top of funnel as you move through the year? Steven Huffman: Sure. Thanks, Josh. So Josh, on machine translation -- excuse me, machine learning, so the feed, look, it's basically everything. So it's both collecting more signals. It's also being more judicious about the weighting of those signals. It is updating our models faster. So designing a new model, getting into production, I think that can be quite a lot faster. It's pretty much the entire stack. This reminds me of kind of our journey in the -- on the ad side, where when we look ahead, we feel confident basically everything we do will work because it has worked for other platforms. And we're just on the early side of this journey. We've been bringing in a lot of talent from platforms that have billions of users who have worked on this problem before. So it's really the entire stack. And quite honestly, it's all of our processes around it. Our goal is to go from where we are today, about 50 million U.S. users to 100 million U.S. users. Since we have 200 million U.S. weeklies on the platform already, we believe investing in the feed here will improve retention and increase frequency and get us there. But really, my answer is everything. Jennifer Wong: Yes, I can talk about the top of funnel. So let me start with our existing top of funnel, which is really significant, and that's some of the traffic that we get from search. And there's an effort to think about how do we convert that traffic from that search use case to the core Reddit use case, which is a combination of search, enjoying different communities and enjoying the feed. So that's an opportunity for us, and that's core to our road map strategy. The second is increasing the top of funnel, which is the work that we do with marketing. And it's different by different territories. So if you think of a mature market like the U.S., that's an area where we go after specific audiences where we have a great content foundation in parenting or in football, like NFL. And we're just trying to help with people know that there's great content for parents and for football fans on Reddit. And so we've done some of that brand and lead generation work to sort of prime the market to increase that awareness. Then we have work outside of the U.S. where we also have more brand foundational work. For example, people might know ready through search, but they may not have the broader understanding of the differentiators of Reddit that we're the most human place on the Internet that we have this network of communities. And so we're building, investing in some of the more broader brand foundations that, again, will allow us to prime a new top of funnel and add to the top of funnel that exists today. So -- and both, I think we're very early in that journey and that for many years, Reddit, for most of its life has not invested in marketing. So that remains, I think, fertile ground for us. Operator: Your next question comes from the line of Ron Josey with Citi. Ronald Josey: Steve, I want to sort of understand a little bit more your points on the progress around verification processes and bot labeling here, particularly as a sign-up and log-in process evolves and the feed evolves as well. So help us understand a little bit more about the process around verification and the successor progress with bot labeling? And then, Jen, with Reddit Max in the first quarter, clearly seeing a lot of progress and momentum here. Just talk to us about some of the key learnings that you're looking to take to this next level of Reddit Max and next version as we continue to see greater adoption? Steven Huffman: Thanks, Ron. So Yes. You asked about verification and bot labeling, and there's also a third dimension to this, which is user log-in in general. These things are actually all overlapping. So I'll start with the easiest one, bot verification. So we have what we call good bots on Reddit, which are basically programs that mostly moderators have written to help run communities on Reddit. We're porting those over to our developer platform. And that will both result in them being labeled on Reddit more transparently and also allow us to batten down the hatches more on unauthorized spot usage. So this is both transparency for users and also part of the human verification and defense of Reddit. On the verification and login side, one of the key technologies there is something like Passkeys. So Passkeys is a general technology that includes things like Facetime, Touch ID, UB keys, it's basically a log-in system that requires a person to do something, look at your phone or touch something. This is both a more secure way of logging in, an easier way of locking in, which will help us just grow login users in general and then also serves as probably the lightest weight and most privacy and user acceptable way doing human verification as well. So all of these things kind of tie together to add more transparency to Reddit, improve bot defenses for Reddit and increase login for Reddit. All of this work is underway on all 3 of those dimensions. So we shipped a few things in Q1. We've got a few more coming in this quarter as well. Jennifer Wong: Okay. Regarding Reddit MAX, I've been really pleased with the adoption of Max. I think customers have been really willing to make the conversion. We've been focused on existing customers and converting existing customers. They're very pleased with the CPA benefits that they're seeing out of the gate, which is great. And I think what this opens the door for us to do is to have faster adoption of our new performance features. And we see this because some of that benefit is coming from the fact that they hadn't adopted maybe one or two features that they auto adopted when they move to Reddit Max and immediately, they are seeing the performance benefit of that. And so this will shorten the time line by which we can roll out performance features to customers what we're really excited about and sort of take the operational friction there out. The other thing is they really love the insight. So we invested not only in delivering the performance, we invested in giving insights on, okay, well, what did the automation sign that was unique on Reddit that makes you learn about what you're creative -- how your creative match to what community on Reddit? And we're getting an incredible like positive response from our customers in that it doesn't feel black boxy to them. They're actually learning from using Reddit Max, and that's an area that we'll continue to invest in. And we really started with converting existing advertisers. But given the adoption and the positive response, we're now moving toward onboarding new customers directly into it. So feeling really, really positive about what we've seen so far. Operator: Your next question comes from the line of Jason Holstein with Oppenheimer. Jason Helfstein: Maybe like one DAU-related question with two parts. So one, we get a lot of questions from investors just about DAU and how important it is. And obviously, from a long-term perspective, it's important. But right now, it's not a huge focus of the company given it's more about monetization. But I guess, Steve, maybe just talk about like, again, how important is it to you to see stable to improving DAU growth and the ways that you can kind of control that in the short term. And then as we think about the discussions around AI and the third-party agents leveraging your data, how potentially you can get credit for, call it, DAU that's generated on third parties and perhaps that's a part of the larger discussions around AI licensing. Steven Huffman: Okay. So contrary to that, DAU is the primary focus of the company because revenue is doing very, very well. So DAU is both our mission, communities for everybody and also fuel for the business. So DAU is the top priority. We have a particular focus right now on the U.S. DAU. So how do we go from 50 million daily to 100 million daily. As I mentioned before, the opportunity is on our doorstep because you look at our weekly number, there are 200 million Americans on Reddit every week. So, we think about how do we increase that frequency from maybe once a week to, for example, every day. There are -- there's a lot on the list here. Our focus the last couple of quarters has been onboarding. We're seeing progress there. We've moved new user retention in the quarter. Feeds will be a major driver looking forward. I think we're at the relative beginning of our journey there. Search has been a consistent driver. So carrying most of the weight the last couple of quarters has been machine translation were translated in the 30 languages today. We've been able to lower the cost there, which is nice. It allows us to scale even more there. And then performance is another big driver. And we look at gaps between iOS and Android and what we -- the expected delta should be, which is basically 0. So I think a lot of opportunity there as well. So I'll just reiterate, DAU is actually the top focus of Reddit and in particular, U.S. DAU. You had a second part of your question about AI and some third-party agents. Look, this is an ecosystem we live in. We have important partnerships with both Google and OpenAI. Those are very meaningful to us. And I think it's mutual. We continue to value those. We continue to look for other top of funnel opportunities in the way to make our products mutually help each other, but nothing new to share on those specific relationships at this time. Operator: Your next question comes from the line of Rich Greenfield with LightShed Partners. Richard Greenfield: I got a couple. First, I just want to circle back on this ambitious 100 million DAU goal. Is there a time frame for how you're thinking about achieving that? And if I look at weeklies versus dailies, weeklies are actually growing even faster than daily. So engagement on that metric is going down. I'm curious what's driving that? And how does that play into getting to this ambitious 100 million goal, Steve? And then sort of a big picture question that ties to the quote you had in the letter. If you're the oil powering the modern Internet, $50 million to $60 million a year from Google and OpenAI seems like a pimple, I guess. How are the conversations changing heading into 2027 renewals given the state of where AI is today? Steven Huffman: Thanks, Rich. Okay, 100 million. Look, when I came back to the company about 10 years ago, we were 12 million DAU. And over the last 10 years, we've 10x that to over 120 million DAU. Now we've got our sights set on 1 billion global DAU and 100 million in the U.S. specifically. I don't know the time line, but we are, I think, relentless in our work to get there. As I mentioned in my script, the strategy is the same, which is build the best version of Reddit. And we've been focused on the last year. I thought we built the best version that our company was capable of, but that's not the best version that we needed. So we've done a lot of work on the team, on the processes, on the technology to get there. We'd like to get there as quickly as possible, but it's going to come through with very consistent product improvements. I've added a lot of the things on the list there, but it's all sensible things if you've used Reddit. And look, I will note your comments on the pricing for AI deals and include you in our conversations with our partners. Look, the world can see that Reddit's data is valuable, both our existing partners and potential ones. Look, at the end of the day, there is no artificial intelligence without actual intelligence, and that comes from Reddit. I think one of the dynamics we're seeing in the modern Internet is the more it becomes sanitized and summarized and optimized for attention by AI, the more that people crave the human, the human information that's both AI that crave it and also the Internet consumer or people in general that crave it. And that's our business is those human connection and conversations. Richard Greenfield: Is there ever a value to an exclusive deal with one company versus opening up to everyone? Steven Huffman: No comment on that, Rich. Operator: Your next question comes from the line of Mark Shmulik with Bernstein. Mark Shmulik: Steve, I kind of hate to belabor this point a little bit. But kind of in your opening remarks about the foundational changes to talent and infrastructure. Is that really just focused on engagement and the product? And if so, kind of when did you realize that you were kind of hitting a ceiling? And so kind of how far are we into kind of some of these material changes? And I guess kind of following on Rich's point, when could we start to see a reflection in the KPIs of some of the efforts of these new changes? And then secondly, Jen, you mentioned you've seen kind of strong performance in both price and ad impressions ad load. How do you kind of think about the tolerance of users for kind of increased ad load and kind of as you also think about balancing kind of the engagement question or ask it another way, is there any risk of kind of pushing the revenue lever too far that may have adverse effects on engagement? Steven Huffman: Thanks, Mark. Look, we've been, I think, upgrading the company top to bottom, the people, the processes, the tech, we're in the middle of that now. I think we've made some important changes with new leadership on product and engineering. We're also bringing in a lot of experienced talent into the company as we speak. But I think there's more work to do there. There will probably always be more work to do there, but we are really in the middle of it. That said, we are working now. And so we've made changes to onboarding to the feeds, to search that have all started to drive growth. We've seen some improvements in user retention, which is the number we care the most about. So I'd like to see our progress here accelerate. There's a lot, I think, below the surface just in terms of how quickly can we get code into production, how sophisticated our experiment readouts, how quick is our decision-making around these things. But I look at all of these holistically as getting Reddit to the next level. And I think we're partway there. I know we can get there. I think there's another couple of levels for us. And so we've been hard at it. But we do expect to see improvements in the results immediately, and we've seen some in this quarter. Jennifer Wong: I think the one on ad loads. So our ad load overall is still quite low compared to peers, especially if you look at it just on a feed-to-feed basis, it's still substantially lower and overall on Reddit, we actually don't even have ads in certain high growing surfaces like search, for example. So overall, I actually feel comfortable on an absolute basis of the ad experiences, there actually is not a high ad load. But that aside, we test this all the time, and I think we're very thoughtful about it. As you increase the ad relevancy, which we do through our ML work and we increased the diversity of advertisers in our marketplace, which we're doing. We said we're growing active advertisers, 75% year-over-year. That actually helps with enabling, if you were to move the ad load lever like giving you the diversity to still maintain performance. So just know that there are other levers that we focus on more than a lot, like our strategy is not to increase ad load. Our strategy is to grow users, all the things that Steve talked about, where we think we have a 10x opportunity there and to make the value of every impression more valuable through more competition and diversity, through stronger optimization and hard marketing outcomes, more clicks, more conversions, more installs per impression so that the marketer -- we increased our inventory of outcomes versus our inventory of impressions. Obviously, impressions will grow, especially with that underlying user growth, but we're very focused on the value that you get from the impression. Operator: Your next question comes from the line of Tom Champion with Piper Sandler. Thomas Champion: Just curious if you could talk about the monetization trends between U.S. logged in and logged out users. Just curious if those are converging at all? And then maybe for Jen, just any thoughts on the ad market? Anything looking wonky from the high oil prices or travel interruptions overseas? Just curious any general comments there. Jennifer Wong: Sure. So for logged in and logged out, which we spent a lot of time on it. I think the way we think about it is the value of an impression. And so the value of impressions is actually pretty consistent across our 2 main surfaces, the speed and our conversation page. And the only reason why logged-in users, you'd say have a higher ARPU than a logged out user is just because they spend more time and they see more impressions. But the -- because of the time spent and the engagement, but the impressions are actually pretty equal in terms of their value. So there's no differential in our ability to monetize any impression against those users. There's no difference. And we do monetize both types of users, we have great contextual signal on all our users. And then obviously, for -- and obviously, we have history on logged-out users and even more in terms of logged-in users because they subscribe to communities, et cetera. In terms of the ad market, look, it's -- we've seen this before. There's volatility in the backdrop, geopolitical. I would say we haven't seen anything acute in any vertical. What we have heard from our partners is that some are planning on shorter cycles. They're planning month-to-month. They don't have as much visibility, no material change in their commitments and their outlook and what they're working on, but just that it might be shorter time line as they sort of assess the market. And we're staying close to our customers, helping them through it with insights from Reddit. That's actually been very helpful in this moment. But overall, the market seems pretty stable, just maybe a little bit more month-to-month with lower visibility. Operator: Your next question comes from the line of Mark Mahaney with Evercore. Mark Stephen Mahaney: Okay. I'll try two questions. I think when we focus on this DAU over weekly users were just trying to get a sense of engagement. I imagine there's a series of metrics that you track internally that track engagement. Can you just talk about those at least qualitatively, like maybe it's -- maybe hours per session or minutes per session or something else, something that that touches on the quality of engagement. Could you just talk about whether there's some trends there that we can't really see from the disclosures that we have? And then just on Reddit Max. And Jen, I know you talked about this earlier, but where are we in terms of the adoption of Reddit Max? And how do you increase that adoption across your advertiser base? Steven Huffman: Sure, Mark. Thank you. Okay. So on engagement metrics, there are a couple of key ones we look at. One is new user retention. So does the user come back after 7 days, after 30 days, after 90 days. That's our core measure of kind of product quality and stickiness. The second we look at is frequency. So how many days per week do users come to Reddit. We have a lot of users. But if you were to do a histogram of days per week, the 2 tallest bars will be 1 day and 7 days. And I think this aligns with our intuition on Reddit. Once we've got you, we've really got you. And then we have a lot of people bouncing off us from search or trying Reddit out. So converting more of those 1 days to 7 days, I think it's a big opportunity. We're starting to mature our thinking around sessions, so sessions per day. That's relatively, I think, a new way of looking at it for us. But again, that will be a measure of the feed quality and general retention. So I think all of these things are important. The most consistent and I think most valuable long term will be new user retention. We don't report it, though you can peak at it through some third-party measurement, which I think will show kind of where we are in maybe relative to other folks. And again, the strategy on all of these things is quality, it's performance, it's relevance, all of the basics. I think there's a lot of opportunity on each of these things. Jennifer Wong: Just on Reddit Max. So it's a top priority for our sales team in adoption this year. They started with converting advertisers. There's thousands of advertisers on Max already, but there's many more to convert still and we do want to move toward new advertisers onboarding directly into Max. We're working on putting Max in the API as well, so that partners who transact that way have access to MAX. So look, it's still early. I just was launched in January. So it's still early. This is a multiyear journey in adoption that those before us with PMax and Advantage+ have been at for many years. But I'm very pleased with the adoption rate and the interest and the benefits that people are getting -- customers are getting, so that's very, very encouraging, but we are less than half a year into this. Operator: Your next question comes from John Colantoni, with Jefferies. John Colantuoni: I wanted to ask about international users. Can you talk through how engagement has trended across markets that have undergone a machine translation and if you've seen any notable shift in logging and adoption or localized content creation once availability of the local language expands? And second, following up on the logged in versus logged out users, is there any component of monetization for the logged in related to personalization since you have more data on their usage trends and interest just sort of outside of the impressions themselves? Steven Huffman: Sure. Thanks, John. So on international, what we've learned is every market is different. Machine translation is a great starting point for building the content base. But for the long term, what's most important is getting more native communities, like communities created in country with content consumed locally in country. And so we've seen the effects of that be different in different markets. And what we've learned there is we need to have a focus on basically, what we call community success. So how easy is it to create and grow a community on Reddit and this includes in the U.S. And so that's one of the dimensions to our product work is making it easier to create and grow subreddits. I think there's a lot of headroom here as well, and that will affect Reddit in all markets. On logged in and logged out, it's exactly as you would expect, as Jen was saying earlier, logged in users spend more time on Reddit and that's because, as you imply in your question, we know them better. And so we can -- we know their interests. We can do personalization and that, of course, just improves retention and time spent. So seeing more users in the app, more users logging in, more users getting the personalization faster drives engagement and then, therefore, monetization. Again, all roads lead to basically the same strategy, which is help users find content that's relevant to them and come back to the app more often. Operator: Your next question comes from the line of Justin Post with Bank of America. Justin Post: A couple of questions. Just wondering if you can update us on how the generative AI engines are using your data? And is that increasing since the deal started over 2 years ago? Any changes or evolution in the partnership on how they're using your data and the outputs we're providing? And then second, I think Google made some algorithm changes in April. Maybe there's a question for Drew, but any impacts on usage retention or time spend or anything like that? Steven Huffman: Okay. Look, Reddit has been for a while and continues to be the most cited source in AI citations across all platforms. We have also for quite some time then in the word Reddit has been one of the most searched words on Google. It's been in the top 10, I think, for a couple of years now. So both AIs and Internet consumers love Reddit content. This is because that basically human verification of what AI is telling people is really important. At the end of the day, you can get a surface level answer from AI, but you need the context. For many questions, there isn't an answer. There are multiple perspectives describing that answer and multiple reasons why different parts of that answer might be relevant to you or not. For example, take a simple question. What movie should I watch tonight? Well, it depends what you're into, how old you are, all these things. So Reddit is the best at providing those answers and we've seen basically across the Internet, people increasingly crave the human perspective that Reddit provides. Google algorithm change, these things are business as usual for us. There are always puts and takes. So we see these things. Sometimes they help, sometimes they hurt. They almost never stand out on our traffic long term. So we saw some changes in the quarter, but nothing further to comment on. Operator: Your next question comes from the line of Benjamin Black with Deutsche Bank. Benjamin Black: So Steve, you mentioned that authentic human connection and that content is your key differentiator. So can you maybe talk about the contribution rates on the platform. How those have been trending? What are you doing to support growth there? And then secondly, maybe a slightly different take on a data licensing question. What criteria are you looking for sort of other than dollars to perhaps go from 2 partners to maybe 3 to 4 data licensing partners? Steven Huffman: Sure. Thanks, Ben. So, we've touched on the call, actually the 3 pillars of our product strategy. So we spent most of our time in these contexts talking about the onboarding and performance and retention, but we had a question about basically the community ecosystem and how important that is for both international and domestic growth. And then your question is on basically the content ecosystem. So communities attract users, users create content. That's one flywheel. And the second is the users create content, content attracts users. That's another area of a lot of opportunity on Reddit. So things we look at there are post success rate. So what percent of posts successfully survive on Reddit, so they don't get removed by a moderator, that sort of thing. That's been a focus of ours. So things like post guidance, which is an LLM that basically helps the user navigate the rules of Reddit have been a big driver there. We're making improvements to post creation in this quarter. And so I think there's a lot of opportunity there as well. And then some maybe -- you need to Reddit, things like the age and Karma limits. So a lot of communities don't let new users submit, which makes it hard to grow new users. So working our way out of age and Karma limits with better AI-powered spam protection to help protect communities from bad new users like spammers, but be welcoming to good new users. So there's a lot there as well. Maybe next quarter, we can spend more time on the community and content contribution because those are both important aspects of credit that we don't usually get into on these calls. And second, on data licensing, things other than dollars. But, obviously, it's citations, it's mind share. It's just general partnership. Like these companies have the data centers, the foundational models. And so our partnerships with all of these companies are multifaceted. And so there's a lot we can do in terms of beyond just the dollars. It's how can these relationships help Reddit achieve its mission. So bringing in new users, advancing our own AI technology. So things like the machine translation, the LLM powered onboarding, all of the safety things, all of these things are kind of part of what we get through these relationships, which is why they're so meaningful to us beyond just the core dev relationship or the business relationship. Operator: We have time for one more question, and that question comes from Naved Khan with B. Riley Securities. Naved Khan: Two-part question. One on the rollout of AnswerPlus search that you did in the U.S. Curious if it helped in increasing the session time or what are the benefits you may be seeing there or not maybe? That's one. The second question I had is just on the international markets. And I think usually, you do not start to monetize markets until they reach a certain scale in terms of reach and usage. So of the markets that you are in currently, how many are you starting to monetize, give us your thoughts there. Steven Huffman: Sure. So on search, search, we've seen great performance. Search DAU, search WAU, search queries, all up meaningfully year-over-year. Search is a great driver of retention. Search has also been a driver of DAU. The search team is, quite frankly, I think, doing a great job. If you use Reddit answers, you can see it better integrated into the product. It itself has more agentic behavior behind the scenes. So things like you can now ask it to compare 2 things, should I watch movie A or movie B. And we're now integrating the product search catalog. So when you get answers from Reddit about, let's say, what's the best headphone actually getting the links to the products as well. So search is one of the kind of main new use cases of Reddit. And across the board is a contributor to basically all of the things we care about in addition to search itself. Jennifer Wong: Regarding the international markets. So we have direct sales footprint across all channels in the U.S., Canada, U.K., covering Continental Europe as well as Australia through -- with a little bit of the APAC sweep from Singapore. That's where we have direct sales across actually both large customers and our scale channel, which includes SMB and mid-market. We then have channel partners that cover other areas, other regions where we're able to bring in active advertisers who might want cross-border export through a partner as those markets continue to grow audience. So we're very thoughtful. We reevaluate this periodically in terms of our coverage model, but it's really based on how the users are growing in different areas and then we'll decide our coverage model. Operator: Thank you. I would now like to turn the call back over to Steve Huffman, Founder and CEO, for closing comments. Steven Huffman: Thanks all. Appreciate the questions. Operator: This concludes Reddit's First Quarter 2026 Earnings Call. You may now disconnect.
Operator: Good day, and welcome to the SPS Commerce, Inc. Q1 2026 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. To ask a question, you may press star then 1 on a touch tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the call over to Irmina Blaszczyk. Please go ahead. Irmina Blaszczyk: Thank you. Good afternoon, everyone, and thank you for joining us on the SPS Commerce, Inc. first quarter 2026 conference call. We will make certain statements today, including with respect to our expected financial results, go-to-market strategy, and efforts designed to increase our traction and penetration with retailers and other customers. These statements are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. Please refer to our SEC filings, specifically our Form 10-K, as well as our financial results press release for a more detailed description of the risk factors that may affect our results. These documents are available at our website, spscommerce.com, and the SEC’s website, sec.gov. In addition, we are providing a historical data sheet for easy reference on the Investor Relations section of our website, spscommerce.com. During the call today, we will discuss adjusted EBITDA financial measures and non-GAAP income per share. In our press release and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP financial measures, including reconciliations of these measures with comparable GAAP measures. I will now turn the call over to Chad. Chad Collins: Thanks, Irmina, and good afternoon, everyone. Thank you for joining us today. SPS Commerce, Inc. delivered a solid first quarter. Q1 revenue grew 6% to $192.1 million. Recurring revenue grew 7%, driven by Fulfillment growth of 8%. Amid rapidly evolving global supply networks, SPS Commerce, Inc. innovations are critical in addressing trading partner needs across the supply chains of manufacturers, retailers, logistics providers, and brands. Tariffs, geopolitics, and risk mitigation are fundamentally restructuring global trade. In this environment, supply chain partners need real-time coordination to respond to disruptions, demand shifts, and capacity constraints, and SPS Commerce, Inc. is uniquely positioned to deliver the AI automation trading partners need at scale. Before I provide an update on how customers are leveraging our AI-enabled solutions, I will review current business dynamics across our product portfolio. First, with respect to our revenue recovery business, we continue to manage the headwinds from Amazon’s policy changes. For example, to better align pricing with the value we deliver to our 3P take-rate customers, we are introducing a subscription platform fee. Joe will be providing further detail. Second, we are pleased with our cross-selling momentum among 1P customers, and I will share some examples of that shortly. Third, our business without revenue recovery is performing in line with our expectations, with early indications that the invoice scrutiny we observed last year as a result of tariff and macro headwinds is subsiding. We continue to expect these transitory headwinds will be largely behind us by the end of the second quarter as we remain focused on delivering the solutions our customers need to succeed in a dynamic trade environment. A great example of how suppliers are realizing value from the SPS Commerce, Inc. portfolio is Siete Foods, a customer since 2018. Over the past year, Siete made the transition from a high-growth emerging brand into an enterprise-scale operation, driven by their acquisition by PepsiCo and rapid expansion across mass retailers like Walmart, Target, Whole Foods, and Costco. As their scale increased, so did the complexity of their supply chain. We worked closely with Siete to modernize their operations and support their goal of full supplier compliance, while integrating tightly with their ERP to ensure they are able to handle higher volumes and evolving retail requirements with greater data consistency across orders, shipments, and invoicing workflows. Recently, Siete became an early adopter of MAX, SPS Commerce, Inc.’s AI agent, embedding our proprietary network intelligence directly in day-to-day operations. Their team is using MAX to quickly diagnose issues that previously required manual investigation, such as identifying why shipments failed or invoices were rejected, before those issues impact their retail partners. MAX is also helping Siete surface broader operational patterns across thousands of transactions to address root causes of inefficiencies, enabling them to scale and handle greater order volume with stronger compliance without adding operational overhead. This customer engagement demonstrates how an SPS Commerce, Inc. partnership evolves beyond trading partner connectivity and compliance to become a core intelligence layer within our customers’ supply chains. Siete Foods is one of many brands participating in the MAX beta release, providing valuable insight into how agentic capabilities are being applied and where customers are realizing value across their workflows. For Siete, by catching undetected inventory failures, MAX is projected to protect up to 8% of revenue that would otherwise be lost to stockouts. Based on feedback from more than 400 MAX beta customers, the biggest impact AI can have on trading partner collaboration is identifying issues early before they cause disruptions. MAX is already demonstrating its ability to do exactly that. SPS Commerce, Inc. is also leveraging agents to improve operational efficiency. Early applications within our agentic network are already driving measurable gains in customer treatment strategies, reinforcing our competitive moat through proprietary network data and intelligence, and reducing onboarding and setup time from weeks to days. In parallel, product engineering has advanced significantly, with much of our software development now agent-driven, accelerating innovation cycles and improving productivity. In sales, our data-powered growth strategy is using demand signals from customer activity across our network to identify upsell and cross-sell opportunities. As we continue to advance our network-led go-to-market motion, cross-selling momentum continues to build across our customer base. For example, Fulfillment customers are expanding into revenue recovery, while revenue recovery customers are adopting Fulfillment, reinforcing the strength of our network and the value of our integrated solutions. Explore Scientific, a precision optics company that designs and manufactures telescopes, binoculars, and other scientific instruments, was a SupplyPike revenue recovery customer. After spending over a year with a different EDI provider during their NetSuite ERP implementation, they faced ongoing usability challenges, unreliable workflows, and incomplete automation, at times requiring manual order processing just to keep pace. More importantly, these inefficiencies created a downstream financial impact, with inconsistent data and limited visibility leading to shipment failures, invoice rejections, delayed payments, and revenue loss through deductions and write-offs. By transitioning to SPS Commerce, Inc., Explore Scientific reestablished a reliable operational foundation. With a fully functioning ERP integration and standardized workflows across orders, shipments, and invoices, they gained consistent, accurate data flowing across their business. This shift enabled their team to move from reactive problem solving to proactive management, identifying issues earlier, understanding root causes, and preventing disruptions before they impact financial outcomes. As their operations stabilized, Explore Scientific expanded their use of SPS Commerce, Inc. solutions, adding analytics and system automation to operate with greater confidence and control. What began as a need to fix operational gaps has evolved into a broader transformation, positioning Explore Scientific not just to process transactions more efficiently, but to actively protect and recover revenue. Explore Scientific’s experience highlights how customers are realizing meaningful value on the SPS Commerce, Inc. network by restoring operational stability and visibility. In addition to cross-selling our products, we are unlocking incremental growth opportunities by unifying them. For example, Walmart suppliers using SPS Commerce, Inc. Fulfillment can now recover overages directly in the SPS Commerce, Inc. solution. This underscores the value of the platform approach and enables trading partners to collaborate better along the entire value chain. In closing, SPS Commerce, Inc. is well positioned to capitalize on significant growth opportunities ahead. Our product portfolio continues to advance with AI-driven solutions for both suppliers and retailers, powered by proprietary data that improves efficiency and unlocks meaningful value across supply chains. As a result, SPS Commerce, Inc. is the leading intelligent supply chain network, embedded in the daily flow of commerce, driving automation, insights, and increasingly AI-powered optimization. Lastly, over the past 16 months, we have added seasoned SaaS leaders to the SPS Commerce, Inc. team who bring the operational rigor necessary to scale our product and go-to-market strategy. Today, I am pleased to formally introduce our new CFO. He joined us on March 16, and we are excited to have his expertise on board as we enter this next phase of our journey. Welcome. Unknown Speaker: Thank you, Chad, for the warm welcome. This is my first earnings call as SPS Commerce, Inc. CFO. I would like to take the opportunity to express my excitement and share my reasons for joining SPS Commerce, Inc. at such a pivotal time. First, I believe SPS Commerce, Inc. is uniquely positioned to capitalize on the dynamics that are driving a growing need for supply chain optimization. Second, with a large global market opportunity, disciplined capital allocation, and a clear path to scale, SPS Commerce, Inc. is well equipped to deliver durable growth, margin expansion, and long-term shareholder value creation. Lastly, and most importantly, having engaged with the management team and many SPS Commerce, Inc. employees, I am truly impressed by the strength of the organization’s culture. I look forward to being part of such an energetic, driven, and highly collaborative team. I share the organization’s strong sense of momentum and enthusiasm for the opportunities that lie ahead. Now let us review our Q1 results. We reported a solid Q1 2026. The core business is strong and continued to show momentum throughout the quarter. However, as Chad called out, we continue to see headwinds in the Amazon portion of our revenue recovery business. Revenue was $192.1 million, a 6% increase over Q1 of last year. Recurring revenue grew 7% year over year. The total number of recurring revenue customers in Q1 was approximately 54,200. Consistent with our expectations, the number of 1P customers was flat sequentially while the number of 3P customers declined by 400. ARPU was approximately $13,550. As Chad mentioned earlier, we are generating cross-selling momentum across our network, and we remain strategically focused on servicing and expanding the 1P customer base, where we see the greatest cross-selling potential for our products. To improve profitability across our smaller customer cohorts, we are in the process of introducing a subscription platform fee to our 3P take-rate customers to better align pricing with the value delivered, while helping offset servicing and infrastructure costs associated with these accounts. We expect this change to increase churn within this cohort, with a projected decline of up to 4,000 3P suppliers in 2026. We do not anticipate this action to result in a material impact to revenue. Adjusted EBITDA increased to $57.9 million, and we ended the quarter with total cash and cash equivalents of $154 million. In Q1 2026, we deployed nearly 100% of free cash flow to repurchase $47.1 million of SPS Commerce, Inc. shares. Now turning to guidance. For Q2 2026, we expect revenue to be in the range of $194.5 million to $196.5 million, which represents approximately 4% year-over-year growth at the midpoint of the guided range. We expect adjusted EBITDA to be in the range of $60.9 million to $62.4 million. We expect fully diluted earnings per share to be in the range of $0.53 to $0.56 with fully diluted weighted average shares outstanding of approximately 37.3 million shares. We expect non-GAAP diluted income per share to be in a range of $1.06 to $1.09, with stock-based compensation expense of approximately $19 million, depreciation expense of approximately $5.2 million, and amortization expense of approximately $9.4 million. As we look to the rest of the year, three dynamics are shaping our outlook: First, we continue to expect headwinds impacting the Amazon revenue recovery business. Second, excluding Amazon, we expect the revenue recovery business to continue to outpace overall company growth. Third, we expect our business without revenue recovery to continue to perform in line with our expectations. For the full year 2026, we expect revenue to be in the range of $796 million to $802 million, representing approximately 6% growth over 2025 at the midpoint of the guided range. We expect adjusted EBITDA to be in the range of $262.8 million to $267.3 million, representing growth of approximately 14% to 16% over 2025. We expect fully diluted earnings per share to be in the range of $2.66 to $2.69 with fully diluted weighted average shares outstanding of approximately 37.3 million shares. We expect non-GAAP diluted income per share to be in the range of $4.73 to $4.76, with stock-based compensation expense of approximately $69.8 million, depreciation expense of approximately $23 million, and amortization expense for the year of approximately $37.4 million. For the remainder of the year, on a quarterly basis, investors should model approximately a 30% effective tax rate calculated on GAAP pre-tax net earnings. To wrap up, I am encouraged by our momentum entering the year. I am excited to be part of this driven team, and I am committed to maintaining the rigor and discipline necessary to scale our success and fully capitalize on the market opportunity in front of us. With that, I would like to open the call to questions. Operator: We will now open the call for questions. Please limit yourself to one question and one follow-up. To ask a question, you may press star then 1 on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star then 2. Our first question comes from Scott Randolph Berg with Needham & Company. Please go ahead. Ian Black: Hi. This is Ian Black on for Scott Randolph Berg. When should we expect to see the 3P revenue recovery business start to trough? Unknown Speaker: I can take that question, Ian. I think on the 3P—the way we are explaining it a little bit more is the Amazon revenue recovery side of the business. Right now, that continues on a negative trajectory. It probably troughs somewhere in the middle of this year towards the end of this year. As we enter into 2027, we would probably see a little bit more momentum in that business. But right now, we still see a lot of headwinds in 2026 as it relates to that business. Ian Black: Thank you. And then you reported some delayed enablement campaigns exiting 2025. What is the progress of those campaigns? Chad Collins: Yes. Overall, our pipeline and activity on the retail relationship management campaigns is quite strong. Some of the specific campaigns that we cited in Q4 that were going to carry into 2026 have now either closed or are near closure, so that momentum has continued. As these programs affect customer count, keep in mind there is some delay to actually run the program and get the suppliers on and initiate the invoicing with those suppliers. We do expect that to affect customer count and be more impactful in the second half of the year versus the first half of the year. Operator: Our next question comes from Parker Lane with Stifel. Please go ahead. Parker Lane: Hey, guys. Good afternoon. Thanks for taking the question. Chad, I think you said tariff and macro headwinds that you started to see in the middle of last year should start to dissipate as we lap them this year. Obviously, we have seen more conflict in the Middle East and some talk about what that could mean for global supply chains. Any thoughts on what your customers could be facing or are facing as a result of that? And is there any belief that, as you look through the year, that could have any follow-through effect that maybe knocks that recovery timeline off of the 2Q that you outlined? Chad Collins: Absolutely. We are seeing the contract scrutiny driven by the cost pressures from the tariffs begin to dissipate. You will remember that most of that took effect beginning the latter half of Q2 last year. We are cautious in watching how we run through the final renewals that may be more susceptible to that on the annual renewal part of our business. As it relates to the broader global situation, we have not yet seen any indicators on that. As I reflect on this situation versus the tariff situation, we were hearing from our customers more directly that the tariffs were a bit more acute to their business with immediate impact on their cost of goods sold, and we are not hearing that type of thing from our customers at this point in time given some of the more global situations that we have right now. Parker Lane: Understood. And maybe one for you as well on the 3P churn you referenced—about 4,000 third-party customers could churn off the platform as a result of the changes you are making. Comparing that to the roughly 7,300 today, what is it about those—are these the smallest of them in nature and most sensitive to cost, or is there something else you would characterize amongst that base that puts them in the category of likely to churn? Chad Collins: Yes. These are the very smallest of our 3P take-rate-only Amazon customers. One, they do not have a high volume of recovery opportunities for us, so they are very low revenue customers. When we introduce this subscription fee, which is quite modest at $19.99 a month, we could find ourselves in some situations where they periodically process a recovery but do not feel there is enough volume to pay a $19.99 per month subscription fee. That is how we arrived at our churn numbers. They are very small revenue customers. In fact, we have a cost to service those customers—platform, monitoring, all those things—so we think there is some benefit to us from a cost perspective to not service those very low revenue customers if they do churn as a result of this platform fee. Operator: Our next question comes from Dylan Tyler Becker with William Blair. Please go ahead. Dylan Tyler Becker: Hey, gentlemen. I appreciate it. Maybe, Chad, starting with you on early takeaways from the MAX program and how customers are implementing it and seeing value across the network. Any incremental color you can provide? I know you had a couple of ROI case studies. Also, the opportunity outside of the prebuilt agents you are spinning up and offering to clients—what about clients building their own agents over time? How do you think about custom-built versus prebuilt deployment over time? Chad Collins: Great question, Dylan. In the MAX beta, we have 400 customers now, and the feedback has been particularly strong. What is interesting is where they are finding value—combining their data in our network with the proprietary databases we have on major retailers’ and distributors’ supply chain expectations for their suppliers. For example, the differences in rules for shipping an order to Target versus Walmart or Costco. When you combine those nuances with a customer’s specific data, it allows you to answer questions like the difference in time to acknowledge an order from Target versus Walmart and how that affects workflow. A good example is Siete Foods, where MAX helped them determine they had less inventory than they believed due to transactions with a supply chain partner involving detailed lot codes and expiration dates. MAX helped them identify and correct their inventory position so they could make more commitments to sales—hard ROI where MAX helped with inventory and generated sales. On customers building agents versus using agents in the tool, our approach is with the MAX Connect product we have launched, which is an MCP endpoint that gives customers access to their network data as well as our proprietary databases around retailer supply chain expectations. Some customers will utilize it within the product itself, but others will want agent-to-agent interaction, and that is where MAX Connect fits in and can handle agent-to-agent communication. Dylan Tyler Becker: Fantastic. Thank you, Chad. And maybe for you on margins—understand the third-party dynamics, but the core business continues to track relative to plan. Historically, we talked about gross margin as a big lever, but it sounds like you have other initiatives underway to improve unit economics of the third-party piece. How reliant is the 200 basis points target on growth, and how many levers do you have to sustain that trajectory as we navigate these idiosyncratic dynamics? Unknown Speaker: Thanks, Dylan. Some of the savings on the 3P side are a pretty small impact on EBITDA and our ability to drive the 200 basis points. A couple of levers you already saw in Q1 with the ability to overperform guidance. We are seeing initial success on time to onboard customers and how much more efficient we can be using AI internally. There are efficiencies on the product engineering side—our ability to iterate much faster. You will see levers across sales and marketing, R&D, and G&A throughout the year. I am working closely with IT on where AI can add the most value internally. There will be more to come on future calls on where we are leveraging AI to drive margin. Operator: Our next question comes from Christopher Quintero with Morgan Stanley. Please go ahead. Christopher Quintero: Hey, Chad and team. On the medium-term targets—historically at least high single digits—you are guiding Q2 to 4% to 5%. I understand the Amazon headwinds. Is high single digits still the right framework, and how should we think about the path back to that growth rate? Chad Collins: Yes, we believe high single digits over the mid to long term is the appropriate growth rate for the business. The headwind is very specifically from the Amazon revenue recovery piece. The other portions of our business—revenue recovery without Amazon—is growing faster than the overall business, and the business excluding all revenue recovery is executing per our expectations. If you take out that headwind, you are back in that high single-digit range, which is consistent with our mid to long term expectation. Unknown Speaker: I will add a couple more data points. On Q2 year-over-year, there is a comp dynamic: Q2 this year has the first full-year comp for Carbon6. That growth rate is probably not directionally where we are headed. If you look at our full-year guide and do the implied growth rates for Q3 and Q4, you see pretty strong reacceleration. Lastly, if you remove Amazon revenue recovery from Q1, the rest of the business is already growing high single digits. There is a huge part of our business growing high single digits; you just cannot see it because of the Amazon revenue recovery headwinds. Christopher Quintero: Got it, that is helpful. As a follow-up on MAX Connect: businesses are choosing vendors based on API strategy and interoperability with broader agents and third-party agents. How are you thinking about the openness of MAX Connect and monetization as agents leverage your network and data? Chad Collins: We have been very open and API-friendly in our product strategy. Many of the ways our network connects to retailers, especially on ecommerce and marketplaces, is through APIs. Customers have always been able to access our network through APIs. Specific to agentic APIs or an MCP approach, we think this is very important. Agent-to-agent workflows are the future—we are already seeing that internally. The data we have—both transactional and, importantly, our databases of retailer and distributor supply chain expectations—are very robust and built over 20 years. Our customers tell us they cannot find this information anywhere else. Exposing the combination of network data and these proprietary supply chain databases will be powerful for agent-to-agent communication via MAX Connect. We will monetize those interactions over time once we get through the beta period. Operator: Our next question comes from Analyst with Citi. Please go ahead. Analyst: Thanks for taking the questions. On approach to guidance: we have seen revenue come in towards the lower end of the range a few quarters in a row. Any learnings or shift in approach toward embedding more conservatism? It sounds like spend scrutiny is improving—has that been baked in or could it be a source of upside? Unknown Speaker: There is no major change in guidance philosophy. On the annual guide, the Amazon revenue recovery business is posing a strong headwind, and we wanted to make sure we were factoring all the risk we are seeing in that part of the business. If you take that out, the rest of the business is in line with expectations. We saw momentum coming out of Q1 into Q2. On EBITDA, there is likely to be upside—we raised the full-year guide and are exploring other AI use cases internally. Overall, no major change in guidance philosophy. Analyst: Got it. And on the Amazon revenue recovery pricing changes—can you give details on the timing of the rollout and how churn from the subscription fee translates through the metrics so we can get a sense of that 4,000-customer number? Unknown Speaker: We will begin rolling that program out into Q2, and the rollout will go into Q3 a little bit. The churn may happen over time, so even though we are rolling it out in Q2 and early Q3, the churn may come throughout the year. Operator: Our next question comes from Lachlan Brown with Rothschild & Co and Redburn. Please go ahead. Lachlan Brown: Appreciate that we are cycling off the second quarter of 2025 where we began to see lower document volumes within Fulfillment. How have these trends been as we exit the first quarter, and what is your confidence we will see strong year-on-year growth in the volume-based component as we head into the coming quarters? Chad Collins: We have seen a dissipation of the headwind related to contract scrutiny, which had customers looking at their document plans and any trading partners they could reduce from their contracts. As we have moved into 2026, we have not seen the same level of pressure as in 2025. As we engage with customers who have renewals through the year, that gives us more confidence about that dynamic in 2026 versus what was a challenge in 2025. Lachlan Brown: And with those 400 customers on MAX, how has consumption/usage been through the beta stage—over or under expectations? Has usage been helpful in formulating the monetization strategy for MAX? Chad Collins: The 400 number was above our internal targets, which speaks to the communication to customers and their ability to see benefits even in beta. As with anything, some customers have heavy use cases and others are smaller with less volume. All of that is informing how we plan to monetize. Our current thinking—although not final—is that we will try to include MAX in a lot of our base subscriptions to get customers using the feature, with usage throttled somehow, and then have an uptick in subscription based on incremental usage. Operator: Our next question comes from Joseph Vruwink with Baird. Please go ahead. Joseph Vruwink: On AI increasing development velocity—you spoke to that inside the company. What are you seeing outside—competitors wielding that capability as well? To what extent is AI making automation easier to build such that suppliers who historically looked to SPS Commerce, Inc. might now consider doing it internally? Chad Collins: There is still a fundamental difference between a do-it-yourself approach and being in a proactively managed network like SPS Commerce, Inc. The majority of competitors facilitate DIY connections—good tooling and now AI tooling to help manage maps—but you still need to manage it yourself. We do not believe most customers, especially small to medium, will get the efficiencies from DIY that they would in a managed approach. In a managed network, one change a retailer makes can immediately cascade to all our customers, which is more efficient. Also, our average revenue per customer is about $13,000 per year; if a customer is dedicated to rebuilding their enterprise IT stack, they will likely prioritize bigger spend applications before a $13,000-per-year connection to the SPS Commerce, Inc. network, which gives us some protection. Joseph Vruwink: Thanks. A clarification on the subscription change in Amazon 3P. You said it will yield logo churn but not a material revenue impact. Yet the revenue guide is coming down and relates to revenue recovery. Are the headwinds absorbed in the Q1-to-Q2 timeframe, and is that the source of change? Chad Collins: These are two different topics. Specific to the subscription fee and churn, while the count seems high at 4,000, the revenue from those is quite modest. For those that remain and absorb the platform fee—again, modest—there is potential for even a small revenue uplift. Netting those effects out, the platform fee and related churn are not material to revenue. The reduction in the guide is related to overall headwinds from the Amazon space tied to policy changes Amazon has made that reduce the amount we can recover for customers. That is separate from the introduction of the platform fee. Operator: Our next question comes from Matthew VanVliet with Cantor Fitzgerald. Please go ahead. Matthew VanVliet: Thanks, and welcome aboard. On the product roadmap, how has the ability to get product to market faster using AI tooling pulled forward items that were “nice to have” but not high enough priority before? Do you think you will roll out functionality that helps expand that $13,000 per-year average customer spend? Chad Collins: Absolutely. A few key areas drive higher ARPU. In revenue recovery, we continue to execute our strategy to build out to more retailers—the more retailers we cover, the more market that opens up. We are making enhancements to our Analytics product and underlying technology to provide more data access and AI capabilities, which we are optimistic about. We are also advancing strategies around ERP connections—for example, our longstanding partnership with NetSuite, where we are investing in technology so customers using NetSuite together with the SPS Commerce, Inc. network can get more full features. These are examples underway in our product roadmap that have benefited from the velocity we are experiencing using agentic engineering. Matthew VanVliet: On M&A appetite—how has AI raised the bar on targets, and what outcomes and potential synergies are you looking for? Also, initial viewpoints on how the M&A strategy might evolve? Unknown Speaker: Overall, we are focused on running the business and buying back stock. We bought $47 million in Q1, and the board has authorized up to $300 million in total. That is our major focus right now—run the business and buy back shares. Chad Collins: The most efficient use of our capital today is buying back shares. Over the long term, we view M&A as part of our strategy in three areas. First, further consolidating in the EDI market—there remain players, and every time we add an EDI company, customers benefit by moving to the SPS Commerce, Inc. network, and those have been efficient transactions. Second, broadening our product solutions for supplier customers—as we drive more cross-selling and build the discipline into our go-to-market teams, we will gain more confidence over time to add to the product portfolio for cross-sell opportunities. Third, activity outside the U.S. has been strong, and as those businesses scale, there could be longer-term opportunities to gain more scale with acquisitions outside the U.S. Operator: Our next question comes from Jeff Van Rhee with Craig-Hallum Capital Group. Please go ahead. Daniel: This is Daniel on for Jeff Van Rhee. Regarding the pricing increase for 3P customers, what was the timetable for deciding on that, and to what degree had it already been anticipated in guidance? Chad Collins: Strategically, if you look at revenue recovery, going back to SupplyPike—SupplyPike was a 100% subscription business with broad retailer coverage, a lot in Walmart, not much in Amazon. We saw an opportunity to quickly gain the world’s two largest retailers, Amazon and Walmart, by acquiring Carbon6. Carbon6’s revenue model was more of a take-rate, where we took a portion of what we recovered for customers. We have always had two revenue models, and we believed portions of the 100% take-rate business could convert to a more predictable subscription model or hybrid over time. That has always been part of our thesis. We decided to start with the very small 3P customers, particularly those that, because they are small in revenue, had cost-to-serve questions relative to the revenue we were getting from them. Unknown Speaker: On guidance, as briefly mentioned earlier, it is revenue-neutral. We believe there will be some churn and these customers are low value, but that will be offset by customers that accept the fee. From a guidance standpoint, assume a net zero impact to revenue for the rest of the year. Daniel: And as you are coming on board, what opportunities drew you to SPS Commerce, Inc., and what are your top priorities stepping into the role? Unknown Speaker: My focus areas: first, ramping on the business and industry quickly so I can help drive strategic decisions. Second, keep driving EBITDA—there is a strong track record, and I want to ensure we stay on that course. Third, there is real opportunity on the AI front internally to drive leverage, and I will be laser focused there. At the highest level, the network we have built between retailers and suppliers and our ability to use that data—plus our proprietary data—and apply AI is a huge opportunity. We are early with MAX, but there is a lot of upside as we introduce AI into the product set. Operator: Our next question comes from Mark William Schappel with Loop Capital Markets. Please go ahead. Mark William Schappel: Thanks for taking my question. There is a new Chief Commercial Officer on board for a little over a quarter. With the recent expansion of your product portfolio into revenue recovery and AI, how is the commercial team streamlining the cross-sell motion to ensure these products are effectively adopted by your current client base? Chad Collins: Historically, our go-to-market motion focused on acquiring new customers. As we established our market-leading position and moved further into our TAM, there is still opportunity for new customers, but the larger driver of growth is expanding ARPU with existing customers—first by expanding their total usage of the network, especially for Fulfillment customers where there is opportunity to add more connections and features, then cross-selling revenue recovery and Analytics, and, as we move into monetizing MAX, cross-selling MAX. In response, we have focused sales and marketing on engagement with customers and full lifecycle relationships, making investments in treatment strategies to retain and grow customers. There is a new operational rigor that our Chief Commercial Officer and our new Chief Marketing Officer have brought to expansion within existing customers while simultaneously maintaining a strong motion, especially on the retail side, to continue adding new customers. Operator: Our next question comes from Nehal Sushil Chokshi with Northland Capital Markets. Please go ahead. Nehal Sushil Chokshi: Thank you for the reminder. Good to see that the guidance implies an inflection of overall revenue growth in the back half of 2026. Given the core business, excluding Amazon 3P, is already growing high single digits, what is the driver for the inflection implicitly projected here? Chad Collins: The right way to think about the dynamics is in three parts. First, the Amazon revenue recovery portion has strong headwinds based on policy changes Amazon has made, which reduce the amount we are able to recover—this drove coming in at the lower end of our range this quarter and the reduction in guidance. Second, all of our revenue recovery business excluding Amazon—for retailers like Walmart, Target, Lowe’s, Home Depot, and others—is growing very nicely with great cross-selling momentum and is growing faster than the overall company. Third, our business without revenue recovery is growing consistent with expectations, and we are seeing improvement compared to 2025—downsells and contract scrutiny are not at the same level, and our forward visibility for 2026 is positive. Nehal Sushil Chokshi: So the core business is inflecting up because you are anniversarying the scrutiny in Q2 2026? Chad Collins: Yes, that is a large effect. We are lapping some of the negative effects from 2025, which appear more one-time in nature, leading to a reacceleration in the back half of 2026. Nehal Sushil Chokshi: If the business excluding Amazon 3P is already at high single digits, does that imply it could move further up beyond high single digits in 2026? Unknown Speaker: We are sticking with the annual guide we gave you. If that changes throughout the year, we will update you, but for now we remain within the guidance provided. Operator: At this time, there are no more questions. This concludes our question and answer session. Thank you for attending today’s presentation. The conference has now concluded. You may now disconnect.
