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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.
Operator: Good morning, and thank you for standing by. Welcome to Integer Holdings Corporation's First Quarter 2026 Earnings Call. My name is Kate, and I will be your conference operator today. [Operator Instructions] Please note, this call is being recorded. I would now like to turn the conference over to Kristen Stewart, Director of Investor Relations. Please go ahead. Kristen Stewart: Good morning, everyone. Thank you for joining us, and welcome to Integer's First Quarter 2026 Earnings Conference Call. With me today are Payman Khales, President and Chief Executive Officer; and Diron Smith, Executive Vice President and Chief Financial Officer. This morning, we issued a press release announcing our first quarter 2026 financial results. We have posted a presentation to accompany today's call on the Investor Relations page on our website at integer.net. On today's call, Payman will provide opening comments. Diron will then review our adjusted financial results for the first quarter of 2026 and our financial outlook. Payman will provide his closing remarks, and then we'll open the line for your questions. As a reminder, the results and data we discuss today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non-GAAP financial measures. For reconciliations of non-GAAP financial measures, please refer to the appendix of today's presentation, today's earnings press release and the trending schedules, which are available on our website at integer.net. Please note that today's presentation includes forward-looking statements. Please refer to the company's SEC filings for a discussion of the risk factors that could cause our actual results to differ materially. With that, I will turn the call over to Payman. Payman Khales: Thank you, Kristen, and thank you to everyone for joining the call today. This morning, we announced our first quarter financial results, which were in line with our February outlook. Sales were up 0.5% on a reported basis versus last year. As expected, our first quarter sales performance primarily reflected the decline associated with the 3 new products, which we first discussed last October as well as the exit of our portable medical business. On an organic basis, sales grew 1.3% versus the prior year. Our adjusted operating income declined 230 basis points, driven primarily by lower fixed cost absorption. This was at the midpoint of our prior outlook commentary. Adjusted earnings per share totaled $1.20, benefiting from lower interest expense, offset by the decline in adjusted operating income. We also announced this morning that we were updating our 2026 outlook ranges to reflect the recent customer forecast updates and further risk adjustments we have made. We now expect reported sales to be in the range of down 1% to 3% compared to the prior year. On an organic basis, we expect sales to be flat to down 1%. We continue to expect a 3% to 4% headwind from the 3 new products. The outlook for these 3 products has not changed. Customer purchase orders and forecast updates are tracking in line with this outlook. We now expect organic sales, excluding the 3 new products, to grow approximately 3% to 4%. This is compared to our prior outlook of 4% to 6% and driven by recent customer forecast updates and further risk adjustments across our portfolio. As a reminder, we received purchase orders from our customers, and those typically provide us with strong visibility for the next 1 to 2 quarters. In addition, we continuously communicate with our customers and most of them regularly share rolling 12-month forecast. Our customers adjust their forecast higher or lower based on their manufacturing plans. Therefore, we typically risk adjust the forecast with a balanced view of the risk and opportunities. The recent customer forecast updates primarily affect the second half outlook for a few products in electrophysiology. Given our recent experience of reductions outside the 3 new products, we further risk adjusted our outlook across our portfolio to minimize the risk of additional forecast erosion. With regards to electrophysiology, over the last couple of years, this market has been very dynamic with the rapid adoption of Pulsed Field Ablation or PFA technologies, which added complexity to forecasting. Understandably, OEMs wanted to ensure sufficient availability of various products used in EP procedures to be prepared for a wide range of potential adoption scenarios. This contributed to increased variability in forecast and ordering patterns. We appear to be entering a period of normalization in the market. We believe there is a clear view of the market dynamics and needs for various EP products. As a result, certain customers have adjusted their forecast for a few products. We expect the impact of these updates to be short term, primarily impacting the second half of 2026. These reductions are not due to in-sourcing or a shift to alternative suppliers. We continue to manufacture these products for our customers. The electrophysiology market continues to be an attractive high-growth market opportunity for us, and we believe we are well positioned. We have strong relationships with the leading players in the market, a broad product portfolio and a strong new product pipeline. Our focus and investments have enabled us to significantly grow our EP business over the past several years. While we are seeing some pressure in 2026, we expect our EP business to contribute to our above-market growth in 2027 and to our growth profile over the long term. And finally, I want to emphasize that we do not take the outlook change lightly. Our outlook reflects additional cost reduction actions underway to mitigate the impact on our bottom line results that do not compromise our ability to service our customers, deliver on our 2027 sales outlook commitments or affect our longer-term growth potential. I will now turn the call over to Diron to review the first quarter results and 2026 outlook in greater detail. Diron Smith: Thank you, Payman. Good morning, everyone, and thank you again for joining today's call. Our first quarter financial results were in line with the outlook commentary we shared in February. First quarter sales totaled $440 million, up 0.5% on a reported basis and up 1.3% on an organic basis. As a reminder, organic sales growth removes the impact of acquisitions, the strategic exit of the portable medical market and foreign currency fluctuations. We delivered $85 million of adjusted EBITDA, down $7 million compared to the prior year or a decrease of 7%. Adjusted operating income declined 14% versus last year, and our adjusted operating margin contracted 230 basis points to 13.9%, both in line with our February outlook. Adjusted net income was $41 million, down 10% year-over-year. Adjusted earnings per share totaled $1.20, down 8% versus the same period last year. Turning to our sales performance by product line. Cardio & Vascular sales increased 1% to $262 million in the first quarter of 2026, which primarily reflected lower electrophysiology sales from the 2 new products we have previously discussed. This was consistent with our expectations. On a trailing 4-quarter basis, C&V sales increased 13% to $1.110 billion, driven by growth in electrophysiology, contribution from acquisitions and strong demand in Neurovascular. Cardiac Rhythm Management Neuromodulation sales increased 5% to $168 million in the first quarter 2026. Cardiac Rhythm Management growth was partially offset by the previously communicated headwind in neuromodulation. This was consistent with our expectations. On a trailing 4-quarter basis, CRM&N sales increased 2% to $677 million. Cardiac Rhythm Management growth was partially offset by the planned decline related to an early spinal cord stimulation customer. Product line detail for other markets is included in the appendix of the presentation, which can be found on our website at integer.net. I'd now like to provide more color on the first quarter's profit performance compared to the prior year. In the first quarter 2026, adjusted net income decreased by $5 million and adjusted earnings per share decreased by $0.11. Consistent with our expectations, the primary driver of our operational decline was lower fixed cost absorption, which affected our gross margin performance. We remain focused on effective cost management, reducing variable costs given the lower sales level and being disciplined in our overhead and operating expense management. Operating expenses were flat versus the prior year, including a decline in selling, general, and administrative expenses and a slight increase in research, development and engineering expenses due to the timing of milestone achievements for customer-funded new product development. As a reminder, the first quarter of the year typically has fewer milestones as compared to later in the year. Interest expense was $4 million lower than the prior year, which contributed $0.10 per share, reflecting the savings from the convertible debt offering completed in March 2025. Our adjusted effective tax rate was 19% versus 17.4% in the first quarter of 2025. We continue to expect our full year tax rate to be in the range of 16% to 18%. The adjusted weighted average shares outstanding in the quarter decreased by 2%, reflecting our share repurchase activity. In the fourth quarter 2025, we completed a $50 million share repurchase of approximately 700,000 shares. And in the first quarter, we completed an additional $50 million share repurchase of approximately 600,000 shares. The lower weighted average share count contributed $0.02 to adjusted earnings per share. In the first quarter 2026, we generated $25 million of cash flow from operations, down $6 million from the prior year, primarily reflecting lower adjusted net income and reduced accounts receivable factoring. CapEx spend was $24 million, which resulted in free cash flow of $1 million. At the end of the first quarter 2026, net total debt was $1.264 billion, an increase of $74 million, primarily driven by the $50 million share repurchase executed in the quarter. Our net total debt leverage at the end of the first quarter was 3.2x trailing 4-quarter adjusted EBITDA within our strategic target range of 2.5 to 3.5x. As Payman noted, we are updating our 2026 financial outlook ranges to reflect recent customer forecast updates and further risk adjustments across our portfolio. For the full year 2026, we now expect reported sales to be in the range of $1.805 billion to $1.835 billion. On a year-over-year basis, we now expect sales to be down 1% to 3% on a reported basis and flat to down 1% on an organic basis. We have also adjusted our profitability outlook ranges. Given the lower sales outlook, we anticipate further margin pressure and are taking additional near-term cost actions to mitigate the profit impact, which are contemplated in our revised outlook. We now expect our adjusted EBITDA to be in the range of $375 million to $399 million, down 1% to 7% versus the prior year. We now expect adjusted operating income to be in the range of $285 million to $305 million, down 5% to 11% and adjusted net income to be in the range between $200 million and $220 million, down 3% to 11% versus the prior year. Lastly, we now expect adjusted earnings per share of between $5.83 and $6.40, flat to down 9% versus the prior year. Taking a closer look at our sales outlook. As I mentioned, we expect sales to be down 1% to 3% on a reported basis and flat to down 1% on an organic basis. As we previously shared, our organic outlook is being impacted by lower sales of the 3 new products. We continue to expect the headwind to be approximately 3% to 4% to our 2026 reported growth. We now expect organic growth, excluding the 3 new products, to be approximately 3% to 4%. This compares to our prior expectation of 4% to 6%, reflecting the impact of recent customer forecast changes and further risk adjustments we have incorporated across the portfolio. We expect an inorganic decline of approximately 1%, which reflects the now completed Portable Medical exit slightly offset by contribution from acquisitions and foreign exchange. We now expect C&V sales to be flat to down low single digits compared to the prior year. This compares to the prior outlook of flat to up low single-digit growth and is due to the recent customer forecast updates that primarily affect our second half outlook for electrophysiology. Regarding our CRM&N outlook, we continue to expect sales to be flat to up low single digits. This growth rate includes the previously communicated headwind from one new neuromodulation product, which is unchanged. In other markets, we now expect a decline of approximately $34 million to $36 million versus our prior range of $30 million to $35 million. The year-over-year decline is primarily due to the Portable Medical exit. As a reminder, other markets sales are primarily related to a manufacturing service agreement with the purchaser of our former Advanced Surgical and Orthopedics business and are outside our targeted markets. In the second quarter, we expect sales to increase sequentially versus the first quarter, resulting in a first half reported sales decline of approximately 2% to 3%, which is in line with our prior outlook. The first half decline in reported sales primarily reflects the significant reduction in sales related to the 3 new products as well as the exit of the Portable Medical business. We continue to expect nominal sales to ramp sequentially throughout 2026. We expect organic sales to return to market growth in the fourth quarter normalized for fiscal calendar production days. As we have previously shared, we have fewer production days in our fourth quarter as compared to the prior year, which represents an approximately 5% headwind to our sales growth rate. We expect our second quarter adjusted operating income margin to improve 80 to 140 basis points sequentially versus the first quarter, and we expect operating income margins to improve sequentially throughout 2026. Turning to our cash flow and debt outlook. We now expect cash flow from operations to be between $185 million to $205 million, a $15 million decrease at the midpoint of the outlook, consistent with the change in our profitability outlook. We continue to expect capital expenditures of between $95 million and $105 million or approximately 5% to 6% of sales. As a result, we expect to generate free cash flow between $85 million and $105 million. We expect our 2026 year-end net total debt to be between $1.185 billion and $1.205 billion. We expect our leverage ratio to be within the targeted range of 2.5 to 3.5x trailing 4-quarter adjusted EBITDA in 2026. I'll now turn it back to Payman for his closing remarks. Payman Khales: Thank you, Diron. In summary, we continue to view 2026 as a transition year. We expect the product headwinds we've discussed to be short term in duration. The long-term fundamentals of our markets and our business remain strong. The medical device markets we serve continue to present an attractive opportunity, and we are focused on high-growth markets such as electrophysiology, structural heart, neurovascular and neuromodulation. We are a trusted partner to the world's top medical device companies and emerging innovators. Our strategy includes engaging with our customers early in the design and development of new products, helping them to accelerate their timeline to market by solving complex engineering challenges and designing for scalable, high-quality manufacturing. We have significantly increased product development sales in recent years, and this has yielded a robust and diverse pipeline. This pipeline, when combined with our underlying business, supports our return to organic sales growth 200 basis points above the market in 2027. Before we transition to Q&A, I would like to address this morning's separate announcement that our Board has initiated a strategic review. Our Board is highly confident in our strategy and our long-term objectives to grow sales above market, expand margins and remain disciplined within a targeted leverage range. At the same time, the Board and the management team continuously evaluate opportunities to enhance shareholder value. As a respected and well-positioned CDMO serving the medical device industry, interest in Integer has historically been strong and has intensified in recent months. Given this recent heightened interest, the Board and the management team believe now is the right time to consider all opportunities to maximize shareholder value, which may include continuing to execute our stand-alone