Operator: Please stand by. Welcome to the Merit Medical Systems, Inc. first quarter 2026 earnings conference call. At this time, all participants have been placed in listen-only mode. Please note that this conference call is being recorded and the recording will be available on the company's website for replay shortly. I would now like to turn the call over to Martha Aronson, Merit Medical Systems, Inc.'s president and chief executive officer. Martha Aronson: Thank you, operator, and welcome, everyone. I am joined on the call today by Raul Parra, our Chief Financial Officer and Treasurer, and Brian G. Lloyd, our Chief Legal Officer and Corporate Secretary. Brian, would you please take us through the Safe Harbor statements? Brian G. Lloyd: Thank you, Martha. This presentation contains forward-looking statements that receive Safe Harbor protection under federal securities laws. Although we believe these forward-looking statements are based upon reasonable assumptions, they are subject to risks and uncertainties. The realization of any of these risks or uncertainties as well as extraordinary events or transactions impacting our company could cause actual results to differ materially from the expectations and projections expressed or implied by our forward-looking statements. In addition, any forward-looking statements represent our views only as of today, 04/30/2026, and should not be relied upon as representing our views as of any other date. We specifically disclaim any obligation to update such statements except as required by applicable law. Please refer to the sections entitled Cautionary Statement Regarding Forward-Looking Statements in today's press release and presentation, for important information regarding such statements. For a discussion of factors that could cause actual results to differ from these forward-looking statements, please also refer to our most recent filings with the SEC, which are available on our website. Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. However, we believe certain non-GAAP financial measures provide investors with useful information regarding the underlying business trends and performance of our ongoing operations and can be useful for period-over-period comparisons of such operations. This presentation also contains certain non-GAAP financial measures. A reconciliation of non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in today's press release and presentation furnished to the SEC under Form 8-Ks. Please refer to the sections of our press release and presentation entitled Non-GAAP Financial Measures for important information regarding non-GAAP financial measures discussed on this call. Readers should consider non-GAAP financial measures in addition to, not as a substitute for, financial reporting measures prepared in accordance with GAAP. Please note that these calculations may not be comparable with similarly titled measures of other companies. Both today's press release and our presentation are available on the Investors page of our website. I will now turn the call back to Martha. Martha Aronson: Thank you, Brian. Let me start with a brief agenda of what we will cover during our prepared remarks. I will begin with a brief summary of the first quarter financial results, then I will discuss several areas of operating and strategic progress that we have made in recent months including an important strategic acquisition in the oncology space that we made subsequent to quarter end. Then Raul will provide a more in-depth review of the quarterly financial results as well as our financial guidance for 2026, which we updated in today's press release. We will then open the call for your questions. Beginning with a review of our first quarter results. We reported total revenue of $381.9 million, up 7% year-over-year on a GAAP basis and up 5% year-over-year on a constant currency basis. Our constant currency revenue results exceeded the high end of the expectations that we outlined on the Q4 2025 earnings call. First quarter constant currency growth was driven by 2.7% organic constant currency growth, and contributions from our acquisitions of BioLife and the C2 Cryo Balloon device, both of which exceeded the high end of our expectations. Our organic constant currency growth includes the impact of the strategic divestiture of our DualCap product line in February 2026, which we discussed in our Q4 2025 call. Excluding divested revenue, our organic constant currency growth was 3.7% in the first quarter. With respect to the profitability performance in Q1, we delivered financial results that significantly exceeded expectations. Our non-GAAP operating margin increased 47 basis points year-over-year to 19.7%, representing the highest first quarter operating margin in the company's history. The team delivered 9% growth in non-GAAP EPS, which exceeded the high end of expectations, and we generated $25 million of free cash flow, an increase of 26% year-over-year. We are pleased with the solid start to fiscal year 2026 and I want to thank our team members all around the world for their effort and commitment to our customers. We updated our guidance in today's press release to include the expected financial impacts from our acquisition of Viewpoint Medical on April 1. Importantly, we remain confident in our team's ability to drive stable constant currency growth, improving profitability, and solid free cash flow this year. Our organization is aligned around our priorities for 2026, specifically to drive strong execution around the globe and to successfully complete our Continued Growth Initiatives program which includes our previously disclosed financial targets for the three-year period ending December 31, 2026. Turning now to a discussion on three key operating and strategic announcements we made since our last earnings call. First, on March 16, we announced the U.S. commercial introduction of the Resilience Through-The-Scope, or TTS, esophageal stent. The Resilience stent is indicated for treatment of esophageal fistulas and strictures caused by malignant tumors. Resilience is designed to demonstrate the greatest migration resistance amongst currently available TTS esophageal stents and facilitates physician control and accurate placement. Resilience targets an attractive market opportunity in the United States and we expect adoption and utilization of this differentiated product to contribute nicely to the growth in Merit's endoscopy platform in the coming years. Second, on April 1, building upon our oncology platform, we announced the acquisition of Viewpoint Medical for an aggregate transaction consideration of $140 million, of which $90 million was paid in cash at closing. Viewpoint Medical is based in Carlsbad, California, and manufactures the OneMark detection imaging system and OneMark tissue markers. This unique ultrasound-enhanced technology offers an innovative solution to localize more lesions at the time of biopsy, representing an estimated 1.3 million procedures annually in the United States alone. This represents an expansion of the annual addressed procedure opportunity of approximately three times for our oncology business. Merit has built a market leadership position in wire-free non-radioactive breast localization procedures. Our leadership has been built upon our SCOUT platform, which utilizes the precision and accuracy of radar. The OneMark system is U.S. FDA cleared for percutaneous placement in soft tissue tumors to mark biopsy sites or lesions, and it consists of a surgical detection system and ultrasound-enhanced tissue markers. After placement, the tissue markers are designed to be visible across commonly used imaging modalities and engineered to minimize interference with future imaging studies. This acquisition expands our portfolio of therapeutic oncology products dedicated to the diagnosis and localization of breast and soft tissue tumors. The combination of SCOUT and OneMark provides physicians with localization options during the initial diagnostic biopsy which may reduce the need for a separate procedure to mark the location of the tumor prior to surgery. We believe this acquisition presents multiple strategic and financial positives and importantly, this acquisition is consistent with our Continued Growth Initiatives program. This acquisition represents another example of Merit selectively investing to expand our product portfolio in key strategic markets that leverage our existing commercial footprint. Finally, I want to highlight our new presentation of revenue, which we formally introduced in a Form 8-K filed on April 13. As discussed on our Q4 call, Merit's new executive leadership team and I have been working through a comprehensive analysis of the business and it became clear during this process that we had an opportunity to streamline our internal planning and reporting processes with the goal of aligning how we think about, evaluate, and plan each of our underlying businesses. We also identified an opportunity to streamline how we talk about the business externally as well. We believe there is significant value in aligning how we talk about the business both internally and externally, and we expect these changes to help the investment community not only better understand the composition of our business today, but also the underlying growth drivers of our business going forward. To that end, as disclosed in the Form 8-Ks on April 13, and reported in our earnings press release today, we are now reporting our revenue in two product categories: foundational and therapeutic. Foundational products are used primarily for access and enabling functions in vascular and other procedures. Merit's foundational products comprised about two-thirds of our total revenue in 2025, and sales increased at a 6% compound annual growth rate over the last three years. Therapeutic products are devices and systems that treat disease in a number of very large markets that together represent significant growth potential. Merit's therapeutic products comprised about one-third of our total revenue in 2025, and sales increased at an 11% compound annual growth rate on an organic basis over the last three years. Given that we call on a wide variety of clinicians and our products are a part of so many procedures, we have solidified our new operating model internally around eight platforms: Access, Vascular Intervention, Procedural Solutions, Cardiac Therapies, Renal Therapies, Oncology, Endoscopy, and OEM. The Access and Procedural Solutions platforms are comprised entirely of foundational products. The Vascular Intervention and OEM platforms are comprised of both foundational and therapeutic products. And Cardiac Therapies, Renal Therapies, Oncology, and Endoscopy are comprised entirely of therapeutic products. In the Form 8-Ks, we shared four years of historical revenue in each of these platforms. So to reiterate, going forward, we plan to report revenue results by foundational and therapeutic products. In addition, we intend to continue to highlight additional color on the underlying drivers of growth within the underlying platforms. As I shared last quarter, each of our platforms is being co-led by a marketing lead and a research and development lead, and each team is comprised of cross-functional and cross-geographic members so that we have better alignment on product and commercial priorities, improved communication across functions and geographies, and a team who feels accountable for that platform globally. I am very pleased with how our teams are taking ownership, increasing communication, and thinking about how best to serve our customers in each area. I truly believe that focusing our efforts in this way will enable us to drive even greater growth within each one of these platforms in the years to come. With that, I will turn the call over to Raul for an in-depth review of our quarterly financial results and our updated financial guidance for 2026. Raul? Raul Parra: Thank you, Martha. I will start with a detailed review of our revenue results in the first quarter. Note, unless otherwise stated, all growth rates are approximated and presented on both a year-over-year and constant currency basis. First quarter total revenue increased $18.6 million, or 5%, exceeding the high end of the expectations we outlined on our fourth quarter call. Excluding sales of acquired products, our total revenue growth on an organic constant currency basis was 2.7%, at the high end of our expectations. Excluding divested revenue, organic constant currency growth was 3.7% in the first quarter. By geography, our total revenue in Q1 was primarily driven by growth in the U.S., where sales increased $14.5 million, or 6.8%, and international sales increased $4.1 million, or 3%, both of which modestly exceeded the high end of our expectations in Q1. Turning to a review of our revenue results by product category. First quarter total revenue was driven by a $10.1 million, or 4%, increase in sales of foundational products and an $8.5 million, or 7%, increase in sales of therapeutic products. Including the contributions from acquired products of $6.6 million and $2.5 million, respectively, sales of foundational and therapeutic products increased 1.5% and 5.2%, respectively, on an organic constant currency basis. Organic growth in the foundational product category was driven primarily by our Vascular Intervention and Access platforms, which offset year-over-year declines in sales of OEM and Procedural Solutions products, the latter of which was impacted by our divestiture of the DualCap product line. Organic growth in the therapeutic product category was driven by strong growth in our Cardiac Therapies and Endoscopy platforms and contributions from solid growth in our Vascular Intervention and Oncology platforms, offsetting year-over-year sales declines in our OEM and Renal Therapies platforms. We were pleased with our first quarter total revenue results that exceeded the high end of our expectations despite the notable headwinds to year-over-year revenue growth experienced in our OEM business in Q1. OEM sales declined 14% year-over-year in Q1, significantly lower than what was assumed in our guidance. Sales to OEM customers outside the U.S. continue to see demand trends impacted by the macro environment, particularly in the APAC region, and these headwinds were largely consistent with our expectations. OEM sales to U.S. customers were impacted by inventory destocking dynamics related to product line transfers to Tijuana, Mexico, as expected. That said, customer orders came in lower than expected, which we would characterize as transient or timing based rather than a reflection of share loss. Our OEM business remains healthy despite the quarter-to-quarter fluctuations in growth rates. We continue to believe the appropriate normalized growth profile of our OEM business is in the mid to high single digits annually. Turning to a review of our P&L performance. For the avoidance of doubt, unless otherwise noted, my commentary will focus on the company's non-GAAP results during 2026 and our growth rates are approximated and presented on a year-over-year basis. We have included reconciliations from our GAAP reported results to the most directly comparable non-GAAP items in our press release and presentation available on our website. Gross profit increased 7% in the first quarter. Our gross margin was 53.2%, down 20 basis points year-over-year, but notably stronger than our internal expectations. Q1 gross margin included a $4.6 million impact from tariffs, compared to no impact in the prior-year period, representing a 120 basis point impact to gross margin in the period. Operating expenses increased 5% in the first quarter. The increase in operating expense was driven primarily by a $5.4 million, or 5%, increase in SG&A expense and, to a lesser extent, a $1.1 million, or 5%, increase in R&D expense compared to the prior-year period. Total operating income in the first quarter increased $6.9 million, or 10%, from the prior-year period to $75.3 million. Our operating margin was 19.7% compared to 19.3% in the prior-year period, an increase of 47 basis points year-over-year. First quarter other expense, net, was $1.2 million compared to $1.7 million for the comparable period last year. The change in other expense, net, was driven primarily by gain/loss on foreign exchange and higher interest income. First quarter net income was $56.7 million, or $0.94 per share, compared to $52.9 million, or $0.86 per share in the prior-year period. First quarter net income and EPS exceeded the high end of our guidance range by $3.7 million and $0.07, respectively. Turning to a review of our balance sheet and financial condition. As of 03/31/2026, we had cash and cash equivalents of $488.1 million, total debt obligations of $747.5 million, and available borrowing capacity of approximately $697 million, compared to cash and cash equivalents of $446.4 million, total debt obligations of $747.5 million, and available borrowing capacity of approximately $697 million as of December 31, 2025. Our net leverage ratio as of March 31 was 1.6 times on an adjusted basis. The increase in cash and cash equivalents in the first quarter was driven by a combination of strong free cash flow generation of $24.7 million and $25.5 million of proceeds from our divestiture and sale of the DualCap product line, offset partially by $6.3 million in cash used for financing activities in the period. Subsequent to quarter end, we acquired Viewpoint Medical for an aggregate consideration of $140 million. Of that amount, $90 million was paid in cash at closing, and two deferred payments of $25 million each are scheduled to be paid no later than the first and second anniversary of the closing date, respectively. In addition to the favorable strategic rationale for this acquisition that Martha outlined earlier, the financial rationale for this transaction is compelling. While we expect the transaction to be $0.05 dilutive to our 2026 non-GAAP EPS, for the twelve months ending 12/31/2027 the acquisition is projected to be accretive to our non-GAAP EPS. Longer term, we project this acquisition to be accretive to Merit's multiyear growth and profitability profile. Specifically, we project sales of Viewpoint Medical's OneMark system to grow at least 20% per year, with 70% non-GAAP gross margins and non-GAAP operating margins above our company average. Turning to a review of our fiscal year 2026 financial guidance. As reported in our earnings press release, we have updated our financial guidance for 2026 to reflect the projected contributions to our total revenue and impact on our non-GAAP EPS previously disclosed on 02/24/2026. Specifically, from the acquisition effective date of 04/01/2026 through 12/31/2026, the acquisition is projected to contribute revenue in the range of $2 million to $4 million and to dilute Merit's initial 2026 guidance for non-GAAP earnings per share by approximately $0.05. This non-GAAP EPS dilution includes approximately $2 million of lower interest income on cash balances used for the total purchase consideration and excludes approximately $5.3 million of non-cash, non-recurring transaction-related expenses. For the twelve months ending 12/31/2026, we now expect total GAAP net revenue growth in the range of 6.3% to 7.8% year-over-year, and 5.6% to 7% year-over-year on a constant currency basis, excluding an expected 80 basis point tailwind to GAAP growth from changes in foreign currency exchange rates. There are a few factors to consider when evaluating our projected constant currency revenue growth range for 2026, including first, our constant currency growth range assumes sales of foundational products increase in the mid-single digits year-over-year and sales of therapeutic products increase in the high-single digits year-over-year. Second, our total net revenue guidance for fiscal year 2026 now assumes inorganic revenue contributions in the range of approximately $17 million to $20 million compared to $13 million to $15 million previously. This increase in inorganic revenue expectation is driven by the combination of $2 million to $4 million of Viewpoint Medical revenue and stronger than expected contributions from our BioLife and C2 acquisitions in the first quarter. Excluding inorganic revenue, our 2026 guidance continues to reflect total net revenue growth on a constant currency organic basis in the range of approximately 4.5% to 6% year-over-year. Third, our total net revenue guidance for fiscal year 2026 continues to assume U.S. revenue from the sales of the Rhapsody CIE of approximately $7 million. Fourth, our total net revenue guidance for fiscal year 2026 reflects the impact of our DualCap divestiture. Product sales and royalty revenue for DualCap totaled approximately $20 million in 2025, and net of approximately $1.6 million of sales in Q1 2026, the divestiture represents an estimated year-over-year headwind of approximately 130 basis points to our total constant currency revenue growth in 2026. With respect to profitability guidance for 2026, we continue to expect non-GAAP diluted earnings per share in the range of $4.10 to $4.15, up 5% to 8%. Note, our non-GAAP EPS range reflects the $0.05 of dilution from the acquisition of Viewpoint Medical, funded by the better-than-expected non-GAAP EPS results we delivered in the first quarter. All of the modeling considerations regarding our profitability and cash flow expectations for 2026 introduced on our fourth quarter call remain unchanged. For avoidance of doubt, our 2026 non-GAAP EPS guidance continues to assume a twelve-month tariff impact of approximately $15 million, or $0.19 per share, compared to a $9 million, or $0.12 per share, impact realized during the last eight months of 2025. As a reminder, the expected twelve-month tariff impact assumed in our 2026 non-GAAP EPS range was based on tariff policies in place prior to the decision of the U.S. Supreme Court in late February. This continues to be an evolving situation. The ultimate impact of the U.S. Supreme Court decision and subsequent new and/or additional tariffs or retaliatory actions or changes to tariffs on our business will depend on the timing, amount, scope, and nature of such tariffs, among other factors, most of which are currently unknown. We intend to review our 2026 financial guidance when we report our financial results for the three and six month periods ending 06/30/2026. We will provide an update on the estimated twelve-month tariff impact and potential gains related to refunded tariff payments in prior periods. Finally, we would like to provide additional transparency related to our growth and profitability expectations for the second quarter of 2026. Specifically, we expect total revenue in the range of $400 million to $410 million, representing growth of 5% to 7% year-over-year on a GAAP basis, and up approximately 4% to 7% on a constant currency basis. Note, our second quarter constant currency sales growth expectations include inorganic revenue in the range of approximately $4 million to $4.5 million; excluding inorganic contributions, total revenue is expected to increase in the range of approximately 3% to 5% on an organic constant currency basis. With respect to our profitability expectations for the second quarter of 2026, we expect non-GAAP operating margins in the range of approximately 18.7% to 20.4% compared to 21.2% last year, and non-GAAP EPS in the range of $0.90 to $1.00 compared to $1.10 last year. With that, I will now turn the call back to Martha for closing comments on the prepared remarks. Martha Aronson: Thanks, Raul. As you can hear, we continue to be on a nice trajectory to successfully complete the third and final year of CGI. I want to commend the organization once again for staying focused on delivering these results while also closing a strategic acquisition on April 1 and embarking on our long-range strategy work. I want to add that when our extended leadership team spent several days kicking off our long-range strategy work during the quarter, we had very robust conversations about each platform and there was tremendous energy around this work. We also recommitted ourselves to ensuring that our infrastructure is solid so that we can continue to scale our business globally. As I have said before, we will do that with both organic product development alongside disciplined tuck-in acquisitions focused on our strategic platforms. Finally, as I have continued my global travels and spend time with customers, investors, and employees, I continue to be inspired and excited about the future of Merit Medical Systems, Inc. We will now open the call for questions. Operator: Thank you. Please signal by pressing star 11 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We do ask that you limit yourself to one question and one follow-up. If you would like to ask additional questions, we invite you to add yourself to the queue again by pressing star 11. And our first question will come from Michael Petusky of Barrington Research. Your line is open. Michael John Petusky: Hi, good evening. Nice results. I guess there was not much in the way other than, I guess, the reaffirmed guide on Rhapsody. Martha, are there any updates you want to share there, whether it is anecdotal or more quantitative, just on early days progress? Thanks. Martha Aronson: Yes. Thanks very much, Mike. You asked—just to clarify—you are asking about Rhapsody? Michael John Petusky: Yes. Yeah. Martha Aronson: We are very pleased with how Rhapsody is going. Again, just to remind folks, we did a bit of a reset, if you will, on how we are approaching our go-to-market strategy with Rhapsody. We really instituted that toward the end of last year. And I would say at this point, we are very pleased with how we are doing. We have given, I think, our previous guidance or our revised guidance in 2026 of $7 million for Rhapsody for the fiscal year, and we are tracking right on that. Michael John Petusky: Okay, great. And then I am not sure who this is for, but I am just curious about—are you guys, like, is there a formal process? Are you seeking refunds in terms of the tariffs that you had to pay last year and the first part of this year? And if so, how does that process work? Thanks. Raul Parra: I will just give a guidance overview if you do not mind, Mike, because there are a lot of moving parts to this. Just as a reminder, for our 2026 guidance, we have left it unchanged essentially from what we did in the first quarter, which is we have got $15 million that is baked into our guidance for 2026 versus the $9 million that we had in 2025. That is unchanged since the U.S. Supreme Court decision. I think there is still a potential for the administration to challenge that, I believe, through May, and so we will reevaluate that as part of our second quarter reevaluation and we will discuss that further after the second quarter once we are on firmer ground. It is a moving target, but there is also the Section 232 stuff that is hanging out there. Michael John Petusky: I was just going to say, have you guys filed it? Like, is there paperwork to file to seek refunds at this point for you guys or no? Raul Parra: Yes. We have started the process of reimbursement. Like I said, though, I think the challenge is that the administration can still challenge the reimbursement through May. From our perspective, we have started the process of filing and have essentially filed for the majority of that. I think we will have an update, hopefully, on our second quarter call as to how that shakes out. Feeling optimistic, I would say, if things stay as they are today, I definitely think the $15 million would come down. Michael John Petusky: Okay. Very good. Thanks, guys. Operator: Thank you. And our next question comes from Jason Bednar of Piper Sandler. Your line is open. Jason M. Bednar: Hey, good afternoon, everyone. Thanks for taking the questions and nice start to the year here. I wanted to start first on Viewpoint, the recent deal. It is a pretty sizable revenue contribution step-up from this year to next. Could you help us out with how you see this coming together—what is supporting the growth ramp going from $2 million to $4 million in revenue this year up to $14 million to $16 million next year? And then should we think about that 20% growth rate you referenced starting in 2028, building on that $14 million to $16 million? And then, looped in here, just any considerations around synergies that could be realized with respect to that SCOUT platform? Martha Aronson: Yes. Thanks, Jason. Appreciate the question. A couple of comments on that. First, taking a step back on oncology: it is about a $100 million platform for us, and it has been growing very nicely. It has been pretty much a one-product platform, so we have been looking for a while at ways to add to that because we have an outstanding field organization and we wanted to get some additional products in their hands. If you think about the breast cancer market, particularly the biopsy phase—someone has a mammogram or something is seen—in the U.S. alone there are 1.6 million breast biopsies done each year. For SCOUT, the product that we have had for a period of time now, the applicable market has been about 300,000 of those procedures each year. With the addition of OneMark, you actually expand the market three to four times because the other 1.3 million breast biopsies tend to be done for lower-risk patients; SCOUT tends to be used for higher-risk patients. We are really seeing a terrific market expansion opportunity. It then comes down to physician choice about whether they would rather use radar technology or ultrasound technology. We are super excited about that. Both of these approaches happen at the time of biopsy, whereas if you do not do something at time of biopsy, a patient may have to go through an additional localization procedure before surgery. We are excited about what it means for patients. Breast cancer grows about 4% a year, and the wire-free localization market where we play is growing at about 13% a year, so when you ask about our confidence in the future growth rates, we feel good about that. Raul Parra: I will add, Jason, at the midpoint of our 2027 guide, which was around $15 million, you can definitely tack on the 20% that we called out. On the synergies, just to be clear, in the guide for 2027 on a full-year basis it is accretive, both on the top line and the bottom line, with strong gross margins at 70%. We are really excited about it. Jason M. Bednar: Thank you for all that. Super helpful. I want to pivot to the OEM part of the business. I appreciate all the extra color in the prepared remarks, Raul. I heard you on the 1Q performance and the normalized growth profile for OEM. But can you say whether the worst is behind you for OEM? Does that performance get sequentially better in 2Q? Does growth return in the second half of this year? And bigger picture on OEM, Martha, we have seen you take actions on portfolio management at Merit. How do you think of the value OEM provides to Merit versus maybe what you could potentially realize through strategic moves like some of the actions we have seen across other med tech OEM players here the last several months? Raul Parra: I will take the last part first. To level set on what our OEM business is: we essentially sell capacity. We are different than other OEM companies out there; we are not a contract manufacturer. We are selling our own products. Divesting of that just does not really work—we would end up with a bunch of extra capacity. Having said that, we love our OEM business. It is a great asset and remains healthy despite quarter-to-quarter fluctuations. I know you find that frustrating, but as we see the visibility, we are getting excited about what we can do there. We continue to believe the appropriate normalized growth profile is in the mid to high single digits. We are starting to see orders for Q2 that give us a lot of confidence that we are going to be at, at the very least, that mid single-digit growth profile that I just talked about. We are excited to see how the quarter goes; the early start is looking really good. Jason M. Bednar: Just to clarify, you are saying mid singles is how you are seeing 2Q come together, mid single-digit growth for OEM? Raul Parra: That is right. Jason M. Bednar: Perfect. Thanks so much. Operator: Thank you. And our next question comes from Sam Elber of BTIG. Your line is open. Sam Elber: Hey, good afternoon. Thanks for taking the questions here. Maybe I can follow up on some of the dynamics in the Cardiac business that was called out in the prior quarter. Just curious to get an update on how that is shaking out here, and then I will have a quick follow-up. Raul Parra: We continue to be on track. To walk through that issue: when we initially had our fourth quarter call, it was a supply chain issue that unfortunately turned into a recall, and I am sure many of you saw the notice go out. From a financial perspective, it is immaterial to our 2026 financial results. We continue to be on track to have this product back on the market. It is unfortunate that it came to this, but to highlight it, it is a Class I recall, and we have not had any of those since 2017. Just to clarify, this was in Renal, right? Martha Aronson: Just for clarity, Sam. Sam Elber: Okay. That is helpful. And maybe just a quick follow-up on some of the geopolitical issues we are seeing out of the Middle East. Are you able to help quantify or think through any impact on the revenue line and then to input costs, whether it is freight or oil—how should we be thinking about that over the rest of the year? Raul Parra: On the positive side, we have yet to receive any price increases from our vendors. We are seeing fuel surcharges; those are pretty typical and we usually see those at least once a year as gas prices fluctuate, so that is nothing unusual. Right now everything is manageable. If the issue continues, we will have to reevaluate, but as of now, we feel like we can overcome whatever is coming our way. On the sales side, we continue to get orders from the Middle East region. We did leave about $1.5 million of revenue on the table from shippers that were not able to pick the product up and deliver it. We are seeing an impact, but it is very manageable, and we continue to feel really optimistic about the guidance that we put out for 2026. Martha Aronson: Thank you. Operator: And our next question comes from David Rescott of R.W. Baird. Your line is open. David Kenneth Rescott: Great. Thanks for taking the questions. Two from us, and I will ask them both upfront. I heard some of the commentary around OEM as it relates to the quarter, Q2, and the guide for the year. I recall that there is some APAC impact in there in general. Can you provide any color around what the assumptions are for China and APAC at this point and, in broad strokes, how that is shaking out versus contribution from that region in the prior year at least? And then on the operating margin side, I believe the results were a little better than we expected. Lower OpEx growth seemed to be the case, better gross margin. Can you help us think about how you are thinking about controls on the OpEx side through the rest of the year? I believe you commented on gross margins already, but would be curious around any of the underlying assumptions you have for better-than-expected operating margins for the year. Raul Parra: On the APAC region and OEM: that was essentially in line with our expectations. APAC as a whole was up 1% on a constant currency basis in Q1, which was a beat versus the high end of our guidance. China sales increased by about 2% year-over-year on a constant currency basis in Q1, essentially in line with our expectations. VBP impact was modestly better than expected. As far as China, we continue to expect low single digits for 2026 as we continue to deal with volume-based purchasing. Moving to operating expenses, we were expecting a lower gross margin, so we controlled operating expenses. With the conflict, as that came out, we really talked to the executive team about being in control of operating expenses, and they did a really good job. We let that flow through to the bottom line with an $0.11 beat and a much better operating margin than we had initially indicated on the fourth quarter call. One of the nice things is that we were able to offset the $0.05 dilution of Viewpoint and essentially increased our EPS guide to cover for that. Overall, the P&L was off to a really strong start for Q1. We beat on the revenue side by over $4 million, gross margin was better than anticipated, we controlled operating expenses, and that gives us a lot of confidence as we head into the rest of the year. We are really confident in the full-year operating margin guide and obviously focused on our CGI targets. Martha Aronson: And, David, I might add one comment. Hats off to Raul and Travis in our finance team. One of the things we have been working on is a number of our processes across the company and getting our finance partners involved earlier in the process. We are doing our best to ensure discipline throughout the organization when it comes to spend. Hats off to our finance team partnering with engineering, operations, etcetera. Thank you. Operator: And our next question comes from Aidan Lahey of Bank of America. Your line is open. Aidan Lahey: Hi, thanks for taking the questions. Two from me on OneMark. One, when you did the deal, how much were you factoring in it being complementary versus cannibalistic to SCOUT? I know you said physician preference. Is this a move that can open up broader accounts? Would some accounts have both systems? And do you think there is any impact on SCOUT sales during the inorganic period that could impact growth? Martha Aronson: Thanks for the question. We really view this as a market expansion play. There could be a handful of accounts where some have both, and there could be some where someone chooses one over the other. There is an opportunity—it is a bit of a better-and-best offering. There is an opportunity to target accounts very specifically, which our team has done a great job preparing to do. We see it as a total expansion of that time-at-biopsy localization market. Aidan Lahey: Got it, really helpful. And then I think we saw OneMark was actually running a trial that was head-to-head with SCOUT. Now that both products are yours, do the outcomes of that trial change the strategy of SCOUT depending on if it goes one way or the other, and what are the plans there? Martha Aronson: I literally got off the phone earlier today with one of the team members from OneMark. This group is super excited to be part of Merit, and Merit is super excited to have them as part of our team. There is a major congress happening starting today—the Society for Breast Surgeons. There was a training with fellows earlier today, and the team reported that it really is a physician preference. Some are more “audible” and like the radar and hearing it; others prefer being able to see it visually. We are excited to have this enhanced product offering across the portfolio and, as we said, it is a great add to the Merit Oncology platform. Aidan Lahey: Great. Thank you. Operator: Thank you. And our next question comes from James Sidoti of Sidoti & Company. Your line is open. James Philip Sidoti: Good afternoon. Thanks for taking the questions. If I heard you correctly, with gross margin, you were able to keep that basically flat despite about $5 million of tariff expense. What drove that? Was that a mix issue? Can you give us more color on that? Raul Parra: It is essentially a 120 basis point impact to our gross margin from tariffs. Hats off to our sales force for focusing on selling the right products at the right price. We have some acquisitions helping us, and that is part of the mix component. We continue to focus on the “throw the kitchen sink” approach at gross margin. The conflict in the Middle East is exactly why we do that—there are surcharges coming that we were still able to overcome. Our operations group is doing everything they can to maintain or improve costs in a really challenging environment. It is a little bit of everything, but there is a mix component helping us. We divested the DualCap, which was a very low gross margin product, and that is helping as well. We are hyper-focused on CGI goals, and gross margin is an important contributor to operating margin, which is why we focus on it so much. James Philip Sidoti: And then, inventory was up about $20 million in the quarter. Can you explain that? Raul Parra: We have acquisitions that have taken place, and we are building out those inventories. There were certain areas we were a little low in. Over the last year in our Endoscopy segment, we dealt with some supply chain issues, so getting that to a healthy point. Same with our Oncology business, and same within our Cardiac and Renal Therapies—areas that had really strong sales. We are getting safety levels to an area we feel comfortable with. You are also in an environment where you look at the supply chain to make sure you are covered given the performance we expect, so we are making sure our safety stocks are at the right level. James Philip Sidoti: Alright. And if I can, I am going to sneak one more in. Can you just tell us what the distribution looked like for the OneMark system prior to the acquisition, and how many people will be selling it now that it is a Merit product? Martha Aronson: We do not share exactly how big our sales organizations are. Viewpoint was certainly a smaller organization. It will fold really nicely into our team, who are excited to have their Viewpoint colleagues join them. It is not a major expansion of our commercial footprint, but the energy behind it will certainly make up for that. James Philip Sidoti: Okay. So the big jump to revenue in 2027—that is not because of increased distribution. You think that should occur due to product awareness? Martha Aronson: Correct. It is increased product awareness, having options as you go into each and every account, and excellent account planning and targeting that our team is undertaking. James Philip Sidoti: Alright. Thank you. Martha Aronson: Thanks, Jim. Operator: Thank you. And our next question comes from John Young of Canaccord. Your line is open. John Young: Hi, guys. Thanks for taking the question and congratulations on the quarter. Martha, when you came into the seat there was an emphasis on OUS growth given your background. Any updates on the progress or changes that you have made there? In the script, you spoke about some alignment changes. Has compensation changed at all for the reps? Martha Aronson: As we go into 2026, there have not been any significant comp changes for our reps. You have heard Raul talk about our gross margin improvement. Over the last several years, this organization has done a nice job making sure our team knows which products to stay focused on, and we are pushing a bit more emphasis on some of our higher-margin products. In general, about 40% of our revenue is outside the United States, and as you heard, our international teams continue to do a really nice job. I am quite pleased with that. John Young: Great. Thanks. And then perhaps any additional color on the Endoscopy segment and any progress you made in the quarter on the integration and training of that sales force. Thanks again. Martha Aronson: We are really excited about the Endoscopy platform. We brought in the C2 Cryoballoon acquisition, which is so far doing better than our end expectations. We also announced a new product, the Resilience through-the-scope esophageal stent. This is a really nice market for us—sub-$100 million in size. For Merit Medical Systems, Inc., that is a really nice market space. This is a great stent, and because physicians deploy it through a scope, they feel they have more control and accurate placement. Most importantly, the initial feedback is that it is not moving once it is there. Migration has been an issue with a number of stents in that market. We are really excited about the opportunity for Resilience and the Endoscopy business in general. Next week, I will be at Digestive Disease Week with the team, which is one of their big shows—more on the GERD side of things—but across Endoscopy we are very pleased. Raul Parra: I will add a little color. As you hopefully saw last year, our Endoscopy team just got better every quarter as they integrated and learned how to sell both bags. Q1 was mid-teens growth—really strong performance—so they are excited about what they are doing, which makes us excited about their potential. John Young: Great. Thank you. Operator: Thank you. And our next question comes from Jason Bedford of Raymond James. Your line is open. Analyst: Hey, Raul. Hey, Martha. It is Zack on for Jason Bedford here. Thanks for taking the question. You have talked about being open to deals that are somewhat larger than historical tuck-ins, and of course we saw the Viewpoint deal. As you look at the pipeline, can you remind us what those key areas are for the next deal? And in terms of sizing, would you say Viewpoint is a good proxy for deal characteristics and size in terms of helping us level set expectations on acquisitions? Martha Aronson: Thanks. Doing deals is not something where you get to say you want to do something of exactly this size at this time to add precisely to this particular platform. That would be lovely, but that is not reality. We are not going to put a number around a deal. We are looking at a lot of things. This company has grown a lot through acquisition; we plan to continue to do that. It is important to think in terms of tuck-ins or bolt-ons—nothing transformational. Every deal has to have a lot of strategic fit. With our platform structure, I am looking to each platform to have conviction around any proposed deal because they are going to own it. That is how we are building these business lines. It is critical that they believe in it and have done the work and analysis. We do a lot of that at corporate as well, but that is how we are thinking about acquisitions going forward. It has to be strategic and fit certain financial metrics that we have in place—certainly being margin accretive would be one of them. Analyst: That makes sense. Appreciate the color. Then, if I can ask a second one: just curious on that Medtronic distribution deal you did during the quarter. Is there any stocking tied to that, and is there a material impact for you on growth that comes from this agreement? Raul Parra: They are going to gear up, and we are not going to give details. It is not our practice to talk about our customers’ launch plans. We are really excited for our OEM division. They have done a good job working with our OEM partners and customers on finding opportunity, and this happens to be one of them. It is built into our guidance for the year, which gives us a high level of confidence in that mid single-digit growth that we expect in OEM. We have a high level of confidence in their performance for the rest of the year. Martha Aronson: This is a really good example of why we say OEM is lumpy. As you saw—and Medtronic put out a press release on it—we have a relationship with them; they have been an OEM customer as they shared in their press release. These things ebb and flow a bit. As Raul said, we are very excited, and this is a factor in gaining confidence on our OEM platform for this fiscal year. Operator: Thank you. And our next question comes from Mike Matson of Needham & Company. Your line is open. Michael Stephen Matson: I just want to ask one on capital allocation. I understand you are focused on M&A and that has been the priority. But the stock is pretty beaten up, pretty cheap here. Would you consider doing a share repurchase at all? Raul Parra: That is a board-level decision, and I do not want to speak on their behalf. For now, with our net leverage ratio of 1.6, and a lot of opportunity out there from an M&A perspective, we continue to conserve cash. We continue to generate strong free cash flow—as you saw, approximately $25 million for the first quarter, a strong increase over 2025. For now, we are focused on CGI, on our free cash flow goals, and on delivering long-term sustainable growth. Michael Stephen Matson: Got it. I will leave it there. Thanks. Operator: Thank you. This concludes our question and answer session. I would like to turn it back to Martha Aronson for closing remarks. Martha Aronson: Thank you, everybody. I appreciate you dialing in today. We are pleased with our strong start to 2026 and feel good about tracking nicely to our CGI goals. Most importantly, I want to thank our team who is so committed to helping patients all around the world. Thanks, everyone, for joining us today. Operator: This concludes our conference call for today. Thank you for your participation.
Operator: Good morning, ladies and gentlemen, and welcome to the Mechanics Bank first quarter 2026 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would like now to turn the call over to our chief financial officer. Please go ahead. Unknown Speaker: Thank you, operator, and good morning, everyone. We appreciate you joining our earnings conference call. With me here today are our President and CEO and our executive chair. The related earnings press release and earnings presentation are available on the News and Events section of our Investor Relations website. Before we begin, I would like to remind everyone that any forward-looking statements are subject to those risks, uncertainties, and other factors that could cause actual results to differ materially from those anticipated future results. Please see our Safe Harbor statements in our earnings press release and in our earnings presentation. All comments expressed or implied during today's call are subject to the Safe Harbor statement. Any forward-looking statements made during this call are made only as of today's date, and we do not undertake any duty to update such forward-looking statements except as required by law. Additionally, during today's call, we may discuss certain non-GAAP financial measures which we believe are useful in evaluating our performance. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measure can also be found in our earnings release and in the earnings presentation. Thank you, and good morning. We appreciate everyone joining our call and for your interest in Mechanics Bank. I will kick things off today and will summarize the highlights of our first quarter performance. I will also provide another strategic update on the bank before handing things off to our CFO to review our financials in more detail. We will then open up the call for your questions. With that, let us turn to Slide 4. We had a productive first quarter reporting $44.1 million in net income. On a fully diluted basis, our earnings per share were $0.19. Our tangible book value per share ended the quarter at $7.53, with $0.40 per share of dividends paid to investors in Q1. As anticipated, this was another noisy quarter, so I will walk you through some of the major items. First, we recorded a £6.5 million provision entirely related to qualitative CECL factors tied to geopolitical uncertainty stemming from the Iran war. Importantly, this was not driven by any specific credit deterioration within our loan portfolios. Asset quality metrics remain strong, and I am pleased to report that we have 0 basis points of net charge-offs when you exclude our auto net charge-offs. Our run-off auto portfolio, by the way, is also performing well as it winds down. This provision was a conservative response to the heightened global risk of the Iran war and its potential impact on the U.S. economy, particularly given higher oil prices. Second, we incurred just under £5 million of merger-related expenses as we continue to work through the final phases of our HomeStreet integration. These costs were in line with our expectations and are nearing completion. The third non-core item was a $1.7 million tax provision related to the remeasurement of our deferred tax asset due to a lower anticipated effective tax rate moving forward for the company. For forecasting purposes, we expect our effective tax rate to be approximately 26.5% in 2026, but this could still move around a bit. When you adjust for the non-core items, it adds up to $53.8 million of core net income for the quarter representing a core ROAA of 1% and a core ROTCE of 13%. First quarter is always the seasonally weakest for us for both noninterest expenses and core deposits. On the deposit front, our seasonality primarily stems from our $860 million of food and ag deposit customers who see large inflows in December and outflows in January. This quarter, $137 million of our non-maturity deposit decrease was from these customers, which is normal course activity. Otherwise, core deposits are roughly flat. Importantly, we did see a $640 million reduction in CD balances during the quarter. This was deliberate as we continue to hold the line on CD pricing and let hotter money from legacy HomeStreet customers leave the bank. When we modeled the merger over a year ago, we expected $1 billion in CD runoff by the end of 2026. However, runoff has been greater than anticipated, and we now expect a $1.4 billion cumulative reduction in CDs, with overall Mechanics CD balances expected to stabilize at a $2 billion run rate. This implies an additional reduction in CDs of just under $150 million in Q2. Notably, the vast majority of CDs leaving the bank were from single-account households, and our core deposit retention from the merger has been very strong. Also, nearly all of our CDs have repriced once at our lower rates and have maturities of seven months or less. While this elevated time deposit runoff has a negative impact on earnings, it is higher-risk, low-ROE, non-core money that is better to not have in our bank. Getting a bit smaller also generates excess capital, which provides strategic flexibility. Staying on the topic of risk reduction, legacy HomeStreet construction loans also decreased nearly $100 million during the quarter, as we made the strategic decision to let certain business go that we felt was not priced appropriately relative to the credit exposure we were taking in the bank. In general, competition for loans and deposits remains quite stiff. We are okay getting a bit smaller in the near term to minimize risk to the company and position ourselves for long-term success. Our total assets are now £21.4 billion with total gross loans of $13.9 billion, total deposits of $18.2 billion, and tangible shareholders' equity of $1.7 billion. We remain 100% core funded with no brokered deposits or FHLB borrowings at 03/31/2026, and we paid off $65 million of high-cost senior debt in March that was acquired from legacy HomeStreet. Primarily because of the Iranian war provision, our ACL grew 5 basis points this quarter to 1.13% of loans and now totals $157 million. Our allowance is also a very robust 2.95x our total nonperforming assets as of 03/31/2026, with NPAs generally flat for the quarter. Our capital ratios remain healthy with a 13.9% CET1 ratio and an 8.7% Tier 1 leverage ratio. Our cost of deposits was 1.28% in the first quarter, down 15 bps from Q4, and our spot cost of deposits at 03/31/2026 was 1.21%. Our NIM was 3.61% for the quarter, up 11 bps sequentially, and our CRE concentration ratio was 348%. Turning to Slide 5. I would like to provide you with an update on some of the key strategic initiatives happening at the bank. I am very happy to report that we successfully converted all legacy HomeStreet customers onto our core banking platform in March. This major milestone was achieved thanks to a tremendous amount of planning and hard work from all our employees. We will substantially complete our merger integration during the second quarter and expect to realize significant additional expense synergies moving forward as we will not be paying two core providers. Other redundant contracts will be terminated and final headcount reductions occur. We remain on track to deliver on our budgeted cost synergies from the merger, and reiterate our prior guidance of achieving an annual run-rate noninterest expense excluding CDI of approximately $430 million by the fourth quarter of this year. The $130 million sale of our DUS business line to Fifth Third has taken a bit longer than expected, but we have a high degree of confidence that it will close in the second quarter. Given the pending DUS sale, our first quarter earnings, and our modestly smaller balance sheet, we will have significant excess capital, and we expect to pay approximately $0.70 per share in dividends in Q2, subject to regulatory and Board approval. Merger integration is almost behind us after a very full year of work, and the buildouts of our wealth, commercial banking, and treasury sales teams are substantially complete. It will be nice to move past integration work and focus entirely on growing each of our core business lines with a technology roadmap for the bank that is increasingly focused on leveraging AI tools to improve enterprise productivity. As for the big picture, we expect a relatively flat NIM for the next two to three quarters as auto loan runoff remains a drag, our deposit costs stop declining given we no longer expect any Fed rate cuts, and our CD repricing moderates. Our NIM should begin expanding again in early 2027, as the impact of auto fades, driven by legacy Mechanics Bank earning asset repricing, which will continue to occur over the next five years and will provide a tailwind to earnings growth. We now expect to deliver a 17% to 18% ROTCE and a 1.3% to 1.4% ROAA in 2027 and beyond, with a projected GAAP net income range of $275 million to $300 million for 2027. Our earnings guidance has been reduced primarily due to removing two Fed rate cuts from our projections as well as from a modestly smaller balance sheet due to the lower CD balances. We also expect outstanding construction loans to be roughly $300 million over the rest of the year versus $500 million previously. Let us go to Slide 6, which shows an overview of Mechanics Bank today. Again, we have £21.4 billion in assets, 166 branches, and very competitive deposit market share. We are the fourth largest community bank in both California and on the West Coast, with a branch map that is nearly impossible to replicate. We fully expect Mechanics Bank to be a high-performing bank despite taking very little risk with our earning asset strategy. On the left-hand side of the page, we compare Mechanics Bank to all publicly traded banks with $10 billion to $100 billion in assets, which, including us, now has 77 banks in the comparative group. As you can see, cost of deposits for the first quarter was 1.28% versus the median of the 77 banks of 1.76%, giving us a rank of number 10, and I expect our cost of deposits to continue to drop in the second quarter before flattening the remainder of the year. Next, our noninterest-bearing deposit mix is 36%, which is third out of 77, up one spot from a quarter ago, and the greatest store of value for our company. Our CET1 ratio of 13.9% ranks nineteenth, and our risk-weighted assets to total assets is just 59% versus the group median at 76%, which is the second lowest out of our 77 competitor banks nationwide. Despite this low-risk profile, our expected 2027 ROTCE of 17% ranks eighth of the 77 banks, which would be exceptional. Finally, our 2027 efficiency ratio is now projected to be approximately 50%, which ranks twenty-second out of 77 despite our operating in higher-cost markets and with the majority of our deposits comprised of small-balance consumer accounts. Slide 7 is key to our investment thesis and another way of visualizing some of the important statistics from Page 6. The strength of our deposits and the efficiency with which we run our bank, both from an expense and a capital management standpoint, will allow us to post very strong returns despite having nearly the lowest risk mix of assets in the country. These charts provide a great visual in my opinion, especially the risk-weighted assets to total assets comparison. In fact, we expect our risk-weighted assets as a percentage of total assets to continue to come down over time as our auto loans run off and our CRE concentration ratio is managed below 300%. While we will pay substantial dividends in 2026, we expect moving forward that our dividend payout ratio will be closer to 80% of net income as we retain some capital to support core growth and preserve strategic optionality. To wrap up my section, let us turn to Slide 8. This slide summarizes our investment highlights. First and foremost, we have very strong market share across the West Coast, with a branch footprint that is nearly impossible to replicate. We also expect to have very strong profitability due to our top-notch deposits and efficient business model despite taking very little credit risk. We are 100% core funded with no wholesale borrowings or brokered deposits, and are highly capitalized with a very liquid balance sheet, with a 70% loan-to-deposit ratio forecast for 2027. We are efficient with our capital and plan to pay out substantial dividends, which would imply a very attractive yield at today's share price. There is also firm alignment between our public and private investors as Ford Financial Fund owns 74% of the company. Finally, we have an experienced management team with a strong operating and M&A track record. Overall, the future prospects of Mechanics Bank are quite bright. I am looking forward to finishing the job with the HomeStreet integration and moving on to the next chapter of growth for our great company. With that, let me turn the call over to our CFO to dig into more detail on our first quarter results. Unknown Speaker: Thank you. Starting on Slide 10, for the first quarter, net interest income declined $3.9 million, or 2.2%, to $179 million compared to $183 million in 2025. Our net interest margin expanded 11 basis points to 3.61%, driven primarily by the reduction in deposit costs and the $640 million runoff of higher-cost legacy HomeStreet CDs. First quarter interest income included $12.7 million of discount accretion on loans acquired in the HomeStreet transaction, and we have approximately $150 million of remaining discount on those loans as of 03/31/2026. Lastly, the earning asset mix shifted modestly during the quarter, reflecting lower cash balances as CDs continue to roll off. Turning to Slide 11. Noninterest income declined $57.5 million, or 73%, to $21 million compared to $78.5 million in the linked quarter. As a reminder, the fourth quarter included a $55.1 billion bargain purchase gain related to the write-up of the DUS intangible asset acquired in the HomeStreet merger. Excluding that item, underlying noninterest income declined $2.4 million quarter over quarter, primarily driven by lower trust fees, lower gain on sale of loans, and reduced OREO income. Turning to Slide 12, noninterest expense increased $900,000, or 0.7%, to $130.4 million compared to $129.5 million in the fourth quarter. Merger-related expenses totaled $4.8 million, up modestly from $3.5 million last quarter, and were primarily comprised of professional services and severance costs. Excluding these one-time merger expenses, noninterest expense declined $400,000 versus the linked quarter. The efficiency ratio increased to 61.6% compared to 46.7% in Q4, reflecting the absence of the prior-quarter bargain purchase gain rather than any deterioration in underlying operating efficiency. Turning to Slide 13. Loan interest income declined $12.9 million, or 6.7%, to $181.2 million, and loan yields declined 9 basis points to 5.25%, driven by slightly lower contractual yields and reduced discount accretion. Multifamily and single-family residential yields declined modestly by 6 and 3 basis points, respectively. The CRE concentration ratio increased to 348% at quarter end. During the quarter, we originated $546 million of loan commitments, predominantly in SFR and other consumer categories, and sold $54 million of loans, primarily DUS, multifamily, and residential real estate. Turning to Slide 14. The commercial real estate portfolio remains well diversified and continues to reflect our longstanding focus on lower-risk multifamily lending. Multifamily represents approximately 70% of the total CRE portfolio, with an average loan size of $3.8 million, an average LTV of 56%, and an average debt coverage ratio of 1.55x. The remainder of the CRE portfolio is broadly distributed across retail, office, industrial, hotel, and mixed-use categories, each with modest exposure and conservative credit characteristics. At the end of the first quarter, our CRE concentration was 348%, which would be 101% when excluding our multifamily portfolio. We also continue to manage down the higher-risk segments of the legacy HomeStreet portfolio. During the last six months, we made progress reducing our HomeStreet syndicated loan exposure, with balances declining from approximately $142 million at 09/30/2025 to about $68 million at 03/31/2026. During the first quarter, we sold roughly $9 million of unpaid principal balance, or $18 million of commitments. On Slide 15, you can see both legacy Mechanics Bank asset quality trends and the impact of the HomeStreet merger. Mechanics Bank has historically maintained excellent credit quality with minimal non-auto charge-offs and a very low level of nonperforming assets. As shown on the slide, the majority of our historical charge-offs were auto-related, and as mentioned earlier, that portfolio is in runoff and continues to outperform expectations. As a reminder, the increase in the non-auto charge-offs in 2025 was due to a charge-off of a legacy HomeStreet acquired loan that had specific reserves established, and the actual charge-off was slightly lower than the original anticipated loss. At March 31, nonperforming assets represented 0.25% of total assets, modestly higher from 0.23% in the fourth quarter. The increase reflects the impact of lower loan balances in total and a slight increase in the non-auto nonperforming assets of $2 million. Loan loss reserves to loans held for investment were 1.13% at quarter end compared to 1.08% in the prior quarter. The increase in the allowance reflects incorporation of qualitative factor adjustments, including a $6.35 million pre-tax provision driven by the heightened economic uncertainty related to geopolitical developments. Turning to Slide 16. Securities interest income increased $3.5 billion, or 7%, to $53.1 million from $49.5 million in the fourth quarter. The increase was driven by higher yields on the portfolio, which increased by 11 basis points to 3.97% as compared to the fourth quarter. The increase in the portfolio's yield was due to the full-quarter impact of the $650 million of securities purchased in 2025 at accretive yields to the portfolio. The overall securities portfolio decreased by $83 million in the first quarter due to paydowns and a $33 million reduction in fair value due to higher interest rates. Turning to Slide 17. Total deposits declined $782 million during the quarter, driven by a $640 million reduction in higher-cost time deposits and a $232 million reduction in noninterest-bearing demand and $137 million in seasonal non-maturity deposit outflows, partially offset by money market growth. This mix shift and balance reduction contributed to a $10.7 million, or 15%, decline in the deposit interest expense compared to the prior quarter. The total cost of deposits improved to 1.28%, down 15 basis points from the prior quarter, driven primarily by the continued runoff of the higher-cost legacy HomeStreet time deposits. Spot cost of deposits at March 31 was 1.21%, reflecting ongoing repricing benefits. Noninterest-bearing deposits represented 36% of total deposits, continuing to support our low-cost funding profile. Turning to capital and liquidity on Slide 19. We remain very well capitalized with a 13.9% CET1 ratio and an 8.7% Tier 1 leverage ratio at March 31. Available liquidity totaled approximately $16.3 billion. Book value per share at quarter end was $12.61 and tangible book value per share was $7.53. During the first quarter, we paid a $0.40 per share dividend on our Class A common stock. As discussed earlier, we expect the $130 million sale of our Fannie Mae Delegated Underwriting and Servicing business to Fifth Third to be approved and closed shortly. Pro forma for that transaction, we expect to have approximately $165 million of excess capital, which we intend to return to shareholders through a special dividend of approximately $0.70 per share in the second quarter, subject to regulatory and Board approval. That concludes our prepared remarks. Operator, please open the line for questions. Operator: We will now open the call for questions. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. Please pick up your handset when asking a question. You are muted locally; please remember to unmute your device. Please stand by while we compile the Q&A roster. It is star 1 on your telephone keypad to ask a question. Your first question comes from Woody Lay with KBW. Operator: Please go ahead. Woody Lay: Hey, thanks for taking my questions. I wanted to start on the net interest margin. Based off the spot rate of deposits you gave, I am a little surprised margin would be flat, or relatively flat, next quarter. Could you walk through the puts and takes to the flat margin over the next couple of quarters and the glide path we need to see in order to hit the $275 million to $300 million of net income in 2027? Unknown Speaker: Sure. Good morning, Woody. I will start, and maybe let our CFO comment as well. Yes, the spot cost of deposits is down, and that will provide a bit of a tailwind, but we expect our deposit cost to be not quite at 1.21%, probably a little higher than that for the quarter overall, as we are really through most of our CD repricing. We also have a bit of a day-count issue with the first quarter and February and how we do some of our yields. The 3.61%, especially in February, which is a short month, is a bit elevated. So that gets some of it. We are very liability sensitive. We are going to add a bit more disclosure around that in our next investor deck in the second quarter, but we do have, of our $18 billion of deposits, $10 billion at basically 1 basis point, noninterest-bearing or very low cost. But we do have $7 billion that is at 2.85% today, and so it is a bit of a barbell for the deposit base. Not getting the rate cuts, having a flat forward curve, is a bit of a negative for us, clearly. We do have about $4 billion of floating-rate assets. So there is a $3 billion gap between our rate-sensitive liabilities and our floating-rate assets, and we have been working to narrow that gap. It has come down; it will continue to come down, but that is putting some pressure on the margin during the year, especially as we still have $600 million or so of auto loans at a 6.5% yield. Those are running off to zero. That is putting pressure on the margin. The offset is we have outsourced the expense for that, and as those loans run off, our NIE continues to proportionally run off with that as well. We have $12 million right now that we are paying, and so as those balances run down, the $12 million also comes down. So the offset to the margin impact is going to show up in noninterest expense. Do you want to add anything to that? Unknown Speaker: Yes, I think you covered most of it. A couple of other items I would add: you gave updated guidance on the construction land balances, which is one of our highest-yielding assets, so there is an impact there. In addition, we have seen interest-bearing transaction costs pick up. Part of that is some of the CD runoff from HomeStreet. Strategically, we have been pushing some of that into interest-bearing transaction accounts, and so we expect that to pick up during the second quarter, along with everything else that you discussed already. Woody Lay: Got it. And then maybe with some of the moving pieces, is there a margin range you expect in 2027 in order to achieve the NII run rate you expect? Unknown Speaker: I would say probably 3.7% to 3.8% in 2027 would be my estimate. Obviously, that is still a ways down the road, and things can change, so I hesitate to give too much there. What I do know is we are 100% core funded, and our deposit costs should be pretty stable, especially if we can grow core deposits, which we think we can do. I think our deposit cost should remain pretty stable once we get through the second quarter. We have at least $5 billion of low-yielding legacy Mechanics Bank assets that are a hangover from the COVID era that will continue to amortize, prepay, cash flow, and reprice. We are going to add some disclosure around that as well in the second quarter, but that is going to be a tailwind. That is happening, and that will push our margin higher every year for the next five years. Eventually this would be a bank that is north of a 4% NIM, and there are levers we can pull to accelerate that. We are going to be continuing to generate excess capital as we are a little smaller, and we have low-yielding loans and low-yielding securities. We may consider a restructure on some of that. It would be small. Eventually, we are going to sell these auto loans. I do not know when that will be, but it is going to be back half of this year, early next year. We are still trying to determine the ideal timing of it, and we may take a modest loss when that occurs, but it will be a pickup to earnings for sure, because that line is losing us money at the moment as we continue our runoff. So there are a lot of levers we can pull, and the underlying earnings power of this bank is very strong, thanks to our rate deposits, and we have not embedded any of that kind of stuff in our guidance. Woody Lay: Maybe just shifting to the balance sheet real quick. As you noted, some of the deposit runoff is coming a little bit more than expected, and I think you said there is another $150 million of planned CDs from HomeStreet that is coming off next quarter. Once we get through that tranche, how are you thinking about the size of the balance sheet? Should it remain pretty stable off those levels, or just given the sale of the auto—potential sale of the auto—portfolio, could we see some additional shrinkage in the back half of the year? Unknown Speaker: Once we get through any remaining CD reductions in the second quarter—and again, the first quarter is also the seasonal low for deposits with us; every first quarter that is the case—expect core deposit growth. We think we should grow 2% to 4% a year in line with our economies, and we have a ton of focus at the bank on growing core deposits. The non-core stuff is basically all out. If we sell auto loans, we will get the proceeds and reinvest somewhere else, so that will not change the size of the balance sheet. I view this as very close to the low. We should be growing; we are budgeting to grow. We have momentum on deposit pipelines and things like that, so I would not expect much, if any, more balance sheet shrinkage—maybe a bit in the second quarter, but that should be the near-term low. Woody Lay: Got it. And then maybe just last for me. You all noted in your opening remarks an 80% payout ratio in 2027 that provides some capital to be strategic with. You noted you could look at restructures, but I was also interested in your thoughts on additional M&A from here, especially once we get past the official core conversion. Unknown Speaker: Good morning, Woody. I think that you have to look at our past to somewhat predict our future. We have always been extremely acquisitive. We are always looking at situational opportunities. Obviously, the opportunities have to be within our footprint. We are not looking to really expand our West Coast footprint, and we do not want to do an M&A transaction simply to get bigger. It has to make us better. And I think the overlay to that is making us better with an M&A transaction gets harder and harder and harder. You heard the 1.28% deposit cost for the quarter and the 1.21% spot rate. We protect these deposits judiciously. I am not talking about our time deposits—the story there is we have run those down intentionally—but it really gets harder and harder to move the needle. I am not saying that we have to buy another bank or acquire another opportunity that has a like deposit cost, but we think the value of a bank—the franchise value of a bank—is demonstrated predominantly by its liability structure and its deposit cost, and so we have to take that into consideration. Frankly, there just are not a lot of banks out there. We are always looking. There are a scant few opportunities that we constantly monitor. Something in our favor is we are trading at a pretty good multiple. All I can say is we are keen to the opportunity set; we are always looking. Being extremely transparent, there is nothing right now on the front burner, and that is simply because there is nothing more important for our bandwidth today than getting this integration right. We only acquired HomeStreet, which significantly increased our size and our footprint, eight months ago, and we are now in the midst of getting our cost out and we spoke to the conversion. Those are the very important things that we have to get done and get right first, and we are getting in the later innings of doing that. Then we will certainly see what is out there. Woody Lay: Awesome. I appreciate you taking my questions and all the color you provided. Unknown Speaker: Of course. Thanks for the questions, Woody. Operator: A reminder, if you would like to ask a question, please press star 1 on your keypad. Your next question is from Dave Rochester with Cantor. Please go ahead. Dave Rochester: Hey, good morning, guys. Unknown Speaker: Good morning, Dave. Dave Rochester: Back on your comments on growth in core deposits, it sounds like you feel pretty good about doing that through the end of this year. I was curious, just given the headwinds in auto and construction, if you think you could still grow the loan book this year. And then I am trying to triangulate into an NII trend with a stable NIM. It sounds like you are still expecting NII to grow through the end of this year as well with—whether it is loan growth or securities growth—through the end of the year, just given that you are growing core deposits. I wanted to get your thoughts on that. Unknown Speaker: From a loan growth standpoint, we expect to grow our consumer loans. We had modest growth in single family; we expect that to pick up throughout the year. Mortgages and HELOCs—we have seen good demand and growth. We are also lending against the cash surrender value of whole-life policies through our partner, Incline. That is growing rapidly. We are now at, I think, $670 million of drawn balances. We expect that over the course of the year to get to $1 billion drawn and really like that business from a risk-adjusted return standpoint, especially given its short duration and a good counter to some of that gap I talked about earlier between our rate-sensitive deposits and our floating-rate assets. So the consumer should grow. We have talked before about our construction balances—we expect those to decrease around $300 million. The homebuilder team that came over from HomeStreet does a great job; they really are a strong team, but that business was thinly priced in some areas, and we are getting it deliberately a little bit smaller. So that will be a bit of a headwind through the year, but we are de-risking. Not doing construction lending can obviously go great for a while, then it can go the other way very quickly, so I think that is prudent. On commercial real estate, we are originating loans, but the plan is still to get that below 300%. I would model us over the next couple of years getting below 300%, so there will be a modest decrease in outstanding multifamily CRE. C&I should be—deliberately we sold some of the syndicated loans that HomeStreet had; that is part of the balance reduction there. That should be close to a nadir and should be starting to grow again. Unknown Speaker: I would add one other comment, and that is the market is extremely—everyone says the same thing, and we have been monitoring earnings releases, and some have had modest loan growth—but I would say the competitive landscape on both term and pricing is as thin and as tight as I have ever seen it. We are tough on credit, and I think that would be an opinion shared by a lot of our lenders that are out in the market today. We are seeing some things out there that may trend to this thing just getting really, really competitive to the extent that it is probably not all that healthy, particularly as it relates to term, which I equate to underwriting. Credit spreads are extremely tight. In my way of thinking, this is not the time to necessarily be pressing the accelerator too hard for loan growth, and with the overlay of our CRE concentration, we have to be very mindful of that. Dave Rochester: Appreciate that. Are you, at this point, still expecting NII growth from the first quarter through the end of the year, or is it more stable along with the margin? Unknown Speaker: It should be pretty stable, I would say, for a couple of quarters, and then start to pick up. The balance sheet is going to be getting a little bit smaller in the second quarter and then should start to grow, but the growth will be modest. I would guide to stable NII and then picking up, I think, pretty materially in 2027. Dave Rochester: You mentioned the upside in the margin as you get into the early part of 2027. Where are you seeing that roll-on, roll-off differential in the earning asset buckets you have at this point? Unknown Speaker: We have a lot of lower-yielding mortgages. Our legacy Mechanics Bank single-family is probably a low 4% coupon. A fair amount of that is starting to prepay and amortize, coming back on the books at, call it, 6%. Multifamily—we have $2.4 billion or something north of $2 billion of multifamily loans that yield low 4% in aggregate. That business today is closer also to 5.75% to 6%. That entire book will reprice—it is all adjustable, five, seven, ten; it was mostly originated in 2021 and 2022. By 2032, it will all have reset to market rates closer to 6%. So there are a lot of tailwinds there. We also have an HTM portfolio that is a drag. It is $1.3 billion today, yielding 1.61%, and $100 million of that amortizes a year. Slower, longer duration, but over time, it will continue to be a tailwind. There is a lot of upside to the bank over time; as time passes, we will have a natural tailwind just from that occurring. This year will be a bit more flat, though, given the flat curve—no Fed cuts—and the final drag of auto. We will make up for some of that in our pretty substantial expense reductions that are coming here in the second and third quarters. Dave Rochester: It looks like between now and the fourth quarter, you are looking at at least a $10 million reduction on a quarterly run-rate basis on expenses, right? How much of that are you expecting to get in 2Q? Unknown Speaker: We are at $474 million, excluding CDI annualized, in the first quarter. We expect to get to $430 million by the fourth quarter. That is $44 million annual—over $10 million a quarter. In the second quarter, we should see—a lot. I do not know the exact number, but there is going to be a significant amount of cost reductions coming off, and that will persist into the third quarter. By the fourth, we will be there. Dave Rochester: Good, that will be good. Switching to the fee side for a minute on the trust business: you were opening an office in Delaware. I think it was this quarter. Is that up and running? If you could just remind us what that does for you and what other expansion you are planning in that business going forward, that would be great. Unknown Speaker: We got a little bit delayed. It is now expected to open in May. We are almost there on the Delaware trust business. We have some demand waiting for us to open that. That is a major step for our wealth group, so that is exciting, but it has been delayed a quarter. Overall, our buildout of the team is complete. We have a great team; a number of folks came over from First Republic after that bank failed right in our backyard. We have been laying the groundwork. We have been very busy with the integration and the merger, and we picked up some private bankers and other new clients from HomeStreet on the deposit side through it, and I think there is opportunity on the trust and wealth side to continue to grow. I am optimistic that that business will continue to grow and be a very accretive business line for us, but the trust business did take longer than we thought. We are at the finish line. Dave Rochester: Maybe just one last one on capital. You mentioned the big payout next quarter—I think it was $165 million of excess that you are looking at. Does that get you down to your target 8.25% Tier 1 leverage, or do you keep a little bit of extra there for flexibility going forward? How are you thinking about that? Unknown Speaker: The way we have been managing capital is 8.25%, but one quarter in arrears, so it is more effectively like 8.5% to 8.6% leverage. This quarter, we are at 8.7%. To your comment, we are going to have excess—my rough math is maybe $35 million this quarter—that we are not paying out. Our dividend is going to be close to $160 million to $162 million this quarter, but there is still some that we are holding back, and we will think about how best to use that. That will persist as we go into the third quarter due to the lag on leveraged assets as the bank gets a bit smaller. Leveraged assets take a quarter to catch up fully, and so we will have some excess capital. The other thing I will point out is there is a lot of CDI amortization that does not show up in GAAP earnings, but it does compound in capital generation for the bank. That is another source of excess capital that we create above and beyond the actual GAAP net income. Dave Rochester: Alright, great. Thanks, appreciate it. Unknown Speaker: Thanks, Dave. Operator: There are no further questions at this time. This concludes today's call. Thank you for attending, and you may now disconnect.
Operator: Good afternoon, everyone, and welcome to IDACORP, Inc.'s First Quarter 2026 Earnings Call. Today's call is being recorded and our webcast is live. A replay will be available later today for the next 12 months on IDACORP, Inc.'s website. If you need assistance at any time during the presentation, please press 0 on your phone. I will now turn the call over to Amy I. Shaw, Vice President of Finance, Compliance, and Risk. Amy I. Shaw: Good afternoon, everyone. We appreciate you joining our call. The slides we will reference during today's call are available on IDACORP, Inc.'s website. As noted on Slide 2, our discussion today includes forward-looking statements including earnings guidance, spending forecasts, financing plans, regulatory plans and actions, and estimates and assumptions that reflect our current views on what the future holds. These are all subject to risks and uncertainties. Those risks and uncertainties may cause actual results to differ materially from statements made today, and we caution against placing undue reliance on any forward-looking statements. We have included our cautionary note on forward-looking statements and various risk factors in more detail for you to review in our filings with the Securities and Exchange Commission. As shown on Slide 3, also presenting today are Lisa A. Grow, President and CEO; Brian R. Buckham, EVP, CFO and Treasurer; and John Wonderlich, Investor Relations Manager. Slide 4 has a summary of our first quarter financial results. Diluted earnings per share were $1.21 compared with $1.10 last year. Our key operating metrics and guidance are unchanged, except for our hydropower generation forecast as we reduced the top end of the range. We are reaffirming our full-year 2026 IDACORP, Inc. earnings guidance in the range of $6.25 to $6.45 diluted earnings per share, which includes our expectation that Idaho Power will use less than $30 million of additional tax credit amortization to support earnings. These estimates assume historically normal weather conditions and normal power supply expenses for the rest of the year. Now I will turn the call over to Lisa. Lisa A. Grow: Thank you, Amy, and thank you all for joining us today. I will start my remarks with a look at our continued growth on Slide 5. We have seen an overall customer increase of 2.3% since last year's first quarter, with growth across all customer segments, including 2.4% for residential. From a load perspective, industrial energy sales grew by 5.7% over the same period. After years of thoughtful planning and execution, we are starting to see the ramp-up in loads and revenues from some of our large industrial customers, and that ramp will accelerate during the year. Two of our industrial customers, Micron and Meta, are examples of that. As you can see in our latest photos on Slide 6, construction of Micron's first fabrication facility continues to progress, and Micron has started ground preparation for the second fab. Meta's data center has reached the testing and commissioning stage. We have worked tirelessly to be ready to serve their needs as they ramp up operation. In addition to these large industrial projects, we continue to see significant interest from core industries—food processing, manufacturing, distribution, and warehousing—as well as inquiries from other large customers in other industries looking to operate in our service area. As we serve one of the fastest-growing areas in the nation, with what we view as a leading rate base growth, we are doing it thoughtfully so that growth pays for growth to help protect our existing customers from cost shifting. As you can see on Slide 7, our approach to contracting with new large industrial projects is focused on protecting both existing customers and shareholders from potential negative financial impacts as well as being transparent and responsive to the new customers. We provide clarity in how we will serve the new load, including timelines, rates, and other terms. We have used take-or-pay provisions, certain upfront payments, credit and security requirements, termination or exit payments, customized pricing terms, and other contractual features in some cases. Like everything we do, we take a thoughtful approach to our customer pipeline. Turning to Slide 8, we remain focused on affordability. We work hard to keep our costs down and provide exceptional value to our customers, and our rates remain 20% to 30% lower than the national average. Our rates have increased at a much slower pace than averages, increasing by 23% over the past decade compared to 41% nationally. This increase also compares favorably to the consumer price index, which increased 36% over the same period. The benefits of our low-cost system—and hydro in particular—help with our affordability focus. Our regulatory model in Idaho, a growth-pays-for-growth system, also helps us retain that affordability, and it has been working. Legislation was passed in Idaho this year that codified the way we currently develop large load contracts with one change: it established a deadline of nine months for the PUC's contract approval process, which had previously been more open-ended. As we discussed on our last call, Idaho Power is not planning to file a general rate case on June 1, and at this point, we are unlikely to file one at all this year. While we are seeing higher depreciation and interest expense associated with growth and our infrastructure build out, as well as wildfire mitigation costs, we expect that revenues from new large load contracts will help offset those additional costs. We also continue to benefit from careful and thoughtful spending. As we move towards summer, and moving to Slide 9, I am happy to report that the Idaho Commission approved our 2026 wildfire mitigation plan earlier this month. As a reminder, the commission-approved plan establishes the standard of care in Idaho under the Wildfire Standard of Care Act beginning this year. Moving to Slide 10, Idaho Power continues full speed ahead on major infrastructure projects, including three major transmission lines that will add critical flexibility and reliability to our system. Work is progressing quickly on our B2H transmission project, which we expect to be in service in late 2027. Nearly half of the access roads and structure pads have been completed, along with 200 structures, about 15% of the total structures for the project. On the SWIFT North transmission project, we received our CPCN from the Idaho Commission. Several project authorizations remain in progress, including final construction authorization from BLM. The construction contractor plans to break ground this June in Nevada and this September in Idaho, and we expect SWIFT North to be complete as early as 2028. We are also continuing to work with PacifiCorp on the Gateway West transmission project, and we recently filed a joint request for a CPCN with the Idaho Commission. We anticipate a critical section of that line between our Hemingway and Midpoint substations will come online as early as 2028. If all continues to go as planned, customers will be served by three new large transmission lines on our system by 2028, bringing with them the benefits of access to diverse markets and transmission wheeling revenue. Turning to Slide 11, I have some updates on the new gas plants we discussed last quarter. We have received a CPCN from the Idaho Commission for the company-owned 167 megawatt plant that will be a natural gas plant next to our existing Bennett Mountain Power Plant. We have also secured an EPC contractor as we continue to work toward an in-service date of summer 2028. Since our last call, we have also filed for CPCN in Idaho for two additional natural gas plants. As a reminder, both were included in the CapEx forecast update we shared at year-end. We plan to bring the 222 megawatt South Hills project online in 2029 and the 430 megawatt Peregrine project in 2030. These natural gas projects will provide firm, dispatchable resources we need to meet growing customer demand, and we view these projects as affordable, low-risk solutions to our near-term capacity deficit. We also have 250 megawatts of new company-owned battery storage that will come online this quarter, and we will be adding 125 megawatts of third-party-owned solar generation to our system later this year. We remain on track to complete the conversion of VOLMI Unit 2 from coal to natural gas before the summer peak this year. These resources support our efforts to add capacity, flexibility, and affordable energy to help serve our customers. As you can see, we are continuing a major expansion cycle, and Idaho Power is an exciting place to be. Turning to Slide 12, Idaho Power received approval of the 2026–2032 RFP from the Idaho Commission. The RFP is aimed at solving a projected capacity deficit of at least 200 megawatts. Idaho's new procurement rules will allow us to complete a timely and competitive resource evaluation, and we will have additional details about potential resources and projects to meet these energy needs on future calls. I will close my remarks by following up on last quarter's announcement regarding the sale of our Oregon service area. The transaction continues to progress ahead, and we plan to make filings in the next couple of months with the Oregon and Idaho Commissions and FERC for the approval of the sale. With that, I will turn the time over to Brian. Thanks, Lisa. Lots going on operationally, which is exciting for us. Brian R. Buckham: On the financial results side, I wanted to summarize the company's strong start to the year by highlighting that we saw strong results even with unusually mild weather and several expected headwinds. Our expected headwinds were higher share dilution, higher depreciation and interest expense, and lower accelerated amortization of ADITCs. The use of fewer ADITCs is technically a headwind when you are comparing Q1 of this year to Q1 of last year. Admittedly, that might be counterintuitive, so I will talk more about that as I go through the reconciliation, which is next on Slide 13. IDACORP, Inc.'s first quarter net income increased over $8 million compared to last year. Higher retail revenues from the January rate increase and from customer growth combined for a $23 million benefit. Usage on a per customer basis decreased operating income by $10.7 million, the result of particularly mild weather that reduced residential and commercial usage. Keying on something that Lisa noted though, industrial use per customer increased notably, in part from a new large industrial customer that ramped up its usage during the quarter. As part of our last general rate case, we updated the FCA mechanism—that was for both the rates and usage per customer base. Combining those updates with lower usage per customer in the residential and small commercial classes from the mild first quarter, we saw increased FCA revenues of over $19 million compared to 2025. As expected, O&M expenses were higher in the first quarter, but the primary drivers were higher wildfire mitigation program expenses and amortization of previously deferred costs associated with the Jim Bridger plant. A large portion of those items we recover in customer rates, so they are reflected in revenues. In total, O&M expenses were up $13.1 million compared to 2025, but, again, with offsetting revenues for much of it. Depreciation and amortization expense increased around $—million dollars for the quarter [inaudible] from our ongoing infrastructure investment. Other changes in operating revenues and expenses increased operating income by a net $13.6 million. That resulted from lower net power supply costs, a decrease in property taxes due to legislative changes in Idaho last year that became effective this year, and updates to the PCA mechanism base from last year's rate case that were not unlike the changes to the FCA base. Nonoperating expense increased about $4 million, which was mostly higher interest expense. Interest expense recorded on the new finance lease, which is our battery tolling agreement, also contributed to the increase. Partially offsetting those items was increased AFUDC from a higher construction work in progress balance, which we still expect will be sustained for some time. Idaho Power amortized $6.3 million of additional tax credits under the Idaho earnings support mechanism in the first quarter. That was $13 million less than what we reported in 2025, so last year's Q1 benefited from additional ADITC usage much more than this year's Q1. As I alluded to, that is actually good news from a financial strength and performance perspective for this year. It means we expect to use or need less support from the ADITC mechanism this year to reach the floor level of year-end return on equity in Idaho, and that is despite what we predict to be a considerably higher year-end book equity balance. I tend to look at that as one helpful barometer of operating performance. Our next slide, Slide 14, reiterates what we discussed about CapEx on the fourth quarter call. I will just note that the forecast does not include any resource that could result from the 2026–2032 RFP, nor does it include some of the projects that often fill the last two years of that plan as we move ahead. So there could be some upside to what is shown on the graph. Moving to Slide 15, I want to point out that we have made a small update to this slide since our last call. You can still see that net cash flow from operations is funding over half of our CapEx needs in the 2026 to 2030 window—and hopefully more than that. Either way, we will still need our growth capital, which we have estimated around $2 billion in equity and $2.9 billion in debt to stay near our target 50/50 capital ratio. What we have updated is in the equity section under FSAs and equity to be issued. In the first quarter this year, we executed on $155 million of forward sales through our ATM program, and we settled nearly $52 million from prior forward sales through the ATM program. So it would be around $2 billion of equity shown as needed on the slide. When you combine the ATM program with our follow-on from last year, we have now settled or executed forward on over $750 million of the need, which we have broken out separately on the chart. That gets us the equity we needed to 2027 and leaves the remaining amount that we think is within relatively conservative ATM issuance ranges. We have a $300 million ATM that we put in place a couple years ago, and we have now used that one in full, so we are planning to establish a new ATM program in the near term. Not surprisingly, any additional CapEx needed to serve loads would require some level of financing. If that were the case, that funding would likely be more heavily weighted at the back end of the five-year forecast where operating cash flow should also be higher to offset financing needs in part. A lot of numbers and detail pretty quickly there, and on Slide 16 you can see the forward sales agreements that we have available and the forwards that we have settled to date. It offers a little better, easier picture of where we stand on equity and financing generally. With that, I am going to wrap it up there. I am going to hand it over to John Wonderlich. John Wonderlich: Thanks, Brian. Turning to Slide 17, you can see our 2026 full-year earnings guidance and key operating metrics. Not much changed from the fourth quarter call. This guidance assumes normal weather for the remainder of 2026 and normal power supply expenses. We expect IDACORP, Inc.'s diluted earnings per share this year to be in the range of $6.25 to $6.45. We still expect that Idaho Power will use less than $30 million of additional investment tax credit amortization in 2026, so less than the $40 million we amortized in 2025. We continue to expect full-year O&M expense to be in the range of $525 million to $535 million. We still anticipate spending between $1.3 billion and $1.5 billion on CapEx in 2026. As the five-year forecast showed, we continue to expect higher CapEx numbers as we continue to focus on safe and reliable service and to respond to strong growth in our service area. Finally, given our current forecast of hydropower operating conditions, we expect hydropower generation to be within the range of 5.5 million to 7 million megawatt-hours for the year, so we trimmed the top end of our guidance. Water storage in our system is near or above average across the Snake River Basin. However, low overall snowpack conditions will result in lower water supplies from spring snowmelt. Record-wet April conditions, with more than three times the average precipitation for the Boise area, have helped to increase spring season streamflows and hydropower production, but will not completely offset the lack of winter snowpack. With that, we are happy to address any questions you might have. Operator: We are now ready to begin the question and answer session for attendees who have joined on the Q&A line. If you would like to ask a question, please press star 1 on your phone. Please ensure your mute function is turned off before you ask a question. We will take as many questions as time permits on a first-come basis. Once again, that is star 1 on your phone to ask a question. Your first question comes from the line of David Arcaro from Morgan Stanley. Your line is live. Lisa A. Grow: Hi, David. David Arcaro: Hey there. Thanks so much for taking my questions. Thanks for the comments on the timing of the rate case. I was wondering what you are currently thinking, or what should be the base case expectation. Could it potentially be next June—June 2027—in terms of when a full rate case might be, or how are you characterizing that? Lisa A. Grow: You know, I think that has been sort of our traditional cadence, but we will keep doing the math and figuring out when the right timing of the next general rate case would be. It will depend on how this year shapes up and what we see coming for the next year. Brian R. Buckham: Yeah, Dave, and a couple of factors we are looking at, just following on Lisa's comments. One is the conversion of Quip to plant in service becoming eligible for rate base treatment. Some of the timing of that dictates when we do rate cases. And then the other aspect is large load revenues—the timing of those coming in and the magnitude of those revenues. Those can both dictate timing of rate cases. David Arcaro: Got it. Thanks for that. That makes sense. And then I was wondering if you could comment on what you are seeing in terms of new customer, new large load inbounds—the pace of demand in that pipeline? And also, when could you deliver new power? When could you handle new large loads coming into the system at this point? Lisa A. Grow: Well, it continues to amaze me how strong the pipeline is. There is just an incredible amount of interest in our service area, again, from many different industries. Certainly, there are some data centers included in that. For what we have ahead of us right now between now and, say, 2028, we are probably at our maximum capacity to actually get work done. But if there was someone that was going to come on with modest ramps, perhaps it could go a little bit towards the end of that time period. We are seeing a pipeline that goes well into the 2030s now, and we are really excited about the sustainability of this growth as we look to the future. Adam? Adam J. Richins: Yeah, David. I do not have a ton to add. In the data centers, we are seeing a fair amount of movement. In the dairy area, biodigesters, base manufacturing, warehousing—so it is pretty diverse in that regard. In terms of keeping up, we feel good about where we are at. We have been able to reserve turbines where needed. Obviously, we have ESAs that are going out the door to make sure we will continue to meet these moving forward. As of right now, we feel good. We are staying ahead of it. Obviously, we have to get our transmission lines built and in place too. Those are all on track, so we feel good about the transmission side too. So far, so good, but it is a constant effort, and we are continuing to focus on it every day. Operator: Your next question comes from the line of Shar Pourreza from Wells Fargo. Your line is live. Analyst: Good afternoon, team. It is Ashley Whitney with Telema on for Shar. As we are thinking about rate case cadence, we are also thinking about the credit outlook. Some time back, Moody's downgraded the holdco to Baa3 as well as Idaho Power. It cited a heavier CapEx cycle and weaker near-term credit metrics, but it also acknowledged supportive offsets like additional parent equity or more frequent general rate cases. From your perspective, is the focus now on simply rebuilding within the new ratings category, or do you still see a path over time to improve credit positioning as recovery cadence catches up with spend? Brian R. Buckham: Yeah, Whitney, thanks for the question. In terms of where the credit metrics stand right now, we do not issue debt at the holding company level—we do all of those debt transactions at the opco level. The move at Idaho Power to Baa2—part of the rationale for that was when you look at sector credit metrics at Moody's, a lot of the Baa1 ratings, which is where Idaho Power was before, have a CFO pre-working capital to debt of around 18% on average—maybe even slightly higher in some instances. Ours, as we have talked about in the past, while we met our prior threshold of 13% in both 2024 and 2025, going forward we are not looking to have a credit metric of 18%, at least not for this year and not for next year at Moody's at the opco level. Moody's report has some of the details on that, but from my perspective there was a lot of peer benchmarking that went into that decision, so perhaps the downgrade was not a surprise in that regard. The new positive is the stable outlook, and a new downgrade threshold at 12% for Moody's. We have received a lot of questions in the past on the negative outlook, but some positive remarks on the new stable outlook. On the IDACORP, Inc. side, you mentioned Baa3—that is part of Moody's notching policy. We have a higher CFO pre-working-capital metric at IDACORP, Inc. and no holding company debt, so that really is just the Moody's policy on notching. We have talked before about the need or desire to keep our balance sheet strong at 50/50—and a simple and straightforward balance sheet—so very focused on that. To your point, that does require some equity issuances that we have signaled for quite some time and actually executed on over time. Maintaining that balance sheet structure for us does require the equity. It keeps us closer to the threshold for S&P and our prior threshold for Moody's in that 13%–15% zone for a while, expecting to naturally grow off of that with large load revenues and rate cases over time. We do not have an intent to immediately target 18%, for example. We will continue to blend debt and equity. We did a debt offering earlier this year. We will have some equity that we will do later in the year—pull down from forwards—to help blend that in. Our financing strategy does take into account those credit metrics, but balance sheet strength is the most important thing for us as we look to continue our financing. Lisa A. Grow: We just take a very pragmatic view of where we are in our spend and where revenues come in. To the extent those are not matching up, especially during this growth cycle, we will go in for rate relief. But like this year, where we are able to stay out given that those revenues are starting to come in, we will use that as the cadence. Brian R. Buckham: I think that is right. One of the things I mentioned earlier is looking at the conversion rate of Quip to plant in service and the financial impact that has if you do not do rate cases around that. Some of it will be weighing the impact of that conversion to rate base and taking that to regulators versus filing rate cases when you have large load revenues coming in. The large load revenues do really cover a lot of what would otherwise be rate cases. I cannot say at this point that we would file every year. The word you used was opportunistic—when we need to go in, that is when we will go in. That is how I look at it. Another thing we can talk about is customer affordability. That is important to us, and we can maintain that through these large load revenues, long-lived assets, and other features of the company with a growth-pays-for-growth mentality. We will look each year at what our rate app would be. We do not want to go in and make really large rate requests, and this growth-pays-for-growth mentality and the way we operate our business from an O&M and affordability perspective help us stay out and use those revenues instead of rate cases in some years. Analyst: Thank you. Operator: Your next question comes from the line of Christopher Ronald Ellinghaus from Siebert Williams Shank. Your line is live. Lisa A. Grow: Hey, Chris. Christopher Ronald Ellinghaus: How are you? Brian, I thought you were going to get into this—I do not remember what you said in your comments—but can you talk about how you foresee ITC recognition through the years? Do you have some visibility there? And in the guidance, you talk about normal weather, but just looking at NOAA’s forecast it is going to be far from normal. Can you give us any sense of what you are seeing—particularly irrigation—as it is supposed to be super hot with well-below-normal precipitation? What have you seen so far in the spring? What is the soil condition? And what are your thoughts about what the summer will look like? Brian R. Buckham: For ITCs, we are actually a cash taxpayer, and so we have a tax credit appetite on our returns each year for federal income taxes. We are monetizing those ITCs every year. That appetite continues. I will say there is some diminishing availability of ITCs in the future when you look at some of the legislation that is out there now. We are getting it from our batteries, for example, now—that will go on our tax returns. Over the long term, things could change. We have also looked at PTCs as another avenue for us as well. Right now, one of the important features of the ITCs that we generate is that they do go into the mechanism. So we have a fairly sizable balance of ITCs that are available for ADITC use in the mechanism going forward. But no planned external monetization through sale of the tax credits—we would be recording them on our tax returns. Lisa A. Grow: On the weather, it is a great question, Chris. Those of us that enjoy winter sports were really bummed out about not having much snow in the hills. We did have some good storage, and we did catch up a little bit with the rain that we had last month, but it is still a little bit short of what we would normally see. Certainly, we like it to be stored up in the mountains as snow and come down on a slower pace. Irrigators have been trying to figure out their strategy given some of the commodity prices, and that may have some impacts. Overall, with hot and dry conditions, our folks on the ground are thinking it could be actually closer to normal than some of that might indicate. Adam has some additional color. Adam J. Richins: Chris, we have been debating this issue with folks on the ground because it is interesting to see their take. What we have been looking at is that low water years have not correlated to less sales because there are so many other factors involved. This summer, the factors pushing towards more sales are projected warmer weather—you mentioned NOAA—Lisa mentioned our reservoirs. We are actually at average, so that is a good sign. When surface water users get cut off a little bit, they tend to use ground pumps to make some of that up when water is scarce. Those things push towards more sales. On the other side, with low water, you can have the risk of curtailments, which could happen—we have had that in the past. As we debated these things and looked at what we thought irrigation sales were going to look like in the future, we got to this net-net normal position that Lisa mentioned, and that is really from the folks on the ground talking to farmers, trying to get a feel for what the season is going to look like. Christopher Ronald Ellinghaus: If I could paraphrase, you are suggesting that you are expecting sort of normal water resources but the demand could be high. Adam J. Richins: It does feel like the demand—if the weather turns out like it is predicted, like you mentioned—could be higher in terms of the need for energy to pump. The water side could be a little bit low, but we have seen no correlation in the past between low water and low sales. In fact, lots of times we have had low water years that have had higher sales because the temperatures have been higher. There are just puts and takes as we look at both sides of it. Christopher Ronald Ellinghaus: Did you get any sort of feedback about the impact that the Iran situation is having on your agricultural customers? Adam J. Richins: We did not get feedback on that. We got a little feedback, as Lisa mentioned, on the commodity side. Some of the pricing for potatoes and beets are a little bit lower than our farmers would like, and so there are some cases when they planted maybe slightly less of those products, which could impact water use. But they did not touch on the Iran issue directly. Christopher Ronald Ellinghaus: Lastly, you touched on the strength of the pipeline. Can we assume that your queue is basically unchanged from what you talked about on the fourth quarter? Lisa A. Grow: I think we have even had a few more inquiries since the fourth quarter. It seems like it is never-ending, honestly. A few new ones come into the queue; a few others might drop out. Overall, it is up. Adam J. Richins: I think that is right, Chris. Just a quick reminder, we have been hanging at that 8.3% IRP growth for a while now. I think we are going to update that as part of the next IRP in Q4. There should be some upside in that. Lisa A. Grow: And it is important to remember that we do not put any prospective load into that number until we have either a sizable financial commitment or a signed contract or something that feels a lot more than a tire-kicker. While the pipeline and the 8.3% are not exactly correlated, there is some lag in between. Christopher Ronald Ellinghaus: Sure. It just helps when you quoted that 4 thousand megawatt queue—it puts things into perspective. I was curious if that number had made any kind of advance or decline. Adam J. Richins: The problem on those issues and talking about the large loads is so many of them are confidential. We just cannot come out with them until they go public, and so a lot of times we are in a holding pattern for them. Christopher Ronald Ellinghaus: Sure. Makes sense. Okay. Thanks a bunch. Appreciate it. Lisa A. Grow: Thank you. Operator: Next question comes from the line of Michael Lonegan from Barclays. Your line is live. Michael Lonegan: Hi there. Thanks for taking my question. Just wondering if there is any update you can provide on Micron Fab 2—when you expect an ESA to be signed, and when we could expect it to be implemented into your capital plan? Adam J. Richins: The ESA for Fab 1 has been signed and is being reviewed by the commission. We expect to hear from the commission. On Fab 2, we are still negotiating the ESA. What I can say about Micron is there is an absolute ton of work that is going on on-site. It is really amazing to see what a $50 billion project looks like as you walk around. Brian, Lisa, and I were able to do that not long ago. In terms of their in-service date, they anticipate initial wafer output for their first fab around mid-2027. On the second fab, they are already moving forward with ground preparations for Fab 2. We have revenues potentially coming in the door mid this year related to Fab 1. On the ESA side for Fab 2, we are still working with Micron. Hard to say exactly the timing of that, but we will let you know when it becomes more public. Michael Lonegan: Thanks. And then you highlighted the capital plan as conservative. You touched upon the 2026–2032 RFP as being incremental. Is there anything you could say about your targeted ownership in the investment opportunity set there? Lisa A. Grow: We always want to go in with some company-owned assets or projects, and we do. Historically, we have won about 50% of those. We certainly have a desire to own as many of the resources as we can, and we do so in a competitive way. Adam J. Richins: I will just add we do have several projects that we will put into the 2026–2032 bid, so we will compete like we do each year. Brian R. Buckham: Michael, on the CapEx impact as well—the CapEx forecast that we have in the slides does not have any resources for the 2026–2032 RFP in it. We do not assume any sort of win rate for purposes of our CapEx. We put it in there when we know it is going to happen. There is some amount of CapEx in the graph that will help a portion of Micron's second fab, but only what we expect would be in the very earliest year or years of operation. Our large transmission projects will help with that. We need more generation resources too, and like Adam said, the amount of CapEx actually depends on the ESAs we sign and how we serve our load growth rate, which we are working on right now. The IRP is filed in June 2027, but we will lock down some form of load growth rate more in fourth quarter this year so that we can do our modeling off of that. If you want to serve load several years from now, you have to start the process now, which means spending some amount in the near term for things like turbine reservations and early payments, and then higher amounts as things get fabricated and delivered and the project gets constructed. So you could start to see some of those payments show up in the current five-year window—maybe weighted more towards 2029 and 2030 than in the very near term. That is how we look at the CapEx upside on that graph. Michael Lonegan: Great. Thanks. And then lastly, you executed on the ATM program this year. You talked about a new ATM program. You have some forward settling later this year. For the balance of your equity financing plan, can you talk about the profile of issuances, broadly speaking? Should we expect it to profile with CapEx? And also, for incremental capital, should we still anticipate that to be financed with your 50/50 structure? Brian R. Buckham: The answer to the second question is yes. For any incremental amounts that are in the plan, you should plan on 50/50. For the stuff that is already in the plan, I think we have quoted more like a 30/70 split, but anything incremental above that—to maintain our balance sheet structure—assume 50/50. On the nature of the issuances, one of the things we have talked about in the past is probably not linear. Part of that is because you have large customer revenues coming in—more operating cash flow in the latter years of the window—so maybe a little bit more end-loaded. The best way we have told people is to model it somewhat like the CapEx profile is right now. Then, if there is incremental upside, build a little more in that window, but definitely not linear. We can look at it from the perspective that, if we were to have ATM issuances with forward settlement, the financing plan for equity—based on the amount you saw on the slide—is within reasonable ATM issuance amounts. With those forwards, we have the ability to shape the equity a little easier to match the timing of payments. Operator: Your next question comes from the line of Julien Dumoulin-Smith from Jefferies. Analyst: Hi. It is Brian Russell on for Julien. It is nice to see ground prep beginning at Micron Fab 2. What are the next milestones that could trigger an ESA, or is it just the parameters of the contract that you are negotiating? And secondly, what load is upside that would be incremental to the prior IRP's 8.3% that would be reflected in this updated IRP? Will Micron's Fab 2 also be included in that load forecast? Adam J. Richins: Fab 2 is not in the 8.3%. We do anticipate that it will be in the upcoming Q4 load forecast. In terms of timing, I shared where they are at. Anything beyond that is not public. They have publicly said they anticipate initial wafer output for the first fab in mid-2027. Beyond that, we cannot get into the details of when they will hit different targets. We can track what they have said publicly, and that is what they have said publicly. Analyst: I apologize if I missed this earlier—could you remind us of what has changed in the RFP bidding process that might give you a slight advantage, possibly, on the win rate? Adam J. Richins: I would not say an advantage as much as it is faster than it was under the Oregon rules. One of the things we are running into—and I think you know this—is that turbine procurement you have to do well in advance of what we used to do because of supply chain constraints and the timeline related to the regulatory process. The review was a lot longer than what we needed to get these projects in place. The other thing is we do not submit a benchmark bid anymore—we just compete equally with all other independent power producers. That does not set us at an advantage as much as it puts us on an equal playing field, and that was not the playing field we were in several years ago. Lisa mentioned we have been at about a 50% hit rate, so we are continuing to strive to do that. Hopefully, this new process will make it go faster, and not having a benchmark bid allows us to compete equally with everyone else. Analyst: Understood. Thank you very much. Operator: Your next question comes from the line of Anthony Crowdell from Mizuho. Your line is live. Anthony Crowdell: Hey. How is it going? I appreciate the update on the beet crop. One quick follow-up: on Slide 12, you talk about the 2026–2032 RFP update. The 200 megawatts of capacity you are talking about there—is that with any particular committed customer or committed load? Adam J. Richins: One thing we mentioned there—you will note this as “at least” 200 megawatts. We view that as a minimum. This 200 megawatts is firm capacity, and it is tied to the 8.3% IRP growth rate that we have been talking about. Again, we are going to update that figure in the future. The way it works in the RFP is we will get a variety of different projects. We will be able to review those projects that are on the short list, and then, depending on our need at that time, we will be able to pull the trigger on as many projects as we need to meet the load forecast at that time. Idaho Power will bid several projects in the 2026–2032 RFP. Brian R. Buckham: I will reiterate: we do not actually have anything in CapEx from the 2026–2032 RFP. It is a common question. We do not assume any win rate. We will compete on equal footing in the RFP, and what shows up from that that is company-owned would be additive to CapEx. Anthony Crowdell: Great. That is all I had. Congrats on a good quarter. Lisa A. Grow: Thank you. Operator: A final opportunity—press star 1 to signal for a question. There are no further questions. That concludes the question and answer session for today. Ms. Grow, I will turn the conference back to you. Lisa A. Grow: Thank you. Thanks, everyone, for joining us today and for your interest in IDACORP, Inc., and I hope you all have a great evening. Thanks. Operator: That concludes today's meeting. You may now disconnect.