strategy. As is typical with this type of process, there is no deadline or definitive timeline set for the completion of the strategic review, and there is no assurance that the review will result in any transaction or other outcome. I want to emphasize that this review does not change our overall focus, which is being a strategic partner of choice to our customers and advancing their goals through our industry-leading engineering and manufacturing and with a relentless commitment to quality, service and innovation, nor does this change our focus on delivering on our financial commitments. We will now turn the call over to our moderator for the Q&A portion of the call. Operator: [Operator Instructions] Our first question comes from Matthew O'Brien with Piper Sandler. Matthew O'Brien: I guess, Payman, for the first one, the second cut on the EP side here announced this morning, can you just talk a little bit more about that? Is that more a function of a market slowdown or inventory work down? Or are there additional products that are not ramping as fast as expected now and the next new headwinds that you're seeing within EP? Payman Khales: Yes. Matt, thanks for the question. So let me expand on that a little bit. So let me clarify first that the adjustments that we're talking about are not related to the 2 products that we had talked about previously. The forecast, the purchase orders that we're tracking and the outlook for those products has remained unchanged. We also do not believe that there is an impact of the market. The market is normalizing. It is slowing down. If you listen to the leaders in the industry and through our own research, we expect the EP market to be in the range of mid-teens to high teens in 2026. This is slower than what it was last year, which was north of 20%, but it is still a very strong market, and we expect it to continue to be very strong in the future in the double digits in the coming years. The products that we're talking about are primarily used in electrophysiology procedures independent of the technology used, whether it's PFA, whether it's RF or other technologies. As we've mentioned before, we participate across the procedures in EP. And these are some of the products that we believe that as the market is normalizing, as our customers have a clear view of what their needs are and they're adjusting their production plans, they have adjusted their forecast on us, and that's what this reflects. As I highlighted in the prepared remarks, this is not a loss of contract in-sourcing or any other change in the supply arrangement, and we believe the impact to be temporary. Matthew O'Brien: Okay. Appreciate that. And just to put a finer point on that, you're saying basically this is not a new PFA catheter that's being impacted. It's maybe some of the accessory products like Crosser or mapping catheter or something along those lines that are kind of normalizing? Is that the right way to frame it? Payman Khales: Yes. I mean the way we had previously discussed it, we had not specified the 2 products, what they were. We had just talked about 2 PFA products. That outlook has not changed. These are products that are used -- primarily products that are used in ablation procedures. As you pointed out, there are different types of products that are used in the procedure. And that's the primary source of the impact. Operator: Our next question comes from Brett Fishbin with KeyBanc Capital Markets. Brett Fishbin: I was hoping you could expand a little bit more on the announcement of the strategic review. More specifically, just interested kind of what it was that led you to make this decision? And then how you're thinking about the tangible next steps regarding some of the outcomes that you mentioned in the press release? Payman Khales: Yes, of course. So we -- I would like to start with our Board and management continue to believe and have confidence in our strategy. We've demonstrated that our strategy is delivering results. We have built a very strong pipeline, a very strong set of capabilities that our customers depend on for their success. And we believe that we have an excellent strategy. And as a result, look, over the years, there has always been interest in Integer, and our Board believes that we can deliver the best shareholder value by continuing our stand-alone strategy. But in recent months, there has been a heightened level of interest in Integer. And our Board, of course, wants to make sure that we explore all options to see what can deliver the most value for shareholders, which is the reason why we're announcing this process now. In terms of the next steps, obviously, we will go through a process, and we will see what the outcome of that process is. As we mentioned, there is no guaranteed outcome with this, and we don't necessarily have a specific time line. Brett Fishbin: All right. Great. Then I just wanted to ask a little bit more about the long-term dynamic. I note that you reiterated the expectation that you expect to return to above-market growth in 2027. Just to put a finer point on that, are you still defining your market as 4% to 6%, even though the 2026 guide assumes 3% to 4%, excluding the new headwinds? And then kind of what gives you the confidence or visibility to reiterate that 2027 directional guidance, just given some of the changes in the last few quarters? Payman Khales: Yes, no problem. Yes, our markets continue to be 4% to 6%. And the reason that we are seeing 3% to 4% this year is because of some of the headwinds that we believe are temporary for the reasons that I mentioned that are primarily in the EP space. So in terms of our growth, our return to growth above market in 2027, as we mentioned, we expect to get back to market growth in the fourth quarter of this year. That will be our exit year into 2027, which is what we expect. And we -- our product -- new product launch schedules, that continues to be very strong. We've talked about that we expect to have new product launches in all of our growth markets in the second half of 2026 as well as 2027. So when you combine the underlying market growth, which we expect to continue to be at 4% to 6% with the addition of NPI, we have confidence that we can get to 200 basis points over market. So I do want to highlight this. The EP market continues to be a very strong market for us. In fact, in the first quarter, our EP business, excluding the 2 new products, had very strong performance. We believe that our performance in EP in 1Q was above market. When you exclude the 2 new products, which, of course, have had an impact. And we have a strong pipeline in electrophysiology, and we believe that this portfolio will continue to give us tailwinds and not only in 2027, but also beyond. Operator: Our next question comes from Richard Newitter with Truist. Richard Newitter: I have 2. Just maybe the first one, I think you gave some explanation for the forecast reduction. It was clearly some discrete EP areas that were not linked to the prior ones that led to the original reduction. So that's one. And then you also mentioned that you took the opportunity to further risk adjust some other areas that felt like as just in case. if you could elaborate on that, what is a discrete forecast reduction in your updated guidance versus what is an adjusted risk adjustment factor and for what? And is it because you think there's something there for that placeholder, if you will? Or is it just to be conservative? And then I have a follow-up. Payman Khales: Yes. Rich, the -- let me confirm the first part of your question that, yes, as you pointed out, the EP reduction, which was the primary source of the forecast adjustment was not related to the 2 other products that we had discussed. The risk adjustment is because we are seeing, as we mentioned, some variability within the EP market after a very dynamic period over the past couple of years and the normalization of the market, we are seeing some forecast adjustments that our customers have a better handle of the market and their needs. We wanted to be prudent. Our guidance philosophy is still to be to take a balanced view, but we have biased it more towards risk adjustment just to minimize the risk of further forecast adjustments as we navigate this period of variability. Richard Newitter: Okay. So just to follow up on that before I get to my second question, you're saying that the further risk adjustment above and beyond the forecast reduction you received was related to the EP areas that you're highlighting right now. Is that right? Payman Khales: It's across the portfolio. And I think part of the question that you had asked, Rich, was whether we have visibility to further potential reduction and erosion. The answer is no. We wanted to make sure that we further risk adjust as we see some variability. That is across the portfolio, not only in EP, just to minimize potential further reduction. Operator: Our next question comes from Nathan Treybeck with Wells Fargo. Nathan Treybeck: Can you share if your wallet share in EP is expanding? Is it stable? Is it declining? And then is your 2027 algorithm dependent on EP reaccelerating? And if so, what would drive that? Payman Khales: Nathan, we have a very strong portfolio in electrophysiology. In fact, that portfolio has expanded substantially in recent years. And that is because of the technologies that we've developed, the participation that we have in the EP portfolio with the major players in the industry. So that is a very strong portfolio for us. In terms of whether our share of wallet increasing or decreasing, we have a very strong portfolio. We believe that we are and expect to be a leader in the CDMO space in EP. We -- as I mentioned earlier, we believe that these headwinds are short term in nature. There are adjustments to a period of variability. And we expect contribution of the EP market -- our EP portfolio to our above-market performance in 2027 and beyond. I do want to highlight that the 2 products that we had previously discussed, we are not counting on any contribution of those 2 products for our growth in 2027. But we believe that our EP portfolio in general as a whole will be a contributor to our growth above market in 2027 and beyond. Nathan Treybeck: Great. And to your response to Rich's question, it seems like you risk-adjusted other parts of the C&V portfolio outside of EP. Can you just talk about the trends you're seeing in those markets? Is there anything specific you would call out? Payman Khales: Yes, nothing that I would call out specifically, Nathan. This is in recognition that we've gone this period of somewhat volatility. Obviously, in the third quarter, we had an event with 3 products that had an adoption challenge. These products that we're talking about is more, we believe, an adjustment to the normalization of the market. We wanted to make sure that we were prudent that we were more measured and further risk-adjusted our portfolio still within a balanced view to minimize further risk of erosion in the event as a normalization continues, there could be some other adjustments. Now I do want to continue to highlight that we believe that our markets continue to grow at 4% to 6%. We expect to get to 4% to 6% in the fourth quarter. And with the product launches that we have and the exit rate, we expect to get back to 200 basis points in 2027. Operator: Our next question comes from Andrew Cooper with Raymond James. Andrew Cooper: Maybe first, you talked about sort of a broader breadth of kind of challenged areas right now within EP. And yet you still talk about the end markets and the EP markets, in particular, still growing like you thought. So what's driving this mismatch? What gives you confidence that this is short term and not something that's a little bit more structural? And kind of how do you think about that at a higher level? Payman Khales: Sure. Andrew, the -- maybe to preface my answer, I would just highlight the fact that we are in the supply chain of our customers. So what that means is that what we sell to our customers are things that likely go into their production sometime 1 to 3 quarters ahead. So there's a little bit of a difference in terms of what our customers sell into market and how they forecast on us. And there's a little bit of a variability there. Our customers sell products on a regular basis, and they adjust, if you will, their forecast on us based on what they see happening in their business, how much product they have on hand, what is their production plans, et cetera, et cetera. So if there is a little bit of a variability, that is normal in normal times, I would call it. This is the reason why we typically point to a rolling 4-quarter look for our business because it takes away, it smooths out some of those potential lumpiness as customers adjust their production needs and then put it on us. This adjustment, we believe, is a little bit unprecedented because of the very rapid change in the EP market caused by the disruption of PFA. Our customers have tried to make sure over the past couple of years, understandably, that they have all products on hand to make sure that they can maximize their opportunities depending on what their customers and physicians use. Well, now the market is normalizing. The growth rates have normalized a little bit. The market itself has stabilized. So the visibility has become clear. And we believe this to be an adjustment to the order patterns, which we believe is onetime and short term. We don't expect it to be something that will continue in the long term. Andrew Cooper: Okay. So maybe just a quick follow-up on that and then tag on a second question. Sounds like maybe you're pointing to some of this might be inventory management at the customer level as they do sort of mature into that more stable environment. Is that a fair takeaway from what you just said? And then secondly, maybe for you and Diron as well. But last quarter, you talked about continuing to spend, continuing your plans sort of regardless of some of these near-term headwinds. Has any of that changed at all? How do you think about the spend and the development work, et cetera, that you have in mind moving forward? And what would have to happen to change that if the view hasn't changed yet? Payman Khales: Yes, sure. So let me -- on your first part of the question, whether there's inventory, yes, there's some. So I think that's likely some of that. I think maybe -- let me start the answer to your second question, and then I'll ask Diron to chime in a little bit. We have a strong pipeline. We continue to invest in our business. We continue to expect to get back to strong performance in 2027 and beyond. So we want to make sure that although we are very -- in a very disciplined fashion, managing our costs that we're not making large changes, if you will, in that to protect our future growth. But I'm going to have Diron chime in and add some more to that. Diron Smith: Yes. So Andrew, thank you for the follow-up call -- a follow-up question. Yes. As Payman mentioned, we're continuing to maintain our disciplined cost management. We shared previously that we were not going to make any structural changes to the business given the lower sales volume and the return to market growth and the 200 basis points above growth in 2027. I would say, philosophically, that is still aligned. But we are looking to be more aggressive on the cost actions and the disciplined cost management but still ensuring that we're not going to damage the ability to return to market growth and the above market. So we are looking to be more aggressive, and we have included that into our forecast and outlook that we have shared. Operator: Our next question comes from Travis Steed with Bank of America. Travis Steed: I wanted to go back on the EP market comments. You were talking about the market was north of 20%, now it's kind of mid- to high teens. But I think a lot of the slowdown has been kind of revenue per procedure, at least that's what we thought at least and would think you're more exposed to volume. And I don't know, like are customers expecting volume in the EP market to slow more from here? I'm curious what kind of volume growth does your 2027 guide assume at this point? Payman Khales: Travis, you are correct that in the past couple of years, a lot of the growth in the market has been because of the price as PFA products have kind of taken over a little bit at a higher price in the market at the OEM level, and it's a little bit less for us. You are correct there that price has been a big factor in the market growth. And the 15% to, I would say, the mid- to high teens that I talked about that our customers talk about. But obviously, that also takes into account their ASPs and their average sale prices. So there is an element of price there. Specific to your question about procedure volumes, yes, procedure volumes are a little less than that, but we still see them as being very strong. Somewhere in the -- close to the high single digits to low double digits, 10% to 12% is kind of what we see procedure volumes. So we consider that to be strong, and we expect it to continue to be strong. Travis Steed: And kind of the follow-up question on inflation kind of coming back to investors' minds again after 2022. I'm just curious if you could remind us how you guys have managed inflation, how you expect to manage inflation, expecting the impact from here, kind of what your -- what kind of things you're exposed to that we can watch from a macro perspective? Payman Khales: Sure. Some of the things that I can point to, obviously, the conflict in the Middle East is causing some inflation across the board. I mean I will start maybe with one of the obvious areas, which is fuel prices. It's relatively limited for us, Travis, in terms of impact. The majority of our customers, because they have strong logistics in place, they pick up product from our manufacturing facilities. So our exposure to fuel prices, if you will, is limited. We are very closely watching our supply chain for 2 things, obviously, for inflation, as you pointed out, but also for any potential disruptions. We believe that the potential disruption is minimal, and we don't see a risk of disruption at this point. And the inflation that we see is not something that is material for our outlook and that we believe it is manageable. So it is not a source of concern for us at this time. Operator: Our next question comes from Joanne Wuensch with Citi. Joanne Wuensch: Looks like a lot of attention has been paid to EP for good reason. But I'm curious what you're seeing in the CRM and neuromod side of the business and how you're seeing that progress? Payman Khales: Yes. No problem. Joanne, our CRM business is performing well. In fact, in the first quarter, our CRM came slightly ahead of expectations. So it continues to perform well. Our neuromod business, as you know, and as we've talked about, is affected in 2026, primarily by a reduction of the one product. So obviously, that has given us some headwinds in 2026. But -- so our neuromod business is expected to be softer in 2026. While we continue to expect neuromod to grow, for example, our emerging customers with PMA products, those products are primarily in the neuromod space. And although we've had a few quarters of softening, we still expect that portfolio to contribute -- to grow at 15% to 20% in that horizon of 3 to 5 years that we have provided previously. Operator: Our next question comes from Suraj Kalia with Oppenheimer. Suraj Kalia: So Payman, I just want to go back to the fundamental question at hand. In your comments, you talked about the attractiveness of med tech markets, normalization in second half, the Board's confidence in the company's strategy. So Payman, the timing of the strategic review seems a little bit hard to digest, especially given where the stock is. Can you help us thread the needle why now? What's driving this? I understand the outside interest, but just if you could just help us understand the different moving parts here. Payman Khales: Sure. Happy to do that, Suraj. So yes, I would like to reiterate that both the Board, management and myself have strong confidence in our strategy, in our pipeline and the future of the company. Our Board has a fiduciary responsibility to always make sure that we are maximizing shareholder value. And although we believe that the strategy that we have is we can do that. Given the heightened interest that we've had in recent months, we believe and our Board believes that now is a good time to explore those strategic alternatives to see whether there is an opportunity to maximize value for shareholders. The outcome of that exercise could be something, some sort of a transaction or could be a determination that our stand-alone strategy is the best way to generate value for shareholders. This is the reason for doing this now is because of the heightened interest that we have received in recent months. Suraj Kalia: Got it. Diron, one question for you. I'll hop back in queue. What percent of your costs would you say are fixed versus variable? And I mean company-wide. Part of the reason I ask is if the Iran war is prolonged and the economic uncertainty lingers, what switches can you turn off temporarily? And then by the same token, how long does it take to turn them on again? Just trying to understand how to model it given the macro level dynamics that are going on. Diron Smith: Yes. Thank you, Suraj. Yes. Look, when you look at our overall footprint as a manufacturer, certainly, we have an amount of fixed cost in our OpEx level, both in the structural elements of supporting the organization. There's a bit of discretionary costs in there, but I would say the OpEx is a highly fixed portion of the business. And then certainly, in gross margins, you're going to have a mix of variable costs between your direct material, your direct labor as well as in your fixed infrastructure for the manufacturing footprint. As an example, rent, repairs and maintenance, utilities, things of that sort. So I think you got to -- you kind of have to look at the fixed versus variable structure when you kind of look at those splits to do the modeling aspects of it. When it relates to dynamics such as conflict in the Middle East or other areas, we look to manage the variable costs very, very closely with our volumes, our sales volume, and that's how we've been managing through this dynamic as well. I think when you look at the sales profile, one of the key things is understanding whether you believe that to be a more longer-term impact or call it, 1 quarter. We've talked about some of the variability that we see at the CDMO on a quarter-to-quarter basis. Our products are not simple products, right? They're complex, which is why we bring great value to our customers. And so as a result, there's a training element for direct labor. So there's an element where that is not turned off and on, on a dime, right? You got to make sure you spend the right time to get the labor trained. And so as you look at the individual quarter variability, that's where we're able to leverage that workforce and look at that. So I think hopefully, that helps you understand a little bit of the nuances of as a complex manufacturer, some of the elements that we have. Operator: Thank you again for joining us today. You can access the replay of this call as well as the presentation on Integer's investor website at integer.net. This concludes today's conference call. You may now disconnect.
Operator: Good morning, and welcome to Bandwidth's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ankit Hira of Investor Relations. Please go ahead. Unknown Executive: Good morning, and welcome to Bandwidth's First Quarter 2026 Earnings Call. I'm joined today by David Morken, our CEO, and Daryl Raiford, our CFO. They will begin with prepared remarks, and then we will open up the call for Q&A. Our earnings press release was issued earlier today. The press release and an earnings presentation with historical financial highlights and a reconciliation of GAAP to non-GAAP financial results can be found on the Investor Relations page at investors.bandwidth.com. During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our financial guidance for the full year 2026. We caution you not to put undue reliance on these forward-looking statements, as they may involve risks and uncertainties that could cause actual results to vary materially from any future results or outcomes expressed or implied by the forward-looking statements. Any forward-looking statements made on this call and in the presentation slides reflect our analysis as of today, and we have no plans or obligation to update them. For a discussion of material risks and other important factors that could affect our actual results, please refer to those contained in our latest 10-K filing, as updated by other SEC filings. With that, let me turn the call over to David. David Morken: Thank you, and welcome, everyone. Bandwidth has entered 2026 with historic momentum. In the first quarter, we exceeded our expectations with record revenue of $209 million, up 20% year-over-year, and record first-quarter adjusted EBITDA of $26 million. Based on this performance, we are raising our full-year outlook. These results represent far more than a quarterly beat. They are a definitive proof point of our structural advantage in a technology sector undergoing a profound transformation. Our global communications cloud and Maestro orchestration layer are essential infrastructure that make voice AI possible. Bandwidth is flourishing as the mission-critical foundation for the AI-driven enterprise. Thank you to our customers for growing and innovating with us and to our Bandmates for your amazing work. And I thank God for giving this team the opportunities to serve together. We are executing against a clear strategy to power mission-critical communications for the AI-driven enterprise. For voice AI to succeed in production, it requires ultra-low latency, carrier-grade reliability, and deep regulatory control capabilities that only a company that owns the underlying network can provide. This is our moat. It creates durable advantages in economics and performance that are impossible for virtual providers to replicate. We are no longer just enabling AI, we are orchestrating it. Through our Maestro platform, we participate in every interaction, allowing us to capture more value as customer usage grows. As AI increases the frequency and complexity of interactions, our model allows us to grow revenue per interaction, not just per minute. We are seeing this play out as customers deploy AI into their live workflows and rely upon our platform to support mission-critical interactions. A key example is our expanded partnership with Salesforce. We recently announced that Salesforce selected Bandwidth as its critical infrastructure partner to power voice and messaging for their groundbreaking new agent force contact center platform. Salesforce is fundamentally rearchitecting the contact center for the AI era, bringing together its customer data, digital engagement, and agentic AI capabilities into a single AI-first platform. In Salesforce's vision, Agentforce contact center becomes a native execution layer for CRM. This gives enterprises a single source of truth to achieve faster, more intelligent customer engagement. Salesforce is a long-time customer and to realize its bold vision for Agentforce, they turned to Bandwidth once again as their critical infrastructure partner. Only we are able to deliver the unique combination of network ownership, real-time orchestration, and global regulatory expertise required to support Agentforce's high-volume AI-driven interactions. This is the result of our years of powering hyperscalers and all the Gartner leaders in CCaaS and UCaaS. In our partnership, Salesforce has embedded Bandwidth's Communications Cloud directly into its governed workflows, enabling the control, observability, and integration depth required for agentic interactions at scale. This is significant for 2 reasons. First, it adds CRM as a new category of platforms we power. In addition to CCaaS, UCaaS, and conversational AI leaders, we are now partnered with the leading CRM platform as it becomes the system of execution for customer engagement. This expands our total addressable market and positions us to capture meaningful share as CRM platforms take on a larger role in customer interactions. Second, it reinforces our emerging role as critical infrastructure embedded inside governed workflows, where every interaction represents a unit of usage and value creation. This is a blueprint for how we expand value by embedding deeper into core enterprise systems and participating in more workflows on our platform. As agent force adoption grows, we believe revenue will build over time. With AI becoming the primary interface for customer engagement, the traditional contact center stack is being rearchitected around Agentic workflows. We have a long history of working closely with the leading CCaaS providers, and they continue to innovate and invest in exciting new AI capabilities. The evolution of the category will expand the range of platforms enterprises can choose from, and Bandwidth is positioned to support them all. Our open platform strategy ensures that, regardless of which application or AI provider an enterprise selects, Bandwidth remains the underlying communications infrastructure. We're seeing the same need for mission-critical infrastructure play out in highly regulated industries, particularly in financial services, where we've secured large wins over several consecutive quarters, including 2 new million-plus deals. The first is with a leading U.S. consumer financial services company that has over 70 million active accounts. This customer selected Bandwidth to replace its legacy telecom provider and migrate its contact center to the cloud through our Maestro integration with Genesys and our ultra-reliable Call Assure toll-free voice solution. Our solution delivers the reliability, control, and integration they needed while also enabling their transition to AI-driven customer engagement. We're now positioned for significant expansion as the customer integrates AI into the next phase of their customer experience transformation. Our second $1 million-plus deal during the quarter is with one of the largest mutual life insurance companies in the world. This customer selected Bandwidth to replace a long-standing legacy carrier. Like many enterprises in regulated industries, this customer required both performance and trust, areas where our owned network and integrated platform provide a clear advantage. Their comprehensive customer experience transformation leverages our Maestro integration with Genesys, our call assured toll-free voice, and our trust services, including call verification and number reputation management. Cost savings from modernization are being reinvested into new AI services, which could further increase usage on our platform, redirecting spend away from legacy systems and toward more intelligent, scalable customer engagement with bandwidth. These examples demonstrate our continued strong momentum in financial services, where scalability, compliance, and resiliency are nonnegotiable. Standardizing on bandwidth enables best-in-class integrations, intelligent call routing, built-in failover, and a clear path to deploying new AI services. This is a land-and-expand model where the initial platform wins immediately demonstrate Bandwidth's value proposition, leading to higher usage, increased software attachment, and long-term, durable revenue growth. We're seeing a similar dynamic play out in our messaging business, where enterprises need a robust, reliable platform partner to scale real-time customer engagement across digital channels. During the first quarter, we won an additional high-volume messaging customer with major consumer brands across the retail and restaurant verticals. This customer reached a level of throughput where their previous large provider could no longer meet their requirements and switched to Bandwidth for our proven delivery performance and ability to scale, particularly as they manage tens of millions of messages per month across short code, 10DLC, and toll-free channels. As they add new AI workflows to automate campaign management and customer interactions, Bandwidth's messaging platform and campaign registration tools ensure reliable execution. This example shows how we're extending the same land-and-expand model into messaging. As customers grow and scale their engagement, activity flows directly through our platform, driving revenue and margin performance over time. In addition to our customer acquisition success in voice and messaging, we are increasingly supporting a growing ecosystem of AI developers building vertical applications on top of our platform. We're seeing continued momentum in this space with developers building Agentic solutions across a wide variety of use cases from restaurants and hospitality to health care, home services, and customer support, where real-time voice and messaging are central to the customer experience. These AI app developers are choosing Bandwidth for the same reasons as our enterprise customers, the ultra-low