Operator: Thank you. Good day, ladies and gentlemen, and welcome to the First Quarter 2026 ACRES Commercial Realty Corp. Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Kyle Brengel, Vice President, Operations. You may begin. Kyle Brengel: Good morning and thank you for joining our call. I would like to highlight that we have posted the first quarter 2026 earnings presentation to our website. This presentation contains summary and detailed information about the quarterly results of the company. Before we begin, I want to remind everyone that certain statements made during this call are not based on historical information and may constitute forward-looking statements. When used in this conference call, the words believes, anticipates, expects, and similar expressions are intended to identify forward-looking statements. Although the company believes these forward-looking statements are based on reasonable assumptions, such statements are based on management's current expectations and beliefs and are subject to several trends, risks, and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. These risks and uncertainties are discussed in the company's reports filed with the SEC, including its reports on Forms 8-K, 10-Q and 10-K, and in particular, the Risk Factors section of its Form 10-K. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to update any of these forward-looking statements. Furthermore, certain non-GAAP financial measures may be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of non-GAAP financial measures to the most comparable measures prepared in accordance with generally accepted accounting principles are contained in the earnings presentation for the past quarter. With me on the call today are Mark Fogel, President and CEO; Andrew Fentress, Chairman of ACR; and Eldron Blackwell, ACR's CFO. I will now turn the call over to Mark. Mark Fogel: Good morning, everyone, and thank you for joining our call. Today, I will provide an overview of our loan operations, real estate investments, and the health of the investment portfolio, while Eldron Blackwell, our CFO, will discuss the financial statements, liquidity condition, book value, and operating results for the first quarter of 2026. Of course, we look forward to your questions at the end of our prepared remarks. Since acquiring the ACR management contract in 2020, we have executed on our strategy to drive book value by originating high-quality loans, aggressively managing the portfolio, repurchasing our stock and creatively using tax assets available to the company. As part of that strategy, this quarter, we sold another of our real estate investments and realized a $3.3 million GAAP and EAD gain. This sale, coupled with the sale of an office building in 2024 and our development and sale of the student housing project in Florida and other projects were key components to our real estate investment strategy. The gains on the real estate investments, stock repurchases and retained earnings raised our book value by 66% since 2020, $29.98 per share. We deployed the proceeds from sales back into our loan book, originating high-quality loans and this quarter closed on our new CRE securitization. ACRES 2026-FL4 is a $1 billion CRE securitization that has leverage of 86.5% at SOFR plus 1.68%, and includes a 30-month reinvestment period. We completed the ramp-up period investments during the first quarter of 2026, and we'll see the full run rate benefit of the transaction in the second quarter. This is the fourth securitization transaction that we have completed at the REIT. We were able to increase our GAAP leverage from 2.8x at December 31 to 3.4x at March 31, which was a stated objective we had last year to increase portfolio leverage and the size of the CRE loan portfolio. In the first quarter of 2026, we closed new commitments of $495.6 million, offset by loan payoffs and net unfunded commitments totaling $121.2 million, producing a net increase to the loan portfolio of $374.4 million. The weighted average spread on newly originated loans is 3.09%. We have increased the loan portfolio to $2.2 billion and 60 investments as of March 31, and the spread is now 3.29% over 1-month term SOFR rates. We now have over half of the portfolio at SOFR floors of over 3%, so we have yield protection in a declining base rate environment. The portfolio generally continues to perform, demonstrating sound and consistent underwriting and proactive asset management. At March 31, our weighted average risk rating was 2.5, a decrease from 2.7 at December 31, and the number of loans rated 4 or 5 was 10, no change from the end of the fourth quarter. The portion of our CRE loan portfolio rated 4 or 5 based on the company's economic interest was 14% at March 31, down from 17% at December 31. As noted earlier, we are excited to announce that we sold one of our real estate investments in the Greater Philadelphia area this quarter, which resulted in a GAAP and EAD gain of $3.3 million. We will now have ACR's CFO, Eldron Blackwell, discuss the financial statements and operating results during the first quarter. Eldron Blackwell: Thank you, and good morning, everyone. GAAP net loss allocable to common shares in the first quarter was $1 million or $0.16 per share. GAAP net loss for the quarter included $9.3 million in net interest income, which was a decrease of $1.4 million over the prior quarter. This decrease in net interest income was primarily driven by the ramp-up period of our new CRE securitization, combined with lower fee recognition from loan payoffs. As Mark noted, we'll see the run rate impact of the fully invested FL4 securitization during the second quarter. GAAP net loss for the quarter also included a $1.3 million net decrease in the performance of our net real estate operations to a net loss of $1.2 million and a $3.3 million net gain on the sale of the previously mentioned land sale in the Philadelphia area. We saw a decrease in current expected CECL losses or CECL reserves of $1 million or $0.15 per share as compared to a decrease in CECL reserves during the fourth quarter of $1.3 million, which was primarily driven by improvements in projected macroeconomic factors during the quarter, offset by an increase in the model credit risk of the company's loan portfolio. The total allowance for credit losses at March 31 was $19.4 million and represented 0.88% or 88 basis points on our $2.2 billion loan portfolio at par, and was composed entirely of general credit reserves. EAD for the first quarter of 2026 was $0.02 per share as compared to an EAD loss of $0.48 per share for the fourth quarter. GAAP book value per share was $29.98 on March 31 versus $30.01 on December 31. Available liquidity at March 31 was $87 million, which comprised $48 million of unrestricted cash and $38 million of projected financing available on unlevered assets. Our GAAP debt-to-equity leverage ratio increased to 3.4x at March 31 from 2.8x at December 31, primarily from the closing of the securitization. At the end of the first quarter 2026, the company's net operating loss carryforwards were $32.1 million or approximately $4.89 per share. And with that, I will turn the call to Andrew Fentress for closing remarks. Andrew Fentress: Thank you, Eldron. Along with the entire ACRES team and Board members of ACRES Commercial Realty, I'm thrilled to announce the internalization combination of these two companies. The logic for the combination is simple: to be the best resource possible for our middle market customers. To be the best partner, we have to offer creative solutions, competitive, flexible capital and exceptional customer experience. Today, ACRES provides a complete dirt-to-perm financing solution program. As we continue to grow this roughly $5 billion platform, our offering and service will only improve, further driving value for all of our stakeholders. Post the merger, the ACRES employees and board members will be the largest shareholders in the company with over a 40% interest. This will keep us directly aligned with our other shareholders and focused on credit, customers and costs. Over time, we want to deliver a sector-leading return profile defined by consistent above-market dividends while employing modest leverage with complete transparency. Management will remain in place. All the ACRES owners and employees received 100% of their consideration for this transaction in ACR shares at book value, signaling our belief in the long-term success of this company. While we humbly recognize the challenges in our market, ACRES is front-footed and growing. We love to compete each day and look forward to working with each of you in the coming years. In addition to our regular shareholder presentation for the Q1, we've also added a short presentation to help further explain the merit of the transaction. Both can be found on our website. This concludes our opening remarks. I'll now turn the call back to the operator for questions. Operator: [Operator Instructions] We'll take our first question from Matthew Erdner with JonesTrading. Matthew Erdner: Congrats on all the continued progress and on the internalization announcement. I'd like to kind of touch on that first as to just the timing of it, why now, why you felt like it was a good time? And then I guess, the economic impact of that going forward if this were to be approved. Andrew Fentress: Sure. So with respect to the timeline, -- the expectation is that this will be obviously an item in our Annual Shareholder Meeting, which is scheduled for June 23 -- excuse me, June 22. And then we would expect it to close shortly thereafter, most likely in the July time frame. With respect to why now, listen, we feel like there's a great market opportunity. We have positive momentum as a firm, as a team. And we felt like the rough size of the two companies made sense to do it at this juncture in our trajectory as well. And then on economic impacts, we've outlined a lot of it in the deck that's in the -- that's available for shareholders. But look, the punchline is we expect to be able to drive non-balance sheet-related revenues from our asset management activities and other operations that exist inside of ACRES today that will all flow up and be available to pay higher and increasing EAD. Matthew Erdner: Got it. That's helpful. I appreciate that. And then as it relates to the $87 million in liquidity, would you guys say you're close to fully invested from a loan portfolio size? How should we think about that and just capital deployment going forward? Andrew Fentress: Yes. I would say today, we would say that we're fully invested. And look, part of the strategy is as we expect to drive a dividend, that will get us to a place where we hope to be able to issue and grow from there. Operator: We'll move on to Chris Muller with Citizens Capital Markets. Christopher Muller: So really great to see the merger and internalization announcement. I guess once the transaction closes, what will the combined company look like? And apologies if this is in the deck, I haven't had a chance to go through that yet. Is it going to look like just a larger ACR with the servicing portfolio? Or are there other complementary businesses that are part of ACC that are going to be part of this combined company? Andrew Fentress: Sure. So the company will have an asset management component. So the public entity will be the registered investment adviser for an existing asset management business that resides inside of funds and SMA structures. Those fees will flow up to the public company and be available to be included in the EAD calculation on a go-forward basis. Christopher Muller: Got it. Got it. And then I see you guys mentioned that EAD supporting a common dividend in the press release there. Should we expect a dividend to be implemented in quick order once the transaction closes? Or is it kind of just getting everything integrated together and then you'll address the dividend down the road? Andrew Fentress: So our general view on dividends is we will pay them as we earn them. And that we expect that once the companies combine, that we'll have a very clear picture on exactly the earnings power of the company, and then we expect to distribute those earnings through EAD as they're earned. Christopher Muller: Got it. Very fair. And just last housekeeping one, if I could. Do you guys have an estimated pro forma book value for this transaction? Andrew Fentress: Not at this time. Operator: We'll move on to Gabe Poggi with Raymond James. Gabriel Poggi: With the internalization happening at book value and management being aligned at book, is book value the bogey for any fresh kind of capital as you guys see going forward as you grow the business? Andrew Fentress: Yes, Gabe, we believe in doing things accretively for shareholders. I think we've demonstrated that by repurchasing shares at a discount. I think as we expect to grow the company, we want to do it accretively as well. So by definition, that means we're issuing at or above book value going forward. Gabriel Poggi: Got it. And then a follow-up. Just as it pertains to leverage and then leverage to total capital leverage to common, I know you guys have the slide, the usual, kind of, base bull case for where you want to get the loan book to be. Where is your comfort level on a total leverage to common? Or do you really talk about this at this size, you just think about it as total leverageable capital, obviously, inclusive of the preferred and non-controlling interest, et cetera. Andrew Fentress: Yes. Look, I think four turns, we expect we're very comfortable. I think one of the advantages of the transaction is that we can target a higher dividend without increasing leverage. And so over time, that's one of the advantages of having essentially non-balance sheet-related earnings where you don't have to increase leverage to increase earnings available for distribution. So that's one of the things that we like about the profile of the company on a pro forma basis. But I think what we've put out is that we've shown three cases where we're basically all at 3.5x leverage with different assumptions for non-balance sheet-related fees that drive to dividends that start the mid-single digits on up into the mid-teens. Operator: And it appears that we have no further questions at this time. I'd be happy to return the call to our hosts for any closing comments. Andrew Fentress: Great. Well, thank you all for attending the call this morning. We know there's a lot of information to digest in the presentation. So please follow up with us directly with any questions going forward, and we look forward to all the conversations. Thank you. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Twilio, Inc.'s First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Rodney Nelson, VP, Investor Relations. Please go ahead. Rodney Nelson: Good afternoon, everyone, and thank you for joining us for Twilio's First Quarter 2026 Earnings Conference Call. Joining me today are Khozema Shipchandler, Chief Executive Officer; Aidan Viggiano, Chief Financial Officer; and Thomas Wyatt, Chief Revenue Officer. As a reminder, we will disclose non-GAAP financial measures on this call. Definitions and reconciliations between our GAAP and non-GAAP results can be found in our earnings presentation posted on our IR website at investors.twilio.com. We will also make forward-looking statements on this call, including statements about our future outlook and goals. Such statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those described. Many of those risks and uncertainties are described in our SEC filings, including our most recent Form 10-K and our forthcoming Form 10-Q. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We disclaim any obligation to update any forward-looking statements, except as required by law. With that, I'll hand it over to Khozema and Aidan, who will discuss our Q1 results, and we'll then open up the call for Q&A. Khozema Shipchandler: Thank you, Rodney. Good afternoon, everyone, and thank you for joining us today. Twilio had a terrific Q1, accelerating revenue and gross profit to their highest growth rates in more than 3 years. We delivered over $1.4 billion in revenue, up 20% year-over-year on a reported basis and drove 16% growth in both organic revenue and non-GAAP gross profit. We also generated $279 million of non-GAAP income from operations and $132 million of free cash flow. Today's results are the outcome of a multiyear company-wide evolution that has fundamentally transformed Twilio's innovation velocity, go-to-market efficiency and financial rigor. In Q1, we continued to see unprecedented demand for voice, reimagined through the lens of AI, which is increasingly an entry point to the Twilio platform for AI natives and enterprises alike. Customers no longer view Twilio as just a provider of communications channels. Instead, they are relying on us to be a foundational infrastructure layer for the era of AI. I can't wait to unveil the next evolution of Twilio's platform at SIGNAL next week. Our voice channel revenue grew 20% year-over-year, marking its sixth consecutive quarter of accelerated growth with AI being a catalyst. We expect voice AI use cases will continue to evolve, to be more conversational and cross-channel over time. We've already begun to see evidence of this as our customers expand their footprint on Twilio's platform. For example, software add-ons such as Branded Calling and Conversational Intelligence both grew revenue more than 100% year-over-year. Our platform strategy is delivering immediate measurable ROI for our customers. As an example, Scorpion, a leading digital marketing and technology partner for local businesses, developed an AI agent by integrating Voice, Messaging and ConversationRelay. In just 3 months, the agent boosted its booking rates by 39%, capturing 6,500 appointments that otherwise would have been lost and generated $8.4 million in revenue. That same performance is why AI native leaders like Sierra and Bland.ai are also deepening their relationships with Twilio. Sierra, a leading customer experience AI company, signed a significant cross-sell deal to fuel their global expansion, while Bland.ai committed to a multiyear partnership to use Messaging, Voice and software add-ons such as recordings and Branded Calling to power their AI agent platform. Finally, Twilio's reputation for reliability is what won over a historic professional sports league, which signed a 7-figure deal to use Verify as the high-trust authentication layer for millions of fans. Messaging revenue growth also accelerated in the quarter, aided by strong growth in WhatsApp and RCS. RCS volume more than doubled quarter-over-quarter, and we saw significant traction in our international markets, inking notable RCS deals with KPN Netherlands to power RCS across all major mobile operators in the Netherlands and with Telavox to enable RCS for organizations in regulated industries. We are encouraged by the continued strength in messaging even as carriers have raised fees on our customers. While this dynamic doesn't impact Twilio's profitability directly, we recognize the pressure it puts on our customers, particularly small businesses. This is exactly why our platform strategy is so important. Our priority is to ensure our customers understand the choice of channels available to them, including over-the-top channels so they can deliver on their use cases and cost effectively reach their customers while maintaining high ROI. Our go-to-market initiatives continue to perform with our self-serve and ISV cohorts driving exceptional revenue growth again this quarter at 25% plus year-over-year. On the self-serve front, we've made significant investments to simplify our onboarding and upgrade process, which has driven higher conversion rates. I'm excited to share more on how we've reimagined the Twilio console experience next week at SIGNAL. In Q1, the team also signed customers, including Aloware, Grupo ProTG, Posh, Sela AI and Solace and landed a key multiyear partnership with the PGA of America. The PGA of America will be expanding their usage of the Twilio platform to power personalized engagement for 30,000 PGA of America golf professionals and millions of golfers. Without giving too much away today, next week at SIGNAL, we'll launch some of the most consequential innovations in our company's history, introducing new capabilities that orchestrate context-rich conversations with persistent memory across every channel for humans and AI agents. We will also unveil new partners. And most importantly, we'll show how Twilio is becoming the foundation for how businesses engage their customers in the age of AI. This moment in time demands a new kind of infrastructure and Twilio has been building just that. It's been amazing watching our marquee customers experience Twilio's new platform and products during our private beta, and many of them will be speaking about their early experiences at the conference. We can't wait to share more on the SIGNAL stage in San Francisco on May 6 and 7. Twilio's innovations continue to get industry analyst recognition as Twilio was positioned as a leader in the inaugural IDC Worldwide Communications Engagement Platform 2026 MarketScape, scoring highest in both strategies and capabilities. Twilio was also named a leader for the fourth time by Omdia in its CEP Universe report. This validation, coupled with our strong execution this quarter, illustrates why we believe that Twilio is truly positioned to be a critical infrastructure leader in the age of AI. Before closing, I also wanted to officially welcome Doug Robinson to Twilio's Board of Directors. Doug is known for growing teams and businesses, helping to scale Workday to the multibillion-dollar business that it is today. His expertise will be invaluable at Twilio as we drive operational excellence and continue to transform our go-to-market organization. Welcome, Doug. And with that, I'll turn it over to Aidan. Aidan Viggiano: Thank you, Khozema, and good afternoon, everyone. Twilio had an outstanding Q1, delivering revenue of $1.4 billion, up 20% year-over-year on a reported basis and 16% year-over-year on an organic basis, along with non-GAAP gross profit growth of 16%. We also generated record non-GAAP income from operations of $279 million. Free cash flow was $132 million. Top line performance was driven by strong volumes and solid execution, resulting in our fastest organic revenue growth rate since 2022. Our self-serve and ISV channels delivered revenue growth of 25% plus in the quarter, and we are seeing strength across the product portfolio. Voice growth accelerated once again with revenue up 20% year-over-year. We continue to see strong growth from Voice AI use cases as well as accelerating growth in voice software add-ons. Messaging revenue growth accelerated to 25%, driven by solid growth in SMS and aided by strength in WhatsApp and RCS. Incremental carrier fees contributed roughly 7 points to messaging's growth. Finally, software add-on revenue growth exceeded 20% year-over-year, driven by Verify and newer products such as Branded Calling and Conversational Intelligence. Our Q1 dollar-based net expansion rate was 114%, reflecting the improving growth trends we've seen in our business over the last several quarters. Incremental carrier fees contributed roughly 4 points to DBNE. We delivered record non-GAAP gross profit of $697 million for the quarter, with growth accelerating to 16% year-over-year, up from 10% in Q4 '25, our best non-GAAP gross profit growth rate since 2022. This was driven by continued momentum in our higher-margin products in addition to meaningful cost efficiencies. Non-GAAP gross margin was 49.6%, down 180 basis points year-over-year and 40 basis points quarter-over-quarter. We incurred incremental carrier pass-through fees of $46 million associated with increased U.S. A2P fees, which drove the year-over-year and quarter-over-quarter declines. Without these incremental fees, non-GAAP gross margin would have been 50 basis points higher sequentially. Q1 non-GAAP income from operations came in ahead of expectations at a record $279 million, up 31% year-over-year, driven by strong gross profit growth and continued cost leverage. Non-GAAP operating margin was a record 19.8%, up 160 basis points year-over-year and 110 basis points quarter-over-quarter despite a roughly 70 basis point headwind from incremental U.S. carrier fees. In addition, we generated $108 million in GAAP income from operations. Q1 stock-based compensation as a percentage of revenue was 9.7%, down 220 basis points year-over-year and 160 basis points quarter-over-quarter. This marks the first time since our IPO that stock-based compensation has fallen below 10% of revenue, and we've reached this level well ahead of our prior target of 2027. We generated free cash flow of $132 million in the quarter, which includes $141 million payment tied to our 2025 cash bonus program that we noted during our Q4 earnings call. Additionally, we completed $253 million in share repurchases in Q1 and have roughly $900 million remaining on our current authorization. Turning to guidance. For Q2, we're initiating a revenue target of $1.42 billion to $1.43 billion, representing 15.5% to 16.5% reported growth and 10% to 11% organic growth. In addition to previously announced U.S. carrier fee increases, Verizon has implemented an additional fee increase that will take effect on May 1. As a result, our Q2 reported revenue guidance assumes $71 million in incremental U.S. carrier fees. As a reminder, our organic revenue excludes the contribution from incremental increases to U.S. carrier fees. Moving to the full year. We're encouraged by the broad-based trends we saw in the first quarter. For the full year, we're raising our organic growth range to 9.5% to 10.5%, up from 8% to 9% previously. We are raising our reported revenue growth range to 14% to 15%, up from 11.5% to 12.5% previously. In addition, we continue to expect full year non-GAAP gross profit dollar growth to be similar to our organic revenue growth rate. Our full year revenue guidance assumes approximately $235 million in incremental pass-through revenue from U.S. carrier fees, up from $190 million previously. This reflects the U.S. carrier fee increases announced in prior earnings cycles plus Verizon's most recent fee increase that takes effect on May 1. As a reminder, while the pass-through fees have no impact on our gross profit, income from operations or free cash flow dollars, they do impact our margin rates. For modeling purposes, we would expect the incremental fees to reduce our full year 2026 non-GAAP gross margin by roughly 200 basis points when compared to full year 2025 non-GAAP gross margins, all else equal. Turning to our profit outlook. For Q2, we expect non-GAAP income from operations of $250 million to $260 million, reflecting incremental costs associated with our annual merit increases as well as expenses for our SIGNAL conference next week. Based on our Q1 performance and Q2 guidance, we're raising our full year 2026 non-GAAP income from operations range to $1.08 billion to $1.1 billion, up from $1.04 billion to $1.06 billion previously. Similarly, we are raising our full year free cash flow guidance to $1.08 billion to $1.1 billion. I'm very pleased with the accelerated revenue and gross profit growth we delivered in the first quarter as well as our ongoing cost leverage that is driving strong profitability and free cash flow. We remain focused on our key go-to-market initiatives and delivering the essential infrastructure that will help our customers win in the AI era. And finally, we're looking forward to seeing many of you at SIGNAL in San Francisco next week. And with that, we'll now open it up for questions. Operator: [Operator Instructions] Our first question comes from the line of Alex Zukin of Wolfe Research. Aleksandr Zukin: I cannot express my congratulations enough on a truly exceptional quarter in a truly difficult environment for software. So maybe first on -- I'm going to make it really easy. I'm going to ask about messaging, and I'm going to ask about voice. Messaging, extremely strong growth, again, almost surprising, I think, for Q1. So just maybe if you could unpack some of the meaningful drivers also between geographies, U.S. and international and how we think about that trajectory? And then on Voice, it's continuing to accelerate, as you mentioned, Kho. Maybe just stepping back, any unique experiences either on the consumer-facing side -- consumer-facing agent side or B2B that you're seeing kind of with some of these deals that you're announcing driving that growth rate? Aidan Viggiano: Alex, I'll start, and then I'll hand it over to Thomas and Khozema to chime in. So yes, really strong quarter for both messaging and voice, both grew 20% plus. On the messaging side, just to be clear, it was -- it grew about 25%, but about 7 points of that was driven by the fees. So high teens on an apples-to-apples basis, but really strong growth. And we've seen that in the messaging business over the last several quarters. This isn't a new dynamic. And I would say it was pretty broad-based when you look at it geographically. The U.S. was strong. International was strong. I think pretty exciting to see RCS volumes ramping. It's still early there, but we are seeing some adopters on that product, which is great. And then I'd say increasingly, volume from AI natives on the messaging channel. And then voice continues to accelerate, 20% growth in that product. That's the highest growth rate in that product in 19 quarters. So really excited about that. And it's a continuation of the acceleration we've seen on the back of the AI use cases as well as, I'd say, the adoption of software add-on products like Conversational Intelligence, Branded Calling, et cetera. So really strong performance in both products, and I'll hand it over to Thomas to give you more of the go-to-market perspective. Thomas Wyatt: Yes. Just -- thanks, Alex. So just to dig in a little more on the Voice specifically. We saw a real acceleration in Voice in our self-service business. It was up 45%. And then if you look at the Voice add-on software, that was also really strong in the mid-30s. So more broadly, it wasn't just connectivity. It was the software layer on top of that. And what's important about it is what we're seeing is most of our customers are not going at it just single channel. They are expanding. If they started in Voice, they're adding that messaging capability. We talked about some of that already with Sierra and Bland and a handful of others. But just think of it as use cases like customer support and services. We're seeing a lot more self-service agents that ISVs are rolling out to help small businesses, for example, when they can't be attentive 24/7 with humans. AI assistants are helping with that. We're seeing a lot of AI Copilots being built for live agents and contact centers. And we're seeing a lot of sales use cases as well where using AI assistant for inbound leads and using that to help customers qualify, answer questions and ultimately hand it off to a sales representative once it's needed. So just a wide variety of use cases across a wide variety of verticals, and it's pretty broad-based strength. Operator: Our next question comes from the line of Taylor McGinnis of UBS. Taylor McGinnis: Congrats on a great quarter. One question for me, just on a continuation on the messaging side. So if we look at the strong growth in 1Q, I think you guys made 2 comments, which is, one, you're seeing good adoption of RCS. And then two, you mentioned that AI natives are starting to attach more Messaging volumes to use cases. So is there any way to quantify, I guess, how much of that led to the acceleration that you guys saw in 1Q? And then as we think about the durability of the messaging channel growth from here, I know as you get into 2Q, you're coming up against a little bit of a tougher compare. But with some of these emerging trends, like how early are we in that? And could you potentially continue to build off of that as we look into the future? And could this be a reason why messaging growth maintains similar levels as we move throughout the year? Aidan Viggiano: I don't think RCS and the AI natives are contributing super meaningfully. Remember, messaging is like almost 60% of our business, right? So it's got a huge revenue base. RCS is very small. It's grown very quickly, but it's not contributing meaningfully. I would say on the AI native side, maybe a little bit more, but nothing outsized in terms of what we're seeing there. I don't know that there's too much else I would say. If you look at it again, operationally, it's up about 18% year-over-year. And that's not too far off from how we've been trending in messaging, a little bit higher, but that business has been growing kind of mid- to high teens for several quarters now. So strong operational growth in that business. It's our biggest biz product, and we continue to perform well there. Khozema Shipchandler: Yes. I would just add, Taylor, I mean, I think you asked about durability. I mean, like we feel pretty good about like the way that the business is performing. We obviously took up our guidance, right, for the balance of the year, and that reflects it in some respects. But I think the kind of bigger opportunity going forward with respect to messaging and AI is, as Thomas alluded to, there's Voice customers who are now going more cross-channel and who are doing much more conversational AI as we go forward. And I think while everything has sort of started in Voice, the opportunity is in some of these other channels as we go forward. And we think that, that provides kind of ongoing durability into the future. Operator: Our next question comes from the line of Ittai Kidron of Oppenheimer & Company. George Iwanyc: This is George Iwanyc on for Ittai. And I'll add my congratulations to the strong results. From -- given how strongly the business is performing, can you give us some perspective on whether macro is having any impact at all either on a regional basis or on a vertical basis? Khozema Shipchandler: Yes. I don't think macro is like -- I mean it's a super dynamic macro environment, right? I mean -- which is probably the understatement of the year. So I wouldn't say it's really having any effect one way or the other. I mean you got a lot of, obviously, things in sort of the consumer realm that would point to pressure potentially. You've obviously got the Middle East. You've got inflation. So I don't think it's really playing into it one way or the other. I think what we're finding is that broadly, the business is performing very nicely. Obviously, we're in a little bit of an AI tailwind right now. But I think broadly, I mean, the business is performing well. And I mean, even AI is not, I would say, meaningfully contributing to the overall results. It's certainly a catalyst for some of it. But I think on balance, the business is just having kind of all around good results. George Iwanyc: And maybe building on that, with the success you're seeing with the sales motion, can you give us some color on what you're seeing from a multiproduct adoption standpoint and how broadly across the customer base that is unfolding? Thomas Wyatt: Yes. We are seeing acceleration of our multiproduct customer count. It was actually up 29% in Q1, which is really encouraging and revenue from multiproduct customers is also accelerating, and we think it will continue to accelerate throughout the year as customers begin rolling out more of these software capabilities that sit on top of the channels. And what's interesting about it is what we're seeing is the use cases that customers want to roll out are naturally multiproduct in nature because you're talking about use cases where personalization and understanding of the relationship between a brand and a consumer requires software orchestration and memory that connects to the underlying communication channel, whether it be e-mail, voice or messaging and having a consistent experience where you have observability and sentiment across all those channels. It just makes it so that customers see the value of the platform and they consolidate spend across the channels with Twilio. So all in all, I think the multiproduct motion is just in the early stages of really accelerating. And it's fundamentally because customers look at Twilio as critical infrastructure for how customer engagement is done in the agentic era, and we're just helping them throughout that journey. Operator: Our next question comes from the line of Siti Panigrahi of Mizuho. Sitikantha Panigrahi: Congrats on a great quarter. I want to ask about Voice AI. How would you characterize your largest Voice AI customer scale at this point? I know you talked about a lot about experiments and testing last year moving in that direction to a full-scale production in use cases. So has that opened up in a meaningful way yet? Or are you still seeing some kind of experiment? And if so, what's the bottleneck there? Khozema Shipchandler: I think it depends on the kind of company and then -- well, it depends on the kind of company. So I would say that with a lot of the AI natives that we support, we're seeing a lot of takeoff velocity there, but it's off of a relatively small base, which is why it contributes to our financial results, but it's not meaningful in sort of the way that Aidan characterized earlier. I think the second thing is that you see it -- you see a higher adoption in -- I'll just make it super simple, like nonregulated industries versus regulated industries. So I think e-commerce, retail, food service, like we're seeing a lot of pilots and heavy experimentation translate into production environments. And I wouldn't say that we're seeing a lot of agent-to-agent necessarily there, but certainly human-to-agent interactions. On the regulated side, I would say it's pretty slow. You're definitely seeing very, very heavy experimentation. But I think just given the high stakes nature of what many of those companies do, it's going to take some time, which I think is good for us because it sort of provides like a longer-term tailwind, if you will, and certainly larger spend, but I think it's going to take some time. Operator: Our next question comes from the line of Mark Murphy of JPMorgan. Mark Murphy: I'll add my congrats. So Aidan, you have margins continually expanding. You grew operating income 31% year-over-year. It's quite impressive. I'm interested in structurally, how are you thinking about the headcount that's going to be required to run the business, especially as some of the AI tooling becomes more powerful, you can augment some of your employees and you can amplify what they could do. And then secondarily, can you comment on what are you budgeting for like seat-based SaaS applications that you use internally? I think there's a little bit of a debate. Will that kind of grow in line with your headcount? Or do you think -- is there any motion to try to vibe code some of the SaaS solutions yourself in-house? Aidan Viggiano: Yes. Let me start on the headcount side and maybe the AI cost. So what I would say, like as you would imagine, right, we tested a variety of AI tools over the last couple of years. We've rolled out a select number of them to our employee base, including some coding tools, some tools for knowledge workers. And I'd say while it's an area of spend that we're watching, our inference costs are manageable. The impact of those are kind of embedded in the guidance that we're providing. And so from a headcount perspective, we've been roughly flat for, I don't know, 2 or 3 years at this point. I would -- for your modeling purposes, I'd keep it around that level, Mark. We're not intending to add meaningful numbers of heads. We continue to focus on controlling our OpEx. I mean if you look at our track record over the last couple of years, we've been about flat from an OpEx perspective. We continue to take down stock-based compensation. So we'll continue to be very disciplined in that regard. In terms of the SaaS tooling, I would say nothing meaningful to highlight there. We regularly invest in different tools. I don't expect the costs associated with them to grow meaningfully, maybe down a little bit. But again, it's all embedded in our guidance. And in terms of vibe coding tools, I mean, nothing that I'd call out that's worthy of noting here. Operator: Our next question comes from the line of Nick Altmann of BTIG. Nicholas Altmann: Awesome. Actually, I kind of wanted to stick on the margin side of the equation. The 8% GAAP operating margins this quarter is super impressive. Aidan, you talked about stock-based comp and how that's well ahead of targets. But just any onetime items that helped the GAAP margins this quarter? And then going forward, any goalposts for how we should think about GAAP operating margins for the remainder of the year? Aidan Viggiano: Yes. Thanks, Nick. No, there's nothing I would call out that's unusual. Like when you look at our GAAP operating margins, it's really driven by a couple of things. Number one, obviously, our non-GAAP op profit is growing. We saw margins expand there. Second is we continue to take down stock-based compensation. We were sub 10% as a percentage of revenue. Our original target was to get there in 2027, got there much earlier. And as you know, we've taken a number of different actions to enable that. The last thing I'd call out is that our intangible amortization, which impacts GAAP but not non-GAAP has come down as well. So those are the 3 drivers of what's kind of resulting in the 8% GAAP op margin as well as the over $100 million of GAAP profit in the quarter. Big focus for us. We'll continue to focus on both non-GAAP OpEx as well as SBC going forward. Operator: Our next question comes from the line of Derrick Wood of TD Cowen. James Wood: Great. And I'll echo my congratulations. Khozema, could you talk about how you see the next phase of Segment playing out as you look over the next few years? I mean you've completed the back-end rearchitecture. I think you've made the data interoperability much more native on a communications platform. So where do you see the most synergies with the comms product? And can we be expecting a revival in growth in Segment this year? Khozema Shipchandler: Yes. I mean we're not as focused, I would say, on Segment as a stand-alone. I think we're much more interested in using the data technology to enrich communications. I mean I think what's obvious in sort of the AI era is that if you don't have context, you're probably looking at much higher cost in terms of your AI workloads and you're not actually solving the customer's problem. And so I think having a CDP in that respect is incredibly valuable, enriching every one of our communications with data is incredibly valuable. And as you look at like some of these AI natives, for example, that we've cited recently that are using tools such as conversational intelligence, just that ability to use data as a means to get smarter about the conversation that's in progress, get to problem resolution a lot faster, like that's kind of the way that I see it. We're going to talk more about it certainly next week at SIGNAL, largely through the lens of having memory and persistency in these interactions so that you can truly create what's sort of proverbially been known as this notion of like lifetime customer value is actually now really possible if you can create memory. So the business on a kind of stand-alone is less the focus. It's more about how it fits into the overall picture. Operator: Our next question comes from the line of Arjun Bhatia of William Blair. Arjun Bhatia: Congrats on a great quarter here. I had 2 quick questions. First, maybe for you, Khozema. I'm curious why AI and the benefit that you're sort of getting from it is different between Voice and Messaging. I know it's super early on both fronts, but would you expect messaging to see somewhat of a similar tailwind from AI adoption? Or is this sort of a Voice-specific use case? And then second, I'm just curious in terms of go-to-market, how you think about readiness and the sales force's ability to sell more software add-ons, given you have, I think, a lot of product with things like Verify, ConversationRelay and others? Khozema Shipchandler: Yes. I'll take the first question and then let Thomas take the second. I do think that there's a longer-term opportunity with respect to Messaging. I mean both are growing really, really well, right? Let me start there. I think as it relates to Voice, the reason you're seeing the takeoff there initially at least is that most of the AI start-ups are starting in Voice. It's our expectation completely that in the same way as happened, I don't know, 10, 15 years ago and Voice workloads moved over to text, I think you're not going to see quite as dramatic a shift, but instead, what you're going to see is conversational AI, where basically, you're using the AI to be able to reach the customer through the channel that they want and using the context that they want. And so I think that benefits not just Messaging, by the way, but also e-mail. And so we're very excited about the longer-term prospects as a result of AI in all of our channels, frankly. Thomas, do you want to take the go-to-market? Thomas Wyatt: Yes. Just on the go-to-market side, we put a lot of energy into organizing the sales organization this year, setting up compensation plans and driving enablement to enable AEs combined with specialist motion to really optimize the multiproduct selling and the cross-sell of the portfolio that we have. And what we're seeing now is the acceleration of the software add-ons that sit on top of those channels like Verify, ConversationRelay, Branded Calling, all good examples of what we've seen, but also the percentage of deals that have multiple products involved at the close is increasing as well. And so from a readiness perspective, we feel pretty good about where we are in Q1. We think it's going to get better every quarter as we get more reps and continue to -- repetitions, I should say, not necessarily reps, but get more repetitions into this motion, but generally feeling good about the progression our team is making and the skill set they have to continue to drive multiproduct scale selling. Operator: Our next question comes from the line of Koji Ikeda at Bank of America. Koji Ikeda: So voice and voice AI demand sounds really good. And I think the opportunity is big and really just getting started. And so what is it about Twilio's offering today and what Twilio may offer in the coming years that's giving you the confidence that you don't get disrupted by the time the opportunity really starts to get going from here? Thomas Wyatt: Yes. A couple of things. So first of all, I mean, we're the market leader by a mile. We have the best technology. We're priced higher than the competition, which I think reflects the fact that we do, in fact, have the best technology. Our multichannel ability is unprecedented relative to anybody out there in the marketplace. And then finally, having a great brand is a really, really good place to be because as the average vibe coder is trying to go figure out how to use connectivity, which they may not even understand any of the vernacular on the way in. They're just trying to figure out a way to reach a customer on the other side. All of our research indicates that Twilio will always be sort of the first person -- first company, excuse me, that is requested. So that's a pretty good starting point. Longer term, I mean, the way that I would characterize it is that if you just think about like what being an infrastructure company means as it relates to communications and data, I think on the communications side, I mean, it's very, very challenging for any AI-related company to be able to get 4,800 different kinds of interconnections across 180 and plus growing countries. And going through all of the compliance checks and KYC hurdles, that is like a very complex body of work that's very regulated and turns out to be like quite operational and relatively physical, not necessarily entirely software-driven. So that creates a substantial amount of moat. And then going forward, being able to drive, and I don't want to get too far ahead of it, but we'll talk about this at SIGNAL next week, our ability to migrate from Voice, which is already sort of a source of strength to multichannel orchestration where now any one of our customers can reach their consumers in exactly the way in which they want to be reached, that's where the data asset really shines because you're using the channels, but then you're using data to inform how that happens, when it happens, what's the kind of context that's necessary and then using that data to actually be able to go and solve the consumer's problem. Like that full wrapper, I think, is a real advantage for Twilio that no other company on the planet has. Operator: Our next question comes from the line of William Power of Baird. William Power: Okay. Great. I'm going to come back to the organic revenue growth improvement. Obviously, really impressive, reaching 16%. I mean it sounds like the answer maybe that it's broad-based given the commentary on Messaging, Voice, software add-ons, et cetera. But nicely above the trend line you've been on for a while. So I just want to see if there's anything else you'd call out as to why now we're seeing this kind of inflection versus the last -- maybe the past couple of quarters. And then kind of tied to that, as you look at guidance, I guess, Q2, it does assume a decent deceleration in growth from Q1. So I'm just trying to think through any potential comps versus conservatives and other things that are factored in there. Aidan Viggiano: Yes. So I mean, it was a really good quarter, Will. I mean, like you said, 16% growth. Like last year in total, we were -- or for the year, we were 13%. It's our strongest growth rate in several years. I would say from a product perspective, you highlighted the 2, Messaging and Voice, we've talked about them quite a bit here. From a sales channel perspective, it was ISVs and self-serve, 25% plus each. I will say it was partly driven by higher seasonal volumes earlier in the quarter as well. But really mostly, it was solid execution across the board. I guess the other data point I'd give you is from an industry perspective, it was pretty broad as well. Some of our biggest industries, financial services, tech, health care, they were all very strong. And then I think importantly, all of that -- all of those factors contributed to revenue growth, and I would say, perhaps more importantly, accelerated gross profit growth at 16% as well. And then from a Q2 guidance perspective, I'd say the guidance trends are pretty strong. Our Q2 guidance is 10% to 11% organically. That's consistent with our Q1 guidance, which was at the time we gave it, right, 3 months ago, the highest guidance we had provided in several years, and it really just reflects the strong underlying trends that we're seeing in the business. But I would say, consistent with how we've guided over the last, I'd say, few years, we continue to plan prudently just given the usage-based nature of the business. Operator: Our next question comes from the line of Jim Fish of Piper Sandler. James Fish: Great quarter. Not trying to take away from the quarter and the deals that you guys are landing here as they're quite impressive. But obviously, one of your competitors on the agent force side of things and just trying to understand how you guys kind of thought about that opportunity, what you guys see on sort of aligning with some of the more CRMs in the space, how you guys see the environment playing out between really these up and comers that you guys are tracking well with as, kind of, the underneath infrastructure versus those systems of records of the world. Khozema Shipchandler: Yes. It's not really what we're worried about. I mean I would say it this way that I think in the emerging AI landscape, what's important is can you be the company that is the single best integrator of all the tools and capabilities that are out there. And so for Twilio, like we've always occupied this space where if you want to bring your own data warehouse, fantastic. If you want to bring your own cloud, fantastic. And the interoperability with those different kinds of tools may also include systems of record, by the way, with which we also integrate. But then going forward, increasingly, like the way that we see it playing out is that customers are going to bring their own LLM capabilities. They're going to bring their own agent capabilities. I think our bet is that it's possible that it could happen in systems of record. I don't think that's going to happen just based on the way that AI is developing with respect to the way that SaaS tools historically develop. And so that's not our concern, whether it's agent force, whether it's the company that you're referring to with respect to agent force, I think we see a much broader opportunity in the landscape, and we're going to continue supporting all of these AI companies and continue to be kind of like the Switzerland, if you will, in support of integrations with anybody that brings them to us to be able to support their business needs. Thomas Wyatt: And just to maybe add one more point to that is we -- last week, we did announce an embeddable version of our Flex products that can be integrated into CRMs or other systems of record, and that allows customers to take advantage of Twilio inside of these systems and also consume usage-based pricing for that as well, so including bringing your own voice. So we're definitely trying to integrate where our customers are and make sure the tools are all available to them. Operator: The next question comes from the line of Joshua Reilly of Needham. Joshua Reilly: This kind of builds off the last point you were making here, but it seems like your competitive moat is being enhanced given the complexity of the evolving ecosystem around AI is kind of the trusted neutral partner. You can orchestrate agents using OpenAI running on AWS infrastructure and pulling data from a Snowflake warehouse. How much of this neutrality is helping accelerate your opportunity as the complexity of the broader kind of ecosystem with AI is growing? Khozema Shipchandler: Yes. I would say it's like a mild accelerant probably today. I mean I think going forward, like it probably helps a lot more. I mean the reality is, is that today, you have sort of conventional developers putting together a lot of this different tooling. I think going forward, I think we all imagine a world in which both agents and vibe coders like really take off in a much more meaningful way. And as that happens and companies have already kind of built on their own stacks, they tend not to want to rip and replace. And so a company's ability to use its existing technology, they're going to need communications and data to be able to create the outcomes that they are for their consumers on the other side and then being able to plug into all of these other different choice points that we have. I think the example that Thomas pointed out a moment ago, I think, is representative. Like it's great to have that, but it's also necessary to have as many other integration points as we possibly can so that the customer always has choice and that they don't have to add cost to their existing tech stack. So going forward, I'd say sort of mild accelerant becomes larger as Vibe coding and agent-based coding starts to take off. Operator: Our next question comes from the line of Jackson Ader of KeyBanc Capital Markets. Jackson Ader: It's really nice to see the self-serve improvement that you've made so far. I hate to be greedy, but do you guys think -- is this one of those situations where the low-hanging fruit on the self-serve mechanism has kind of been picked and now we might be entering a normalized phase in that channel? Or is it you're just kind of laying the foundation and now it unlocks like a bunch more actions that you can take in order to optimize this channel over the next multi-years, maybe? Thomas Wyatt: Yes. Jackson, it's Thomas. We feel really good about the strength of our self-service business, and it's -- some of it is things that we've done over the last 12 months to optimize the onboarding and the upgrade process for customers. But it's going beyond that. In fact, next week, we're going to launch some new capabilities as part of the console that's going to really make it even easier for our self-service customers to get started with Twilio and adopt more than one product. And so multiproduct adoption should continue to accelerate through our channel there. So we continue to see opportunities to continue to improve conversion rates across the funnel, but we feel really good about the strength and durability of that business and the new products that are coming over the next week or 2 to unlock even more growth. Operator: Our next question comes from the line of Jamie Reynolds of Morgan Stanley. James Reynolds: This is Jamie on for Elizabeth Porter and congrats on the strong results. Just the ISV channel, obviously, really good traction here. Is that primarily being driven by just like a handful of ISVs? Or is this more a sign that the breadth is kind of widening in a material way? Thomas Wyatt: Yes. So it's a wide range of ISVs across the major verticals. So it's beyond the marketing, it's service desk, it's education ISVs. We see it in hospitality, just a broad portfolio across all the different verticals. And I think really, the growth is coming from the adoption of multiple channels. So if an ISV grew up with us in one area, they're now expanding to that second or third area, and that's helping us accelerate growth in multimillion-dollar customers as part of that. Operator: Our next question comes from the line of Patrick Walravens of Citizens. Nicholas Lee: This is Nick Lee on for Pat. Congrats on the quarter. On Voice AI, I've sort of come to understand that customer service is one of the most popular uses for it. But as these deployments mature, where do you see customers taking Voice AI next? Thomas Wyatt: Yes. I think the very early Voice AI use cases were largely just customer support. But what we're seeing now is much more outbound sales motions, inbound sales motions. I'll give you a couple of examples like live seller augmentation. Next best actions for sellers to be able to recommend what product given the live nature of a conversation they may be having with a virtual agent. There's use cases around compliance that are starting to be introduced. We're seeing increases in Voice Recording as a software layer on top of our stack. So it's just the beginning of what we're seeing. The classic use cases have been evaluated and rolling into production. And now people are getting creative and they're introducing a whole new variety of virtual agents combined with human-assisted agents through an escalation path. And it really just depends on the vertical, but there's a lot of different use cases being unlocked. Khozema Shipchandler: I'd say one of the more interesting ones from our perspective is like Mainstreet businesses, when they're closed at night, their ability to service customers during the off hours like that's super exciting and benefits the real economy and businesses that would otherwise not be able to afford it. They'll probably get served by an ISV in between. But still, I mean, it's really compelling technology for a Mainstreet business. Operator: Our next question comes from the line of Ryan MacWilliams of Wells Fargo. Zeeshan Rauf: This is Zeeshan on for Ryan Mac. In your top customer wins, there was a mention of a large customer consolidating their traffic on to Twilio. I wanted to get your perspective on how meaningful competitive takeaways have been for you over the past couple of quarters and where competitors might be falling short and consequently ceding share. Thomas Wyatt: Yes, I can speak to that one, Ryan. So it really starts with the platform capabilities that Twilio is offering and the value prop of having a brand work with a consumer and have the understanding of sentiment, observability and orchestration of how to work with the consumer across multiple channels. And so when customers understand that road map and they see the power of the software that sits on top of our traditional communication channels, they see the value to consolidate spend with Twilio, which is leading us to take more market share in different parts of the world. And so I think it's the platform approach that we're taking and the uniqueness of our ability to scale globally across all the different channels that we do provides customers the confidence and trust that we're the right partner to pick, especially when they have to introduce the more complex use cases that we've talked to about some of these Voice AI use cases, in particular, it does require personalization and memory and orchestration. And you just can't do all of that if you're using multiple providers across multiple channels, and that's been an advantage for us. Operator: Our next question comes from the line of Rishi Jaluria of RBC. Rishi Jaluria: Nice to see continued strength and acceleration at scale, especially given everything going on in the environment. Maybe I want to touch a little bit on the momentum that you're getting with the AI natives and particularly in Voice AI. Without speaking to a particular customer, a lot of us have been on the outside looking at the headline numbers that we've seen out of some of your reference customers and can imagine some of that is helping. But maybe just from a high-level perspective, can you help us understand as those companies grow and you not only grow with them on your consumption/usage-based model, but also expand your footprint on them, how should we just be thinking about what that time line looks like because it's clearly not everything can happen in real time. But I just want to kind of be able to control and temper our expectations as we see exciting headline numbers out there. Khozema Shipchandler: Yes. I mean I guess the way I would characterize it, Rishi, is that it's still relatively early. I mean most of these companies that are in that start-up space, as you know, I mean, they're relatively small still. I mean they're growing at very, very fast rates, no question. But they're at relatively low, let's say, triple-digit kind of hundreds of millions revenue numbers. We will obviously end up taking a piece of that based on the work that they end up doing with us. So I would characterize it as like quite early days. I mean, frankly, I think the bigger pony here is probably as this migrates over to enterprises, whether those AI companies -- AI start-ups that is act as ISVs on our behalf or whether we end up deploying directly to enterprises, I would say that is happening just more slowly given the nature of enterprises and their buying cycles. I'm sure you heard the answer to my question earlier about like what's sort of the schism here. You've got retail, e-comm, food service adopting rapidly. On the other side, you've got regulated adopting less rapidly. So I think there's a lot of tailwind here in terms of the way that this plays out. I think there's a lot of Voice AI workloads still to deploy. And as we've said a number of times, I think Voice ends up moving over to other channels as well. And when this becomes conversational AI, there's an even bigger opportunity there. So pretty early days. Operator: Our next question comes from the line of Andrew King of Rosenblatt Securities. Andrew King: Congratulations on the good quarter. Just wanted to see if you could provide any color as to how much of an accelerator that AI has been to these cross-sell opportunities for you? And then if I can just sneak in a second one. Can you just remind us as to how you are viewing the balance between driving profitability and maintaining AI investments? Aidan Viggiano: Maybe I'll start with the second one. So we are -- as I think someone asked a question similar on AI earlier, but we're definitely investing in AI tools. It's embedded in our guidance. And I'd say it's moderate right now in terms of the amount of cost. It's manageable in terms of what's hitting the P&L. It's all embedded in guidance right now. Profitability continues to be a big focus for us. We just increased our guidance for the year on both cash and profitability. And yes, continue to be a focus for us, both on the GAAP and the non-GAAP line. Thomas Wyatt: And I'll just take the first part of the question around AI acceleration from cross-sell. And it's really just -- there's probably 2 elements to it. One is the direct acceleration, which you're seeing in the acceleration of our software add-ons because we use AI as part of that software stack to do fraud detection or to do personalization of conversations using our conversational insights layer and the ConversationRelay layer. But also, we're getting an indirect acceleration because overall spend is consolidating with us as well across the channels to take advantage of that software stack. So it's hard to quantify financially exactly what the accelerant is, but we do see it in the deal cycles where customers really want to go deeper in some of these more advanced areas of our portfolio, and that's setting us up nicely from a pipeline perspective for the rest of the year. Operator: I am showing no further questions at this time. This does conclude the program. You may now disconnect.