latency, reliability, and scalability required to run AI applications in production, along with the orchestration capabilities of Maestro. As enterprises increasingly adopt verticalized applications built by third-party developers, Bandwidth becomes the essential communications layer powering additional usage on our platform. In summary, we are the mission-critical communications platform for AI-driven enterprises. First, we are executing against a clear and consistent strategy to power mission-critical communications for the AI-driven enterprise, and we are seeing this focus translate into large enterprise adoption across our platform. Second, we are expanding our role inside governed customer workflows as AI moves into production. And third, we are scaling a business model that drives increasing usage, expands revenue per customer, and delivers exceptional incremental gross profit growth. Taken together, we are positioned as the mission-critical communications platform for AI-driven enterprises. Now I'll turn it over to Daryl to walk through the financial details of the quarter. Daryl Raiford: Thank you, David, and good morning, everyone. Bandwidth's 2026 is off to a historic start. Our first quarter performance was exceptionally strong, with demand for both voice and messaging exceeding our projections and driving results above the top end of our guidance ranges. This robust momentum across all key financial metrics, including revenue, gross profit, adjusted EBITDA, non-GAAP earnings per share, and free cash flow, has given us the confidence to raise our financial guidance for the full year. Our market performance and execution underscore the depth of our competitive moat and the resilience of our business model as we continue to scale our cloud communications platform and drive long-term value for our shareholders. Now diving into our first quarter 2026 results. Total revenue was $209 million, an increase of 20% year-over-year. Cloud communications revenue, which is total revenue less messaging surcharge revenue of $59 million, reached $150 million, a 13% year-over-year increase, driven by growth across our core communications platform. Non-GAAP gross profit of $89 million increased 14% year-over-year and marked another quarter of improving gross profit yield on incremental cloud communications revenue. Non-GAAP gross margin improved 50 basis points to 59.5%, illustrating the structural margin advantage of our unique global owned and operated communications platform. Adjusted EBITDA grew by 17% to $26 million, driven by gross profit growth and the scale of higher revenue across our operating expense base. Non-GAAP earnings per share rose to $0.38, representing 6% growth, and operating cash flow grew significantly to yield essentially breakeven free cash flow, representing a marked year-over-year improvement despite the typical first quarter working capital cycle. Focusing on our first quarter cloud communications revenue growth, both voice and programmable messaging solutions exceeded our expectations. For our voice solutions, we reported revenue of $121 million, growing 12%. Both of our voice market categories contributed to the total voice growth. Within our global voice plans category, we saw broad-based demand-producing revenue growth of 12% year-over-year, underscoring both the strength and durability of our installed customer base and the tailwind of AI-influenced voice usage. For our enterprise voice category, revenue grew 14% year-over-year to $13 million. Growth was driven by both recent customer additions and increasing momentum as enterprises scale on our Maestro platform. In programmable messaging, revenue rose 15% year-over-year to approximately $30 million. This performance exceeded our projections, particularly given the typical first-quarter seasonal headwinds we often encounter. Turning to our operating metrics. Our reported net retention rate for the first quarter was 102%. Adjusted to normalize the cyclical political campaign revenue impact, our commercial net retention rate was a healthy 110%. We believe this adjusted view more accurately reflects underlying organic commercial demand and customer expansion. Customer name retention remained well above 99%, indicating near 0 customer churn, a remarkable and unique track record that we expect to continue. Average annual revenue per customer reached a new high of $244,000, reflecting the mission-critical nature of our platform and deep integration with our customers. Taken together, these metrics demonstrate continued expansion within our existing customer base as customers increase their usage, adopt more of our services, and deepen their reliance on our platform. In the first quarter, we progressed our balanced capital allocation strategy. We deployed approximately $11 million in cash to mitigate share dilution by 700,000 shares, while repurchasing $100 million in aggregate principal of our 2028 convertible notes at a discount to par. This resulted in a long-term debt leverage ratio of less than 1.25x. Shares acquired under our $80 million repurchase authorization were purchased at an average price of $15.93. Looking ahead, we intend to maintain this opportunistic approach, prioritizing debt reduction and dilution management while remaining steadfast in our commitment to prudent cash flow management and a strong, flexible balance sheet. Turning to our second quarter 2026 outlook. We expect revenue to be in the range of $214 million and $220 million, representing 20% growth year-over-year, adjusted EBITDA to be in the range of $24 million and $27 million, representing 20% growth year-over-year, and non-GAAP EPS to be in the range of $0.35 and $0.37. Turning to our improving full-year outlook. We are raising our full-year 2026 guidance to reflect the first quarter beat and continued demand strength. Our positive outlook for the remainder of the year is underpinned by 3 significant growth catalysts. First, the transition of AI-driven traffic into high-volume production. We are seeing a marked acceleration in our global voice category as AI voice agents move beyond the pilot phase into full-scale deployment. This organic growth is generating volume that leverages the carrier-grade reliability and ultra-low latency of our owned network, further expanding our competitive moat. Second, a robust enterprise pipeline is poised for a second-half inflection. We expect growth to accelerate as our record pipeline of large-scale deals completes onboarding. Our role as a mission-critical partner is validated by Salesforce selecting Bandwidth to power agent force alongside our significant $1 million-plus wins in financial services this quarter. These partnerships cement our position as the foundational infrastructure for next-generation engagement. Third, the continued expansion of high-margin software services. As enterprises integrate more deeply with our platform, they are increasingly adopting unique services within the Bandwidth Communications Cloud. During the quarter, software services revenue nearly doubled year-over-year, with its sequential ARR exit rate growing 67% to $25 million. This provides a powerful tailwind for both long-term business durability and incremental profitability as we scale. We now expect the full year 2026 total revenue to be in the range of $880 million and $900 million, representing 18% growth year-over-year at the midpoint compared to our prior range of $864 million and $884 million. Within total revenue, we expect Cloud Communications to be in the range of $616 million and $624 million, representing 10% growth year-over-year at the midpoint. The adjusted EBITDA outlook is in the range of $119 million and $125 million, representing 31% growth year-over-year at the midpoint compared to our prior range of $117 million and $123 million. Non-GAAP EPS to be in the range of $1.77 and $1.83, representing growth of 26% year-over-year at the midpoint. Compared to our prior range of $1.66 and $1.74. Additional modeling details underlying our full-year 2026 outlook are as follows: We expect net interest expense to be in the range of $1 million and $3 million, depreciation expense to be in the range of $38 million and $42 million, adjusted effective tax rate to be in the range of 20%, and 21%; weighted average diluted shares outstanding of approximately 35 million. And for capital expenditures, we expect these to be in the range of $24 million and $26 million. With that, I'll now turn the call over to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from?Erik Suppiger?from B. Riley Securities. Erik Suppiger: Congrats on a solid quarter there. Can you speak a little bit about some of the developments going on with some of the frontier model providers like Google and OpenAI in terms of their advances in their ability to support AI voice technologies, and is that making a difference to Bandwidth? David Morken: Yes, certainly, and thanks for joining, Erik. There are a number of these announcements just in the last 10 days, I think most recently, the voice model that Brock came out with for that Gemini OpenAI. These models are focused on improving the text-to-speech, speech-to-text legacy experience that has a number of different challenges associated with it. So we're excited about the voice focus that the frontier models have. It really does accelerate lots of the performance and quality for voice agents, and that is very favorable as a tailwind for our platform and our approach to serving voice agents globally on our platform. Erik Suppiger: Are they putting much behind marketing those services? And are you fully capable of integrating with those services? David Morken: So on the first point, they have been very forthright and expansive in talking about the new voice-focused models. In fact, one of them talked about it displacing one of their sister company's contact center legacy experience and resolving 70% of tickets in the contact center environment just with that voice model last week. So these things have just been announced. There's no reason that we shouldn't be able to support voice agents utilizing these models fully, and that they will complement the quality that we offer for PSTN delivery of voice agent experiences again across 80 countries plus. Operator: Our next question comes from Patrick Walravens from Citizens. Patrick Walravens: Dave, congratulations to you and all the Bandmates. Fantastic. So 2 questions. I guess one is a follow-up. So first of all, can you tell us a little bit more about the Salesforce partnership? In your remarks, you talked about how they're fundamentally rearchitecting the contact center. Tell us a little bit more about that and where you fit in? And also, are customers buying into the way they're fundamentally rearchitecting the contact center? David Morken: Pat, thanks. I appreciate the congrats. And I want to also congratulate our Chief Operating Officer, Navesh Agrawal, for delivering fantastic results with all of our Bandmates. To answer your question on Salesforce, I think the team at Salesforce, Mark Benioff, the long-time founder and CEO, and their whole team have a compelling vision for every sales call to be a conference call. And that vision of having an agent aware of all the context of your customer experience is powerful. And we believe in it as well. So when we say that they are absolutely challenging the legacy assumptions around contact center, it's more like a context center now, where an agent is fully aware of all your needs, wants, wishes, your sentiment, and can share, suggest, complement, or correct a sales rep or an operations representative of your company in real time. So it is a revolution, no question about it. Their headless approach just last week, saying that they're taking the face off the UI and allowing agents to directly engage with the system of execution within their CRM Salesforce platform, is powerful. I don't think that it's it can be overstated very easily. And in terms of the second part of your question, Pat, are companies embracing this? I don't think companies have a choice. The level of intelligence that is now going to be available to real-time customer interactions through an approach like Agentforce is differentiated. It is competitively ahead of its peer group and cohort, and I think everyone will follow. Patrick Walravens: And so for my follow-up, if someone does, if you have a big airline or a big bank or whatever that decides that they're going to move forward with Salesforce on their new approach, how does Bandwidth make money? What are the dynamics there? David Morken: You bet. Great question. So we make money on a usage-based model based on interactions. So we are powering an announcement already on every one of those calls. And so when every call becomes a conference call, there are multiple usage components to that that we benefit from. And they're obviously relying on us for high, high quality, resiliency, footprint, all kinds of our advantages that we've enjoyed for the last 15 years. But our usage-based model is the approach we take to powering these experiences, and there are multiple units of usage now with AI involved. Operator: [Operator Instructions] ?And our next question comes from Joshua Reilly from Needham. Joshua Reilly: Maybe just starting off, global voice plan revenue growth was really strong at 12% year-over-year. I guess what are you seeing from these customers in terms of their adoption of AI driving incremental growth relative to maybe some other factors like new customer ramps. We know there's been a lot of million-plus customers ramping up there. Maybe you can just give us a sense of what was the relative driver of that strong 12% growth there. David Morken: Josh, thanks, and thanks for your good question. I've got with me today, John Bell, our Chief Product Officer. Let me invite him to respond to your good question. Yes. So we see broad-based adoption of AI and integration of voice agent technologies by our customers. Our customers are making it very easy for enterprises to realize real economic value from voice agents, and we see that consistently across our customer base. And in addition to that, we do see new entrants as well coming into the market, AI-native companies that we are enabling. We also announced our bandwidth build program, which allows new entrants to easily onboard as customers, and we're really excited about that as well. So, both a mix of existing customers integrating voice agents and driving their business, as well as new entrants coming into the market. Joshua Reilly: And then maybe just a follow-up on the $1 million-plus customers. If you look at the $1 million-plus customers that you added in 2025, would you say that all of those now are in the run rate here of revenue as of this point in 2026? And then how are you thinking about the net new $1 million-plus customers that you've added year-to-date thus far in 2026 relative to 2025? Can you add a similar number, even more $1 million-plus customers this year versus last year? Daryl Raiford: This is Daryl. I'll take that question. It's nice to speak with you. The short answer is no. The 6 million, much larger than the $1 million deals we announced last year, are not fully in the run rate right now. In fact, 5 of them are less than 50% deployed. With one being fully deployed and now nearly exceeding 120% of our initial estimated contract value. So we're really excited about what's to come when I said the inflection in terms of enterprise and second-half acceleration. And we're really excited about the one that has fully deployed and more because, as I said in the prepared remarks, as soon as that occurs, the client immediately understands the value proposition that the communication Cloud brings, and it allows for our land and expand and cross-sell, upsell model. So we're really excited about that. In terms of your second point about the momentum of enterprise, much greater than $1 million deals. We did announce two this quarter. We have a view into our pipeline, and we think that we're very much on pace with last year or to exceed. Operator: And the next question comes from Arjun Bhatia from William Blair. Arjun Bhatia: Congrats on the solid quarter here, guys. Maybe I'll start on the messaging side because I think you called it out early, but usually, there's a Q1 seasonality dynamic where there's a dip down in Q1 from Q4. But it seems like the year-over-year growth rate is actually accelerating there. So I'm curious what's driving that? Is that AI volumes starting to layer in? And how do you expect that to sort of play out through the rest of the year, even with political layering into the back half? Daryl Raiford: We were pleasantly surprised with the strength in programmable messaging, as you said. Given the typical seasonal headwinds that occur in the first quarter, we saw pretty strong commercial and civic engagement messaging. And of course, we had announced a couple of messaging customers who won last year that began to deploy and onboard more fully as well. So we had a favorable comparison for that. But yes, the market dynamics plus our customer onboarding exceeded our expectations. David Morken: And Arjun, I'd only add to that. This is David. That performance wasn't due to politics in the quarter. It was largely commercial, and that squares with the announcement that we had about our messaging win. That was a commercial consumer brand messaging platform for both retail and restaurant verticals, and that was a major win and consistent with the success we're seeing, which has nothing to do with the seasonal civic traffic. Arjun Bhatia: And then just maybe a broader question, if I can. And I don't know, maybe this is for you, Dave. But just as AI becomes more prominent, like what is the change you expect in the business to play out, not just through 2026, but over the next couple of years, it seems like your product is there, but how does it impact the revenue model, your visibility into your revenue stream, and the customers, maybe that you even are going to serve. I'm just curious what this evolution might look like for Bandwidth over the next couple of years. David Morken: We believe the next billion users of the global PSTN are significantly going to be voice agents. And so we're building for those agents, as are many other broad AI infrastructure companies. We've launched ways like a command line interface for agents to be able to autonomously sign up and secure service. We obviously know how to comply with know your customer while we do that. But look, over the next 2 years, to your good question, we're going to do a terrific job in being understood broadly as the best place for voice agents to speak with people around the world over the PSTN. We think we'll do that with differentiation on our vertically integrated universal platform and our global footprint. And we're starting to see the beginning of that, I think, in these results. But let me pause and invite John Bell, our Chief Product Officer, to also opine on your question. John Bell: Yes. And I would just add that a big part of our role right now is helping our customers transition to this new world and helping both the human agents and the voice agents work together in a harmonized way. That creates a very big opportunity for us, and a lot of value for our customers to help them quickly realize the economic value of voice agents in their businesses. Operator: The next question comes from Jim Fish from Piper Sandler. James Fish: Congrats on the agent force side of things. Just wanted to circle back on the political side. Was there any political messaging impact this quarter? David Morken: There was no meaningful political impact this quarter. Again, for full transparency, we are really believing that, that impact will be exactly like we've seen in the last 2 cycles, which is very second-half weighted, just given the dynamic of how campaigns work. We're calling in our guide for right at $15 million of political campaign messaging benefit, and that's what we see right now. So we haven't really changed that. As we get into the 1st of July and then beyond, we're going to have a lot better sense with our customers of where this campaign dynamic is headed, but we're looking for about $15 million net effect in cloud communications revenue this year, second half. James Fish: And then look, your new business looked pretty strong here. Agent force isn't even kind of in the numbers at this point from your language here. But what are you guys seeing with cloud conversions across the core unified and CX market? Are we finally getting to a point where enterprises are really starting to shift over towards the cloud, especially the CCaaS side? And could the new SEC proposals of more human onshoring here change anything for you guys underneath? David Morken: I'll handle the second part of your question first and then invite John to talk to the first, if I could. So nothing about the regulatory change augurs negatively for us. The voice agent revolution will apply equally. And if anything, I think it bodes well for the partners we work with and the call volumes we support. We've got an extraordinary global and domestic network underneath all of these initiatives. So we're not deterred or concerned about that migration or change at all. John Bell: Yes, I'd add. So the move to the cloud certainly enables a lot of enterprises to easily adopt voice agents, which we're excited about. But I would also add that a core benefit of Maestro is that even for customers who still have a lot of their human agents and the software for the human agents on-prem, we are still able to voice agent enable them. And that is a tremendous benefit of our Maestro platform. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to David Morken for any closing remarks. David Morken: Thank you, operator. In closing, our first quarter performance underscores Bandwidth's expanding role as the mission-critical foundation for the AI-driven enterprise. By combining our unique global owned and operated network with the increasing velocity of the Maestro platform, we are capturing more value as customers deploy agentic AI into live production workflows. Compared to prior cycles, our growth today is increasingly complemented by embedded AI workflows and software attachment rather than episodic traffic alone. Our raised full-year guidance reflects this momentum and the scale of our record deal pipeline. We remain committed to a disciplined capital allocation strategy that balances strategic investment in our AI moat with opportunistic shareholder returns, ensuring long-term value creation. Thank you very much. Operator: This concludes our conference call today. You may disconnect your lines. Have a nice day.
Operator: Hello, everyone, and thank you for joining the Butterfly Network's Inc. Q1 2026 Earnings Call. My name is Gabrielle, and I will be coordinating your call today. [Operator Instructions]. I will now hand over to your host, John Doherty. Please go ahead. John Doherty: Good morning, and thanks to all of you for joining our call today. Earlier, Butterfly released financial results for the first quarter ended March 31, 2026. We also provided a business update. The release, which includes a reconciliation of management's use of non-GAAP financial measures compared to the most applicable GAAP measures is currently available on the Investors section of the company's website at ir.butterflynetwork.com. I, John Doherty, Chief Financial Officer of Butterfly, along with Joseph DeVivo, Butterfly's Chairman and Chief Executive Officer, will host the call this morning. During today's call, we will be making certain forward-looking statements. These statements may include, among other things, expectations with respect to financial results, future performance, development and commercialization of products and services, potential regulatory approvals, revenue attributable to embedded partnerships through revenue share, ship purchases or otherwise and the size and potential growth of current or future markets for our products and services. These forward-looking statements are based on current information, assumptions and expectations that are subject to change and involve a number of known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those contained in the forward-looking statements. These and other risks are described in our filings made with the Securities and Exchange Commission. You are cautioned not to place undue reliance on these forward-looking statements, and the company disclaims any obligation to update such statements. As a reminder, this call is being webcast live and recorded. To access the webcast, please visit the Events section of our investor website. A replay of the event will also be available on this page following the call. I would now like to turn the call over to Joe. Joseph DeVivo: Thanks, John. So before I begin, I want to take a moment to congratulate our Board member, Dr. Erica Schwartz on her nomination to serve as this country's CDC Director. The entire Butterfly family is proud of her and we remain grateful to have her as a valued member of our Board. We've been so fortunate to benefit from her insight, leadership and friendship for the past 5 years. She has certainly contributed to where Butterfly is today. So with that, I'm pleased to welcome you to our first quarter call this year and to share that we've been making real progress across every facet of our business. Our plan to become the leader in point-of-care ultrasound is firmly established. And the market is moving towards a system-wide understanding of the power Butterfly can bring. Butterfly opened 2026 with another strong financial performance, 25% revenue growth, 69% gross margin and the lowest first quarter net loss since going public, all while maintaining a very strong balance sheet to support future growth. This performance shows our momentum regardless of the environmental noise. And it's an indicator of what's ahead as we continue to make meaningful progress across every phase of our business and I'm excited to walk you through our updates. Butterfly is in the middle of the digital transformation of imaging, driven by the power of semiconductors and ultrasound. We are beginning to experience the convergence of massive computational power, artificial intelligence and the incredibly customizable digital visualization, which can disrupt not only imaging and health care, but far beyond. We are living through a profound moment of technological acceleration, one that health care has been waiting for, the merge of intelligence with the human body through smart ultrasound form factors that can live with every person everywhere. It starts with our core POCUS business, empowering every doctor and nurse with a powerful digital imaging device, connected to an ecosystem of AI applications, education and data to deliver immediate clinical care wherever the patient is in the world. We are excited to be the first company ever to earn FDA clearance of a blind sweep AI tool, which in 2 minutes can determine the age of a fetus. You may have seen this circulating on either LinkedIn or X. But we were very proud that the FDA itself highlighted our clearance publicly on social media as a meaningful demonstration of their increased focus on AI-enabled technologies and how to do it correctly in partnership with them. I have reposted it if you want to go to my account and find it. The GA tool is a true reflection of our mission. Each year, millions of women around the globe enter pregnancy without a reliable way to determine gestational age. In global, rural or emergency settings, patients often enter care not knowing key dates due to lack of prior prenatal care or are unable to verbalize them due to their condition. Without accurate gestational age, clinical decision-making becomes more complex as each stage of pregnancy requires different treatment pathways. Now, clinicians can determine gestational age quickly and with a high degree of accuracy using our GA tool that's built on deep learning models from Dr. Jeffrey Stringer's team at the University of North Carolina and trained on over 21 million images. Butterfly is now in the process of launching this tool to those who need it most in the U.S. and many global health settings that rely on FDA regulatory pathways. Moments like this demonstrate the strength of Butterfly's architecture. With a single cloud-based software update similar to how a smartphone is updated, we can push this capability to existing users anywhere cleared in the world. The GA tool is expected to unlock new relationships with ministries of health across developing countries, moving beyond the idea of democratizing health care to actually delivering on it. AI applications that give local caregivers access to advanced diagnostics will be the most powerful accelerator of handheld point-of-care ultrasound. Whether developed internally or through our partners in the Butterfly Garden, these applications can make the complex simple and expand access to patients in highly scalable and cost-effective ways. This quarter, 2 new partners joined to develop in the Butterfly Garden, bringing the portfolio total to 30. Four of our existing partners have received FDA clearance for versions of their software. Most recently, Deepecho received breakthrough designation from the FDA and expects clearance of a robust prenatal AI application potentially by the end of this year. We anticipate iCardio going live with an FDA-cleared model this year, beginning of next year as well. And we are very pleased with the progress HeartFocus is making following its launch of a clinical app late last year. We believe all of these applications, combined with Butterfly's internally developed capabilities will become the largest, most powerful AI-powered ultrasound library in the industry. Over the next 3 years, we expect this to drive a meaningful inflection in probe utilization and overall system adoption. So continuing with POCUS, our Compass AI launched last quarter is showing early success. Our pipeline of software deals measured in total contract value is up sharply from the first quarter of 2025, serving as an early indicator of meaningful enterprise adoption in 2026. We have already closed our first enterprise deal this quarter and are seeing strong momentum, including a 7-figure software TCV deal with a customer committing to the long-term Compass AI road map. In addition, medical schools are accelerating one-to-one adoption with nearly 1,000 probes sold so far this year across 6 institutions and more programs coming online. These efforts are supported by continued advancement of our already robust enterprise security posture with recent milestones, including HITRUST r2 certification and entry into the FedRAMP marketplace as in process with VA sponsorship, further enhancing our ability to support large health systems and expand into federal opportunities. Over the next few quarters, we expect to further the global scale of our POCUS business continuing to open multiple new markets across the Americas and Asia, including some of the largest and fastest-growing POCUS markets like Brazil. At the same time, we've been working to expand iQ3 availability to over a dozen additional countries already in our regulatory pipeline. So moving to Home. Now officially named Butterfly Home and Community Care, we are making important progress. We expect now our first commercial agreement to be signed in the first half of this year and begin training nurses to support patient scanning across our full state in the third quarter. We believe this model can expand significantly across the United States in 2027 and represents a foundational shift in how care is delivered. It enables at-risk providers to take control of patient outcomes with AI-powered diagnostics, reducing unnecessary hospital visits and improving system efficiency. I'm very proud of our team for maintaining their focus and skilled execution in building this business. So lastly, I'd like to briefly update you on our efforts regarding the RoHS Lead Exemption for handheld ultrasound. We filed an application to revoke this exemption last year, which currently allows the continued use and disposal of toxic materials in lead-based piezoelectric crystal handheld ultrasound in the EU. The commission engaged a third party named OKYO to review the exemption request and make a recommendation. And through this process, they confirmed CMA to be a technically viable alternative, meaning they have met or exceeded the capability of incumbent technologies. OKYO ultimately recommended reapproval of the exemption, but only for 2 years. This is important because exemptions can typically span anywhere from 2 to 7 years. And therefore, OKYO opted to recommend the lowest possible term for an exemption following its review of our request. We believe that during these 2 years, the EU will gain the understanding they need to revoke the lead exemption for handhelds, including greater awareness, viable alternatives to piezoelectric crystals and handheld ultrasound devices and clarity that replacing piezo handhelds will not present an impediment to health care delivery, but rather introduce a more digital and more effective delivery of medicine. We understand the complexity of disrupting established industry practices, but believe the