Operator: Greetings, and welcome to the Zeta Q1 '26 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Matt Pfau. You may begin. Matthew Pfau: Thank you, operator. Hello, everyone, and thank you for joining us for Zeta's First Quarter 2026 Conference Call. Today's presentation and earnings release are available on Zeta's Investor Relations website at investors.zetaglobal.com, where you will also find links to our SEC filings, along with other information about Zeta. Joining me on the call today are David Steinberg, Zeta's Co-Founder, Chairman and Chief Executive Officer; and Chris Greiner, Zeta's Chief Financial Officer. Before we begin, I'd like to remind everyone that statements made on this call as well as in the presentation and earnings release contain forward-looking statements regarding our financial outlook, business plans and objectives and other future events and developments, including statements about the market potential of our products, potential competition, revenues of our products and our goals and strategies. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. These risks and uncertainties include those described in the company's earnings release and other filings with the SEC and speak only as of today's date. In addition, our discussion today will include references to certain supplemental non-GAAP financial measures, which should be considered in addition to, and not as a substitute for, our GAAP results. We use these non-GAAP measures in managing our business and believe they provide useful information for our investors. Reconciliations of the non-GAAP measures to the corresponding GAAP measures, where appropriate, can be found in the earnings presentation available on our website as well as our earnings release and our other filings with the SEC. With that, I will now turn the call over to David. David Steinberg: Thank you, Matt. Good afternoon, everyone, and thank you for joining us today. We delivered our 19th consecutive beat and raise quarter. This consistency is not driven by a single product cycle or a short-term tailwind. It is the result of a structural shift in the market. AI is no longer a feature. It is driving a replacement cycle where enterprises are demanding fewer systems, measurable results and applied intelligence that works today. We are winning in this environment because of the system we have built, proprietary data that improves with every interaction, intelligence that compounds with every decision and a platform with AI at its core that allows customers to consolidate vendors into a single unified operating system. This differentiated approach has been recognized by Forrester, where Zeta was once again named a leader and also reflected in our customer advocacy with an NPS score in line with market leaders, up 23% from our assessment in the prior year. Both come on the heels of Forrester study showing Zeta returns an average of 600% on marketing spend for its customers. Athena by Zeta is an accelerant. It is the user interface that brings AI directly into marketing workflows and removes the barriers to enterprise-wide adoption and impact. Signs of this were evident in Q1 with beta customers plus strong early adoption of Athena contributing to the revenue beat. Our first quarter performance, once again, shows we are the disruptor in the AI-driven marketing ecosystem. First quarter revenue of $396 million, representing year-over-year growth of 50% and up 29% year-over-year ex Marigold, our fourth straight quarter of revenue growth acceleration, excluding acquisitions and political candidate revenue. And adjusted EBITDA was $66 million, up 42% year-over-year. 19 consecutive beat and raise quarters combined with a 4-year revenue CAGR of 30% reflect more than just consistency. They are evidence of sustained demand in a market consolidating around platforms that can deliver measurable outcomes at scale. And that visibility is reflected in our outlook. After raising the midpoint of our range for 2026 revenue guidance last quarter by $25 million, we are again raising it by $30 million, representing growth of 37%. These market share gains are evidence of a shift in the competitive landscape as AI moves from feature to a new way of doing business. Athena is designed to accelerate our share gains by bringing intelligence directly into workflows, turning answers into actions and ultimately changing how marketing is planned, executed and optimized. Athena is currently available to all of our enterprise customers, and its impact is already evident in sales pursuits and results. The number of Athena demos to potential new clients increased dramatically throughout the quarter. The promise of Athena is influencing decision-makers and helping Zeta win deals as customers want to invest in applied AI, not road map AI. One new customer we closed in the quarter commented, "Leapfrogging to the future requires thinking differently today and committing to execution. Interacting with Athena made it clear that Zeta has already made this leap, bringing its vision to life and positioning us to accelerate into a fully agentic marketing future." Athena was a driver in one of the largest deals we have ever closed. The customer is a leading global apparel retailer operating across multiple brands, each with unique customers and over 3,000 locations worldwide. Zeta's platform was purpose-built to handle the complexity required by the largest enterprise companies, and this customer was able to consolidate down from 4 vendors to 1, Zeta. As the legacy Marketing Cloud replacement cycle begins to accelerate, this particular client was a marquee win. We are also seeing rapid adoption among existing customers. Early feedback and usage shows that customers view Athena not as incremental functionality, but as transformational technology. As adoption increases, Athena learns from more data, outcomes improve and usage deepens, driving ARPU expansion and ultimately reinforcing the same flywheel that has powered our growth. That flywheel is powered by more than just Zeta's AI models. It's driven by the data and infrastructure behind them. Zeta SuperGraph, our proprietary identity and intelligence graph, unifies data across the enterprise and enables a complete deterministic view of the consumer that we believe is difficult to replicate at scale. This is translating directly into wins where access to our data is a key driver for customer decisions. For example, our SuperGraph was instrumental in a win with a leading online retailer of pet products in the United States that serves millions of active customers with a highly personalized e-commerce experience, a broad assortment of over 100,000 products and a rapidly expanding ecosystem that includes autoship subscriptions, pharmacy services and pet health offerings. In addition, our proprietary data and the intelligence it generates was a key component in the expansion of a Fortune 100 telco client, expected to drive an 18x increase in spend with Zeta in 2026 versus 2025. As Athena brings that intelligence to our customers in real time, the impact of this data advantage only grows. This foundation of data plus AI continues to power One Zeta. We are consistently seeing that the land, expand, extend model takes hold as customers begin with a single-use case and scale across the platform over time. That expansion is driven by the modern CMO mandate, do more with fewer partners, improve ROI and simplify execution across the organization. The result is larger commitments, deeper adoption and a growing role for Zeta as the marketing operating system and core infrastructure. That momentum is showing up in the data. Super-scaled customer ARPU was up 21% year-over-year, well ahead of our target range. Net retention rate remained above our target range of 110% to 115%. And the number of super-scaled customers using more than one use case was up over 50% year-over-year at scale. It also creates a reinforcing cycle. Consolidation drives adoption, adoption drives results and results drive further expansion. This is the One Zeta model, and it continues to be a powerful driver of durable growth. What stands out for me this quarter is the strength we are building across every part of the business. At the center of this is Athena, which is already beginning to change how our customers operate and how we compete. Together, our data, our platform and our leadership in AI are positioning Zeta not just to participate in this shift but to define it. As always, I want to sincerely thank our customers, our partners and our shareholders for your continued support of our vision. And to team Zeta, thank you for everything you do. It was an honor to be recognized as a Great Place to Work for the third year in a row. This is a reflection of your hard work and collaboration. Now let me turn it over to Chris to discuss our results in greater detail. Chris? Christopher Greiner: Thank you, David, and good afternoon, everyone. Our results, once again, demonstrated the durability, predictability and profitability of Zeta's growth. Revenue growth, excluding acquisitions and political candidate revenue accelerated for the fourth consecutive quarter to 29% in Q1, further cementing the durability of our growth and market share gains. Broad-based strength across the business is resulting in improved visibility, leading us to, once again, raise our 2026 outlook, underscoring the predictability of our growth. Even in doing so, we're maintaining our typical conservatism. And we also saw free cash flow conversion improved to 63%, generating $42 million in free cash flow, demonstrating the increasing profitability of our growth. These results surpassed even our internal stretch goals, coming in $26 million or 7 points above the midpoint of our revenue guidance for the quarter. As I analyzed the strength of our quarter, what stood out was how balanced the upside contribution was. It was not 1 or 2 isolated benefits. Instead, in baseball parlance, it was a lot of singles and doubles, which in my opinion, is healthier. Here are some examples. In terms of revenue growth, excluding Marigold's contribution, approximately 14 points of growth came from existing customers and 15 points from new customers. From an industry lens, 9 out of our top 10 industries grew faster than 20%, with more discretionary industries continuing to be at the upper end, demonstrating why in tougher macro times, data-driven, lower marketing funnel, high ROI attributable marketing is paramount. And finally, as it relates to how customers use our platform, e-mail, connected TV, mobile and social all grew double digits, all while each use case, acquire, grow and retain also grew double digits. Now let me dive deeper into our KPIs, income statement and balance sheet. Total super-scaled customer count grew to 189, up 19% year-over-year and an addition of 5 customers sequentially. This exceeds our Zeta 2028 model of 4% to 8% super-scaled customer count growth. Super-scaled customer additions were especially strong in advertising, marketing, travel and hospitality. Super-scaled customer ARPU was $1.7 million, up 21% year-over-year. This also exceeded our Zeta 2028 model of 12% to 16% ARPU growth. Strong ARPU growth in the quarter was driven by an increase in the number of customers using multiple use cases, which was up over 50% year-over-year, as well as customers using more than 3 channels, which increased 40% year-over-year. Both are great examples of the One Zeta sales motion working and how Athena can unlock more of the platform's capabilities for our customers to use. The forward-looking sales pipeline is also robust, going into a season when Athena will be front and center at multiple industry conferences. In fact, Athena demos were a crucial differentiator versus incumbents and RFP competitors in each of our marquee enterprise and agency wins in Q1. And we expect Athena to play an even bigger role in adding to the sales pipeline, which is already up 40% year-over-year with a subset of discretionary industries up even more, those like retail, advertising, travel, restaurants, furniture and resorts to name a few. This outsized sales pipeline growth in discretionary industries is consistent with what we've seen in previous periods of macro volatility and is another proof point that in times of uncertainty, customers consolidate onto fewer platforms that can drive measurable ROI with AI-driven efficiency. Now moving on to revenue mix. Direct revenue in the first quarter was 75%, above the 73% last year and in line with our target of 70% to 75%. Our GAAP cost of revenue in the quarter was 41%, a 190 basis point increase year-over-year and 50 basis points sequentially. The increase in cost of revenue was driven by new agency wins, driving a higher initial mix of social as a channel. This is consistent with the pattern of business we've seen and spoken to previously when new agencies platform on to Zeta. This is because we offer a substantially more efficient and effective solution for social and has become the first of many channels adopted by new agencies as they migrate. As new agencies scale over time, not only does their aggregate spend increase, but they do so by adding Zeta-owned channels like e-mail, display, video, mobile, CTV and others. It also bears repeating, while social has a higher cost of revenue, it is still accretive to both adjusted EBITDA and free cash flow margins. Further, social drives high customer stickiness as well. In the first quarter, adjusted EBITDA was $66.1 million at a margin of 16.7%, 100 basis points lower year-over-year and $5 million better than the midpoint of our guidance. Marigold integration is progressing rapidly and tracking ahead of our expectations. We took aggressive steps in the quarter to execute operating synergies, which should begin to benefit our adjusted EBITDA margin in Q2 and into the back half of the year. At the same time, Marigold's revenue came in better than we anticipated, and we're seeing encouraging traction from the One Zeta approach of cross-selling Marigold's loyalty product along with Zeta's grow-and-acquire use cases to the combined customer base. Another area we spoke about last quarter was becoming GAAP net income and EPS positive for the full year of 2026, specifically generating between $0.02 and $0.04 of GAAP earnings per share. Our first quarter results have us pacing towards the high end of that range. In Q1, our GAAP net loss was $13.2 million, an improvement from a net loss of $21.6 million in the first quarter of last year. GAAP loss per share was $0.06, coming in ahead of our expectations for the quarter with forecasted costs related to the integration of Marigold being the primary driver and not seen as recurring over the rest of the year. First quarter net cash provided by operating activities was $49.7 million, up 43% year-over-year, with free cash flow of $41.7 million, up 48% year-over-year and representing a margin of 10.5%. This represents a free cash flow conversion of 63%, a 270 basis point improvement from the first quarter of 2025. This also includes a roughly 13-point working capital headwind driven by longer agency payment cycles standard for their industry. During the first quarter, we repurchased 1.5 million shares for $25.7 million and have approximately $138 million remaining on our share repurchase authorization. We expect to remain active buyers of our stock, especially at these price levels, subject to market conditions and other priorities. And we continue to make significant progress in reducing dilution and stock-based compensation expense. Excluding Marigold, our dilution in the first quarter was 0.1%, and we remain on track to achieve our normal course net dilution target of 3% to 4% in 2026. Relatedly, with most of management's previously issued equity now fully vested post-IPO, Zeta's Board of Directors and Compensation Committee, in consultation with an independent compensation consultant, approved a new long-term equity incentive plan for management. This performance-based plan secures continuity of Zeta's named executive officers and management for 6 years and incentivizes management to achieve its long-term revenue and adjusted EBITDA margin objectives while adhering to its principles of lowering dilution, reducing stock-based compensation as a percentage of revenue and achieving GAAP positive earnings. Furthermore, named executive officers who received these incentives will not be rewarded any further equity for the next 6 years. Now on to our increased guidance. For the full year 2026, we're increasing the midpoint of our revenue guidance by $30 million to $1.785 billion, representing a 37% growth rate or 22% year-over-year growth when excluding Marigold and political candidate revenue. None of our guidance increase is related to political candidate revenue, which we continue to assume will be $15 million in 2026 with $7 million in the third quarter and $8 million in the fourth quarter. Additionally, we continue to take a conservative view of Marigold, contributing $47.5 million per quarter to 2026 revenue for the remainder of the year. Our revenue guidance also includes minimal contribution from Athena. And as shared earlier, we have taken into account our typical conservatism of 2% to 5% in setting our outlook. For the second quarter, we now expect revenue of $420 million at the midpoint, $4 million higher than our previous guidance and representing year-over-year growth of 36% or 21% when excluding political candidate and Marigold revenue. For adjusted EBITDA, we're increasing the midpoint of our 2026 guidance to $397 million, up $6 million from our prior guidance and representing a year-over-year increase of 43% at a margin of 22.3%, an improvement of 90 basis points over 2025. For the second quarter of 2026, we now expect adjusted EBITDA of $86.6 million at the midpoint, up from our previous expectation of $84.9 million and representing growth of 47% and a margin of 20.6%, up 155 basis points year-to-year. We are also increasing our 2026 free cash flow guidance to $235 million at the midpoint, up from $231 million, representing year-over-year growth of 43% and a conversion of 59% of adjusted EBITDA, which likely has upside. And here's the broader point. A 19-quarter beat-and-raise track record is obviously something we're proud of and continues to demonstrate our consistency and strong execution. We also recognize the times we're in, specifically the need to underwrite investments in companies with strong free cash flow generation, durable revenue growth and share gains and demonstratable moats. Q1 was an excellent jumping off point for these emerging investor frameworks. Not only did free cash flow set a record in the first quarter, but we are also tracking to the high end of our 2026 GAAP EPS range of $0.02 to $0.04 and long-term 2028 targets. As it relates to durable growth, this was the fourth quarter in a row we accelerated revenue growth, excluding acquisitions and political candidate revenue. And in terms of exhibiting our moats, our marquee wins with enterprises and agencies this quarter came at the expense of legacy marketing clouds and legacy DSPs, where Zeta's proprietary data and Athena operating system were capabilities our competition could not match. With that, I'll hand the call over to the operator for David and me to take your questions. Operator? Operator: [Operator Instructions] And the first question comes from the line of DJ Hynes with Canaccord Genuity. David Hynes: Congrats on a fantastic quarter. Nice start to the year. David, I want to ask you a competitive question. So obviously, there's been more public backlash against the Trade Desk and the agency ecosystem. But I think for those living in the marketing and ad tech world, like that's been going on for a while now, right? So two related questions here. Number one, like how much do you think Zeta has benefited from that dynamic? And then second, if the Trade Desk figures out how to get pricing right or at least make it more transparent, does this rebalance competitive dynamics at all? Or is the horse already out of the barn there? David Steinberg: Well, let's -- I mean, first of all, DJ, thank you. We appreciate it. Could not be happier with this quarter. And I think it really speaks to kicking off the year right and Athena really was a massive driver here. I want to separate the conversation about the agency and other technological platforms like the Trade Desk that are out there and struggling a bit because the agencies continue to thrive and they're not really having any issues from our vantage point. And I just got back from 3 days at the POSSIBLE Conference, where I did 54 meetings in 3 days, hosted 4 dinners and 3 cocktail parties, which is why I'm losing my voice going into this. I think that -- and I don't want to speak to any particular platform, but I think the horse is out of the barn. I think that organizations that have built workflow management tools that do not have proprietary data, they do not have proprietary native artificial intelligence are going to really struggle in this next evolution of where sort of marketing is going as it relates to intelligence. Because if you're not creating intelligence in today's world, you're not winning. And I think that we are a direct reason that a number of our competitors are either growing slower or shrinking as we take meaningful market share. Chris, in his prepared remarks, was very clear about the fact that we had a number of meaningful agency wins in the quarter that will continue to run out through the rest of this year and into future years that are starting with social. We're starting to see those move over to programmatic and connected TV as well. So I think if you separate the agencies, which are doing well and thriving from the technological platforms that have based their business on workflow management, I think they are going to struggle, and we are going to continue to beat them handily in the marketplace. David Hynes: Yes. Perfect and helpful color. Chris, I want to follow up with you. So David gave a bunch of great anecdotal data points around Athena and the early success there. The product is not explicitly monetized, right? So what are the signs that we all, as investors, should be paying attention to from a financial perspective that will signal to us that Athena is moving the needle for Zeta? Christopher Greiner: Great question, DJ. I'm glad you asked. There's a couple of leading indicator data points that I think you can already begin to look at. So as part of the press release, one of the data points that was called out was a 7x increase, and this is just in the first week of Athena's general availability. We saw a 7x increase in the type of -- in the amount of agentic interactions on the platform, coupled by 60% of the AI usage on our platform being driven by Athena. How that should ultimately translate to the usage part of our revenue can be seen through ARPU expansion, some of which you already started to see. So if you look at ARPU in the quarter for super-scaled customers, it was $1.7 million. It was up 21% year-over-year. But if you look underneath that, what drove it are exactly the dynamics that Athena was engineered to be able to do, which is to make more of the platform available and visible for the customers to be able to exploit. If you look at multiple use case customers, it was up over 50% year-over-year. If you look at the customers that are using 4 or more channels, that's up over 40% year-over-year, which again are not just great examples of Athena as an unlock, but also Zeta working well. David Steinberg: And by the way, she's just getting started, DJ. David Hynes: Yes, totally. Congrats, guys. Operator: And the next question comes from the line of Gabriela Borges with Goldman Sachs. Gabriela Borges: David, I want to ask you about the people and process part of Athena, meaning the technology you've demoed, it clearly is able to do a huge amount of knowledge work. My question for you is, how do you then change the end user behavior? What does the training and enablement look like? How do you encourage more people to use it once your customers have already decided to adopt it? David Steinberg: First of all, Gabriela, what a great question. First, let me say that we were incredibly proud that we were able to make the product not just generally available on time, but available to 100% of our enterprise clients, which was not a small task. At the same time, to your exact point, we have a learning and development group that is literally purpose-built to train our clients and get them up and running on this new product. And they've already done. Our top 30 clients have been onboarded through that group, and we're going to be adding all the other clients as we continue to expand out. The other thing that's really important is we're doing a weekly leaders -- I'm sorry, a weekly learning and training program to all of our clients that's virtual, recorded and they're able to then watch it at their convenience inside of the platform when they want to. But we're doing sort of a ask Athena question of the week. Every week, a new question that you could ask Athena goes out to all of our customers so that they can begin they process of using her. And I know I'm sure you've seen the demo, you know how incredibly intuitive she is to use. So what I would say is we're really focusing on it from a relationship management, learning, development, both in-person, virtually and weekly follow-ups. But the intuitive nature of her is, I think, one of the reasons you saw her so powerful. Just in the first week she was live, Athena drove 60% of all AI utilization across our platform. That is off the charts for a new product from an adoption perspective. Gabriela Borges: Very good. And Chris, the follow-up for you on inference cost. So Athena has pieces of Zeta proprietary technology. And then I believe you have some third-party technology in there, too. How do you think about managing those inference costs or optimizing those inference costs? And then same question for your R&D team, your engineering team. We're at the stage where we've been through more token usage is generally better, but also can sort of outrun budgets very quickly. How do you think about managing that internally? David Steinberg: So Gabriela, I'm going to take that one. Sorry, Chris. First and foremost, as the world moves from large language models to inference-based AI, our platform is purpose-built for that as the operating system and infrastructure for our clients. The vast majority of our queries, Gabriela, are done on our own platforms, on our own data. So we are not buying tokens as we roll this out to our customers. It's fully embedded, which is one of the reasons I think you're seeing us project substantially higher growth to profits and cash flow than we are even to revenue. We have put ourselves as sort of the perfect spot as the market moves to inference-based AI. As it relates to our internal consumption, we have built a platform called Spade. Don't ask me what it stands for. It is an acronym. But the reality is that Spade is a tool that we custom built inside of Zeta and is being utilized by a very large percentage of our engineering team, where effectively, an engineer would go into Spade, they would create the construct for the code they are trying to develop. Spade would then automatically choose the most efficient and best large language model to do the coding itself. So if it's security-based, we might choose Claude. If it's general coding based, Spade might choose ChatGPT. If it's complex publishing, Spade might choose Gemini. Now of course, Cursor is sort of at the center of this as we think about where that's expanding. The code is then auto generated by the LLM, which is the only time we utilize tokens. Everything else is sitting on our own platform, our own cloud. The LLM creates the code. It then goes to a program called Zippi because obviously, we have great nomenclature capabilities. And Zippi automatically QAs the code on our platform once again. Once it's done, it sends it to one of our senior architects. They review the code one more time, and they can make it generally available. To put it in perspective, Gabriela, at the end of the first quarter, Zeta was already driving 75% automated new code creation. I believe that puts us even above Google as it relates to that. And the pods working on Athena today, I know for a fact are up from a productivity perspective between 400% and 600% year-over-year from an output and productivity perspective, all the while, the vast, vast majority of the compute and of the tokenization is on our own platform. So as you look at our growth, we will not experience some of the constriction of margin or additional CapEx. We've already allowed for everything in the projections that we've got, and we're very, very comfortable with where we are externally and from an engineering perspective. Operator: And the next question comes from the line of Arjun Bhatia with William Blair. Arjun Bhatia: Congrats guys on a very strong quarter here. David, I have two questions, maybe I'll just do them one at a time. The first on awareness. It seems like the customers that are using it are getting great value out of it. It's early, but for this to have a material impact, for the company as a whole, you have a fairly large revenue base. Like how do you roll this out to all your large customers? Where is it right now in terms of customers having awareness and knowing what Athena can do? And how do you sort of plan to progress that? David Steinberg: Yes. So great question, Arjun. First of all, from an awareness perspective, I would say that our marketing team today is doing the greatest job it's ever done in the history of our company. I just came back from the POSSIBLE Conference where you couldn't walk 5 feet without seeing the brand Athena and without seeing Buy Zeta. And it was really exciting. We did an Athena Suite. We did a Zeta Cafe Powered by Athena. And we're starting to see that we're moving to that next evolution of our brand where it's sort of moved to it's getting the must-have Zeta in our industry. And I didn't think I would say that this early. As it relates to internal awareness, we have built an internal learning and development team, which is doing nothing but training and onboarding our clients. One of the things we're going to be rolling out in the next few months, which I'm super excited about, is an Athena certification. We're going to certify the individuals who work for our clients on Athena utilization. They'll get a full certification that they can put into their resume, and we're very excited about how that's going to be rolling out. So we're also doing sort of a hint of the week, tip of the week, question of the week. It's going out to all of our clients. I would tell you, in all of the years I've run this company, which is a long time now, I have never seen a faster uptake of a technological product that we've rolled out, and it's really been exciting, Arjun. Arjun Bhatia: Awesome. That's great to hear. And then maybe switching gears from Athena for a second. Marigold, that also looks like it was off to a strong start. I think you beat your sort of Q1 target on that front. But where are we on the cross-sell there? And what's the early traction you're seeing on, I guess, the 2-sided cross-sell, both into your base and into Marigold's base? Christopher Greiner: Arjun, I'll take that, and David will wrap it up also. So a couple of places where you can see where it's evident that the cross-selling is working. So we talked about the number of multi-use cases. It's nicely contributing to the growth that we've seen across the base of super-scaled customers. But I think more broadly, if you look at the areas that we talked about being purposely conservative around Marigold, it was around the potential for their SMB and mid-market customers that were on the enterprise platform we anticipated churn. We're not seeing as much as we thought, which is good. There were products that -- and geographies that we thought we would have less growth on and would also see churn. That hasn't happened yet. And then just more broad normal churn at the enterprise level, and it stayed healthy. And by the way, a lot of that is being driven by Zeta's interactions with those customers and partnering with Marigold's people. David Steinberg: So it's been really interesting, Arjun. We've seen a meaningful uptick from existing Marigold clients with us integrating the data cloud into the platform. So the first thing we did and we had it done within 90 days was a full data cloud integration into their platforms, which allowed clients to begin to access data sets that they've never had access to before. So we've seen meaningful growth there. As it relates to cross-selling, we're really -- we're making progress, but not a lot of that is in the numbers yet. These products are complicated, and they're very big. I think you'll see more of that as the year progresses. But I think -- I mean, to say we're very excited about how well we're performing with the asset would be an understatement. And a lot of that today is a result of the data cloud integration. Now whether you want to consider that a cross-sell because we're bundling the Data Cloud in to drive additional utilization or not, that's up to you. But to us, as we're rolling out loyalty to all of our global clients, and we're starting to take sell-through and roll it out to the LiveIntent clients and all of the different things we're doing, that's in the early stages, and I think will drive meaningful growth in the future. Operator: And the next question comes from the line of Jack Nichols with KeyBanc Capital Markets. Jackson Nichols: Maybe pivoting back to Athena. I was wondering if you could walk us through the early adoption trends among the enterprise customer base, specifically around how they're deepening engagement with the platform and then existing use cases today? And then I've got a quick follow-up. David Steinberg: Well, first of all, welcome, Jack. It's great to have you on coverage. We really appreciate you. Second, we have been really blown away by the early adoption of Athena. We made it generally available to 100% of our enterprise clients, and we saw a 7x increase in agentic interactions from our clients in the first week of Athena alone. So we think of that as pretty good. 7x is always something we aspire to. But our long-term goal is for Athena to be the operating system of our clients' businesses, and we're just getting started on that. But early adoption has been very, very exciting. Jackson Nichols: That makes sense. And then pivoting quickly to Marigold and thinking about the recurring revenue mix, as those customers adopt the Zeta platform, should we expect that mix to trend down or up over time or kind of remain in line with the 2025 60% expectation disclosure? Christopher Greiner: Jack, it's Chris. I'll take this. And as David said, welcome. It should go up is the short answer. And I think a really interesting proof point that you'll see in the queue tomorrow is just how substantially RPOs went up quarter-to-quarter. They went up $66 million just from fourth quarter to the first quarter. Obviously, part of that is Marigold, which then helps with visibility. But I think an interesting thing for the audience here to understand is another large piece of that was not only these marquee wins that we talked about with the apparel retailer and the e-commerce pet retailer, but it was also agencies beginning to now also sign long-term committed contracts. That is an exciting proof point for us. It adds to the recurring revenue, which then obviously adds to visibility, which both of those came into our confidence to be able to raise the guidance that we did on the top line by $30 million while continuing to keep to our 2% to 5% conservatism. Operator: And the next question comes from the line of Clark Wright with D.A. Davidson. Clark Wright: Awesome. I wanted to maybe quickly touch on the consolidation story. You noted on one of the marquee wins this quarter that you consolidated 4. And I recognize over the course of the last few quarters, you mentioned consolidation being a key piece. Can you talk about the use cases that beta continues to solve for and how you see that expanding over time? David Steinberg: Yes. Thank you, Clark. Listen, when John and I founded this company, I don't know, 18, 19 years ago at this point, our vision was to put everything a marketer needed into one user interface with one reporting infrastructure. And I would tell you that because of Athena, I think we are finally there. And our ability to consolidate anywhere from 8 to 12 different vendors into one user interface and one reporting infrastructure has never been stronger. In the case of this global company because it's a retailer and a manufacturer of their clothing, we displaced what I think many people think to be certainly the longest serving of the marketing clouds. They made, I think, their acquisition first in the space as they built their marketing cloud. And in fact, this particular client used that company for everything. They consider themselves a you know what shop, so to speak. So decoupling their marketing cloud from everything else they were doing, I think, was a very difficult decision. We also displaced another competitor of ours who tends to be more focused on mobile. They tend to be a little easier to displace because they're so singularly focused on mobile. And neither of those companies brought any data or any activation capabilities to task. When you're working with one of the large marketing clouds and you displace them, you're almost always also displacing a professional service provider, who they have to then spend millions of dollars on to customize their platform versus our platform is pretty much ready to go from a cloud perspective. So that would be a really good example of a -- and we see this as one of the most important wins in our company's history, and it goes back to not just our ability to consolidate other vendors, but to do everything that each one of those point solution does better than they do while simultaneously putting everything into one place. Clark Wright: Got it. That's helpful. And then if I could just add one more. Over the long term, you talked about increasing wallet share with customers. Do you think AI accelerates the rate of share capture, increases the total wallet share or both? David Steinberg: I think both. I mean, remember, the single greatest way, Clark, to get market share is drive meaningful return on investment to your clients. The Forrester study that came out that said we have a 600% return on marketing spend, we're seeing early adopters of Athena at a materially higher return on investment than even that. The higher we drive return on investment, the more wallet share we're naturally going to get. And as you know, our existing global super-scaled customers will spend well over $100 billion to $110 billion on marketing this year. And at the middle of our range, we'll have, call it, 150 to 170 basis points of wallet share. I believe we can get that to 700% to 1,000% of their wallet share in the years to come. The key will be driving better return on investment. Artificial intelligence, specifically Athena, plus our data as a moat into our business is going to drive return on marketing spend up meaningfully, which we think will then drive wallet share. Operator: Our next question comes from Jason Kreyer with Craig-Hallum. Jason Kreyer: Great job. So I wanted to stick with the point on wallet share because you announced some major wins and you've announced some major wins over recent quarters. But I'm curious, when you look at the aggregate data representing somewhere less than 2% of wallet share, how big of deals are you winning today? And how big a deal do you think you can win over time just in terms of the wallet share of those customers? David Steinberg: It's interesting, Jason. I would say the last few wins we've had have been at a comparable wallet share to our current wallet share, but the clients are spending 4 or 5x as much per year on marketing and CRM. So they represent some of the largest deals we've ever done right out of the gate. Does that make sense just mathematically? At the same time, what we're starting to see is some of our clients who have been on the platform for 2, 3, 4, 5 years are getting to that 7% to 10% of wallet share and higher. And we're using that as a road map for how do we take new clients there. So the wins are much bigger than they've ever been, but I'm not sure they're much bigger wallet share only because the companies are so big that we're winning. Now that will give us meaningful upside as they're on the platform, and Chris does a much better job than I do, talking about how ARPU grows the longer a client is with us, and these clients are starting at probably the highest ARPU we've ever seen clients starting. Christopher Greiner: That also drives, Jason, with our sales pipeline. So we talked about its growth. But if you look at deal sizes and particularly the annual contract value of deals are up pretty substantially year-over-year. Jason Kreyer: Perfect. Maybe one quick follow-up, David. You've been doing AI for a long time, but it seems like the release of Athena has certainly put you in a different conversation within the AI industry. I'm curious, how has that translated to conversations with customers? And like do you feel like Zeta is becoming more of an AI thought leader in the marketing ecosystem and that's driving that engagement? David Steinberg: It's interesting, Jason. In some ways, being a native AI company has been complex for us over the last few years because everybody is rolling out shiny new products, most of which are not real, but most of the people are rolling them out. And we've always been seen as sort of like AI is under the engine. Athena is the hood ornament to what we're doing as a company. She is now us announcing ourselves with authority that we are not just an AI company, we are the leader and the disruptor in the AI space. And with the launch of Athena as a marquee product, it has changed the game for the way people are seeing us. And I will tell you, the 2 client wins we talked about in the prepared remarks, there is 0 chance we would have been in the room if we had not launched Athena or started talking about her at Zeta Live. And there's -- I don't think a chance we would have won these accounts without Athena showing that we are the leader in artificial intelligence as it relates to marketing. From an internal perspective, we're also one of the best users of AI. I mean back to what I was saying around the Spade internal platform we've built. If you had told me a year ago, we'd be auto generating 75% of our own code while simultaneously driving the type of quality products we're driving, I would have said that's just not possible. Spade has made that possible. And it's really been very interesting how we've done that in an environment where we're still using a very de minimis percentage of tokens versus what many of our competitors are doing, which is going to allow us to continue expanding our operating margin as we've done over the years. Operator: Our next question is from Matt Swanson with RBC. Matthew Swanson: And my congratulations for the quarter. I think the metric that really jumped out to me was the increase in multi-use case. And I know that's something we had kind of talked about with Athena and its ability to kind of create this organic expansion motion. Given that, that 50% increase was for the full quarter, like is Athena a real part of that? Is there other parts of your go-to-market driving that? If you could just kind of touch a little more there. David Steinberg: The great news is Athena is just getting started. So we had a great trajectory going into our launch. Now I will tell you, every client that was on the beta became multi-use case. So it was -- but that was not a lot of clients, right? So as she rolled out to generally available, we saw an uptick there. But I think that's continued upside to growth in multi-use case. And the One Zeta team continues to just do an exceptional job. I'll remind you, Matt, we really started on the One Zeta mission just 18 months ago. So you've got a massive tailwind coming out of the work we've been doing there. And then I think Athena is going to supercharge that. Christopher Greiner: And Matt, I think the reason why you picked up on it, but for others, empirically, what we know is that when customers use more than one use case, their ARPU is 3 to 5x greater. So I think you're right on that being an exciting data point. Matthew Swanson: Yes. No, I appreciate that. And we'll make sure to take note that 100% of Athena users will become multiuse case. That's what I heard. David Steinberg: I wouldn't go quite there. I mean we -- obviously, that's the goal, Matt, but we certainly didn't say that just yet. Matthew Swanson: Yes. The other one I want to talk about is the independent agencies. I know you called out advertising as a key vertical for you guys. I think your willingness to kind of share the credit with agencies and allow them to white label some of your technology has been part of the reason you've been so successful there. I guess with Athena, how much more can that help you in those deal environments as a lot of these independent agencies are trying to compete with the big holdcos and so on? Christopher Greiner: One of the key wins we had, Matt, in the quarter was with a large independent. If you look at business done a year ago with them was 0. Business done within this quarter was 8 figures with Athena being, again, something that was visible to them as something they could also exploit for their benefit. The same was true with a very large new agency that began piloting Zeta in 2025. The spend was material, call it, a little less than $2 million, but that new agreement that was signed is more than 10x that size. So both the independent as well as the large agency continues to have a lot of runway. In fact, amongst the 5 large holdcos, the number of brands we're working with year-over-year grew by 50%. David Steinberg: And I just want to say, Matt, we're actually big fans of the agencies. They provide incredible services to their clients. And we've had clients approach us to go direct. And we always try to bring the agency back into it because we think it's a very healthy relationship when it's the three of us. And listen, we're good if the agencies make their money because they're providing meaningful services. But as it relates to our business, I'll remind you, none of the agencies really focus on the retain, which, as of last quarter, is about 60% of our business. So we have real greenfield opportunity there as it relates to the activation, which sort of create customers, monetize customers. We're very, very happy to partner and give the credit to the agencies because they've built incredible businesses, and we're very excited now to be working with pretty much all of the large holdcos. I think now it's all. And well, certainly the biggest ones. And then to be partnering with a select number of independent agencies. There's a lot of them out there, but we want to work with only the best. Operator: Our next question comes from Naved Khan with B. Riley. Ethan Widell: This is Ethan Widell calling in for Naved. To start, can we talk about the ideal customer profile for Athena. I'd imagine there are two kind of distinct value propositions there, a, where Athena can drive efficiency gains for your larger enterprises that already have sophisticated marketing teams and whatnot; b, more small and mid-market players where Athena creates access to capabilities that these customers don't necessarily have in-house. So like which of these is management really seeing more of early traction-wise? And what's kind of the ideal customer size that you're leaning into with your early sales motion? David Steinberg: Well, it's interesting you put it that way. I mean, today, to be honest, Ethan, we don't focus on midsize. We're really just focused on very large enterprise, although Athena opens up the midsized market to us at some point because you're very intuitive to understand that the cost of layering Athena out to midsized companies is so de minimis to us that would allow us to move into those -- that vertical -- or I'm sorry, into that sort of category without having to meaningfully hire people to do it. But today, we focus solely on very large enterprise. So I would tell you the two things very large enterprises have really focused on is, a, and you're totally right, efficiency. What they're finding is it takes 70% less labor to manage the Zeta marketing platform with Athena than it did with hands-on keyboard. So you're effectively able to take 70% of your marketing workforce and retask them into other functions where they can be more valuable to your organization. We're also seeing that because -- and this is something I talk about a lot, Ethan, but when you buy software, whether it's us or it's Bloomberg or somebody else, you're buying a stealth fighter, right? We're all spending to build a Stealth fighter of a platform. And most of our clients know how to fly Cessna with -- I mean think about a Bloomberg terminal, the vast majority of their customers only use 5% to 10% of the capabilities. As you look at our platform, being able to fly that Cessna, we're still delivering a 600% return on marketing spend. As clients are able to use Athena as their copilot, they can get right into the cockpit of that stealth fighter, and they can then fly the entire platform, which is driving meaningfully higher return on marketing spend than even that 600%. Ethan Widell: Got it. That makes a lot of sense. And then coming out of first quarter, I think you mentioned 9 out of 10 top industries grew more than 20%. I know you spoke to some customer consolidation being a benefit there. But are there any verticals that you see showing any signs of softening, particularly anything sensitive to the macro and geopolitical risk going on right now on the discretionary? Christopher Greiner: Yes. Short answer, no, Ethan. The 9 out of the 10 were effectively say 9 out of 10 that ended last year. The 1 out of 10 that wasn't growing over 20% is 4% of revenue. So it really gives you a sense for the vast, vast majority of revenues on all of the verticals we support are performing in a very healthy way. Operator: Our next question is from Terry Tillman with Truist. Terrell Tillman: I'll just keep it to one question because I know we're running over time. And maybe I'm getting too far ahead of myself, but I like hearing about 40% increase -- 40% plus increase in the sales pipeline. And I think you said your discretionary markets where you have a lot of activity is even higher. Is it too early to start to say because of the emphasis on agentic in AI in general that's in the market, plus you have Athena that's now credibly in the market and in production, could it start to tip the scales and move in some of this funnel activity faster and you actually close new deals quicker? Or is it just too early or I'm just way too optimistic? Christopher Greiner: I don't think you're too optimistic. But I do think it's -- from an expectation setting perspective and frankly, from a data-driven perspective, and this is a multi-quarter statement I'm about to make. Our deal cycles in good times and in less good times have stayed consistent. What we're seeing is more opportunities in RFPs, many more at-bats than we were given a year ago and certainly 2 years ago. Those by nature take longer. But again, our strategy many times is to work around those processes through pilots and proof of concepts. Those deals are getting bigger, as David said. So yesterday's $100,000 pilot is today is $1 million. But I wouldn't say right now, it's an accelerant, but it's in addition to the pipeline. David Steinberg: And I would concur. But I do want to be clear, Terry, we're getting at bats that we would have never gotten a few years ago. So it's sort of -- it's working really, really well. Operator: Thank you. This concludes the Q&A session and our call. You may disconnect your lines at this time, and have a wonderful day.
Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the First Quarter 2026 SPX Technologies Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Mr. Mark Carano. Sir, please begin. Mark Carano: Thank you, operator, and good afternoon, everyone. Thanks for joining us. With me on the call today is Gene Lowe, our President and Chief Executive Officer. I'm also excited to be joined by our new Head of Investor Relations, Johann Rawlinson. He has joined us from the Hertz Corporation, where he served as Head of Investor Relations for the last 5 years. A press release containing our first quarter results was issued today after market close. You can find the release and our earnings slide presentation as well as a link to a live webcast of this call in the Investor Relations section of our website at spx.com. I encourage you to review our disclosure and discussion of GAAP results in the press release and to follow along with the slide presentation during our prepared remarks. A replay of the webcast will be available on our website. As a reminder, portions of our presentation and comments are forward-looking and subject to safe harbor provisions. Please also note the risk factors in our most recent SEC filings. Our comments today will largely focus on adjusted financial results and comparisons will be to the results of continuing operations only. You can find detailed reconciliations of historical adjusted figures from their respective GAAP measures in the appendix to today's presentation. Our adjusted earnings per share exclude intangible amortization expense, acquisition and integration-related costs, nonservice pension items, among other items. Finally, we look forward to meeting with investors at various events during the upcoming months. And with that, I'll turn the call over to Gene. Eugene Lowe: Thanks, Mark. Good afternoon, everyone, and thank you for joining us. On the call today, we'll provide you with an update on our consolidated and segment results for the first quarter of 2026 as well as an update on our full year outlook. We had a strong start to the year with year-over-year growth in adjusted EBITDA of 23% and adjusted EPS of 22%. We continue to execute well, driving significant profit growth in both segments and making meaningful progress on several key initiatives. We are raising our full year guidance range to reflect our strong performance in Q1 and outlook for the remainder of the year, partially offset by the impact of the recent changes to the Section 232 tariffs. We do not expect these tariffs to impact 2027 earnings. Looking ahead, we remain well positioned to continue executing on our organic and inorganic value creation initiatives supported by our robust M&A pipeline. Turning to our high-level results for the quarter. We grew revenue by 17.4%, driven by the benefit of recent acquisitions and organic growth in both segments. Adjusted EBITDA increased 23% year-over-year with 90 basis points of margin expansion. As always, I'd like to update you on our value creation initiatives. The capacity expansions across our HVAC facilities to meet the strong demand for our data center cooling and custom air handling solutions are progressing well. They remain on track with the time line and capital requirements outlined last quarter. In Q1, we began producing highly engineered aluminum dampers in TAMCO's new Tennessee facility and expect production to steadily increase throughout the year. We also began production of the OlympusMAX in our Olathe, Kansas facility in the first quarter. Additionally, the Madison, Alabama facility build-out is well underway. We still expect to have assembly capabilities for OlympusMAX and custom air handling products in the second half of this year and initial production capabilities in the first half of 2027. Turning to Detection & Measurement. We continue to advance our new product initiatives across the segment. Our location and inspection platform, recently launched a new locate performance management software that meaningfully expands the real-time analysis of our customers' critical data that is seamlessly transferred from our radio detection precision locators in the field. We believe this solution significantly enhances how our customers locate underground utilities by increasing their efficiency, safety, accuracy and overall data management capabilities. And now I'll turn the call back to Mark to review our financial results. Mark Carano: Thanks, Gene. Our first quarter results were strong. Year-over-year, adjusted EPS grew by 22% to $1.69. For the quarter, total company revenue increased 17.4% year-over-year, primarily driven by the benefit of acquisitions and strong organic growth in HVAC. Consolidated segment income grew by $25 million or 22% to $135 million, while consolidated segment margin increased 100 basis points. In our HVAC segment, revenue grew by 22% year-over-year with 11.5% inorganic growth and a modest FX tailwind. On an organic basis, revenue increased 9.6%, with solid growth in both cooling and heating. Segment income grew by $15 million or 20%, primarily driven by higher volume, while segment margin decreased 40 basis points, largely due to start-up costs associated with the capacity expansions. Segment backlog at quarter end was $755 million, up 38% organically year-over-year, primarily driven by data center demand. In our Detection & Measurement segment, revenue grew by 8.3% year-over-year. The one month of inorganic revenue from KTS contributed 3.9% and FX was a modest tailwind. On an organic basis, revenue increased 3%, primarily driven by higher volumes in our transportation platform. Segment income grew by $10 million or 28% and segment margin increased 410 basis points. Increases in segment income and margin were primarily driven by higher volume and a favorable mix, including greater-than-typical high-margin software volume. Segment backlog at quarter end was $333 million, down modestly year-over-year. Turning now to our financial position at the end of the quarter. We ended Q1 with $158 million of cash on hand and total debt of $674 million. Our leverage ratio, as calculated under our bank credit agreement was approximately 0.9x quarter end, below our long-term target range of 1.5 to 2.5x, giving us significant capacity to pursue accretive growth opportunities. Q1 adjusted free cash flow was approximately $16 million. In addition, during the quarter, we received approximately $60 million in cash proceeds following the completion of the sale of Crawford United's Industrial and Transportation products business. As a reminder, these businesses were reported in discontinued operations and not part of our original 2026 guidance. And net of these proceeds, the implied EBITDA multiple for the acquisitions of the Air Enterprises and Rahn Industries, formerly the Air Handling segment of Crawford United is approximately in line with our average acquisition model. Moving on to our full year 2026 guidance. We are increasing our adjusted EPS guidance by $0.15 to a midpoint of $7.95 to reflect our strong Q1 results, particularly in D&M, and additional data center-related volume anticipated to be delivered in the second half of this year. Our updated guidance reflects a $0.05 to $0.10 impact from the recently announced changes to the Section 232 tariffs. This headwind is expected to predominantly affect HVAC in the second quarter. Excluding this tariff headwind in Q2, we expect first half adjusted EPS gating to be similar to the prior year. As always, you will find our updated 2026 guidance on this slide and modeling considerations in the appendix to our presentation. And with that, I'll turn the call back over to Gene for a review of our end markets and his closing comments. Eugene Lowe: Thanks, Mark. Current market conditions support our 2026 outlook, which implies 21% adjusted EBITDA growth. Within our HVAC segment, our core end markets remain resilient, and we continue to see strong demand for our data center solutions. In Detection & Measurement, our run rate businesses continue to see solid demand supported by new product introductions. For our project-oriented businesses, the front log remains active. In summary, I'm pleased with the strong start to 2026. We are executing at a high level, and our key initiatives, including the capacity expansions and the integration of recent acquisitions are on track. We are confident in our increased full year guidance, which implies adjusted EBITDA growth of 21% at the midpoint, and we remain well positioned to navigate the changing tariff environment. Looking ahead, I'm excited about our future. With a proven strategy and a highly capable experienced team, I see significant opportunities for SPX to continue growing and driving value for years to come. With that, I'll turn the call to Johann. Johann Rawlinson: Thanks, Gene. Operator, we will now go to questions. Operator: [Operator Instructions] Our first question or comment comes from the line of Andrew Obin from Bank of America. Andrew Obin: Can we just talk just on your HVAC business. Very strong growth even with data centers. But if you back data centers out, what end markets really stand out to you in terms of strength? Eugene Lowe: Yes, sure. I think, I'd say, Andrew, if you look at it, our -- you're right, the growth is strongest in data center. With the change in outlook this year, we moved our data center growth somewhere from the neighborhood of 50% to 70%. If you look at the rest of HVAC, where we're mid-single digits, maybe a hair above that. And really, what we're seeing, I'd say, outside of data centers, health care and pharma remains very, very strong. We're seeing power be very strong. And I think some of this is somewhat linked to data center. This would be both on new power and aftermarket. We're seeing some heavy industrial that also a lot of activity there. And then the aftermarket has been very strong for us. So in general, we've seen a number of areas of strength across HVAC. I'd say the areas of softness. They really have not changed a lot quarter-to-quarter. I'd say, commercial real estate still remains at a relatively low level, same with hotels. And what I would say, if you kind of look at more institutional market, universities, government, that's been very healthy over the past couple of years. I'd say that's relatively flattish this year from what we're seeing in the early part of the year. And then we've called out softness in battery and semiconductor, which was very strong a couple of years ago. That has been lower recently. Having said that, we actually see some nice new opportunities coming, some bidding. So that could be something that is coming back on the upswing. But overall, we're feeling very good about our markets, both within data center and outside of data center. Andrew Obin: And on Detection & Measurement, you highlighted strength in transportation. I think military was an area of strength. There was some pull forward. How should we think about that? Any benefit from what's happening? I know you have a very different business, but any benefit from what's happening in Iran, on your business? And just in general, how did the government business do? Eugene Lowe: Yes. So I think we touched the government in a lot of ways. Transportation, it tends to be more the U.S. municipal markets. I'd say the area of exposure that the Iran impact could affect would be more on the CommTech business. What I would say is we've had very strong demand there over the past couple of years, and we expect that to continue that CommTech, as a reminder, would be our legacy TCI ECS business, does a lot of drone detection and so forth with the addition of KTS. So we see continued growth there, but I wouldn't say we see any really step change in growth there because there's been a lot of activity over the past couple of years there. So I'd say it's very active. We like our value proposition. But I don't think it's something that, at least at this point in time, materially changes our mid-single-digit anticipated growth rate for D&M. Andrew Obin: Thanks for the color on CommTech. Operator: Our next question or comment comes from the line of Joe O'Dea from Wells Fargo. Joseph O'Dea: Can we just talk about this? The step-up in the HVAC orders in the quarter, and just the timing of shipments around that, as well as when you talk about the front log, as we see that backlog number step up to where it is, you're just trying to think about moving forward and expectation setting and the degree to which there was a sort of concentrated amount of activity? Or as you look forward, you see that strength persisting? Mark Carano: Yes. Joe, I'll start off. I mean I think with respect to the backlog, I think we -- in our prepared remarks, we talked about data centers and there's real strength there in those markets, and we're seeing those orders come through. We also raised our guide for the year on the HVAC side, I think as you saw again in the slides on the prepared remarks, largely driven by the data center market. So we're seeing opportunities, orders, bookings going into backlog for 2026. And then as we look out into 2027, we're seeing opportunities there that will be executed next year. So that market, I would say, is obviously very healthy. The momentum is strong there. So it sets us up well, I think, for '26, and we'll see as we look into '27. Eugene Lowe: Yes. So I think if you kind of look at the data center market overall, we're just very pleased with what we're seeing. The demand strength is very strong. We would say accelerating. We're seeing this across our different product lines. We're seeing some of our key customers really looking to accelerate, and we're able to expand capacity in this year. That's how we've taken our growth rate from 50% to 70% in data centers this year. But beyond kind of to your question, what does this look like? We actually see some attractive runway looking ahead in '27 and '28. We think we have a really good customer mix here. We have a number of hyperscalers and colos. We have a good global presence here. We're very balanced, and we have a very good line of communication and good visibility with what the expectations of demand are from our data center customers. So overall, we're very pleased with what we're seeing in data center, and we think we're really getting some nice traction in that market, and we would expect that to continue. Joseph O'Dea: I appreciate the color there. And then on the tariff and sort of cost inflation front, just in terms of your response to that? And how much of that is a pricing response? How much of that is a cost mitigation response? And then in particular, where you're manufacturing outside of the U.S., what you see as a time line to bring more of that into the U.S. to help on the mitigation side? Mark Carano: Yes. A couple of comments there, Joe. With respect to sort of sizing that. And we talked about $10 million of kind of gross costs. But that will -- we can offset, we believe, 50% of that, primarily through price, but we've got other levers to pull with respect to that. So that kind of gets you to a net impact. Probably 75%, 80% of that is going to fall within the second quarter of this year. Why is that? Well, it really relates to a couple of our businesses in Canada, the Ing nia business and the Sigma & Omega business that have backlog today that's already priced. But as we go through the back half of the year, we think the impact will be de minimis. And in 2027 I think as we highlighted in our prepared remarks, we don't expect to see any impact from tariffs. We've got the levers in place to offset that. With respect to your kind of second part of your question, we're largely in country for country, really. So we manufacture in the region that we're selling in. So when you think about those Canadian businesses, for example, the TAMCO expansion that we've highlighted in Tennessee and then the Madison facility, a part of that is going to be for the Ing nia product, the custom air handling. We were doing that, a, because there's a lot of demand, obviously, in the U.S. market for those products. But also, it allows us to move that manufacturing into the U.S. and kind of create that in country for country model. Operator: Our next question or comment comes from the line of Brad Hewitt from Wolfe Research. Bradley Hewitt: So you mentioned there were some start-up costs and related inefficiencies with HVAC capacity expansions. Curious if you'd be able to quantify how much of that HVAC margin miss versus your expectations was due to the capacity ramp? And have you seen anything so far that kind of changes your thinking about the near-term timing of the ramp or the margin impact? Mark Carano: Yes. I would -- Brad, I'll start. I think if you're referring to Q1, a couple of comments to make. We had, I think, in our last call, highlighted the start-up costs. I think if you did the math around what we said, it would kind of get you to $8 million to $9 million of start-up costs, predominantly landing in the first half of the year, right? 2/3 of it will impact kind of Q1 and Q2. So you'd see that impact, and I can come back to what those costs were, if that's helpful. But what I would say is first of all, I mean those start-up costs were expected. I think as we thought about the margin performance in Q1, it was on track with where we expected it to be from our perspective. And if you peel out those start-up costs and just look at the operating leverage and the accretion from the acquisitions, you'd see there's sort of sort of roughly 40 basis points of margin lift absent the start-up costs. Bradley Hewitt: Okay. Great. And then maybe switching over to the D&M side of things. Curious if we could kind of unpack some of the moving pieces there with the revenue outlook unchanged, but margins bumped up by 75 bps for the year. It sounds like there may have been some pull forward on transportation, but just any color on how that project timing shifted and kind of the resulting impact on the segment seasonal guide for the year would be helpful. Mark Carano: Yes. Sure. Just back on your last question, just to be clear, I was talking about year-over-year when I made that last kind of comment around the bridge. So when you think about where Q1 actual was and for '26 versus Q1 2025. With respect to the D&M, so it wasn't a project pull forward. What this was, was expanded scope on an existing project we have, or that we're currently executing. It is in the transportation segment. It's one of our larger multiyear projects. And many of these projects, as you know, have a software scope to them. This one did, and the customer decided to expand the scope of that portion of the project. So it wasn't something that was in our forecast or in our backlog. It's sort of effectively by expanding the scope in a way it sort of dropped in, for lack of a better word. So those projects, I think, as you know, the software components, they have high margins. We don't typically disclose what those are just for competitive reasons. But when you think about the software revenue that we have, it has a very high variable margin associated with it. So when you expand that scope, it really leverages through. And that's really what -- when you think about the full year guide and raising it by 75 basis points, it's really driven in large part by the benefit from this expanded scope and project. Operator: Our next question or comment comes from the line of Jamie Cook from Truist Securities. Jamie Cook: Just understanding like some of the margin impact in the quarter that you spoke to for the year related to just tariffs and capacity additions. I guess, Mark, what's your comfort level in the ability to put up normalized incremental margins as we exit 2026? Just concerned capacity could continue to weigh on margins. So I guess it's my first question. And then the second question, was there anything unusual as you think about the cadence of orders or sales throughout the quarter and as we -- we're into, I guess, April, just given some of the macro uncertainty that's out there? Mark Carano: Yes, I'll start on margins. Listen, I'm very confident in our ability to kind of deliver our traditional kind of incremental margins that we see in the HVAC business, particularly through the back half of the year and as we get into next year. When you sort of look at where we ended the year in 2025 and you look at our guide, right? And if you strip out the impact of these expansion costs that I was chatting about just on an earlier call, and a very modest impact from tariffs that we're going to see in Q2. If you pull that out, you're going to see -- if you isolated the revenue, you'd see operating leverage of, let's call it 60 to 70 basis points. And then on top of that, you have the inorganic piece, which I think we've sized is 10 to 20 basis points. So we're seeing it right now when you strip out those costs, I know it's harder for you guys to see all those components. But I've got confidence in what we're doing now, and I'm not worried about it as we go into next year. Eugene Lowe: Yes. On the end markets question, Jamie, I think we're actually feeling very good. We do have a small amount of sales into the Middle East. I think it's under less than 1%. And we are seeing some impact there, which is to be expected, but not really material. And I would say if you look outside the Middle East, in general, across all of our businesses, we actually track our bookings very close in each business by end market. And I would say, we're feeling good about what we're seeing. And I would say we're a little bit ahead about where we thought we would be in bookings. So overall, we're feeling comfortable with what we're seeing on the end market demand side. Operator: Our next question or comment comes from the line of Bryan Blair from Oppenheimer. Bryan Blair: I was curious, how did radio detection perform in Q1? How is your team thinking about Q2 and full year revenue performance? And to what extent is the outlook influenced by the new technology and product rollout that you cited? Eugene Lowe: So well, I'll do the full year and then you guys can get into Q. We're feeling very good about what we're seeing in radio detection. As you know, they're the global leader in underground location equipment, very strong presence, Asia, Europe, U.S. If you look at their revenue, it's been modestly flattish over the past couple of years, but we are seeing -- so part of that's a result of some real slowness on the continent of Europe, U.K., some of the Asian countries. But we actually see some very nice momentum there, both in just the end market demand, but also the innovation that we're bringing to market. We did talk about, or I did mention in the prepared remarks about locate performance management. This is an area we believe we have a very nice advantage to anyone in the market. This is an area that's really getting traction. We've also been a leader in bringing in mapping solutions as well as integration with utility ERP. So we're doing a lot, and it's actually working. So radio -- and you might be asking this question because we've always said this is the canary in the coal mine, but radio is actually performing very well to date. One of the things, Bryan, we talked about -- I talked to every GM on the day of these calls, and we like what we're seeing right now. Mark Carano: Yes. And I think, Bryan, I mean Gene touched on it, right? The order rates are healthy. And particularly in the U.S., that market has performed well. I would say, when I think about that business overall, it's kind of this year, we're forecasting, and I feel confident about kind of mid-single-digit growth, and we're seeing that in the first quarter kind of low to mid-single-digit growth in that business. Bryan Blair: Okay. That's great to hear. And it's obviously very early days, but maybe offer a quick update on the integration of Air Enterprises, Rahn and Thermolec. And has there have been any surprises, positive or negative to date. Then as always, it would be great to hear a little more color on your M&A pipeline and the prospects for capital deployments over the next few quarters. Eugene Lowe: Yes. Sure, Bryan. I think -- I mean, the punchline is we're very pleased with both of these acquisitions. The Air Enterprises, Rahn one was a little more complicated. That was where we acquired Crawford United, the pink sheet public company. And as we had announced, we successfully sold off the noncore piece within the quarter. So very quick. And I really like Air Enterprises and Rahn. I think these really strengthened us. Air Enterprise is a really good custom air handling solution, very unique, very good leakage rates. So very pleased with that. And then Thermolec also, there is such a good team. They have such a good market position. As a reminder, the logic for Thermolec is we believe we're a leader, the leader in electric duct heating in the Americas, but we're always tiny in Canada. We believe Thermolec is the leader in Canada. And we see some really nice synergies where we can help leverage our channels to grow some of their products and technologies. And similarly, we actually think Thermolec has a very nice channel. So we see some real nice synergy there. As a reminder, after the sale, both of these are, I would say, at very attractive valuations. Both of these are right around our normal acquisition before synergy, which is 10.5 to 11x. And so we feel like we've gotten 2 really good businesses, and we're off to a very nice start there. Look at the pipeline, even after doing these 2 acquisitions, as Mark alluded to, we're about 0.9x leverage below our target leverage. We think we'd be down about where we were at the end of last year. So we have a lot of capacity. The areas where we see the most opportunity haven't really changed in HVAC, I would say it still remains engineered air movement and electric heat. The one change I would say is we are seeing more Detection & Measurement opportunities, some intriguing opportunities, both in transportation, CommTech and AtoN at the moment. So what I would say is the pipeline is very robust. We feel like we have a very good opportunity in front of us and the flywheel is working. So there's a lot of activity going on, and we feel good about both the recent acquisitions and then what we have in the pipeline right now. The other point that I would bring up is, as a reminder, we also did Sigma & Omega and KTS last year, and we're also very pleased with these 2. So they fit really nice. KTS has really given more scale and some really nice technology to our CommTech business, and Sigma & Omega just fits in so well with our Hydronix business. So it's very complementary. And so -- yes, I think on our inorganic strategy, I feel very good about what we're seeing in front of us, but also the companies that we brought into the family. Operator: Our next question or comment comes from the line of Joe Giordano from TD Cowen. Joseph Giordano: Just to follow-up on the cap deployment side, what's the sense of like can a disciplined acquirer be successful in the market like this right now? I mean, anything assets touching things that are really attractive right now are kind of like spiraling higher in terms of the valuations paid, and there seems to be people willing to pay it. So how do you think about your discipline in a market that is seemingly lacking a lot of that? Eugene Lowe: That's a great question. I think we have been, if you think about it, if you step back at 30,000 feet and talk about our M&A strategy, we've always said, it always starts with strategy. So everything starts with how we get the full potential out of our businesses organically. So new products, new channels, new geographies, lean, digital AI. And then out of that process is really how we define our M&A strategy. So as a consequence, as you know, approximately half of our M&A targets have been proprietary deals. These are deals where there's no banker involved, there's no one else involved, and we like that. For those that do have a banker involved and our competitive processes, what I would say is you just have to be disciplined. I think there's some segments that are at valuations that we just will never play. As we have talked about, our average valuation over our 18 acquisitions before synergies is in the neighborhood of 10.5 to 11x. If you actually take the synergies that we capture, you're probably talking another 1.5 to 2x. So we're bringing these really strong businesses into our company, and we're getting them for effectively 9x EBITDA. And I think when you do see some craziness, and I would say there is some areas that you will not be likely to see us playing is. There's some areas of Detection & Measurement, kind of larger businesses, you could see going in the high teens or 20x EBITDA. We're not going to play there. We're seeing some data center companies getting acquired for 20, 25, 30x EBITDA. And that's just not -- we will never be there. That's just not our cup of tea. So at the end of the day, I think you focus on strategy, you stay very disciplined. And what I would say is, with what we have in front of us, we have a tremendous amount of opportunities with what we know and what we're working on. So I think we've been able to stay disciplined and still affect capital deployment and growth. So yes, I think -- but today, I tell you, I would agree with you. There are some things you see out there and some of the valuations on there, they're rich. Joseph Giordano: Yes, I agree. Anything noteworthy that you're seeing in terms of inflation. We're seeing some of the readings tick higher here. And just curious how you're planning around that. Mark Carano: Yes. I think, Joe, you're probably referring to some of these costs, input costs like steel, aluminum and things of that nature. Those costs have moved up a little bit over time. I guess the bias is probably upwards. But I think from our perspective, the reality is that as a total cost of goods sold, they represent kind of let's call it, mid-single digits of exposure. But the reality is, just given the nature of our business, a lot of what we do is engineered to order or configured to order. So our ability to pass those incremental costs on price real time, effectively, that really puts us in a good spot and has allowed us to mitigate any of these inflationary pressures so far. So I feel good about where we sit today. It's not something I'm clearly watching, but I'm not overly concerned about. Operator: Our next question or comment comes from the line of Amit Mehrotra from UBS. Amit Mehrotra: Mark, maybe just give us a sense of how you're thinking about the second quarter, just so we can calibrate our expectations. I mean, there's some tariffs, there's new capacity, there's good growth in data centers. Any color on organic growth and margin by segment in the second quarter would just be helpful to calibrate our expectations. Mark Carano: Yes, it's a good question. I mean I think just broadly, I would say those markets that we participate in, I mean, all of them kind of remain healthy, right? We're not seeing any challenges or I wouldn't say we're at the tipping point of anything that would change with respect to that. And when I think about the second quarter, we kind of spoke to that a little bit in the prepared remarks. We kind of suggested the first half gating would be similar to the prior year. So when you look at that absent the tariff impact, you really need to pull that out, to really kind of get a sense for what those numbers are. But I think broadly defined, we're -- we feel good about as we look into the second quarter. I think the other thing I would add to that, I mean, listen, when you think about HVAC revenue, I would expect that to be up sequentially. With respect to D&M, I think, obviously, that business can be impacted by the timing of project revenue and that clearly, as we often talk about, we're pretty good about getting that in the year. But where it ultimately lands quarter-to-quarter can create some variability for us. But we feel good about where we sit from that perspective. Amit Mehrotra: And just on that. When you say sequentially up, are you talking about year-on-year growth is up from the 9.6% or just absolute revenue up sequentially in HVAC? Mark Carano: Well, year-on-year, but also -- yes, absolutely. Amit Mehrotra: Okay. Year-on-year growth. Got you. Yes, yes, of course. Okay. And then just maybe a more -- less tactical question, forgive me for that question. But maybe a more important question for the long term. You're obviously adding a lot of capacity. You raised the data center growth of 50% to 70%. One, can you just update us now on where you think data centers are going to be a percentage of your revenue? Probably low teens I would imagine. And then when you ramp up this capacity, Tennessee, Mirabel, Madison, et cetera, how much more revenue you think you can unlock? Because the question is, it feels like you're more capacity constrained than customers seem like they might want to -- they'll take anything you can give them. And so I'm just curious about when this capacity comes online, how much more revenue you need to unlock for that market? Mark Carano: Yes. Amit, we talked a little bit about this in our last call. Maybe a couple of comments. First of all, when I think about the incremental data center growth that we're going to see this year and that we've added into our guidance, our Olathe facility, which is really the primary driver of that for 2026. That's just come online earlier than anticipated. So we're seeing really nice performance on that, and it is allowing us to meet more of the demand that's out there. But as we look out over the next couple of years in support of all this capacity expansion, I would say, as we sit today, our view hasn't really changed from that perspective. We highlighted that these capacity expansions would give us the ability to serve circa $550 million of revenue in the data center market. These sites though, whether it's Olathe or the new facility in Huntsville, right? They're constructed in a way that gives us flexibility to ultimately, drive the product line that's most available to us at that time. So I'd say our view hasn't changed on that. That capacity is really going to ramp. I think Olathe should be at full capacity as we get into mid-2027. The Tennessee facility, which is the TAMCO business, we expect that to be at full capacity in 2027. And then the ramp on the Madison facility is not going to be as linear as those 2 because we're going to be doing assembly only in the back half of the year. We won't have full production capacity until the first half of '27, and then it will ramp from there. And our stated view and -- from last quarter and still holds that that would be at full capacity -- running at full capacity in middle of 2028. Eugene Lowe: Yes. And one comment, Mark, just to clarify for people on the call, that $550 million was incremental off of a $200 million base. So if you kind of say at -- what is the data center capacity after we get these up and rolling. Really our expansions in our existing facilities are largely in production right now. So those have gone very well. Our TAMCO expansion is they've already got 3 lines up. I believe they're adding the fourth line. They're already shipping. That's done very well. And then the Madison, Alabama facility is the longest lead time, but we will be producing product there in the back half of the year. And we actually will see a nice ramp up there next year. So point being, if you kind of say we're at $200 million last year, say we're in the $350 million neighborhood for data centers this year, you can say that we have about $400 million more capacity. And we actually think there could be some more levers we could pull to potentially push more through that facility. But that's kind of where we sit today. Operator: Our next question or comment comes from the line of Jeff Van Sinderen from B. Riley Securities. Jeff Van Sinderen: A little bit more on the data center area. Are you guys seeing any supply chain delays or any other color on supply chain around data center for you? Eugene Lowe: Not for us, I think that there's several critical components that we have, and before we can take on, more purchase orders, we go through a very rigorous process to ensure that we do have this supply chain, but we've been very fortunate. I think with the rapid growth we have had to expand. As a reminder, we are truly an engineered product. So we really -- everything is pretty unique to us. So if you take our cooling towers, for example, we design and engineer our own fans. We have proprietary fans, proprietary gearboxes, proprietary motors, proprietary heat exchange. And so it's ensuring that we have a supply chain that we can make it or the raw material inputs, we can manufacture that. So yes, it has put a little pressure on us. We've had to expand some new suppliers, but we feel very good about where we are now, and we're actively working to ensure that we feel very comfortable as we look ahead to '27 and '28, where we would expect continued growth. Jeff Van Sinderen: Okay. Great. And then I think you mentioned semiconductors and I'm just wondering what kind of work you're seeing to bid on there. Eugene Lowe: Yes. So I think -- I know there's a couple of -- there's some bidding going on now. I think there's one we believe we're very well positioned to be awarded on. Some of these are under confidentialities. I don't think we can speak to the names at this point in time. What I would say is we are very strong, typically in semiconductor with a lot of the largest OEMs. Some of these have us specified in as the choice for cooling towers. So I think we have a very strong value proposition for that market. So as that market starts to bubble up, we think we'd be very well positioned to capture more opportunity. And it is nice to see some early bidding. So I don't think we'll be back where we were a couple of years ago, but we are getting some new opportunities, which we think we'll be able to convert to revenue. Jeff Van Sinderen: Okay. Great. And then just one more to clarify. It sounds like with the Middle East, I realize only -- or less than 1% of your business is there. But it sounds like you don't anticipate any impact from higher oil prices and the macro around that on your business. Is that a fair assessment? Eugene Lowe: I think Mark alluded to this, and I think it's very true, something that is somewhat unique to us in being an engineered product company is, we don't make a product and then ship that same product for the whole year. So it's very rare. So like every cooling tower, for example, is unique. We don't build a single one of those to inventory. So when we do a proposal that we have real-time information on exactly what our costs are. So it's very rare, we have PPV either positively or negatively because we're very real time. So I think you do have to manage inflation. You do need to be careful about that. But I think we have pretty good systems and processes in place, and the fact that the majority of our business is engineered or configured products also makes it such that you're pricing things in a much more real-time basis. Operator: Our next question or comment comes from the line of Walter Liptak from Seaport Research. Walter Liptak: I want to stick with the data center questions. I don't mean to beat a dead horse on this, but so last quarter, the numbers around data center were $200 million in 2025, going to $300 million. I wasn't sure I fully understood why you're taking that number now up to $350 million. Eugene Lowe: Yes. Well, I'd say the punchline is the demand is there. One of the things we've seen from a lot of our large customers is pushing for accelerated deliveries. And when we put our plan together, we had capacity expansion. We've pulled some different levers, some new lines, and we've found ways to expand our capacity to be able to meet demand. This is predominantly in our Olathe facility as well as our Springfield facility. Walter Liptak: Okay. Great. And kind of a follow-on to that, is the data center demand during the quarter, did your teams make progress with new hyperscalers, with new customers, or is it existing customers that are looking for more capacity and quicker lead times? Eugene Lowe: Yes, yes and yes. So I would say our existing large customers want more and it's interesting the increased CapEx that caused a big stir from the large hyperscalers, we are seeing that front and center. Having said that, several of these are existing customers. There's also some new customers, large hyperscalers and colos that we've talked to. So -- but what I would say, while it's not just 1 or 2 customers, it's very broad-based. We're seeing a lot of activity. And it's both with -- everyone talks about the 4 to 5 hyperscalers, but it's also the chip manufacturers. It's also a lot of the colos. And I think we're very well positioned with our product line here. I think if you look at what we bring to the table, if you look at our different product lines and cooling towers, I do believe we're the global leader in cooling towers for data centers. I think we have a leading position with our TAMCO business, our actuated dampers and air movement technology there is a very strong position. And then a lot of the growth is really coming in the dry and adiabatic area. That's kind of a more of a nascent, newer area. So we're talking to some customers, this is the first time they've bought this, that they're installing these. And I just think we bring a lot to bear in this market because the requirements are so large, and that is where we really excel. We are superb at large, complicated cooling. And so I think our background -- so I think where technology is evolving for these very large-scale data centers, you're seeing some that are gigawatt, some even larger, it fits well with what we are good at. So yes, it's pretty broad-based, and we're very encouraged and very excited about the opportunity. Some of the things customers are looking for, a lot of these customers, they want custom engineering for their particular requirements. It could be size, could be thermal capacity, speed, they want modularity and of course, they want efficiency, both on the power side and the water side. So they're looking at solutions that can help their PUE or their WUE, which they typically report at. And I think that's kind of -- as I said, I think it's in line with what we're typically very strong at. So yes, it's a very active and exciting market. It's moving very quickly. Johann Rawlinson: Thank you all for joining today's call. We look forward to updating you again next quarter. Operator, with that, we can end the call. Thank you. Operator: Thank you, sir. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Speakers, stand by.