EU has gained significant insights into the existing of a viable alternative and meaningful progress is being made. So I'll save our embedded update after John's comments. I would now like to turn it over to John. John? John Doherty: Thanks, Joe. Butterfly continued its solid and focused execution in the first quarter of 2026 with an increase in revenue driven by double-digit growth in both our core and embedded businesses, an increase in gross margin and continued improvement in operating performance with further reallocation of resources towards higher ROI opportunities and markets. Let me touch on a few highlights in the quarter that demonstrate this, including revenue attainment that was above consensus, continued gross margin improvement, adjusted EBITDA that was above consensus and our guidance range with improvement driven by our revenue performance, higher gross margin and continued financial discipline. Growth in probe sales of 5% and an increase in the mix of iQ3 devices driving an 11% improvement in ASP year-over-year. The expansion of the Butterfly Garden platform as well as the inclusion of the GA tool in our latest software update, execution of a large 7-figure TCV Compass AI contract with a growing pipeline in this area that Joe mentioned upfront and the expected commercial launch in an initial state with a major U.S. direct care provider to support in-person, virtual and in-home health care services. With that, let me move on to our results. We started the year strong with revenue of $26.5 million, an increase of 25% year-over-year. Our growth was primarily driven by strength in our U.S. health, international and vet channels, a higher mix of sales of the iQ3 year-over-year, driving a higher ASP and from Butterfly Embedded. Breaking things down between the U.S. and international channels, during the first quarter, U.S. revenue was $21.4 million, which was 25% higher year-over-year, driven by revenue from Embedded as well as solid demand in the core business with unit sales up 5% in what is typically a slower quarter due to seasonality. Total international revenue increased by 23% year-over-year to $5.2 million in the quarter. While sales of the iQ3 in the quarter were up 39% year-over-year, sales of the lower-priced iQ+ were down 43%, driving the increase in ASP. With the increasing contribution from Embedded today and going forward, I'm going to provide you with a revenue split between our core business and Butterfly Embedded. We have also included this split in our 10-Q. The core business includes probe sales and related software, Compass AI, other services and in the future Home. Embedded revenue currently includes onetime NRE payments, annual license fees, revenue from SOW-driven development work and chip sales to Embedded partners. With that, core revenue for the first quarter was $20.8 million, an increase of 10% versus the first quarter of 2025. This increase was driven by growth in volume and price with a higher mix of iQ3 sales, which strength in U.S. health, international, e-com and vet. Butterfly Embedded revenue was $5.7 million, an increase of 147% versus the first quarter of 2025. This increase was primarily driven by the Midjourney partnership. Moving on to gross profit. Gross profit was $18.3 million in the first quarter, a 37% increase as compared to the prior year gross profit of $13.4 million. Gross profit margin percentage increased to 69% from 63% in the prior year period, an increase of 9%. Gross margin percentage was positively impacted by the higher-margin Butterfly Embedded revenue and the higher mix of iQ3 and its higher selling price, along with lower software amortization. Moving to EBITDA and cash. For the first quarter of 2026, adjusted EBITDA loss was $6.1 million compared with a loss of $9.1 million for the same period in 2025, an improvement of 32%. The improvement in adjusted EBITDA loss in the first quarter was driven by contribution from higher-margin revenue and continued financial discipline. Our cash and cash equivalent balance, excluding restricted cash at the end of the first quarter was $138 million and the use of cash in the quarter was $12.5 million. This compares to a use of cash of $14.7 million in the prior year quarter, an improvement of $2.2 million or 15%. These results continue to demonstrate that we are very well positioned as we move forward to continue to invest in the business in areas where we see significant opportunities for additional growth and disruption, including expanding our POCUS business and penetration of Compass AI as a core operating system for health systems, empowering third-party development through Butterfly Garden to accelerate adoption of our platform, expanding our Home and Community Care business into its commercial phase. Enabling a new wave of ultrasound-on-chip technologies through Butterfly Embedded and continuing AI and semiconductor innovation with the development of our fourth-generation chip. Before turning to guidance, I want to update you on the global macroeconomic environment relative to Butterfly. We continue to monitor the war in the Middle East and the ripple effects on the global economy as well as tariffs in certain markets. While there are some impacts to our business, they have been minor. And we continue to manage through it and make the appropriate adjustments. Our first quarter 2026 results are indicative of this. And our second quarter and full year 2026 guidance include any expected impacts. I would now like to turn to our outlook for the second quarter of 2026 and for the calendar year ending December 31, 2026. In the second quarter, we expect revenue in the range of $27 million to $31 million or a year-over-year increase of 24% at the midpoint. We expect an adjusted EBITDA loss in the range of $6 million to $8 million. For the full year 2026, we are reaffirming our guidance for both revenue and adjusted EBITDA. We expect revenue to be between $117 million and $121 million, an increase of approximately 20% to 24% over 2025. We expect our adjusted EBITDA loss to be between $21 million and $25 million. As I mentioned previously, our guidance for adjusted EBITDA in the second quarter and full year includes increased investment in key areas to support continued innovation and revenue growth in our core business and our emerging Embedded business for 2026 and beyond. In summary, we had a strong start to 2026. We came in above the midpoint of our revenue guidance and we beat our adjusted EBITDA guidance. We believe we are very well positioned for the balance of 2026. As our 2026 full year guidance indicates, we look forward to continued growth this year and beyond. Our overall outlook on the business is positive with the first quarter reinforcing our view. We continue to be focused on gaining share in 2026 through deeper penetration of existing customers, new customers and applications. We also continue to be focused on enhancing our existing and developing new partnerships, leveraging our ultrasound on-chip platform. We continue to be excited about the potential of Butterfly Embedded and our licensing and related revenue opportunities. The business is getting stronger, with core focus generating new revenue opportunities in addition to probe sales through Compass, Garden and Home and the potential of Butterfly Embedded. This is happening while we continue our intense focus on driving operating efficiency across the business and return on investment. I continue to be excited about what is ahead for the company in 2026 and beyond. Now, let me hand it back to Joe for some closing comments. Joseph DeVivo: Thanks, John. Ultrasound has many use cases, which are growing rapidly in both scientific and clinical importance. As I mentioned last quarter, if you scan publications in nature over the past year, you'll find a body of literature growing around functional ultrasound. These applications are ranging from neuro imaging and brain computer interfaces, biosensing and targeted drug delivery to wearable monitoring and autonomous robotic procedures, just to name a few. Who was once a diagnostic modality is aspiring to become something far more powerful. It's becoming a dynamic interface with biology itself. As I mentioned at the start, what is driving this shift now is the convergence of massive computational power, artificial intelligence and a new class of digital imaging systems. For the first time, imaging is no longer static. It's becoming adaptive. It's becoming intelligent. It's beginning to learn. There is only one company in the world that has commercialized ultrasound at scale through a fully digital semiconductor-based system that is infinitely programmable. That's Butterfly. Our traditional piezoelectric crystal, well, they're fixed. They transmit and receive in a fixed way. But our digital ultrasound is fundamentally different. It can transmit and receive signal, interpret what it sees through powerful compute and AI and immediately adjust how it transmits and receives again. It creates a closed-loop system where sensing, thinking and acting are happening continuously in real time. This is the beginning of imaging systems that do not just observe the human body, but will integrate into it. Over time, these systems will move from episodic use into continuous presence, embedded into workflows, into devices and eventually into everyday life. This is where imaging, computation and biology converge into something entirely new. Butterfly is at the center of this convergence, which is becoming increasingly evident in the brain computer interface space. Our chip is uniquely well suited for this application given their programmable architecture, ability to both transmit and sense with precision and tight integration with software compute and AI. This is exactly where our Apollo platform is headed. By extending this foundation, we are building a platform that combines the ability to image and stimulate through software and enable new classes of applications beyond traditional handheld imaging. We are investing strategically in the talent, the partnerships and the platform to lead in this new category through Butterfly Embedded, which we introduced last quarter as a rebrand of Optiv. Embedded is being led by Dr. David Horsley, a proven innovator in MEMS and semiconductor systems. And we are furthering our engineering and commercial capabilities required to engage with the most important technology platforms in the world. Establishing the Embedded business with intentions of building a team in San Francisco is a critical step in extending our platform into the broader technology ecosystem. The early traction in Embedded is very promising. We signed our ninth partner this month and expect to add at least 2 more mid-year. And these are not just incremental relationships. They represent the early formation of a new market where ultrasound becomes a native capability inside other systems and we are just getting started. Speaking of transformative platforms, we are very excited about the progress we are making with Midjourney and look forward to them unveiling their solution when they are ready. It is clear to us today that the Apollo chip will be a major catalyst of revenue growth for Butterfly. Not only will it usher in the next wave of AI in image processing and enhancement as well as on-device AI compute for POCUS. Our partners want the processing speed it will provide given the massive amount of data they intend to generate. As I mentioned, not only will Apollo have the more powerful MEMS elements that enable harmonic imaging, it will be able to process 20x the data of the chip that we will launch next year to 5.1. This new architecture is being designed into very sophisticated future systems that stream real-time ultrasound data straight into the GPU memory, providing the ability to process a massive amount of image data far exceeding today's standards. We also have identified versions of the Apollo architecture, which can be modified to meet some of the largest future use cases known today. When you step back and look at Butterfly today, you see 3 engines of growth that are beginning to reinforce each other. Point-of-care ultrasound is scaling across health systems globally. Home and Community Care is expected to extend that capability directly into the patient environment, changing how care is delivered and paid for. And Embedded extends Butterfly beyond stand-alone devices by integrating ultrasound as an AI-enabled sensing platform into entirely new applications across health care and adjacent markets. Together, these are not separate businesses. They are all playing a key role in leveraging our unique ultrasound-on-chip ecosystem. Over the next 3 years, we are not just expecting growth. We are entering a period of transformation. As these systems mature and converge, they will unlock new behaviors, new standards of care in entirely new markets that do not exist today. What has historically been episodic, expensive and limited will become continuous, intelligent and broadly accessible. We believe this shift will fundamentally change how the world interacts with imaging with health care and ultimately with the human body itself. Over the next 3 years, we expect this convergence to materially expand our addressable market and drive a step change in utilization, which we believe will be reflected directly in revenue growth and operating leverage. This is the moment where decades of scientific progress meet the scale of modern compute and the power of artificial intelligence. And when that happens, change does not move linearly. It moves exponentially. We believe Butterfly can become the default imaging and sensing layer for the human body. Butterfly is positioned at the center of this shift. Importantly, we are building this with discipline, maintaining the strength of our balance sheet. So our investors can fully participate in the value creation ahead. So this call marks my third anniversary with Butterfly. The last 3 years, we were focused on building a framework for success and the foundation to execute. The next 3 years are about running fast, scaling revenue into the future and being the company to enjoy the full potential of what we've built. We are in a new era where imaging becomes intelligent, adaptive and ever present, where it moves closer to the patient becomes part of everyday care and ultimately becomes part of everyday life. We are incredibly excited about what lies ahead. This is only the beginning. With that, operator, please open it up for questions. Operator: [Operator Instructions] Our first question is from Chase Knickerbocker from Craig-Hallum Capital. Jacob Soucheray: This is Jake Soucheray on for Chase. It seems like the one-to-one partnerships are going well. Can you speak to any progress made with the med schools so far in the second quarter and how that compares to prior years? Joseph DeVivo: Well, the second quarter is happening right now. Usually, the second quarter is our biggest medical school quarter given that their fiscal year ends on June 30. And so yes, I mean, this is -- we had a good first quarter with medical schools. We'll have a very good quarter in the second quarter with medical schools. And the key for us is continuing the momentum to convince them that every student when they come in, should have their own probe. There are 100,000 medical students in the United States, 25,000 enroll every year. And that is an opportunity if it extended to every school of doubling the amount of probes we sell every year. So we are -- we have very good relationships. We just had weeks ago, the e-com meeting with a lot of people participating in our Lunch & Learn and or AACOM, meeting. And the relationships, the momentum is all growing. So I'd expect our medical school activity to be very positive in the second quarter. Jacob Soucheray: And then I'd like to hear some more color on the Compass AI enterprise deal. How did that process go? Can we expect more of these partnerships materially contributing to revenue in the rest of the year? Joseph DeVivo: Yes. As I said in the prepared remarks, we -- our pipeline has like clicked up. It's -- I think the word in the script was it was up a sharp increase. We're seeing a lot of activity, a lot of receptivity in the innovation that we brought to the platform plus just the general market building. So our pipeline is up pretty big. And if the pipeline is up pretty big, then that's an indicator, the enterprise sales will follow. So I'd expect this to be a very good enterprise year. I'd expect this to be a very good Compass AI year. I think we hit the mark with making this easier for clinicians, faster to document. There's a lot of