Operator: Good afternoon, and thank you for joining us today for Ryan Specialty's Holdings First Quarter 2026 Earnings Conference Call. In addition to this call, the company filed a press release with the SEC earlier this afternoon, which has also been posted to its website at ryanspecialty.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements. Investors should not place undue reliance on any forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Listeners are encouraged to review the more detailed discussion of these risk factors contained in the company's filings with the SEC. The company assumes no duty to update such forward-looking statements in the future, except as required by law. Additionally, certain non-GAAP financial measures will be discussed on this call and should not be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most closely comparable measures prepared in accordance with GAAP are included in the earnings release, which is filed with the SEC and available on the company's website. With that, I'd like to turn the call over to the Founder and Executive Chairman of Ryan Specialty, Pat Ryan. Patrick Ryan: Good afternoon, and thank you for joining us. With me on today's call is our CEO, Tim Turner; our CFO, Janice Hamilton; our CEO of Underwriting Managers, Miles Wuller; and our Head of Investor Relations, Nick Mezick. For the quarter, total revenue grew 15%, driven by organic revenue growth of 11.8% and contributions from M&A. Adjusted EBITDAC grew 15.7% to $232 million. Adjusted EBITDAC margin expanded 10 basis points to 29.2%. Adjusted earnings per share grew 20% year-over-year to $0.47. We also repurchased $40 million of our stock. We are very pleased with our strong start to 2026, especially considering the headwinds our industry is facing. Our first quarter results on both the top line and bottom line speak to the resiliency of the platform we have built. Our founding thesis was to provide innovative specialty insurance solutions to brokers, agents and carriers. That's exactly what we have done. We created a true specialty insurance services firm, expanding our offerings far beyond wholesale broking. We have built one of the most efficient and effective insurance distribution platforms in the world. Through RT Specialty, the second largest wholesale broker, we've assembled world-class expertise across industry verticals, serving global retailers as well as the tens of thousands of retail brokers in the U.S. Ryan Specialty is the largest delegated underwriting authority provider. We deliver leading underwriting solutions, supported by strong alignment and governance, distribution at scale and our position at the intersection of the biggest secular tailwinds in insurance, all driving sustainable, profitable growth. Together, RT Specialty and RSUM form a distribution engine of unmatched scale, sophistication and breadth in the specialty insurance market. This distribution platform is built to unlock all of the innovative solutions we're capable of building. Through our strategic alliances and executive level relationships with key carriers, we've holistically changed the conversation. This goes beyond trust and strong returns. It has evolved into the development of innovative products and solutions to address the complex needs of our clients. Take one of the largest mutual carriers in the country as an example. Our relationship started many years ago when they were looking for access to specialty risk and has evolved into the creation of a new reinsurance market. Over the last 6 years, we created a remarkable business through our reinsurance managing underwriter, Ryan Re, which is strategically positioned to capitalize on expanded opportunities and is quickly approaching $2 billion in premium. We've made acquisitions and brought in top talent across both benefits and alternative risk. With their support, we are building unique capabilities in structured solutions, capital management and funding through group captive or single cell captives. Separately, for a leading global property carrier, we expanded their reach into specialty lines they've never participated in before and are exploring various additional opportunities together. For a blue-chip specialty carrier, we have developed unique solutions throughout our firm across RT, RSUM and with new capital management capabilities, allowing us to launch our flagship alternative capital sidecar, RAC Re. These are not isolated stories. They are the compounding outputs of a distribution platform that gets stronger and more strategic with each relationship. Built on the strength of industry-leading underwriting results, we innovate alongside our clients and capital trading partners and deliver unique solutions that we believe cannot be easily replicated by our competitors. The depth and durability of these strategic alliances, the breadth of products and solutions we deliver to the market and the scale of capital we manage on behalf of our trading partners are the dimensions of value that capture what this platform is truly capable of and what will define our story over time. Our strategy is to continue widening our moat, leveraging the operational flexibility created by Empower and building into the white space that we believe no one else in our industry can match. Turning to the market. We continue to operate in one of the most volatile and reactive insurance markets I've ever witnessed. While volatility in market cycles is inevitable. We are feeling the effects of this across our business, particularly in wholesale brokerage, where we now expect more tempered growth in 2026. With that said, I am very proud of our brokers and underwriters as they're delivering impressive growth in the face of significant pricing pressures and broader economic uncertainty. Turning to AI, which Tim will expand on shortly. I want to say a few words. Through automation and AI, we believe we are unlocking the capacity of our people to more efficiently and effectively do what our clients and trading partners value most. We solve for complexity through our expert-led advice and advocacy and a culture of execution and innovation. We believe our scale, specialized talent, proprietary data, the breadth of trading relationships with brokers and carriers and the significant volume of transactions flowing through our platform and Ryan Specialty, a clear net beneficiary of the AI-driven transformation reshaping our industry. Lastly, on capital allocation, beyond our modest and sustainable dividend, we view both M&A and our share repurchase program as key priorities. We will continue to do what we believe is right for our shareholders, particularly given the continued spread between public and private multiples and the dislocation between our current valuation and our confidence in the near- and long-term outlook of our business. Make no mistake about it, when the right strategic M&A opportunities present themselves, ones that fit our 3 M&A criteria, strong cultural fit, strategic and accretive. We will be the first in line for those high-quality assets, and we'll have the financial capacity to execute on those opportunities. As we look forward, we are confident in our ability to innovate, invest and continue to strengthen and diversify our offerings within the specialty insurance market. Our relentless efforts to navigate this transitioning market all while investing in areas of accelerating growth, give us strong conviction that we will generate industry-leading organic growth over time and remain a leader in the specialty lines insurance sector for years to come. Before I turn the call over to Tim, I want to share one more thing with you. We have announced a onetime option grant program in the second quarter, funded entirely by a portion of my own holdings to make sure the broader team is properly aligned over the long term. It is structured to be neutral to the company's outstanding share count and will function as a direct reinvestment for me into the team that has built this platform. I believe in this team, I believe in this platform, and I believe in the direction Ryan Specialty is heading. As we look forward to the work of the next several years, I want every leader at this company to be aligned to our mission, and I'm offering a meaningful piece of my own capital to support that conviction. With that, I'm pleased to turn the call over to our Chief Executive Officer, Tim Turner. Tim? Timothy Turner: Thank you very much, Pat. I am very proud of how our team performed this quarter. We remain hyper-focused on successfully executing what we can control. Diving right into our results by specialty, our wholesale brokerage specialty continues to deliver in a transitioning market. In property, our team navigated a very challenging environment. Rates continue to decline with large and cat-exposed accounts down 25% to 35%. Capacity continued to increase across insurance, reinsurance and alternative capital and competition intensified broadly, including in the admitted market. However, despite these trends, our property book declined only moderately in the quarter, and we are extremely proud of these results. Again, we are controlling what we can control. We are focused on winning head-to-head against our competitors and capturing new business from the steady flow into the E&S channel. In casualty, the trends remain net favorable for Ryan Specialty, yet the picture is bifurcated. In high hazard large account classes like transportation, habitational, health care, social and human services and public entity, loss trends driven by social inflation continue to drive meaningful rate increases, in many cases, exceeding 10%. At the same time, there is growing competition for small and medium hazard risks. We saw select carriers looking to deploy new capital, adding competitive pressure within the E&S market. Our professional lines team significantly outperformed the market despite continued yet moderating pricing pressure and aided our growth in the quarter. We also had strong construction activity in Q1. We remain optimistic about this pipeline heading into the balance of the year and are well positioned as the leading wholesale broker in the construction space. We are encouraged by the momentum of data center activity we saw this quarter, further supported by a strong pipeline. As we have noted in the past, this business is inherently lumpy and the timing of large project findings is difficult to predict. Taking these trends together, we're anticipating more moderate casualty growth in 2026. Now turning to our delegated authority specialties, which include both binding authority and underwriting management. Our binding authority specialty continued to perform well, though the environment showed signs of heightened competition. We saw pockets of small commercial business move toward the admitted market, consistent with what we've described last quarter. Our underwriting management specialty had an excellent quarter with strong results across transactional liability, international specialty, casualty, financial lines and reinsurance. Zooming in on the transactional liability, our practice once again performed exceptionally well, supported by the investments we've made over the past few years and a more constructive global M&A outlook. Ryan Re delivered an outstanding start to the year with strong renewal retention, especially considering the tough pricing environment. We are encouraged by the Markel portion of the book, which also displayed strong client retention and was supported by expanded relationships across casualty, specialty reinsurance and the London markets. As we do across our entire underwriting management specialty, we exercise underwriting discipline, leaning away from the property cat business where pricing did not meet our standards and leaning into risks with better risk-adjusted returns. Adding to what Pat said, I'd like to update you on our digital transformation and AI strategy. We are making significant and responsible investments in AI leadership and infrastructure and are partnering with leading AI platforms to accelerate our progress. This is a top priority for our management team, and we've rapidly delivered numerous models to our 6,000-plus employees. We are moving quickly live in production in certain areas and are actively developing new tools. Our digital transformation and AI strategy is built around 3 principles: our clients, our people and our process. In practice, we invest behind workflows that improve client outcomes, make our people more productive and make our process faster and more reliable. Let's start with our clients, spanning across brokers, agents and carriers. Faster speed to market, deeper risk analysis and even stronger advocacy. We are deploying AI that helps our underwriters triage a submission in minutes instead of hours, which benefits the flow in both directions. Our broker clients see improved turnaround times and the carriers receive better informed, higher-quality submissions. That is an improved client outcome. AI is also improving underwriting insights. In parts of Ryan Re, we are running enhanced portfolio level analytics like concentration analysis and risk modeling, which gives our carrier trading partners a level of analytical rigor that is extremely challenging to complete manually. Better data leads to better placements and better placements lead to stronger, longer-lasting trading relationships. This also means more proactive service. As our broker workbench capabilities mature, we will enable automated coverage gap identification and AI-assisted cross-sell analysis. These maturing capabilities will assist our brokers in delivering more value to their retail trading partners by being increasingly proactive. The second of our 3 principles is our people. We want our brokers to broker and our underwriters to underwrite. Today, too much of their time is spent on manual processes, ingesting submissions, massaging data, chasing subjectivities and formatting proposals. Not only does AI and automation take that work off their plate, but it will enhance their productivity by giving them capabilities at a speed and scale that weren't possible before. And this goes beyond our brokers and underwriters. We are changing how we train and develop talent. New hires will ramp up faster when our AI tools accelerate institutional knowledge, recommend next steps on unfamiliar risks and provide real-time guidance informed by decades of placement data. What used to take a junior broker 2 years to learn through experience, they will begin accessing in just months, accelerating our return on the most accretive investments we make. Across the organization, AI and automation are improving how we operate. We are enhancing our internal tools and systems to give our leaders better data to make timely informed decisions. When our people are equipped with tools that improve speed and efficiency, our clients get better outcomes. The last of our 3 principles is our process. Put simply, this refers to our scale. We manage over $30 billion in premium across hundreds of products. We are thoughtful in how we're turning manual tasks into reimagined end-to-end automated workflows deployed across our firm. Within our underwriting management specialty, certain projects are beyond the pilot phase. AI-enabled and automated submission processing has reduced turnaround times from approximately 24 hours to under 2 hours and look promising to scale. This digital transformation will assist us in scaling this platform without proportional headcount growth, while maintaining the differentiated specialist expertise that defines us. Lastly, on process, it means building the right foundation, a unified data and technology architecture for the next decade of growth. Now that we've covered our principles, let's talk about how this all fits together across our 2 disciplines: wholesale brokerage and delegated authority. On the brokerage side, we are building a submission gateway and broker workbench. These tools allow us to reimagine, redesign and automate the most time-consuming parts of the broker's day from submission, ingestion and clearance to carrier matching to detailed quote comparison from various carriers. On the delegated authority side, this is where our platform is most differentiated and where some of our most advanced capabilities are operating today. Within Ryan Re, we have built an AI-powered underwriting platform for our facultative reinsurance business. We have reduced average processing time per submission from approximately 2 hours to minutes while increasing the number of submissions each underwriter can evaluate by roughly 10x. Within Velocity, our property catastrophe MGU, we deployed an AI-driven platform that scores every submission on appetite fit and propensity to bind. The result being an 11x uplift in submit to bind ratios for our highest appetite category compared to our lowest. Simultaneously, the speed to quote has improved by 36% on a median basis. These capabilities are changing how our underwriters work every day, and we are preparing to deploy them more broadly across the firm. Lastly, I would like to remind everyone what business we're in and why we believe this platform will endure. We solve for complexity through expert-led advice and advocacy and a culture of execution and innovation. Every placement we touch requires specialist judgment on unique risks, negotiation across multiple carriers and advocacy when the contract needs to perform. That is not a data processing problem. It is an expertise problem and expertise is what we deliver. Disintermediation risk rises as complexity falls. Ryan Specialties portfolio sits on the other end of that spectrum. Now turning to a brief update on our talent investments. The recruiting class from late 2025 is performing very well and contributing to our new business growth. We continue to expect these hires will become margin accretive within 2 to 3 years. Stepping back, we are very pleased with the first quarter. That said, we are clear-eyed about what lies ahead, and Janice will walk you through how we're thinking about the rest of the year. With that, I will now turn the call over to our CFO, Janice Hamilton. Thank you. Janice Hamilton: Thanks, Tim. In Q1, total revenue grew to $795 million, up 15% period-over-period. Growth was driven by organic revenue growth of 11.8%, contributions from M&A, which added over 2 percentage points to our top line and contingent commissions as we continue to deliver strong underwriting profits for our carrier trading partners. As expected, Q1 was aided by Ryan Re, which had a strong start to the year as the Markel portion of the book contributed to our growth. Adjusted EBITDA grew 15.7% to $232 million. Adjusted EBITDAC margin of 29.2% expanded 10 basis points compared to the prior year period. Adjusted earnings per share grew 20% to $0.47. Our adjusted effective tax rate was 26%. We expect a similar rate for the remainder of 2026. On capital allocation, we repurchased $40 million of our stock. As Pat described, our key priorities remain our M&A strategy as well as our repurchase program. When high-quality assets come to market that meet our criteria, we will be first in line and we'll have the capital to execute. We remain willing to temporarily go above our leverage corridor for compelling M&A opportunities that meet our criteria. We ended the quarter at 3.3x total net leverage on a credit basis, well within our 3 to 4x comfort corridor. Based on the current interest rate environment, we expect GAAP interest expense net of interest income on our operating funds of approximately $222 million in 2026 with $58 million to be expensed in the second quarter. We are making good progress on our Empower program and are on track for a cumulative charge of approximately $160 million through 2028, delivering approximately $80 million of annual run rate savings in 2029, with savings ramping through 2027 and 2028. More than the savings themselves, Empower is creating the operational flexibility we need to invest behind the strategic opportunities Pat described. Now turning to our outlook. The platform we have built positions us to navigate this environment with discipline, yet we want to be transparent about the recent trends we are seeing today. As Tim mentioned, current market conditions in both property and casualty continue to evolve rapidly. And as a result, for the full year, we are now guiding to organic revenue growth in the mid-single digits. Our guidance embeds continued property rate declines of 25% to 35% for the most cat-exposed lines and now incorporates the more recent acceleration in competition more broadly, resulting in a meaningful decline in our property book for the full year. In casualty, we are assuming more moderate growth across our book, reflecting growing competition for small and medium hazard risks and new capital being deployed, which Tim described. We continue to expect organic growth to fluctuate quarter-to-quarter. As we have discussed, the second quarter is our seasonally largest property quarter. As of today, we are assuming Q2 organic growth to be near 0, with the biggest uncertainty being how property trends play out. On margins, we are now guiding to a full year adjusted EBITDAC margin that will be down approximately 100 to 150 basis points year-over-year. The pressure will be most pronounced in the second quarter, where we are assuming Q2 margins to be in the low 30s. That said, the year-over-year decline reflects the revenue impact of the current and evolving market conditions beyond what we described last quarter, the continued absorption of our talent investments, lower fiduciary investment income and higher health care and benefits costs. At the same time, we are taking thoughtful action across our cost structure, advancing the operational efficiencies underway through Empower, accelerating the integration of our recent acquisitions and continuing to leverage our digital transformation and AI strategy. These actions are designed to protect our ability to responsibly invest in the areas driving growth and position the platform to capitalize when the market returns. Looking ahead, we continue to expect modest margin expansion in most years, supported by Empower and the natural operating leverage of our growing platform. Before I close, I want to make one important point about our guidance. Our mid-single-digit organic guidance for 2026 reflects what we can see and quantify based on the trends in the market that are impacting our near-term growth. We are encouraged by the momentum we've gained in the strategic alliances and executive level relationships that Pat and Tim described and look forward to updating you in future quarters. Through innovation, we have and will continue to create new differentiated opportunities to aid our growth over time, which is entirely unique to the scale and expertise we have built at Ryan Specialty and something we believe cannot be easily replicated by our wholesale broker peers. This is the framework we want investors to understand. The diversification we have built and the platform we are continuing to expand are not theoretical. They are tangible compounding sources of growth. I am proud of how our team is executing through this environment, continuing to deliver for our clients, advancing our technology and AI investments and driving the Empower program forward with great collaboration. In closing, our first quarter results are a testament to the dedication of our team and the strength of the platform we've built. We are navigating through a transitioning market, and we are doing so with discipline, transparency and a clear focus on the levers within our control. With that, we thank you for your time and would like to open up the call for Q&A. Operator? Operator: [Operator Instructions] Our first question will come from Elyse Greenspan at Wells Fargo. Elyse Greenspan: I guess my first question is on the updated organic growth. I know you did guide the Q2 to be flat. But I guess, how do you define mid-single digits, I guess, is that within range of 4%? Or where are you looking, I guess, for the full year? And then within that mid-single-digit guide, I'm assuming you're expecting property to decline for the full year and see like modest growth within casualty. But can you help us think through, I guess, the moving pieces of how you're expecting organic growth to trend over the course of the year while bucketing in what mid-single digit means? Janice Hamilton: Yes, sure. Elyse, this is Janice. So thank you for the question. All good parts. Hopefully, I can pick them all up here. So maybe just starting with your first one on the mid-single digits. So that is a step down from the high single that we had previously guided to. We think about that, kind of, either side of 5%. We've historically not -- or we've historically guided with a bit more precision with specific numbers, but we think about that just to help you out somewhere between the 4% to 6% range effectively. When we think about how organic growth will play out for the remainder of the year, obviously, we had a really strong start to the year with 11.8%. The additional help that we gave on the second quarter, we typically don't guide by quarter. So we wanted to make sure that just given the concentration of property within the second quarter being our biggest property quarter and the trends that we're seeing, the intensification of some of that competition that is continuing to interact also with the 25% to 35% rate reductions that we've seen that there is a risk that our property book combined with the rest of the portfolio could be effectively near 0 for the second quarter. Playing that out for the remainder of the year, third and fourth quarters obviously are helped out by business mix. That concentration in property disappears. And then when we think about the full year being at that mid-single digits, we've also got other elements of where we think underwriting managers and other parts of the book will go, but then also the build-in or the buildup of the new talent that we brought on in the second half of last year. Elyse Greenspan: And then my follow-up is on margin, right? Recognizing, right, the new guidance obviously factors in, right, this mid-single-digit growth combined, right? You guys are obviously investing in talent, right, that you started to do towards the end of last year. Can you guys help us think through like I understand it takes a couple of years for the hires to be margin accretive and then there's also time to benefit revenue. But how do you guys balance, right, just making these investments now, right, at a time when growth is lower, right? So you're going to see lower growth and then even more pressure on your margin as we're going through what you call like a transitionary period. Janice Hamilton: Yes. So Elyse, I would just start with the guide for what we've just updated, that includes the impact on the top line pressures from a revenue perspective. So we were expecting to be moderately down -- flat to moderately down over where we ended last year. We're now projecting to be 100 to 150 basis points down, and that does reflect the increased pressures on our top line. Similar to the conversation that we just had around the organic, we expect that impact to be most pronounced in the second quarter, just given the concentration of property. But we are taking thoughtful actions around our cost structure. And we really think about the timing and the opportunity and the flexibility that Empower affords us to do that. There are a lot of opportunities we have to advance our operational efficiency program. We are going to be focused on accelerating, integrating our platforms in terms of technology and then also just leveraging our AI and digital transformation strategy. So all of those together create additional flexibility to allow us to continue to invest in the platform. Elyse Greenspan: And then one more, if I could. The second quarter organic for the property book to decline meaningfully. How much of that is within your MGU book of business? Janice Hamilton: Elyse, I would say that when we think about the concentration of property, obviously, we've talked primarily about wholesale brokerage being where the concentration of that is coming from. We talked about the tempering of growth in that area. But I would also mention, and I think Tim shared this as well, that as we continue to face pricing pressures, the importance of exercising discipline in underwriting managers becomes paramount. We want to ensure that we're delivering profitable underwriting results for our carriers. And we will look past certain property risks if they don't meet our return threshold. Operator: Our next question comes from Alex Scott with Barclays. Taylor Scott: Could you describe, I guess, thinking more medium term, what kind of spread do you think you can make over sort of the retail brokerage business? And I think the knee-jerk would be this feeling like growth is coming down closer to where some of the retailers have been. But on the other hand, there's some unique pressure from price on you guys. So I just wanted to understand like where net new business is and how you view that just kind of making a broad comparison. Patrick Ryan: This is Pat. We're anticipating and realizing today the same as our founding thesis. Our role as the intermediary, as an adviser, and an advocate, that role that we're playing brings specialty insurance solutions to brokers, agents and carriers. That's all expanding, particularly providing services to carriers. However, in the soft market, pricing is a headwind. I've been through several soft markets and price does get to be a driver. But it doesn't replace the value proposition that our people bring to our clients. So we're working our way through. We're fighting through, and we're fighting effectively. And we did have a good first quarter. But we don't have the same trajectory that we've had in a hard market. Incidentally, the conditions that caused that hard market are still out there. But as we all know, there were some benign results in wind and other perils and carriers made a lot of money. And so they're buying market share. So we knew we'd be in a soft market, and we built this platform really with that in mind, and we've positioned the firm to really work its way through effectively, and we're confident that we will. And we base that on, we have the largest and most effective distribution capabilities in our niche, thousands of relationships with large and small brokers. As we've said many times, they use us when they need us. But we are constantly expanding the services that we provide so that they need us more. And you're seeing that in our diversification strategy. That diversification strategy was not accidental. That was well thought through, planned for a long time. And that allows us to create new and innovative products and bring new solutions to our retail brokers and yes, even some of our wholesale broker competitors. So creating these new innovative products and solutions strengthens us in reinsurance underwriting. And as Janice mentioned, or Tim mentioned, in facultative property, so expanding the reinsurance capabilities. We're growing very nicely in benefits. And that's tied in also to our alternative risk strategy because alternative risk is growing nicely and bringing solutions to clients who want to put up some of their own capital. So we're applying that same principle on our benefits, whether it be employers are being put in the group captives. And so constantly improving our solutions that we bring to our broker clients. So we've got these strong strategic alliances. And I would submit that no one else in our space has those strategic alliances that allow us to create new solutions, allow us to bring more new capital to our clients' needs. And frankly, those trading -- special trading relationships really make us enthusiastic about our future, but they also enhance our ability to attract and retain talent. And all of this is about talent. Talent gets a little more of a pressure when it's a pricing phenomenon like we're having in a soft market. But we know how to grow in a soft market. But we want to be transparent. We want to make sure that you understand the headwinds we're facing but also understand the tailwinds that we have. So we're in a cycle here that is putting pressure on. But we're absolutely positioned to take advantage when the market turns, and it will. And I would say that we still believe that we will be the industry organic leader, having industry organic revenue growth translating into profit growth over time. Tim, if you want to add anything to that. Timothy Turner: No, I think that covered it, Pat. We're very optimistic that we can grow even in a softening market. And again, our creative, innovative culture gives us that confidence. We have the tools, we have the products, we have the talent, and we look forward to this challenge, and we know we can do it. Thank you. Taylor Scott: As a follow-up, I just wanted to ask about the broader macro environment and just some more volatility, a little more uncertainty out there. Is that affecting things, whether it's construction here in the U.S. or some of the business you do in Europe? Timothy Turner: I'll let Miles talk more about Europe, Alex. But I would say this that our construction float is very strong. There's a little bit of pressure from interest rates. We've mentioned it before. The opportunities are as strong as they've ever been in construction, but there's a delay from submit to quote to buy. So our quotes and our winning RFPs are sitting for a little bit longer. But we are binding them. We're getting a lot of traction in the actual data center area and crypto opportunities. So we remain very bullish on our construction pipeline. Miles Wuller: I'll touch on transactional liability, which is a global product for RSUM. The space remains quite resilient despite macro uncertainties. The market is working extremely efficiently. There's substantial capital on the sidelines. There's efficient access to debt leverage. And so we're seeing dollar value of deals continue to increase. Unit count of deals is down slightly, but we continue to take more than our fair share of those deals in both transactional rep and warranty as well as tax indemnity. Operator: Our next question will come from Bob Huang with Morgan Stanley. [Operator Instructions] Jian Huang: Can you hear me now? Operator: Yes. Jian Huang: Okay. Perfect. Sorry about that. My first question is about the broader macro environment. Just given there is likely higher expected inflation due to the Middle East conflict and inflation into the U.S. Is there any conversation or thoughts on how that might ultimately flow into pricing? When do you think pricing will start to reflect higher inflation through exposure units or through pricing initially? Just curious your view on that. Miles Wuller: Well, so Tim spoke about RT's construction practice. And so maybe I'll tackle that through the lens of RSUM's builders' risk practice, which does tend to service more of the small and midsized builders risk part of the marketplace. Certainly, we would benefit from more certainty in that space. Borrowing rates remain higher, inflation remains high, and the war creates certainty in the smaller part of our -- the U.S. economy. But I think the same outcome, as I said on the -- we've all said in the larger risk and the transactional risks, we have the product, we have the quotes. We're winning more than our share. And we will all simply benefit from more shovels going in the ground as a result of stability. But yes, we are taking inflation into account as we price risk in real time. It does remain a factor in keeping rates firm in certain classes. Jian Huang: Okay. Maybe a follow-up on data center because I want to unpack some of the commentary you had already. If we look at the larger brokers increasing their data center facility size meaningfully versus last quarter, can you maybe talk about the competitive environment here? It feels like the layer that you're playing with, I have a hard time seeing significant competition against you in the data center space. Is that right? And can you maybe give us more commentary around the pipeline for data centers, the great growth contribution in the next few quarters specifically? Timothy Turner: Sure, Bob. For starters, as we've mentioned, we know we're the industry leader in construction in the wholesale market. And we know that our pipeline is full of opportunities for data centers. Having said that, there's quite a difference between property and casualty opportunities with data centers. So we would have to break that down for you. But it all leads to what Pat says frequently, the brokers use us when they need us. And right now, there's a real strain on capacity in the valuation of these projects. And there's a completed operations exposure that long-tail casualty underwriters are leery of. So there's a lot of pressure on building towers and limits in space, and our services are in high demand. So we see this as a great opportunity going forward, all part and parcel of our construction practice group. Operator: Our next question will come from Tracy Benguigui with Wolfe Research. Tracy Benguigui: Pat, you've been in the industry for many decades and seen many cycles. I was struck by your comments that we're in one of the most volatile and reactive markets you ever witnessed. So when I look at turning points in prior wholesale markets, what is different today? Or if I ask this differently, has the E&S market changed so much that what is ahead is less known? Like it used to be that E&S was a dirty word no longer as carriers are well capitalized. Is that part of it? Patrick Ryan: Well, I would say that the rapid increase in property and casualty rates starting back in '19, second half of '19. That rapid and prolonged rise in rates was -- I've never seen anything like that. And then we have a very risky world out there. And the risks have not diminished. They've just taken the hiatus, some of them have. And so what shocked me is how rapidly property rates have declined and now certain parts of casualty. And it's generally understood that casualty results in '21, '22, '23 are putting pressure on reserves, and it's still early. So some people have said caustic remarks about what underwriters are doing. We're not going to say that, but we are saying that it's surprising how quickly declines have emerged. And so it's that whipsaw volatility. And as you know, when you're coming off large increases and then you get large decreases, that puts so much pressure on new business because you're renewing the business, but you're renewing at a lot lower rate. And as you know, we're a straight commission business. And so we rise and fall with how the pricing of our products are being presented to the marketplace. So that's what I mean when I say I've never seen anything like that, particularly because so many hard markets in the past were event driven. This really wasn't an event. This was a recognition of how the world has changed with climate issues and litigation issues, all the litigation finance. None of that has subsided. And so it's surprising that people would take their products or their profits and reinvest so aggressively, property movement into casualty because it seems to have a better rate environment. All of that is sort of that's what's starting to surprise me. And I think it surprised a lot of people. We're one big storm away from some adjustments. And I can't -- I'm not going to comment about people's behavior. It's just surprising that it is so dramatically swing up and swing down as quickly as we have done. Tracy Benguigui: Got it. And you guys tend to talk about how flow is so much more important than pricing. But if I listen to the commentary today, I think it's been mostly on pricing, particularly wholesale that's informing your outlook on organic. Can you touch on if you're though contemplating any reverse flow or even on the underwriting management business, are you seeing any type of MGA cancellations? Timothy Turner: Tracy, I'll start by kind of showing some of the statistics that we've all seen in the marketplace. We know that the non-admitted property and casualty market, the flow into the channel is up 8%, and we're outpacing that as a company. So our opportunities and the flow of business into the channel remain very strong and healthy. And so we -- a lot of our optimism comes from that. We're getting lots of opportunities. It's just the price. The price continues to go down in property and starting to see some headwinds in casualty. But we're confident that the flow will continue. The business has been restructured. Pat talked about the cycles gone by. But one of the biggest changes has been that we now have instead of a dozen or so E&S companies, we have over 100, so structural change there. The percentage of non-admitted business was 4%, 5% pre second quarter of '19, and now it's up to 24%. So it's a very, very healthy flow into our channel. We believe that it will stay in the channel, most of it. We don't see -- we see some moderation back into the admitted standard market, but not very much. It's moderate. And again, the stamping evidence is strong. So we remain very positive that we'll be able to capture our fair share of that flow. Tracy Benguigui: Can I ask also about MGAs? Have they need carriers? How are those relationships going? Anyone cancel a relationship? Is that play in your outlook at all? Miles Wuller: This is Miles. I appreciate the question. It's actually quite the contrary where we continue to attract substantial capital from existing and new partners almost on a daily or weekly basis. I'd add to what my colleagues have said that Ryan's $12 billion delegated platform wins through standard of care, alignment and material investment in our people and our platform. And the reality is that the carriers are printing record ROEs, profit, combined ratios, none of that is at all coincidental. I think we've had a role in this. We've pushed substantial rate, terms and conditions and innovation. Beyond that, through the MGs and distribution, we've guided the highest hazard risk into the monoline -- excuse me, the highest hazard modeling risk into the E&S market where the balance sheets have the best chance of the proper risk-adjusted returns. And the outcome isn't that surprising. There's substantial insurance, reinsurance and alternative capital coming to support the channel. So there is a lot of talk in the industry where the world is always, I guess, essentially looking for an enemy who's driving this. But the answer is really pretty simple. It's an abundance of capital that was driving price pressure through new facilities, the easing of terms and conditions on existing facilities and even existing balance sheets. But as it pertains to, I believe, our role in the delegated space, over 40% of E&S premium is delegated today and delegated is approximately 20% of the U.S. commercial P&C marketplace. So I'm actually quite proud of RSUM's or all of Ryan's delegated underwriting contribution to the exceptional results in the carrier community. And we're convinced that Ryan will continue to contribute to thoughtful underwriting and leading underwriting profit into the future, and that's represented in our forecast. Operator: Our next question will come from Meyer Shields with Keefe, Bruyette, & Woods. Meyer Shields: Am I connected? Janice Hamilton: Yes, Meyer. Meyer Shields: Okay. Great. So really a couple of quick questions. First, I just wanted to confirm that the change in the margin guidance for 2026, is there anything in that other than the change in expected organic growth? Janice Hamilton: Meyer, I would say the simplest thing, the change from where we were last quarter to now is as a result of the top line change. Meyer Shields: Okay. Great. And I'm wondering -- so we're in clearly a weird environment right now in terms of pricing. When you take a 3- to 5-year outlook across the cycle, has your view on Ryan's organic growth potential in that environment changed at all? Janice Hamilton: Meyer, would you mind repeating that one? Meyer Shields: Yes. I'm wondering, I understand that there are particularly surprising and pronounced pricing pressures in 2026. But if you take a step back and say, okay, over the next 3 to 5 years, has your view of the organic growth opportunity changed from that perspective? Patrick Ryan: My perspective on it, Meyer, it's Pat, is that we are much stronger today than we've ever been. We have so much more to offer our brokers and our carriers and these strategic alliances that the opportunity for innovation has never been greater. The data that we're now managing much more effectively as most people are because of the pressure of AI and the opportunity through AI, there's tremendous opportunity to utilize that data to innovate new product. And the way we get organic growth is by bringing innovation and empowering our people to execute on that. And so absolutely remain very, very bullish on being long-term industry leader in organic growth. And we have not given up on double digit. We just are suffering from these price reductions. But in terms of the quality of our solutions, they just keep improving and the quantity keeps improving dramatically because of the innovation. So -- and I would add one other thing. And that is that AI, as Tim talked about, is going to allow us or provide the opportunity for us to take people who are doing administrative support work and get them into the field. And there's nothing more successful than having more boots on the ground talking to clients. And so AI is opening that opportunity for us, and we are moving towards availing ourselves of that opportunity. We're not making any predictions, but for one, we'll have more people out dealing with clients in the quite near term because of the streamlining of our back-office work and taking very talented people that are now experienced enough to go out and work with clients and be successful. In my past life, I experienced the value of bringing young talented people into the marketplace and letting them loose to go out and make calls and develop business. And so our strategy to recruit, train, develop people and bring them into the industry is going to accelerate the impact. That's my opinion. Operator: Our next question will come from Rob Cox with Goldman Sachs. Robert Cox: Yes. My first question was just on retail brokers. I think there's some industry discussion that retailers are working to keep growth as the environment gets more challenging. Are you seeing retail brokers pushing harder to pivot business into retail or admitted markets? And are you seeing retailers look to internalize wholesale business? And is that embedded in your guidance at all? Timothy Turner: Rob, it's Tim. Yes, we are seeing some of that activity, but it's not a lot, and it's not a meaningful amount. There are retailers, global and national, as you know, that have wholesale solutions. For the most part, they're very small and they don't interfere with our flow. But there's pressure, and there's pressure to go direct when they can, and we deal with that every day. But there's 100 wholesale-only P&C companies now in the U.S. and the high hazard classes of business that we're in are very technical and they require expert marketing expertise to achieve the best results for the client. And I would say majority by far of the retailers in the U.S. know that. And they'll continue to count on us. And again, our flow is as strong as it's ever been. So we see a little bit of activity to your question but it's not meaningful. Robert Cox: Okay. That's helpful. And just as a follow-up, yes, I'm curious if you're seeing any insurance product innovation around artificial intelligence and if that's flowing into the E&S market at all? Timothy Turner: No, we have not seen any particular product innovation around that. We've seen coverage enhancements. We've seen some coverage tightening, if you will, carriers creating manuscript endorsements around the exposure. So there's a heightened awareness about what the potential losses could be. So our professional liability brokers are fast at work. And I believe it's inevitable that there'll be new products that emerge from the AI explosion. Robert Cox: Okay. And if I could squeeze one more in. I just wanted to ask; did you guys quantify the RAC Re and Ryan Re deal benefit to organic growth in the quarter? And maybe how much you expect them to contribute next quarter as well? Miles Wuller: Rob, it's Miles here. We do not break those out by line. But I mean, I think behind the numbers that we published, we're proud that across the entire underwriting segment with extremely attractive growth despite the property headwinds, new product development, incremental capital under management, taking share from others and compounding that core organic growth to get to total growth, we had continued increase in profit commissions. And then on top of that would be the Markel transaction, as you highlighted. Patrick Ryan: Going to the Ryan Re part of the question, Rob. We have tremendous, talented team. They've seamlessly taken over Markel Re and growing it really nicely. We can't predict any other subscale reinsurers, but it's certainly a great solution for Markel. And we just have a very, very strong team of management at Ryan Re. And that reinsurance capability permeates our entire strategy in that alternative risk is reinsurance. Our benefits is in funding through group captives, that's reinsurance, facultative capabilities that they have just launched. That's another service to other capital providers where they'll be facilitating facultative coverages. So there's a long runway on reinsurance. And this is not accidental. When I retired from Aon, I said we will not become a competitor as a retail broker or as a reinsurance broker. But I love the reinsurance industry. And it was wide open for an MGU to partner with real solid capital like Nationwide Mutual and get innovated. And that's what's happening, and we're enthusiastic about the future of reinsurance as part of our portfolio. Janice Hamilton: And Rob, just on the question of organic as well. Ryan Re was something that we called out as a contributor. We knew and we expected that with the Markel renewal rights deal, that would have an impact on our first quarter organic, which it did. It was a strong contributor, and it exceeded our expectations as well. Going back to what I said earlier on the call with Elyse just around business mix, we do expect Ryan Re and the Markel book to contribute to our organic for the remainder of the year, but the largest renewal is actually in the first quarter. So just from a seasonality perspective, we would expect the most significant impact to happen in the first quarter. Operator: Our next question will come from Andrew Kligerman with TD Cowen. Andrew Kligerman: Can you hear me? Patrick Ryan: Yes. Andrew Kligerman: Okay. Great. My first question is around delegated authority, which is now actually more than half of net commissions, and it's led by delegated -- I'm sorry, by underwriting management at 37.7%. So I'm wondering in the underwriting management area, what's the deal pipeline looking like? And is there a point when delegated authority is more than 2/3 of net commissions within the next 5 years, say? Patrick Ryan: Well, that's a really interesting and important question because so much of the -- what we call our diversification strategy involves delegated authority. In fact, most of it does. So just by virtue of that, and the already good growth that we have in existing facilities, it's going to become a larger percentage for sure. That was part of the founding thesis, and that's got a lot of runway, Andrew. So we've got a great distribution business in wholesale broking. But as we've said, we're way more than a wholesaler. We love the wholesale broking business. It's been a fantastic growth business and will continue to be. But the diversity around that, these are more than adjacencies. These are really core businesses that integrate very nicely. So yes, I mean, delegators has continued to be a larger percentage. Miles Wuller: Andrew, you asked about -- you asked about pipeline, so I just want to chime in. The focus is on organic buildouts on the platform and launching new products off of the M&A of the last 2 years. And I'd also highlight that the benefit of diversification of the platform is our ability to be an increased solution provider to our capital partners by creating more touch points across the distribution chain, binding programs, MGUs, alternative capital, alternative risk benefits. And we're able to offer a much more holistic approach solving the carrier needs as well, create more FS, create stickiness and create more special relationships that Pat opened with in his intro. Andrew Kligerman: Got it. And my follow-up is around just MGAs, MGUs in general. Some of the specialty carriers and maybe it's just talking their own books, but they've been very critical of MGAs and MGUs and how they're pricing in this declining or decelerating environment. Why is the Ryan MGA platform, the underwriting management platform, why is that different? What kind of distinguishes Ryan from kind of commentary that we're hearing? Patrick Ryan: Millions of dollars, hundreds of millions of dollars of investment. Most MGAs are started by capital backing some underwriters who have a following. We never believed that, that was the appropriate strategy. We always believe the appropriate strategy is to find a niche that needs delegated authority and to equip that with the top-quality services that any carrier would provide. That's actuarial, that's data science, that's cat modeling, and it's great underwriters and it's an overall culture. Culture #1 is we have a duty of care to the capital provider to make an underwriting profit and represent them appropriately in the marketplace. That's not the way historically, MGAs have come and gone in the business. But we don't like being harnessed with that brand because we're totally different. It was part of the founding thesis that this was going to be an evolving -- quickly evolving change in the industry. We seized the opportunity, and we made the investments. And just to put an exclamation point on that, the $2.7 billion that we invested in '23, '24, part of '25 is all delegated authority. That's how much we believe in it. And so I said hundreds of millions, I should have said billions have been invested in that. So that's the difference between us and the run-of-the-mill new MGA. But that run of the new MGA is putting a lot of pressure on pricing, but that's not us, but it's putting a lot of pressure on pricing. So a carrier who wants to put capital to work, doesn't have the talent, knows some underwriters that they did business with a company A and they get together and they form an MGA. The average life cycle of those kinds of MGAs is very short term. At Aon, we had MGAs for many, many, many years, decades now. We have purchased companies that are over 60 years old as MGAs. So we take a totally different approach to it. Andrew Kligerman: That was super helpful, Pat. Maybe just real quickly, the Ryan stock option trust, that's funded entirely by you? Or are there some loans? I read it so quickly. I just wanted to make sure I understood it. Are there loans attached to that? Patrick Ryan: Yes. You're talking about the option plan. Andrew Kligerman: Yes, yes. Janice Hamilton: Andrew, would you just mind repeating the question? Andrew Kligerman: Yes. I just wanted to understand the dynamic. Is that -- is there some kind of loan that Pat is making and then funding it with the stock? Is that how it works? Patrick Ryan: No. No, it's very simple. We have always believed in alignment. We've always believed in a reward system that gives people a long-term interest in their results. So we've, I think, been farsighted in sharing equity. We really believe we have a unique opportunity for our employees because of the tremendous pressure on our shares and the reduction in the share price. That is a unique opportunity to bring more of our people further along to align with all of our efforts, but aligned with our clients, aligned with our shareholders. So to align and reward certain employees. We believe it's a unique opportunity because of the dislocation. I consider it a direct investment in the platform. I believe in the team, I believe in the platform. I believe in the direction we're going. And I want every leader in the company to be aligned in our mission; there I'm offering a meaningful piece of my own capital behind that conviction. There's no loan involved. It's a reward and it's an alignment. And by the way, it's good business. Operator: Our final question will come from Mike Zaremski with Bank of Montreal. Michael Zaremski: My first question is just trying to get some additional kind of macro context around the organic growth guide of mid-single digits. I guess in '25, the E&S market grew -- the U.S. E&S market grew about 7%. Ryan's organic was about 10%. Is there a way we could -- since a lot of us think kind of outside looking in, would your mid-single-digit guide imply the U.S. E&S market is still growing, growing a little bit, a lot, maybe 0%? Is there a way to kind of put that in context? Timothy Turner: Well, I'll try to explain what we think is happening here with the E&S flow. I mentioned it earlier. We continue to see 8% plus growth of new E&S business coming into the market. So the flow remains very strong and very healthy, and we're capturing more than that. We're outpacing that. It's just the prices are coming down, and the premiums are coming down. But in terms of our market share, we're gaining market share all the time, and we're confident that we'll get even more market share this year. It's just, again, price effective flow at the moment, especially in property. Michael Zaremski: Got it. So yes, taking market share. Okay, then I can -- we can work with that. Maybe just also sticking with kind of on a macro level. So back to maybe Meyer's question that over time, if the North Star is still kind of getting back to double-digit organic, how would you break down that organic between flow versus pricing? Is it kind of 50-50 or lopsided towards flow or pricing? Timothy Turner: Well, it fluctuates constantly, not just property and casualty, but there's dozens of product lines within those verticals that have niche firming phenomenon is going on. Prices are going up on classes of business-like transportation, habitational, public entity, lots of health care verticals where, again, the pricing is actually going up, rates are rising, capacity is shrinking. So we give you a macro view of property and casualty, but there's so much more within these segments that are opportunistic for us. So it's kind of hard to break out those rates on a macro basis. Patrick Ryan: I think an important point to add to that, when we say we're still aiming for and believe we can get to down the road back to double digit. We're getting scale in what we call our diversification strategy. We're getting scale, we're getting good scale. And so as that scale rises, it actually has a bigger, obviously, mathematical impact on organic. So the 2 core divisions, each are going to perform well as we believe. But on top of that, we have this diversification with reinsurance, with newly created, we call them de novo delegated authority opportunities, but also alternative risk with new product and of course, benefits. Now those were all de novo, and so you've going through the growth pains, but they're getting scale. So they'll start to contribute more to the overall organic recovery over time. Michael Zaremski: That's helpful. And just lastly, back to the, I think, $52 million stock grant. Any -- are there any terms and conditions that we should be aware of that the stock needs to hit certain hurdles or over certain time frames? Or is it just a straight stock grant that vests over x amount of years? Patrick Ryan: It's the latter. It's 5-year vesting, years 3, 4 and 5. Operator: And our final question of today will come from Rowland Mayor at RBC Capital Markets. Rowland Mayor: Can you hear me? Janice Hamilton: Yes. Rowland Mayor: I wanted just a quick reminder on the timing of recent M&A. As we move through the year, I assume revenue growth should begin to converge with organic growth. Janice Hamilton: Yes. So in terms of our M&A, and I think we shared this in our prepared remarks, the expectation is that more of our material opportunities are going to come potentially later in the year. So we would expect total revenue and organic to converge on that basis, excluding contingents. Patrick Ryan: And the other part of that is that there are properties coming on the market, but not the quality that we're looking for generally. So there will be activity that we're not choosing not to participate in. We have line of sight out in time on potential really good strategic opportunities. But at the earliest, they'd be late in the year and probably '27. But in the meantime, we got a heck of a good investment opportunity in our own shares. Rowland Mayor: Yes. And I did want to follow up on that. The authorization, I think, went in during the middle of the quarter. Is it better to think about the $40 million as for a go-forward basis is like the daily average volume or the $40 million overall? Patrick Ryan: Well, the $40 million is just limited by time and the rules. But let's be clear that within the rules, we want to buy stock. And that's the plan. I think we got a few days that we have to stay dark, but not much longer. Operator: There are no further questions at this time. I will now turn the call over to management for closing remarks. Patrick Ryan: Yes. Well, this is Pat. I'm not going to repeat all the challenges, but we're -- we know we're in a challenging market, but we're also disciplined. I hope you believe, and I think you do, that we're transparent, and we have a really clear focus on the levers we have within our control to bounce back and we're looking at that. We're looking at doing everything we can to bounce back to improve the growth and the margin, which will drive the share price. So we're investing in technology in a significant way, talent always and expanding the capabilities that will allow us to emerge from this current cycle that we're in much stronger. So thanks for your really good questions. Thanks for your support. We look forward to speaking with you next quarter. Thank you.
Operator: Good day, and welcome to the NMI Holdings Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to John Swenson of management. Please go ahead. John Swenson: Thank you, operator. Good afternoon, and welcome to the 2026 First Quarter Conference Call for National MI. I'm John Swenson, Vice President of Investor Relations and Treasury. Joining us on the call today are Brad Shuster, Executive Chairman; Adam Pollitzer, President and Chief Executive Officer; and Aurora Swithenbank, our Chief Financial Officer. Financial results for the quarter were released after the close today. The press release may be accessed on NMI's website located at nationalmi.com under the Investors tab. During the course of this call, we may make comments about our expectations for the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results or trends to differ materially from those discussed on the call can be found on our website or through our filings with the SEC. If and to the extent the company makes forward-looking statements, we do not undertake any obligation to update those statements in the future in light of subsequent developments. Further, no one should rely on the fact that the guidance of such statements is current at any time other than the time of this call. Also note that on this call, we may refer to certain non-GAAP measures. In today's press release and on our website, we've provided a reconciliation of these measures to the most comparable measures under GAAP. Now I'll turn the call over to Brad. Bradley Shuster: Thank you, John, and good afternoon, everyone. I'm pleased to report that in the first quarter, National MI again delivered standout operating performance, continued growth in our insured portfolio and strong financial results. Our lenders and their borrowers continue to turn to us for critical down payment support. And in the first quarter, we generated $12.3 billion of NIW volume. Ending the period with a record $222.3 billion of high-quality, high-performing, primary insurance-in-force. In Washington, our conversations remain active and constructive. We have long noted that there is bipartisan recognition of the unique and valuable role that the private mortgage insurance industry plays. We are in the market every day with a clear mandate and purpose, offering a low-cost, high-value solution that helps borrowers bridge the down payment gap and meaningfully reduces the cash required at the closing table. In the process, we help to make homeownership more affordable and achievable for millions of Americans in communities across the country. With coverage that works to insulate the GSEs and taxpayers from risk and loss in a downturn. National MI and the broader private MI industry have never been stronger or better positioned to provide support than we are today, and we're looking forward to continuing to work with the administration to advance their important housing goals. With that, let me turn it over to Adam. Adam Pollitzer: Thank you, Brad, and good afternoon, everyone. National MI continued to outperform in the first quarter, delivering significant new business production, consistent growth in our insured portfolio and strong financial results. We generated $12.3 billion of NIW volume and ended the period with a record $222.3 billion of high-quality, high-performing primary insurance-in-force. Total revenue in the first quarter was a record $183.5 million, and we delivered adjusted net income of $99.4 million or $1.28 per diluted share and a 15.2% adjusted return on equity. Overall, we had a terrific quarter and are confident as we look ahead. The macro environment and housing market have remained resilient through an extended period of headline volatility. Our lender customers and their borrowers continue to rely on us in size for critical down payment support, and we see an attractive and sustained new business opportunity fueled by long-term secular trends. We have an exceptionally high-quality insured portfolio covered by a comprehensive set of risk transfer solutions and our credit performance continues to stand ahead. We're delivering consistent growth and embedded value gains in our insured book. And we continue to manage our expenses and capital position with discipline and efficiency, building a robust balance sheet that's supported by the significant earnings power of our platform. Taken together, we see a clear opportunity for continued outperformance. Notwithstanding these strong positives, however, macro risks do remain and we've maintained a proactive stance with respect to our pricing, risk selection and reinsurance decisioning. It's an approach that has served us well and continues to be the prudent and appropriate course. More broadly, we've been encouraged by the continued discipline that we see across the private MI market. Underwriting standards remain rigorous, and the pricing environment remains balanced and constructive. Overall, we had a terrific quarter, delivering strong operating performance, consistent growth in our insured portfolio and strong financial results. Looking ahead, we're well positioned to continue to serve our customers and their borrowers, invest in our employees and their success, drive growth in our high-quality insured portfolio and deliver through the cycle growth, returns and value for our shareholders. With that, I'll turn it over to Aurora. Aurora Swithenbank: Thank you, Adam. We again delivered strong financial results in the first quarter. Total revenue was a record $183.5 million. Adjusted net income was $99.4 million or $1.28 per diluted share, and adjusted return on equity was 15.2%. We generated $12.3 billion of NIW and our primary insurance-in-force grew to $222.3 billion. 12-month persistency was 82.2% in the first quarter compared to 83.4% in the fourth quarter. Net premiums earned in the first quarter were a record $154.8 million compared to $152.5 million in the fourth quarter and $149.4 million in the first quarter of 2025. Net yield for the quarter was 28 basis points, consistent with the fourth quarter. Core yield, which excludes the cost of our reinsurance coverage and the contribution from cancellation earnings was 34 basis points, also unchanged from the fourth quarter. Investment income was $28.6 million in the first quarter compared to $27.5 million in the fourth quarter and $23.7 million in the first quarter of 2025. Total revenue was a record $183.5 million in the first quarter, up 2% compared to the fourth quarter and 6% compared to the first quarter of 2025. Underwriting and operating expenses were $30.6 million in the first quarter compared to $31.1 million in the fourth quarter. Our expense ratio was 19.8% in the quarter compared to 20.4% in the fourth quarter. We have a uniquely high-quality insured portfolio and our credit performance continues to stand out. We had 8,044 defaults at March 31, compared to 7,661 at December 31, and our default rate was 1.17% at quarter end. Claims expense in the first quarter were $20.7 million compared to $21.2 million in the fourth quarter and $4.5 million in the first quarter of 2025. GAAP net income for the first quarter was $99.3 million and diluted earnings per share was $1.28. Adjusted net income was $99.4 million and adjusted diluted EPS was also $1.28. Shareholders' equity as of March 31 was $2.6 billion and book value per share was $34.57. Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio was $35.46, up 3% compared to the fourth quarter and 15% compared to the first quarter of last year. In the first quarter, we repurchased $27.7 million of common stock, retiring 716,000 shares at an average price of $38.65. Since starting our buyback program in 2022, we've repurchased a total of $377 million of common stock, retiring 12.8 million shares at an average price of $29.43. We have $198 million of repurchase capacity remaining under our existing program. At quarter end, we reported $3.6 billion of total available assets under PMIERs and $2.2 billion of risk-based required assets. Excess available assets were $1.5 billion. Overall, we achieved robust financial results during the quarter, delivering consistent growth in our high-quality portfolio, record top line performance, continued expense efficiency and strong bottom line profitability and returns. With that, let me turn it back to Adam. Adam Pollitzer: Thank you, Aurora. We had a terrific quarter, once again delivering significant new business production, consistent growth in our high-quality insured portfolio, and strong financial results. We have a strong customer franchise, a talented team driving us forward every day, an exceptionally high-quality book covered by a comprehensive set of risk transfer solutions, and a robust balance sheet supported by the significant earnings power of our platform. Taken together, we are well positioned to continue to serve our customers and their borrowers, invest in our employees and their success, drive growth in our high-quality insured portfolio and deliver through the cycle growth, returns and value for our shareholders. Thank you for joining us today. I'll now ask the operator to come back on so we can take your questions. Operator: [Operator Instructions] The first question today comes from Bose George with KBW. Bose George: First, I wanted to ask what was the default per new notice this quarter versus last quarter, that's a little hard to calculate sometimes just with the intra-quarter cures. Aurora Swithenbank: Sorry, Bose, was the question specifically around the reserve per new notice? Bose George: Yes, yes, the reserve per new notice for this quarter versus last? Aurora Swithenbank: It's $14,200, which is broadly consistent with the $14,500 that we established last quarter. Bose George: Okay. Great. And in terms of the delinquency rate in the first quarter over the fourth quarter, was that in line with expectations given the seasonality increase, but obviously, it's a very modest increase. Adam Pollitzer: Yes. Bose, I think that's right. Look, broadly speaking, I'd say we're really encouraged by the credit performance of our portfolio, including the trends in our default population. We've talked about it. We're continuing to see a natural normalization in our experience tied to just the growth and seasoning of our book. That's nothing new. And then seasonality, you noted there's always going to be a plus/minus around that seasonality. Just one, depending on how things trended in the preceding quarter because it's a period-to-period view what's happening in the macro. And there's other factors also that can play into it, particularly in the first quarter, the timing of when borrowers received their tax refunds, for example. But as you noted, when we look at it, we have an incredibly high-quality portfolio. Our existing borrowers are broadly well situated and the resiliency that we continue to see in the macro environment and housing market continues to set a favorable backdrop. And when all of that comes through performance, we were really encouraged by the performance. Nothing stood out to us that we highlight as a point of concern. Bose George: Okay. Great. Actually, just one more on credit. The loss severity number trended up a little bit as well. Anything to call out there? Or is it just a small cohort of loans there? Aurora Swithenbank: Yes. I think it is that, it's a law of small numbers. And also, it reflects what Adam was just talking about of the growth of the seasoning of our book. More and more of our ultimate claims, both our NODs and those progressing through to claims are from those post-COVID vintages, the '22s and later, which inherently have less embedded equity in them. Adam Pollitzer: Yes. We only paid 170 claims in Q1. So it's still a very small pool to draw from. Bose George: Yes. Yes. Absolutely. Operator: The next question comes from Terry Ma with Barclays. Terry Ma: Maybe just a follow-up on credit. anything kind of notable to kind of call out either within the vintages or regionally that you're kind of seeing? And then just overall, how are you thinking about the macro environment on just the consumer with higher energy prices? Adam Pollitzer: Yes. Maybe I'll take them in reverse order because I think probably useful to talk about the big picture and then to talk about anything that stood out in the quarter. I think we've been -- we use the phrase encouraged right across the board, but we've really been encouraged by the broad resiliency that, that we've seen in the housing market and the economy for a while now. I think headline unemployment is still low. Consumers are still spending. Businesses are continuing to make significant investments. Equity market continues to set new highs. And I think we've got a little bit of stimulus coming in just in the form of larger tax refunds under the One Big Beautiful Bill Act. But real risks do remain, right? The labor market continues to show some signs of strain with the slowdown in hiring activity. Confidence is certainly down on the consumer side. And sort of getting to what you've touched on, I think the conflict in the Middle East has certainly added a new dimension to things. But I think the approach that we've generally been taken all along is to plan for the possibility that stress could emerge. And if it doesn't, we'll be happy to have planned and protected nonetheless. And I think we're in the point now of being happy, right, being happy to have built our business with an eye towards disciplined and long-term risk responsibility to make sure that we can continue to perform through all cycles. But right now, when we look at the backdrop, it's still a broadly encouraging one. And in terms of the impact specifically from higher gas prices I mentioned that the conflict in Iran has added a new dimension. But in terms of gas prices themselves, we really don't expect to see a notable impact. If you parse through all of the data, although oil prices are up dramatically and there is real impact for certain households, they're still below actually where they were in 2022 at the onset of the war in Ukraine. And on an inflation-adjusted basis, they're still below where they were in the late 2000s, early 2010s. Gas today accounts for roughly 3% of household expenditures. And so when you put all of that together, while there will certainly be pockets of the market that are impacted and it will have a impact perhaps on broad consumer behavior, we don't really expect to see anything of consequence comes through in our default activity or claims experience, again, in isolation related to gas prices. As to the second question, as to whether or not there's anything that we would call out in the default population, nothing new at all, I would say, in terms of borrower risk or geographic concentrations that emerged in Q1 compared to where they've been, all the same trends that we've seen for a while, which is a little more strain in higher risk cohorts, right? More default concentration in the geographies that we've had in focus for a while now like Florida and Texas. And just this natural movement that Aurora mentioned in terms of the vintage composition, right, with an incremental portion of our defaults now tracing to '22, '23, '24. But none of this is new. It's just a continuation of the themes that we've been talking about and seeing for a while now. Terry Ma: Got it. That's super helpful. I guess maybe taking a step back, big picture, I think it's well-known and also well messaged that the MI industry is experiencing measured credit normalization. Is there anything in this quarter that may suggest that, that rate of normalization may be accelerating? Because at least from the outside looking in, from what we could see, it looks like new notices are accelerating on a year-over-year basis. The cure rate is lower also relative to last year. So like anything that may suggest that the rate of credit normalization may be accelerating? Or should it just kind of stay stable? Like, any color would be helpful. Adam Pollitzer: Yes, obviously, so much depends on what happens in the world around us, but there's nothing that stood out this quarter that makes us think we will get to normal quicker than where we were otherwise pacing. I do think the quarter-on-quarter trend is obviously instructive and it's valuable to look at. If you broaden the aperture a bit, though and look at, say, how NOD count has trended over the last 6 months, just not the last quarter and you compare the experience that we've had, say, from the end of Q3 '25 to Q1 '26. It actually comps favorably to the experience that we had at the end of the third quarter of '24 to the first quarter of '25. So again, I think there's nothing that really stands out. Borrowers are broadly well situated. The environment around us is still quite a favorable one. And movements quarter-to-quarter, nothing stood out in a way that we call attention to. Aurora Swithenbank: And just on the cure rate, it was down at 28%, but it was 31% in the first quarter of last year. So it was only very nominally down year-over-year. Operator: The next question comes from Rick Shane with JPMorgan. Richard Shane: I apologize, I've got a few things going on here. But look, we -- first quarter, and we talked about this a lot with the consumer finance names. First quarter was sort of a tale of 2 quarters. And I would describe, we had January and February pre-Iran, we're now March and April, we have 2 months post. I am curious how that sort of impacted the contours of your quarter in terms of volume? And also curious if you saw anything else that we should be aware of? Adam Pollitzer: Yes. Rick, it's a good question. I think confidence obviously plays an important role in the consumer decision to purchase a home, right? For most borrowers, it's the single largest item that they'll ever -- assets that they'll ever own. And not only do you need to have -- be at a point in life where it makes sense in terms of family dynamics and want to point downwards to the community and to [indiscernible] consider the school and all these life events and not only just the math have to pencil out from an affordability and a value standpoint, but you have to feel confident to make such a significant leap. So that does play a role in it. But even more important is the arc of interest rates. And so it happens to be that the period you talked about January and February, we saw a continued rally in rates, and we touched towards the end of February a multiyear low with a 5.99% rate. And even though it's just a touch below 6%, I think the psychological value of seeing a rate with a 5 handle on it is really powerful. And since then, rates have sold off and I think today, we closed something close to 6.5% on the 30-year fixed rate mortgage. And so we're seeing some of that come through where that hits most specifically is on the pace of refinancing activity. So the first quarter was a strong quarter for purchase volume. It was an even stronger quarter from a refinancing volume standpoint, and we've seen some of that begin to slow just as rates have moved somewhat higher, right, 50 basis points is a pretty significant move. I think that's going to be a much more significant driver than the psychology and confidence that comes around what's happening in the Middle East. Operator: The next question comes from Mark Hughes with Truist. Mark Hughes: I wonder if you could talk about the competition, the competitive dynamic in the quarter. Your NIW was quite strong year-over-year. I think you just touched on the cancellations, which I assume was a little more refi activity in the quarter. But anything you would say about competition, what that implies for the balance of the year? Adam Pollitzer: Yes. I guess what I mentioned that we see a broadly balanced and constructive market environment around us both in terms of how lenders are engaging, where credit standards are set, but also just the general tone of the competitive environment. And in terms of our performance, we're delighted with our results for the quarter from an NIW volume standpoint, right, up 33% year-on-year is a terrific result. And I point to 2 drivers. One is just, I'd call it, sort of foundational on-the-ground execution, right? Doing what we do every day, adding more customers, providing value-added input to existing accounts so we can win more of their business, doing all the things we've always done around proactively managing our mix of business and flow by borrower, geography, product risk attributes, just the day-to-day that we've always done. But the second is the market, right? I think we've been saying for some time now that despite elevated rates, the MI market presents us with a compelling and durable opportunity. And in Q1, the sort of first 2/3, right, January and February, declining rates really added to that and helped to spur some incremental activity both on the production side -- sorry, on the purchase side, but also on the refi side. So all in, I think because of what we're achieving with our customer franchise in the market and then strengthen the market around us, it was a really constructive market. As we look out across the year, we don't provide guidance, but I'll trace back to some comments that I made on our Q4 call. Coming into the year, we generally expected that 2026 volume would look similar to how 2025 volume trended from an overall market standpoint, right? A strong year where long-term secular drivers of demand and activity continue to come through, where resiliency in house prices continue to support larger loan sizes and where affordability challenges continue to drive a real need for private MI coverage and the down payment support that we provide. And that's absolutely been the case through the first quarter. Obviously, first quarter was stronger than Q1 last year because we had the tailwind of rates. Now that they've sold off as we look ahead through the remainder of the year, I think we're still calibrating off of 2025 performance, which, again, was a highly constructive environment, and we'd be delighted to see that type of experience this year. Mark Hughes: Understood. And then on the expenses, just in absolute terms, you've been last 3 quarters kind of down a little bit, up a little bit. Year-over-year on expenses and that's contributed to nice leverage. Does that pattern continue in subsequent quarters on an absolute basis, maybe just a modest progression? Aurora Swithenbank: I think in terms of absolute dollars of expenditure, we've said this before, we will expect increases over time, but we try to be very disciplined about minimizing those increases. So each individual quarter has its own quirks and certain things that manifest in those quarters. So I think the best comparison is year-over-year. And in the first quarter of last year, we had $30.2 million of expense. This year, it's $30.6 million of expense. So again, as you indicated, a modest increase. But I think we need to balance against that. We have the smallest expense base in absolute dollar terms in the industry, and we want to make sure we're continuing to invest in our people, our systems, our data and analytics and risk management and making sure that we're making those investments for future value. So I think we're going to continue to remain disciplined but you should expect, over time, increases to that absolute dollar expenditure. Operator: [Operator Instructions] The next question comes from Mihir Bhatia with Bank of America. Mihir Bhatia: Adam I wanted to go back to the credit discussion a little bit. Maybe just on credit losses, in-period losses in particular, I think they were up pretty materially like $13 million year-over-year versus new notices up being 300. It sounded like you didn't change any assumption. Maybe just talk a little bit about that. Is that just like the extra $13 million was just from the 300 new notices? Adam Pollitzer: No. It's going to be a combination of things. So one, the environment is never static. And so when we're going through -- we're not applying a blanket homogeneous assumption around frequency or severity. We're actually going out and modeling each individual default and where those defaults sit at the time that we're closing the book. So an estimation of the mark-to-market LTV, for example, of that loan. So we've got just -- there's a different set of actual experiences that go into how we're marking each of those defaults at a given point in time. The default composition themselves, we've talked about this idea of normalizing. So if you rewind a year, there would have been fewer defaults in the overall population a year ago that traces to the post-COVID population, the '22, '23, '24, '25 for example, nothing in the -- of the 2025 year. And now that more of those are coming through they're broadly similar to the loans that have experienced default in prior periods with the one big differential being the mark-to-market LTV position is higher because. Those are loans that while they were originated in a constructive environment didn't get the benefit of the record run of house price appreciation through the pandemic. And that has a big impact on our expectation for ultimate claim outcomes from initial default. So that will factor through. And the other one is that over time, as we're seeing house prices continue to move higher, loan sizes themselves move higher, that the average risk exposure, the average risk in-force for each defaulted loan can grow a bit, and that will contribute to a different reserve per NOD that we're establishing. So it's kind of all of those together will drive the differences. Plus, as you noted, there's a larger number of notices that we reserve for. Mihir Bhatia: Okay. And then is that the same -- like I guess, is this the mix and the mark-to-market of the loss, is that what's also driving the reserve per default assumption higher? Like I'm just trying to understand because obviously, you released $26 million of prior period reserves but the reserve for default is moving higher. Is that just the same thing that's driving that? Aurora Swithenbank: Yes. I'm sorry. It is moving nominally higher. So if you look at our entire -- I referenced the new NODs earlier. If you look at our entire population of NODs, it's [ 26,000 round about 300 ] is the average reserve, which is up approximately 2% quarter-over-quarter. And if you look at what's driving that change, it really is the larger loan size of the loans that are in default. Mihir Bhatia: Got it. Maybe just turning to NIW for a second. I think it's down a little bit quarter-over-quarter. So I know everyone hasn't reported yet, so we don't have like market share. But I'm sure you do some ongoing monitoring. Maybe just decompose some of that for us? Like what are some of the key factors driving it? I imagine a little bit smaller market, but do you see any shift in market share? Is there any mix shift going on, whether from the bulk market or what have you, that's driving that would make you think your results will be different than some of your peers? Adam Pollitzer: No. When we look at it, we -- again, we don't -- because we're talking share, I feel the need to give the caveat. We don't manage to market share at all, right? We never have, and that certainly remains the case today. But in terms of our performance in the quarter, we didn't see any significant moves. There obviously was a bulk transaction that one of our competitors announced over the last few days. So that will just skew the headline number, and you need to normalize for that because that's not flow business that really traces to share. But there were no significant moves. Our NIW was up 33% year-on-year. Rough estimate, we think market is probably up about 35% year-on-year, so right in line with market growth, which is where we want to be, right? We're in a terrific position with our customer franchise as we continue to perform from a new business flow standpoint at that level, we'll just naturally, we've got this embedded growth engine in terms of our share of industry insurance-in-force continuing to accrete higher. Mihir Bhatia: Got it. And then just I'll end with a reinsurance question. The profit commission has been trending a little bit lower. Is that just a function of normalizing credit default, something else going on there? Aurora Swithenbank: Yes, that's -- you put your finger on it. Operator: This concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks. Adam Pollitzer: Thank you again for joining us. We'll be participating in the BTIG Housing & Real Estate Conference in New York on May 6, the KBW Virtual Real Estate Finance Conference on May 19 and the Truist Securities Financial Services Conference in New York on May 20. We look forward to speaking with you again soon. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and thank you for joining the First Quarter 2026 Earnings Conference Call for LPL Financial Holdings Inc. Joining the call today are Chief Executive Officer, Rich Steinmeier and President and Chief Financial Officer, Matt Audette. Rich and Matt will offer introductory remarks, and then the call will be open for questions. [Operator Instructions] The company has posted its earnings press release and supplementary information on the Investor Relations section of the company's website, investor.lpl.com. Today's call will include forward-looking statements, including statements about LPL Financial's future financial and operating results, outlook, business strategies and plans as well as other opportunities and potential risks that management foresees. Such forward-looking statements reflect management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward-looking statements. For more information about such risks and uncertainties, the company refers listeners to the disclosures set forth under the caption Forward-Looking Statements in the earnings press release as well as risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission. During the call, the company will also discuss certain non-GAAP financial measures. For a reconciliation of such non-GAAP financial measures to the comparable GAAP figures, please refer to the company's earnings release, which can be found at investor.lpl.com. With that, I will turn the call over to Mr. Steinmeier. Richard Steinmeier: Thanks, operator, and thank you to everyone for joining our call. It is a pleasure to speak with you again. It's been a strong start to the year for LPL. We delivered solid organic asset growth and continued to progress our build and build our recruiting pipeline. We advanced the operational work in preparation to onboard Commonwealth Financial Network, and we made meaningful progress driving improved operating leverage. We accomplished all this against the backdrop of rising macroeconomic and geopolitical uncertainty and an increasingly loud and often speculative narrative around the role of artificial intelligence and wealth management, whether enabler or disruptor. It's periods like this that serve as a reminder of the value of professional advice, the importance of our responsibility to support our advisers and institutions and the strength and resiliency of our business model. Okay. Now let's turn to our Q1 results. In the quarter, total assets decreased to $2.3 trillion as organic growth was more than offset by lower equity markets. We attracted organic net new assets of $21 billion, representing a 4% annualized growth rate. Our first quarter business results led to strong financial performance with record adjusted EPS of $5.60 and an increase of 9% from a year ago. Next, let's turn to our strategic plan and how we are progressing against our organic and inorganic initiatives. Our vision is clear. We aspire to be the best firm in Wealth Management. To do that, we remain focused on 3 key priorities: one, maintaining the client centricity the firm was built upon. Two, empowering our employees to deliver exceptionally for our advisers and their clients and three, delivering improved operating leverage. Effectively executing on these focus areas will help us sustain our industry-leading growth while advancing the efficiency and effectiveness of our model. With that as context, let's review a few highlights of our business growth. In Q1, recruited assets improved to $17 billion, a solid outcome in what is typically our slowest quarter of the year. Throughout Q1, we advanced opportunities into the later stages of our recruiting pipeline while pushing the overall pipeline to record levels. We continue to expect the pull-through to improve over the course of the year, supporting improved organic growth. In our traditional markets, we added approximately $15 billion in assets during Q1 as we improved on our already industry-leading capture rates of advisers in motion. With respect to our expanded affiliation models, strategic wealth, independent employee and our enhanced RIA offering, we delivered another solid quarter, recruiting roughly $2 billion in assets. Turning to overall asset retention. It was 98% for Q1 and 97% over the last 12 months. This is a testament to our continued efforts to enhance the adviser experience through the delivery of new capabilities and technology and the evolution of our service and operations functions. As for Commonwealth, the integration is progressing well. Advisers are completing their diligence. And as they do, we are pleased that many are deciding to stay with Commonwealth. In terms of asset retention, we are in the mid-80s today, and we continue to track towards our target of 90% retention. At the same time, we are working closely with our Commonwealth partners to jointly map the path forward to ensure we are bringing together the best of Commonwealth and LPL. With several foundational elements we are looking to embrace, for example, Commonwealth's indispensable approach to adviser satisfaction and their commitment to responsiveness is woven into the fabric of their culture and something that must be preserved. As a key step to enable this, we are developing a comprehensive case management solution to serve as a foundation for an evolved approach to how we route work and communicate progress to our advisers. Modernized platform will connect advisers' offices to critical systems from relationship management to service, to operations, to product experience functions helping ensure greater continuity, consistency and follow-through across every step of the adviser experience. Beyond the work we're doing to prepare for the onboarding of Commonwealth advisers in Q4, we've continued to advance our capabilities to better meet the needs of high net worth individuals. We've expanded the inventory of alternative investment products available on the platform and are delivering more personalized investment solutions through enhanced direct indexing and tax loss harvesting capabilities. In closing, the first quarter was a strong start to the year, and we feel great about our position as a critical partner to advisers and institutions. As we continue to improve the efficiency of our operations, we are creating capacity to reinvest in growth while driving stronger operating leverage. We believe this positions us to deliver sustained value for both our advisers and our shareholders. With that, I'll turn the call over to Matt. Matthew Audette: Thanks Rich, I'm glad to speak with everyone on today's call. As we move into 2026, we continue to advance our key priorities, which include driving solid organic growth, driving improved operating leverage by enhancing efficiencies and better monetizing the value we deliver, providing a market-leading adviser experience through ongoing investments in our platform, and advancing our M&A initiatives as we continue our preparation to onboard Commonwealth. Announced the acquisition of Mariner Advisor Network and continue to execute on our liquidity and succession strategy. These efforts resulted in strong first quarter business and financial performance and position us well for the year ahead. Now turning to a few highlights from our Q1 business results. Total client assets were $2.3 trillion, down slightly from Q4 as continued organic growth was more than offset by lower equity markets. Total organic net new assets were $21 billion, an approximately 4% annualized growth rate. As for our Q1 financial results, the combination of organic growth and expense discipline led to adjusted pretax margin of approximately 38% and record adjusted EPS of $5.60. Gross profit was $1.593 billion, up $51 million sequentially. As for the key drivers, commission advisory fees net of payout were $487 million, up $33 million from Q4. Our payout rate was 87.2%, down 80 basis points from Q4 and largely due to the seasonal reset of the production bonus at the beginning of the year. Looking ahead, we expect our payout rate will increase approximately 50 basis points in Q2, driven by the typical seasonal build. With respect to client cash revenue, it was $460 million, up $4 million as the growth in average cash balances more than offset the full quarter impact of short-term rates. Overall client cash balances ended the quarter at $59 billion, down $2 billion, primarily driven by record net buying in Q1. Within our ICA portfolio, the mix of fixed rate balances ended the quarter at roughly 60% within our target range of 50% to 75%. Looking more closely at ICA yield, it was 336 basis points in Q1, down 5 basis points sequentially and driven by the full quarter impact from the Q4 rate cuts. As we look ahead to Q2, based on where client cash balances and interest rates are today, we expect our ICA yield to be roughly flat. As for service and fee revenue, it was $211 million in Q1, up $30 million from Q4 as the benefits from our previously announced fee changes more than offset the seasonal decline in conference revenue. Looking ahead to Q2, we expect service and fee revenue to increase by approximately $5 million as the previously announced direct mutual fund fees go into effect. Moving on to Q1 transaction revenue. It was $81 million, up $6 million from Q4, driven by record trading volumes. As we look ahead to Q2, we expect trading activity to normalize and transaction revenue to decline by roughly $5 million. With respect to other revenue, it was $4 million in Q1. Going forward, we expect this to be roughly $6 million per quarter. Now turning to our acquisition of Commonwealth. As Rich mentioned, the transaction continues to progress well, and we remain on track to onboard in the fourth quarter. As for the financials, accounting for the market-driven decline in Q1 assets, we now estimate run rate EBITDA of approximately $410 million once fully integrated. Next, let's move on to expenses, starting with core G&A. It was $532 million in Q1, below the low end of our outlook range, reflecting our continued progress in driving greater efficiency and reducing our cost to serve. For the full year, given our progress to date, we are lowering the upper end of our outlook range by $20 million. We now anticipate 2026 core G&A to be in a range of $2.155 billion to $2.19 billion. To give you a sense of the near-term timing of the spend, we expect Q2 core G&A to be in a range of $540 million to $560 million. Turning to TA loan amortization. It was $136 million in Q1, up $3 million from Q4. As we look ahead to the second quarter, we expect TA loan amortization to increase by roughly $10 million, driven by the strengthening of our recruiting activity. As for promotional expense, it totaled $76 million in the first quarter, roughly flat with Q4. Looking ahead to Q2, we expect promotional expense to increase $5 million, driven by conference spend. Moving on to share-based compensation expense. It was $22 million in Q1, and we expect this to increase a few million sequentially as we head into Q2. Turning to our tax rate. It was approximately 26.5% in Q1, and we expect a similar tax rate in Q2. Regarding capital management, we ended Q1 with corporate cash of $567 million, up $98 million from Q4. As for our leverage ratio, it was 1.86x at the end of Q1, just under the midpoint of our target range. Moving on to capital deployment. Our framework remains the same, focused on allocating capital aligned with the returns we generate, investing in organic growth first and foremost, pursuing M&A where appropriate and returning excess capital to shareholders. In Q1, we continued to deploy capital in line with our priorities, investing primarily in organic growth and M&A, where we advanced the Commonwealth integration and continue to allocate capital to our liquidity and succession solution. Regarding share repurchases, a reminder that we paused buybacks following the announcement of the Commonwealth acquisition with a plan to revisit following the onboard. Given our progress to date, with leverage slightly below the midpoint of our target range, the operational work to onboard Commonwealth on track and the dislocation in the price of our stock, we opportunistically resumed buybacks earlier this month with roughly $125 million planned for Q2. We will continue to remain flexible and dynamic with our capital deployment as we advance through the year. In closing, we delivered another quarter of strong business and financial results. As we look forward, we remain excited about the opportunities we have to continue to drive growth, deliver operating leverage and create long-term shareholder value. With that, operator, please open the call for questions. Operator: Certainly. And our first question for today comes from the line of Steven Chubak from Wolfe Research. Steven Chubak: Rich and Matt. Richard Steinmeier: Absolutely good to hear from you. Steven Chubak: So there's been much focus on the structural headwinds to cash flow with anticipated adoption of Agentic AI tools. And given the value prop you offer your advisers, both in terms of technology and enhanced service. Can you speak to the flexibility on the pricing side if cash balances do remain in structural decline and have you done any external research or engage with advisers on a potential pivot to a more fee-based model that reduces your reliance on cash monetization? Richard Steinmeier: Yes. Thanks, Steven. So first off, we don't see an imminent risk to further adviser-led cash sorting from AI. But with respect to cash, while the AI and tokenization angle is new, we've heard variations of this question over time. We are well attuned to the recent developments in the sector and understand the focus on this subject. So you should know we're doing the work, to properly assess the opportunities and risks of reducing our reliance on cash sweep economics over time. And as with everything we do, we must ensure we're delivering a fair value exchange with our advisers and their end investors and understand how any change may impact them or position us with prospective advisers. While being cognizant of how our shareholders value predictable recurring earnings rates. However, while the levers are clear, this is grounded in a lot of complex work. On the one hand, we're a monoline business. So theoretically, it should be straightforward to affect change especially since we don't have to contend with the constraints of operating a bank and all that entails. But on the other hand, we only exist to serve the over 30,000 advisers and over 1,000 institutions that have trusted us with their business in the 8 million American families they serve. We must ensure that any potential changes would work for them and also how it might intersect with other services we are delivering in the broader value exchange. So maybe to summarize, we're doing the work, which we know is extremely important However, I would note, it's going to take some time as we work closely with our clients to ensure any potential changes would work for them. We appreciate the question, deeply understand the setup and know that this is top of mind for many of you. Operator: And our next question comes from the line of Alexander Blostein from Goldman Sachs. Alexander Blostein: I was hoping you could speak to your appetite for incremental M&A vis-a-vis the updated share repurchase outlook over the coming several quarters. as you're getting kind of deeper into the Commonwealth integration. Obviously, very nice to get a deal announced here recently. So maybe speak to the pipeline, the engagement you see in the channel now for additional M&A? And again, how to think about that versus share repurchases? Matthew Audette: Yes, Alex, I think maybe I'll speak to the near term and then Rich definitely jump in with anything to add on the longer term. I think more in the near term, Alex, like when you look at our focus on integrating Commonwealth, that's where we're spending our time and energy. So I think from a capital allocation standpoint, what is right in front of us is the opportunities to drive organic growth, which we covered a bit in the prepared remarks on those pipelines building. And then I think they're really clear and compelling returns on buying back our stock. I think that's more of a near-term dynamic. I think the longer-term dynamic, maybe I'll turn it over to you, Rich, to touch on this. I think the longer-term dynamic is still quite compelling. Richard Steinmeier: Yes, I think -- thanks, Matt. So I think longer term, look, our core strategy is to drive organic growth, and M&A is an important component of thinking about that holistic growth story. Historically and continually, we would look at a couple of different categories for M&A. So one would be growing our markets. So broker-dealers and RIAs at different sizes. I think you could look at Mariner as a good example of that, the Mariner Advisor Network. And for us, we've demonstrated that ability to integrate large and complex opportunities and deals better than anyone else. So second would be our liquidity and succession solution, which we've talked extensively about with the ability to help existing and external advisers solve succession needs in ways other firms don't. We'll point that this is a very unique offering in the marketplace for us, and we feel very good about its continued progress in supporting our advisers and opportunistically looking externally. And then third, where appropriate, we'll look at capability transactions and evaluate whether we should allocate capital to build, buy or partner. So in general, our M&A criteria remain, whether a transaction is a good fit strategically, financially, culturally and operationally, but we'll remain disciplined around this framework as we go forward. Operator: And our next question comes from the line of Craig Siegenthaler from Bank of America. Craig Siegenthaler: So AUM retention rebounded to 98.2% in the quarter, but the adviser count declined by 34. Now that's a rounding error, but a little curious on what drove that dynamic and also, how do you expect the financial adviser headcount to trend into year-end? Matthew Audette: Yes, Craig, I'll take that. I think you've got the -- on the Q1 results. That's just a near-term dynamic with respect to Commonwealth. So as we track towards that 90% retention, and we're at in the mid-80s right now, as those folks actually leave, you'll see those come out of head count. So they're still in our headcount until they actually leave. So it's just a little bit of a dynamic there. That was about a net 90 reduction in the quarter from that. So headcount was positive from that. I think to your question on head count going forward, I think it'd be pretty typically tied to our recruiting efforts as those ramp up. And then just always, I think you asked as we went into the end of the year, just always keeping in mind as you get towards the end of the year, especially November and December, so for Q4, that's a lot of times where you see smaller advisers not kind of get out of the business or not renew their licenses. So that would be something where you could have some headcount noise that really has little to no AUM or NNA impact but that would be typical pretty much every year towards the end of the year. Operator: And our next question comes from the line of Devin Ryan from Citizens Bank. Devin Ryan: I want to come back to the topic of artificial intelligence and maybe just a broader question. Can you talk about how you're just thinking about implications right now on LPL's model across areas like adviser productivity. How do you see it impacting demand for advice over time? And then even potentially consolidation towards scale firms or even adviser movement towards scale firms? Just some more color there would be helpful. Richard Steinmeier: Devin, it's Rich. Thanks for the question. A lot of questions out there around AI. I think if you look to historically how we've driven the enhanced value exchange and value proposition at the firm, we have consistently invested in tools and technology and services to support advisers throughout the life cycle of their practice. And so not surprisingly, we view transformative technology and specifically AI as an incredibly powerful tool to help our advisers and not as a replacement. We put it into 3 broad buckets. First would be directly serving the adviser. And so this is where we help them deliver their value to clients and usually helping them accelerate their growth as well. So think about that like note-taking tools, proposal generation tools, enhancements to wealth planning and portfolio construction. I think we're really bullish there that there is ways to build solutions and integrate them into our core workstation, I think will be very valuable and enhance their value delivery to their clients. The second bucket would be processing of transactions and tasks to drive straight-through processing. We've alluded to these before. This is the automation and made more efficient of actual workflows, transaction types, et cetera, follow-up. This will lead to more efficient workflows, fewer errors, less manual intervention, while dramatically reducing our cost to serve and improving the adviser experience. And I think examples in this area, Devin, would be reducing the time and cost of compliance, supervision, marketing reviews, et cetera, things that really sometimes fall to the adviser and oftentimes fall to their staff. And then maybe our last bucket that we think about are foundational improvements in coding and development. This for us is the ability to materially advance the development and deployment of code inside of our systems to modernize our code base and to deliver capabilities more quickly and more robustly. And so in there, we're leaning on tools like GitHub, Copilot, Cursor, Claude Code, et cetera, and are seeing early results that are very encouraging. Taken together, maybe specifically to address your question, we feel really good about the ability for us to integrate those experiences into our value delivery. I think that's why you've seen an increasing move of advisers choosing to join this firm. We that at-scale firm in the independent segment supporting advisers and institutions with a differentiated set of capabilities that are fully integrated. And I think the integration of those capabilities are incredibly important in driving efficiency through the advisers' practice. You marry that with our ability and responsibility to protect our cyber environment through the deployment of AI and enhancement of our controls and governance systems and strengthening our own defenses through AI, like reducing the time required to identify and address emerging risks in an increasingly AI-driven threat environment. When you take that together, we feel like this is an extension and continuation of our strategy and not a marked change, and we are incredibly excited about how AI will help our advisers as well as our bottom line. Operator: And our next question comes from the line of Michael Cho from JPMorgan. Y. Cho: Rich, I just want to touch on NNA and recruiting. I think you mentioned in your prepared remarks about record pipeline exiting Q1 and the expectation of improvement throughout '26. I'm just kind of curious how you think the pace of improvement progresses from here for your recruiting pipeline? And any comments in terms of April since we're at the end of the month anyway. Richard Steinmeier: Michael, thanks. So first, I will tell you, I think we feel really good about, as you're aware, adviser movement has returned to historical norms. And so we feel good about the environment that we're in stabilizing with more advisers beginning to move again. Second, maybe specific to us, given our strong progress with Commonwealth, we're increasingly focusing our recruiting efforts on external opportunities. My interpretation for us was that as we've gotten more and more resources back and available to talk to advisers, I see an increasing responsiveness to the value proposition that we're putting forward in the marketplace. And so I think as you look throughout the year, and it takes time, and we referenced this before, it takes time to build those pipelines to progress those pipelines. But now sitting at record levels, we feel really good about the progression and about the absolute level of engagement we're having with advisers in the marketplace in a marketplace for which more advisers are moving. So you take that together with the strength of our value proposition, I think it leads us to feel very confident in our ability to deliver those mid- to high single-digit growth over time. And if you look at that not just in the near term, but maybe over the longer term, it also supports the long-term systemic leading in organic growth through, one, increasing our win rates in traditional markets; two, further penetration of the wirehouse and regional employee adviser space for which we continue to see progression, and we're up to capturing now 11% of the advisers in that segment in motion, up from 9% just a couple of years ago. And then L&S, I'll tell you as we're in conversations, L&S is a critically important component, not necessarily always just at the time of transition, but as us having a unique and differentiated solution in the marketplace for advisers as they think about their options to transition their business. So you pair that with low attrition and steady contribution from same-store sales, and it sets up collectively to hit a high -- sorry, a mid- to high single-digit growth over the long term as well as the short term. Matthew Audette: Yes. Thanks, Rich. I'll take -- Michael, I think you slipped in 2 questions there, but we'll do it. I'll do the second question. And I'll cover client cash, too, because I think everybody would also be interested in how April is shaping up there, too. So we'll save someone else from asking that. So overall, I think everybody knows, but like April, the seasonality in April, it's typically the -- from an organic growth standpoint, one of the lowest months of the year, if not the lowest month of the year. And then on cash balances, you'll typically see one of the larger declines of the year because of 2 seasonal factors. So starting with client cash. And in addition to advisory fees hitting in the first month of the quarter, which is around $2.5 billion now, given our size, you also have the impact of people paying their annual taxes. That reduced client cash by about $3 billion this year. So those 2 seasonal factors together are a decline of around $5.5 billion. And then from a cash standpoint, outside of that, we continue to see the build that we saw in March. We continue to see the build into April, going up by about $1 billion. So the net of all that would be client cash down by around $4.5 billion. Now on the organic growth side, and those seasonal factors hit organic growth as well and get annualized into that single month. So both taxes, the impact of tax payments and the impact of advisory fees reduced April organic growth by around 3 percentage points. And then we had a little bit of attrition that was earlier in the quarter from a large practice that left in April that impacted as well. Now outside of those factors to what Rich was just highlighting, organic growth has continued to improve as recruiting has continued to pick up. That said, when you put all those factors together for April, we'll probably be in the zone of around 1.5%. But as we move into May and June, as those seasonal factors abate and to the recruiting point, as the pipelines build and the recruiting starts to come on board, we would expect to see organic growth pick up in May and in June. Operator: Our next question comes from the line of Chris Allen from KBW. Christopher Allen: I wanted to ask about the Commonwealth EBITDA run rate being lowered. I realize you talked about mark-to-market dynamics. Just trying to reconcile that versus with the current market level, the improvement we've seen so far in April. I would imagine that the EBITDA was as of the quarter end. So would we expect a positive inflection next quarter? Matthew Audette: Yes, Chris, you got it right. So I think that the reduction from $425 million to $410 million was all market-driven, meaning no changes to expected synergies or things like that. So to your point, if we were to snap the chalk with the market having come back, and that's where it stays until the end of the quarter, I would expect us to be back at $425 million. Operator: And our next question comes from the line of Benjamin Budish from Barclays Benjamin Budish: Maybe just following up on Chris' question there. So the $410 million run rate down sequentially based on the market moves, but that is still below the starting point that you disclosed in Q1, Q2 of '25, but the asset level is still higher than that. So I'm just curious, is there anything else going on under the surface? -- anything mix related or anything like that, that might be impacting the EBITDA run rate today? Matthew Audette: No, not at all. I mean I think we've given updates each quarter on some things that have moved around. But I think that the 2 things that have moved from a market standpoint are going to be the equity market levels and the market levels overall. And maybe the other item just to highlight is cash sweep, which that also has moved around. But that's the only update. No changes to expected synergies. It's simply market movements. And just reiterating what I just said to Chris. As we sit here today, those things have recovered. So -- if we're giving an instant update, which we're not, we would be back at $425 million. Operator: And our next question comes from the line of Michael Cyprys from Morgan Stanley. Michael Cyprys: I wanted to follow up on AI and cash monetization. I was hoping you could help unpack why you don't see more risk or risk of more adviser sorting from AI. Curious what informs your viewpoint there. And then I think you mentioned you're doing some work around reducing reliance on cash economics. I was hoping you could elaborate on what exactly those work entails, how you're going about your analysis? What factors are you considering and also not considering? Richard Steinmeier: It's Rich. Let me take the first part of that, and maybe I'll take both. So on why don't we think it's a risk? I think first, in many ways, the behavior you're alluding to has already happened. We've seen sustained yield seeking over time and cash allocations today are already at historical low levels. And cash is around $5,000 per account, which has been hovering there for nearly 2 years consistently, barring slight seasonal movements. So the system has been adjusting. And what we tend to see is incremental evolution, not step function change first. Second, we've always provided advisers with an abundance of options for managing yield sensitive cash on behalf of their clients. And so we think that this set of offerings, most advisers have adopted that into their practices themselves. And so we don't see behavioral change necessarily occurring, whether a tool be available or not available. In terms of the work, do you want to take the work? Matthew Audette: Yes. Sure. Mike, I just have to unmute myself before I answer. It was a really good answer to start there. Look, I think on -- and just kind of building on or reiterating what Richard said, I think when you look at what the changes could be, like we have straightforward fee-based levers that we can use to manage and sustain our economics. And we've got flexibility in how we price, how we package, how we deliver value across the platform. But I think the core item and just to reiterate what Richard said is like we exist to serve our 30,000 advisers and over 1,000 institutions that have trusted us with their business and the 8 million clients that they have, right? So I think the work that we're describing is all about ensuring any potential changes would work for them and how that would intersect with other services that we're delivering. So that's what I would just underscore. We've got the levers. It's more about what could work for our clients, and that's the work that we have in front of us. Operator: And our next question comes from the line of Jeff Schmitt from William Blair. Jeffrey Schmitt: So one more question on the run rate EBITDA for Commonwealth. What are you assuming for synergies in that estimate that would materialize, I guess, mostly next year? And just what are a few of the biggest drivers of those synergies? Matthew Audette: Yes, Jeff, there's no change there. I think they are the ones that we had covered in the beginning. So they're pretty common from a revenue side when you get things onto our custody and our clearing platform, whether it be cash sweep as well as the sponsor-related revenues. And then you get your typical expense synergies of being on our platform and our self-clearing platform on that side, too. So they are the -- I think the synergies that you would expect and no change there. Operator: And our next question comes from the line of Mike Brown from UBS. Michael Brown: I just wanted to ask another one on AI and AI disruption risk, but maybe more from the risk to the adviser and not from the cash angle. But I think over time, advisers have continued to really prove the value to their customers, but the transformative potential of AI is tough to ignore here. So can you maybe speak to the risk of AI impacting that traditional adviser model with some of these AI-centric platforms and capabilities that are kind of rolling out in real time? Like could we see client behaviors shift to prefer models like this, especially if the economics are more favorable? And how are you kind of thinking about defending the turf of the traditional adviser model? Richard Steinmeier: Thanks, Mike. It's Rich. I think first, what we see historically is that the pies of bind in a relationship are between the adviser and their client. And those aren't necessarily because of efficiency of the delivery of the experience. More often than not, it's because of a trust and extended relationship that for many has extended over years and oftentimes decades. So when we look at the potential for the enhancements to the technology, we see things that actually may commoditize everyday low-value experiences to make them more efficient for the adviser. We see things that allow the personalization of the experience between the adviser and the client to enhance. And more often, what I would say is we'll see more time available to actually serve clients, more insights available to work with those clients, the ability to deliver them where I think you're going to see more of advisers' time spent with clients, but also more of their staff and their team's time in support of those and oftentimes their teams moving away from mundane task delivery into higher value added. I think you see the opportunity there for a significant enhance in the delivery of the EQ element of the adviser experience while you see a commoditization of some of the IQ elements, that being portfolio construction, risk remediation, et cetera, but with a personalization opportunity that is dramatically enhanced. And so we are running headlong into those enhancements through AI that prop the adviser up. And I think we see cases even in the services industry. When you look at radiologists, I think there was a belief that radiologists were going to be minimized with the application of AI in the reading of scans. But in fact, what you see is there are more radiologists today than there were 10 years ago because there are more high value-added services being provided in that experience as well as more folks getting scans. I think you might see an opportunity for advisers to more broadly serve more clients with deeper personalized advice through tools to help them be more productive. And in that regard, those are the applications that we're running at with advisers in partnership with them. And so we don't see the risk exposure nearly as much as we see the opportunity side of that equation. Operator: [Operator Instructions] Our next question comes from the line of Wilma Burdis with Raymond James. Wilma Jackson Burdis: Just a quick one on the payout ratio. It was 87.2% in 1Q, up about 40 bps from just year-over-year and then compared to also '24. Can you go into some of the drivers? And is it related to recent acquisitions or Commonwealth or anything along those lines? Or what else could be driving it? Matthew Audette: Yes, Wilma, that was the primary driver. It was Commonwealth. So a couple of things related to Commonwealth. One, on average, they have advisers with larger AUM. So the payout is higher. And then there's a little bit of noise that's unique to Q1 and the way that our payout works with a production bonus that builds throughout the year. They don't have that. So the mix impact of their payout being higher is most notable in Q1. And now that we've closed on the acquisition, you see that noise in Q1. And then a secondary item, I'd say a relatively minor driver of it is just keep in mind that the payout was driven off of advisory fees that were snapped, if you will, at the end of the year when asset levels are much higher. So for those larger advisers where there's a tiered pricing impact where they get discounts, the larger they are, you had a little bit of that happen as well. But the primary driver is the Commonwealth noise as you suspect. Operator: And our next question is a follow-up from the line of Michael Cho from JPMorgan. Y. Cho: I just had a quick follow-up on G&A. Matt, you talked through G&A and efficiency and you pulled down the top end of the guide. I was wondering if you could just unpack a little bit more where the efficiency gains, I guess, were maybe in the quarter and how we should think about those efficiency gains as you progress through the year in terms of areas for more potential there versus maybe other areas of more organic investments that you're considering? Matthew Audette: Yes. I mean I think broadly on where we're investing is continues to be at the highest level, investments to drive adviser capabilities, our technology, drive organic growth overall, combined with investments to drive efficiency. And I think maybe just to give you a little bit of examples on the efficiency side and building on what Rich talked about a little bit earlier on AI. That's been a big driver of it, and it's a big component of our plans for the year. So we take those kind of 3 areas that we're talking about for AI, for adviser capability, for our own internal operations and efficiency. And then third, our ability to develop technology even faster. I'll just focus in on that second area on the opportunities internally in areas like service and operations. And that's where it's really exciting because not only does it drive the cost story that you're asking about, it also drives an improvement, a materially better adviser experience and I think ultimately puts us in a better place to drive growth as well. But just to give you some examples on the expense savings and what we're doing. Rich touched on it in the annuities area, we're the largest distributor of annuities in our space. And it is a very manually intensive process. And that's where we've been able to deploy AI to not only streamline the costs associated with it, but also increase the pace at which we can improve annuities as an example. Within service, I mean these are probably some of the more expected examples, but being able to provide tools to our advisers to do natural language search, build out AI-enabled chat rather than having to call us, they can ask questions to get those answered themselves. And then for the service team themselves, so our team delivering tools to them so they can answer questions more quickly, more accurately with AI on their side. And then maybe last and one that I think has a big opportunity is just on the operations side. And this is where the Agentic AI that everyone loves to talk about becomes real, where you can do things like non-ACAT transfers, which are intensely manual. And you can deliver agentic AI that can cut cycle times there by significant amounts. I'm talking 90% of the time can be reduced. So not only are you lowering the cost, you're actually improving the experience to move those in, especially when the transfers in. So those are just some examples. I think the broad point a little bit to your question is we're still in the early innings of this. So not only do we have a nice road map for we're building out this year, this is an ongoing opportunity in '27 and beyond as well. So we're excited about it. Operator: Our next question is a follow-up from the line of Steven Chubak from Wolfe Research. Steven Chubak: So I wanted to ask about the long-term NNA outlook beyond the Commonwealth integration. across multiple questions, you spoke about low adviser attrition, record pipelines, steady contribution from same-store sales. How does that inform what you believe is an achievable organic growth rate? And separately, if you can just provide an update on the enterprise opportunity and how that pipeline is tracking. Richard Steinmeier: That's a follow-up with a double dip in it, and I'll take that. So on the first one, Steven, I think that when you take all of that together, I alluded to it a little bit earlier, we do believe that we should be able to sustain mid- to high single-digit growth rate over the long term. I mean we have what we believe is the strongest value proposition in the marketplace. And I think as we get into recruiting more actively back into the recruiting market, what I see in the pipeline, what I see in HOVs, what I see in directly engaging with advisers is that, that value proposition resonates significantly in the marketplace. And you can hear even from third-party recruiters as we're back engaged, I think they feel bullish about our ability to really move back into the position we have historically been, which is the leader in capturing adviser movement and extending that share capture over time. I actually think as you think through even the application of AI and the enhancements that we're going to make in an integrated system that allows all of that not to be in a swivel chair environment, but the AI largely to be integrated into our core operating systems. I think you're going to see that value proposition further extend relative to our historical competitors, I think you're going to see us strengthen even more. So when you put that all together, I think we feel like we have a value proposition that is strong. We see it resonating in the marketplace, and we see it strengthening in time. That reiterates our belief in that sustained mid- to high single-digit growth rate. Now you asked about the institutional segment as well. And I think on the institutional segment, we have -- we are the leader in that partnership in the institutional market. We have demonstrated it over decades of delivering experiences to help firms who want to advance their wealth management business. We have done that first in the financial institution segment, where we have asserted and sustained leadership in supporting banks and credit unions in support of their wealth management businesses. And then we've extended that into adjacent opportunities in the marketplace, most notably recently with insurance and product manufacturers. And I would point out Prudential, who converted a little over a year ago, who by their measures, their business is stronger. We see it in terms of them thriving. We see it in terms of financial performance as well as their attractiveness in the marketplace and then recruiting advisers into their platform. That has a ton to do with them, maybe less so to do with us, but we feel great about how the Prudential delivery allows us to be more active in the marketplace in conversations on the institutional segment. And so across banks, look, some of that's going to be opportunistic. And as we mentioned maybe last quarter, there's a little bit of overhang in some of those discussions just because of the movement in M&A that exists inside of financial institutions at this moment. We see increasing conversations with long lead times in the institutional segment, but I think we feel good about the ability for that to be a meaningful contributor that adds on to that organic growth that is pretty consistent inside of the Adviser movement segment. So having those 2 different killer growth strategies to drive the movement of advisers to the strongest value proposition in the market plus the ability to be strong partners to institutions as they look to outsource and partner. I think we feel good about having 2 anchors to drive that growth and reinforces our belief in that middle -- mid- to high single-digit growth over the long term. Operator: Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Rich for any further remarks. Richard Steinmeier: Thank you, operator, and thank you all for joining us. We look forward to speaking to you again in July. Have a good night. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.