other tools that we're building. So very, very good start. Operator: Our next question is from Josh Jennings from TD Cowen. Joshua Jennings: Congratulations on the strong start to the year. Exciting times. I appreciate the download and Joe, you're sharing your enthusiasm on all the progress in the future. I wanted to ask about Butterfly Embedded as 9 companies in the portfolio. It sounds like there may be other partnerships on tap. I don't know if there's any way to help us think about the pipeline and any qualitative or quantitative help thinking about it just in terms of -- I mean, should we be thinking that there are more Midjourney type deals on tap, a mix? Any more color on that Embedded partnership portfolio and pipeline would be great to hear. Joseph DeVivo: That's a great question, Josh. It's good to hear from you. Thank you. So I guess the way I'd put it is every time we add a partner, we're adding the opportunity of developing an entirely new market segment, an entirely new market segment where we are embedding our technology and their technology and they have a vision to be able to grow and grow and invest. And so each new partner is an opportunity to create significant leverage for Butterfly. And it really depends upon where the stage of the idea is and where the stage of the company is. These companies are developing these new technologies. And they also want to keep it secret. They're not looking to give breadcrumbs to their competitors. And they're looking to do their development. So it is a very delicate balance for us where we're a public company. We need to be able to communicate our progress. And we try to do the best we can to frame the progress to give you the understanding of what's happening without getting any trust from our partners. I mean even the Midjourney deal, as we discussed, was never announced, just a press release. We had to do an 8-K because it was a material deal. But they want to be able to announce and communicate when they're ready. What I will say, because I know what you're getting at is you're asking if any one of these deals that we are working on could potentially have the financial impact in the near term that a Midjourney deal could have? And I would say yes. We are working on opportunities that could present similar type of near term. I think each one of these are different. Each of them are different companies, different markets and different phases. But sometimes a company comes in and they don't want to invest this type of work unless they have the opportunity to be exclusive in their area. And the exclusivity is what they're paying for. And I would say, yes, there are conversations that we are having that could replicate a Midjourney type of transaction. Joshua Jennings: Appreciate that. And maybe a follow-up just on the update on the Home and Community Care channel, commercial agreement first half, initial statewide deployment in 3Q. I was hoping to better understand your vision of -- or how you envision this playing out? I mean, is the initial statewide deployment of a commercial pilot and then build from there? Or how do you -- how should we be thinking about the contributions from that Home and Community Care channel state by state over the next 6, 12, 24 months? Joseph DeVivo: No problem. It's a very good question again. So as we had communicated in the past, we had conducted a pilot and it was, let's call it, more of a feasibility pilot where our partner wanted to see if this would work. And as we communicated in the past, I think there's about 100 patients that went through the protocol. And we saw a meaningful reduction of admissions and readmissions into the hospital. And so we were able to, in that feasibility work show that this conceptually could be very valuable. And so now we're on to the next phase, which is our first commercial agreement. And if we get everything done, which we expect will now with the activity in place, be done by the first half of the year. That will then have us now operating with the teams commercially. And instead of just into a controlled pilot, it would be into a real-world setting where there would be education, there would be daily interaction through our platform. And then there would be the ability to measure outcomes. And if that commercial -- the initial commercial stage continues to show the type of economic benefit that the initial pilot stage and it's only logical to believe that we would expand through more states. And we would expand throughout the entire country. And so that's what our goal is for 2027. So for 2026, we want to get the first state up and running. We want to show this is operational. We want to show this is incremental. We want to show this is profitable. We want to show it's better for patients. And the overlying narrative here by teaching nurses who are at the bedside, caring for these patients every day, how to use AI to help do a scan that they were not classically trained to do, but to do a scan that now allows for a specialist to give expert opinion to that patient where they are is a completely disruptive new model. The alternative is just simply waiting until they get sick enough where you have to send an ambulance to the skilled nursing facility, transport them to the hospital. We will care them up to radiology, do a cardiac echo, get them into the hospital, give them diuretics, monitor them and then send them back home. So we send them back to the facility via that same ambulance that's up in there. That is not an inexpensive. That is not efficient. And that is not welcoming to our health care system or what is best patient care. Being able to have that expert cardiology cardiologist opinion to happen real time, to have the data extracted real time to allow a lower cost health care professional to capture that image and be able to get that opinion within 24 hours and change the care for that patient and dial them in better, faster is a significant reduction in the overall cost of health care. And it's just the beginning because we're talking now about managing congestive heart failure patients. But what about patients with bladder infections or we can do 3D bladder scans, wake in and there. They can do one after the other while they're with the patient. With all these new AI tools we're talking about, there's a flywheel here. There could be -- now, for example, they can test for a deep vein thrombosis. They can test for a pleural effusion. There's all different types of things. Now this is not just about creating a single revenue line in these facilities. It's about accelerating the evolution of handheld ultrasound at the patient bedside by not just selling a probe, but by teaching them how to perform the application and being there with them and creating the linkages between them and expert clinical care and then being there to also measure those outcomes. This is a very, very big deal because what this will do is help accelerate the flywheel of adoption and in its core. So I'd expect to see some revenue contribution in the second half of 2026. And then I'd expect us to be successful. And I expect us to go more and more states and to start to build revenue, very positive growth in 2027. Operator: Our next question is from Andrew Brackmann from William Blair. Andrew Brackmann: Maybe just a follow-up to Josh's first question. I just want to follow up to Josh's first question. So can you maybe just sort of talk to us about the life cycle for the Embedded partnerships? Just how do these typically start? When is that aha moment? And I guess from your vantage point, what's your visibility look like throughout all these phases, visibility into sort of their ultimate use case and how big these could potentially be for you longer term? Joseph DeVivo: I'll do the best I can for that one. So right now, up until 3 months ago, we have been simply getting inbounds. We have people who are looking for solutions. They understand that we have a chip. They bumped into our intellectual property. They call us and they asked us consider working with them. And I think I mentioned before, we have over 40 companies that we are actively speaking to. And they're in a bunch of different markets. It's in pharma. It's in DCI and neuromodulation. It's in robotics, in surgical robotics. It's in HIFU. It's in organ preservation. It's in these different markets where they're already working with some level of ultrasound, but kind of have a closed-loop system. They want a system that can learn. And also wearables and monitoring in a lot of different clinical variations are being investigated. Some of these are start-up companies who just got their funding. Some of them are larger companies who are looking to add this into their product portfolio. And so each of them have their different time lines. And so they come to us and then they want to understand, integrate with computational systems, how fast can they get the data, how fast can they process the data, where could they process the AI because a lot of this has to do with pulling data out of the body, processing that data and then making clinical decisions or even using the ultrasound to continue to get data to continue to refine it and then even provide therapy through the ultrasound or additional diagnostics. This is very, very complicated systems. And it's unbelievably exciting. It's all being based upon this new mass computation and also the intelligence of AI. Classic ultrasound systems cannot modify and modulate in real time. If you have a lens that is cut to see near on a camera, say, no matter what you do with your digital, no matter what you do with your energy. When you push it through that glass lens, it's going to only see near. With Butterfly, you can look, you can learn and then it's almost like you're asking another question through ultrasound. And you can change how you ask that question. You can change how you modulate it. You can change the array. You can toggle from 2D to 3D. You can scan, you can slice. And so what we do is when partners come to us and say, well, we're really interested. The first thing they do is they give us a set of parameters. They say, look, we're trying to get this frequency, this array or in this location. Can you do it? And we say, depending upon those parameters, we will answer that question. And if the question is favorable, we then go into a laboratory setting. And we show them how we can tune the ultrasound. We show them how we can get close to their use case or get to their use case with tuning the chip. It's kind of like just putting a program on a TV screen. It just reprogram it and then it goes. And then when we prove to them that we're either there or close to there, then that determines the next phase, which is what does it take to get the product and the software to be exactly the way they want it and what would the integration be in their systems. And then we map out a road map. And it's -- here's the work that they would do, here's the work that we would do. That turns into depending upon the stage of the business, a development agreement. That development agreement would mean that they pay us a licensing fee for our software, just like with NVIDIA, you're paying for a license for their CUDA. And then they'll buy chips and they'll do labs and they'll do development. And if they ask us to help them refine certain things, then they'll pay us engineering fees to be able to help them do that. And then there's some point in time where they realize, well, okay, I have a line of sight to what this means to us commercially. And they will either who like with NVIDIA will just purchase their product and use it or they will be someone to say, well, gosh, if I can be the only one in the world to use it for this use case, would you be willing to license it specifically? And that's where those conversations go. So these are multiple steps. But what this means is Butterfly shareholders are now tapping into entirely new markets that are well beyond point-of-care ultrasound with opportunities to have very vibrant and profitable recurring revenue streams without having to do the market development that we're doing in point-of-care ultrasound, without having to hire the sales force and supporting a public company and back-office costs. It's simply we get license fees. And we are able to sell our chips. And we now have an option to grow revenue in entirely new markets that would take us a lot more capital than we've had to deploy so far in order to build. So it is an exponential flywheel. And so we've been developing. And fortunately, for Butterfly, from day 1, we've built our architecture to support this. We are cloud-based. We are app-based, iOS, Android. We integrate with SaaS. We have our hardware. And so, a lot of these components turn into the application that our partners are looking for. So they're not just licensing our chip, but some of them want to use our cloud. Some of them want to use our SaaS-based Compass platform for data aggregation. And so these partnerships are very viable, but it does take time to onboard. There is diligence, there is lab work. But -- and so when we say a new partner comes on, that's a big check because that is a wonderful opportunity for us to increase the TAM of Butterfly and to bring more revenue and market opportunity for our investors. Andrew Brackmann: Great. Appreciate all that color. John, maybe one for you just on guidance here. It seems like there's a lot of tailwinds here between the Garden expansion, the Compass AI contract moving into Home Care in the second half of the year. Can you maybe just sort of unpack for us the underlying assumptions? What's in guidance now from a revenue perspective? And what's the potential upside lever? John Doherty: What's in guidance now is everything that we have a line of sight of, including across our core business with probe sales. Joe talked to Home. We have some of that in there as well in the second half of the year. We talked about Compass AI. So the things that we have a very good line of sight on are in our guidance. Other things that we might be in the process of negotiating, for example, like if you look at that could be potential upside down the road. It's early in the year. As you know, we just printed the first quarter. So ultimately, I'd say our posture is going to be a little bit more on the conservative side. But we reaffirm guidance. We're very confident in where we're going for 2026. And in addition, if you look at adjusted EBITDA, obviously, we had a beat in the quarter. But ultimately, we are investing in certain areas of the business. So with the launch of Home, it does require some investment to get it off the ground. And ultimately, it will be a positive. It has a very strong ROI for us, but that takes time. We're not in this to just have a really, really solid 2026. We're also in this to continue to grow at the rates we're growing at for the foreseeable future. We're talking about years here, not just quarters. Operator: Our next question is from Ben Haynor from Lake Street Capital Markets. Benjamin Haynor: First off for me, obviously, great to hear the FDA enthusiasm on the gestational age AI tool. Presumably, this derisks kind of the future blind sweep AI like tools from you guys. But I would imagine that it also does so for folks that might be looking to develop something similar for Butterfly Garden or Butterfly Embedded. Any more color you can kind of share there? Has it peaked more interest? What has that done for you guys? Joseph DeVivo: Well, I think what is important, and I think what the FDA is pointing to is there are a lot of people can imagine right now and I don't have access to the data. But I would imagine there are thousands of applications in the FDA for clearances of AI tools. And I would imagine that a very high percentage of those are probably not doing it in the manner of treating it like a device or treating it like something with consequence because people at times just think software is software. But when you have to -- when you're going to inform a patient and that information is going to change the clinical pathway, right. And so we have taken a longer path with the gestational AI tool. We have done, is we've done a lot of clinical work. We've done a lot of work with the University of North Carolina and Jeff Stringer, we've done a lot of work making sure that the -- because remember, this blind sweep, there's no image that anyone is looking at. Blind sweep the pregnant abdomen and it spits out an age. And so it's got to be right. And you're not doing it based upon looking at an image. So I think what the FDA saw was that here's a company who took this seriously, understood the consequence. The incredible upside value proposition and did the work to validate the AI just like you would do the work to evaluate any type of device that was going to intervene into the body. And so I'm proud of our regulatory and quality teams for holding such a high standard. I'm proud of our management team for not being short-minded. A lot of times, people get in and they argue with FDA. They try to convince them that it shouldn't be this way, it shouldn't be that way. And sometimes FDA is wrong. They're not perfect. And sometimes they need persuading or educating and whatnot. So I'm certainly on that front. But after my 30 years of putting products through FDA, I have -- I think the world is better because we have FDA. FDA keeps us safe. I think FDA keeps us on our toes. And there's always someone who's wrong or someone who might overdo it or underdo it. But the process, I think, leads the world in making sure that this technology works. And when you get through that gauntlet, then you now have -- you have a moat and you have -- because you've earned that moat. And we have that over every ultrasound company in the world. So we are now actively working with partners and ministries of health that have been waiting for this for years. If you've heard of some of the visionary statements from the Gates Foundation, they've always believed that AI and ultrasound is probably the biggest catalyst to improvement of overall care for these developing countries because of the power of these diagnostics in these remote areas. And I think this is a tool that is going to now translate into revenue by there being large deployments of probes and systems in all these different places. We accomplished something 1.5 years ago, 2 years ago that was extraordinary. We trained 1,000 midwives in Africa who are managing over 80,000 women who are having childbirth and they're doing, I think, about 80,000 scans a month to make sure that they identify the fetal position of a baby because 20,000 women a year die in childbirth just because they were not able to get the baby out, which is horrible. Like you can't even imagine that. But with the Gates Foundation, we've trained those 1,000 midwives. And they're now improving care every single day. With the architecture that Butterfly has, we can just push this new tool to all thousands of their probes and get them now being able to identify the age earlier. These are significant flywheels in the acceleration of patient care and that's being done on the architecture of Butterfly. So we're proud and for the FDA to go to their social media and their social media part to specifically call out Butterfly. I think it makes us proud. And it makes us feel like we're doing something right. And that we're a real company who really cares with terrific technology, who has profound respect regulators. And I think they've returned that respect. Benjamin Haynor: FDA communicated is definitely feather in your cap. Overall, just a fantastic update here this morning. The one thing that maybe I missed and I apologize if I did. Any updates on kind of additional form factors? I know historically, you talked about the IQ station and things like that. Anything else on that front? That's it from me. Joseph DeVivo: Yes. So thank you, Ben. We appreciate the questions. So we didn't call it out in this particular call. But as an update, early next year, we will have a new probe. And we will detail the capabilities and the branding and the cost and everything. I think probably closer to the end of this year, beginning of next. So that is online. And that will bring to market not only the -- bring our ultrasound on-chip technology. But it will be the first ultrasound on chip that has harmonics with CMA. So we're thrilled with that innovation. And we are actively working on our station. And that is also in early to mid-2027 time frame. So we didn't chronicle it, but it is very much still in our work. And also, we've talked about wearables for a very long time. And we have a wearable today. But if we went and launch that wearable, I don't know what that market would be for it yet. What we are doing is building out applications in Home. And then quite frankly, several of the Embedded partners are wearable partners where they not only want the ultrasound chip. But they're developing a wearable form factor around what we've created. And then they are developing applications for clinical application of that wearable. So I would think that the first wearable that comes to market would be through one of our Embedded partners into some extraordinary use cases that they're developing. So we are -- we do have a lot of resource focused on new technology development and software and AI and hardware. But we are able to accelerate our market opportunity as we partner with other companies with visions and novel ideas for them to be able to create whole new markets. And so those are probably the devices that you'll be seeing from us over the next several years. Operator: We currently have no further questions. So I will hand back to Joe for closing remarks. Joseph DeVivo: So everyone, thank you so much for the interest. I know that the macro environment has a bunch of ups and downs, but I think we're going to be swimming upstream of those. We have a lot of tailwinds. We had tremendous growth last year, tremendous probe growth. We have tremendous new product launches. We are coiling up opportunities for Garden and Embedded. We are coiling up opportunities for more one-to-one medical schools and enterprise. This is the time when we are -- our foots on the accelerator. We're stretching our legs and we're making things happen. And we appreciate your support and the unbelievable energy of all of the employees of Butterfly who are actively changing the world. So thank you all. Operator: Thank you. This concludes today's Butterfly Network, Inc. Q1 2026 Earnings Call. Thank you for joining. You may now disconnect your lines.
Operator: Hello. My name is Cindy, and I will be your operator this morning. I would like to welcome everyone to the Garrett Motion First Quarter 2026 Financial Results Conference Call. This call is being recorded, and a replay will be available later today. As per the company's presentation there will be a Q&A session. I would now like to hand over the call to Cyril Grandjean, Garrett's Vice President, Investor Relations and Treasurer. Cyril Grandjean: Thank you, Cindy, and good day, everyone. We appreciate you joining us to review Garrett Motion's first quarter 2026 financial results. Our presentation and press release are available on the Investor Relations section of our website. Today's discussion includes forward-looking statements that involve risks and uncertainties. Please refer to our SEC filings, including our most recent annual report on Form 10-K for a discussion of factors that could cause our results to differ materially from these forward-looking statements. Today's presentation also includes certain non-GAAP metrics, which we use to help describe how we manage and operate our business. Please review the disclaimers on Slide 2 of our presentation as the content of our call will be governed by this language. With me today are Olivier Rabiller, our President and Chief Executive Officer; and Sean Deason, our Senior Vice President and Chief Financial Officer. Olivier will begin by sharing highlights from a very strong quarter, both in terms of financial performance and strategic wins. Sean will then review our first quarter financial results and updated 2026 outlook. With that, I'll turn the call over to Olivier. Olivier Rabiller: Thank you, Cyril, and thank you all for joining the call today. We started the year by delivering another very strong set of financial results in the first quarter, driven by growth in a muted industry and disciplined operational execution. Net sales for the first quarter were $985 million, up 6% at constant currency. We delivered growth across all verticals, including commercial vehicles and industrial. Considering that light vehicle production was down in Q1, Garrett's growth reflects share of demand gains in passenger vehicles as well as continued strong performance in commercial, off-highway and industrial. Through continued productivity actions and disciplined execution, we have been able to convert this growth into a very solid operating performance. Adjusted EBIT was $151 million, and our adjusted EBIT margin was 15.3%. In addition, we generated an adjusted free cash flow of $49 million in the quarter. Together, the strong results support our decision to increase the upper range of our 2026 full year outlook. Lastly, we continue to allocate capital in line with our stated framework and our commitment to return capital to shareholders. During the first quarter, we maintained our share repurchase activity, buying back $87 million of common stock, and we also paid $16 million in quarterly dividends. With that, let me now turn to Slide 4 to share more on Garrett's continued success across our differentiated technologies. Indeed, we continue to win across our turbo portfolio with multiple gasoline awards, including VNT turbo for hybrids and range extended electric vehicle applications. At the same time, we kept on the successful trend we have seen in industrial as we secured additional wins, including for large power generation applications. Turning now to our zero-emission technologies. We have made solid progress in Q1 2026 as we secured our second commercial vehicle E-Powertrain production award in China with start-up production planned again for 2027. We also won a major production award for our industrial cooling compressor with TONFY in China, a leading supplier for battery energy storage system cooling solutions. Overall, I'm very pleased with our progress. These wins demonstrate customer adoption of our differentiated technologies across a broad range of applications, supporting both portfolio expansion and growth while continuing to deliver strong financial results. I will now hand it over to Sean, who will talk you through our financial results and outlook Sean Deason: Thanks, Olivier, and good morning, everyone. I will begin my remarks on Slide 5. As Olivier highlighted, we delivered strong financial performance in the first quarter. Our net sales were $985 million, driven by sequential growth across all verticals. This was driven by share of demand gains in diesel and gasoline applications, recovery of commercial vehicle volumes and continued demand for industrial applications. We delivered $151 million of adjusted EBIT in the quarter, equating to a 15.3% margin. This represents both a year-over-year and a sequential improvement driven by strong volume conversion and favorable foreign exchange. Finally, adjusted free cash flow was $49 million as the business continues to convert earnings into cash in line with expectations. Now moving to Slide 6. We show our Q1 net sales bridge by product category as compared with the same period last year. In the quarter, net sales increased by $107 million versus the prior year or 12% on a reported basis and 6% on a constant currency basis. Double-digit growth in commercial vehicle, industrial and aftermarket contributed significantly to the strong performance. We also benefited from continued gasoline share of demand gains and new launches in diesel. This sales growth occurred across all key regions. In North America, the key drivers of sales growth were off-highway, industrial and aftermarket. In Europe, we saw share of demand gains in light vehicle gasoline and diesel as well as a recovery in off-highway applications. And in China, growth was driven primarily by industrial and on-highway applications. Turning to Slide 7. During the quarter, we generated $151 million in adjusted EBIT, representing a $20 million increase over the same period last year. Our margin rate of 15.3% reflects a 40 basis point improvement year-over-year, 20 basis points of which are due to favorable foreign exchange currency impacts, partially offset by tariff pass-throughs. The increase in adjusted EBIT was primarily driven by volume and favorable mix from our strong growth in commercial vehicle, industrial and aftermarket. In the quarter, year-over-year operating performance was slightly negative, largely as a result of timing and in line with our expectations as we begin to execute on our productivity measures. We expect to generate positive operating performance through the balance of this year, continuing to benefit from sustained fixed cost actions and variable cost productivity. Turning now to Slide 8. I'll walk you through the adjusted EBIT to adjusted free cash flow bridge for the quarter. We delivered positive adjusted free cash flow of $49 million, aligned with our full year expectations. The working capital used in the quarter was primarily driven by our strong sales and is expected to be recovered throughout the year. All other bridging items were also in line with expectations. Now moving to Slide 9. We ended the quarter with a liquidity position of $772 million, consisting of $630 million in undrawn capacity from our revolving credit facility and $142 million in unrestricted cash. We have ample liquidity with no near-term debt maturities, and our net leverage ratio remains unchanged versus the prior quarter at 1.92x. Moving to Slide 10. During the first quarter, we repurchased $87 million of common stock under our $250 million share repurchase program, further reducing our outstanding share count to approximately 188 million. We continue to target returning approximately 75% of our adjusted free cash flow to shareholders over time through dividends and share repurchases, the latter of which will vary over time and depend on various factors, including macroeconomic and industry conditions. As mentioned by Olivier earlier, the Board declared our quarterly dividend for the second quarter of $0.08 per share, which will be payable in June. I will now transition to Slide 11 to discuss our 2026 outlook. Following our first quarter performance, we anticipate demand across all verticals to be strong through the first half of the year. Although our industry assumptions remain unchanged versus our initial outlook, we expect to continue to benefit from share demand gains in light vehicle, continued recovery in commercial vehicle and growth of industrial applications, particularly for stationary power generation. As a result, we've increased our high end and midpoint outlook across all metrics to reflect the stronger performance to date. Given macroeconomic uncertainties and geopolitical events, we are maintaining the low end of our outlook range at this time. Our updated outlook implies the following midpoints: net sales of $3.75 billion or 2% growth at constant currency, adjusted EBIT of $560 million, implying a 14.9% margin and adjusted free cash flow of $415 million. With that, I will now turn back the call to Olivier for closing remarks. Olivier Rabiller: Thanks, Sean. Let's now turn to Slide 12. As we announced during our Q4 earnings call and in our subsequent press release, we will host our 2026 Technology and Investor Day in person in New York City on May 20. We will outline the next phase of the company's strategic evolution, including progress across turbo, zero-emission vehicle and industrial technologies. Beyond the presentation, it is a fantastic opportunity to interact with management, see and touch new hardware and better understand the way Garrett is expanding its technology differentiated portfolio, both in auto, commercial vehicle and industrial. Let me wrap this up on our final slide. We delivered a strong first quarter, driven by share of demand gains in gasoline turbo and growth in commercial vehicle, off-highway and industrial. Adjusted EBIT reached $151 million, and we generated $49 million of adjusted free cash flow. In zero-emission technologies, specifically, we secured our second series production award for commercial vehicle high-speed E-Powertrain, further validating the long-term potential of this technology. In parallel, progress continues with our new industrial compressor offering as we secured a production award in battery energy storage systems. Alongside this operational and technology execution during the quarter, we returned more than $100 million to shareholders through share repurchases and dividends, reaffirming our commitment to disciplined capital allocation and shareholder return. Lastly, based on the strong start of the year, we also raised our full year 2026 outlook, reflecting the strength of our execution and confidence in our trajectory. So thank you for your time. And now operator, we are ready to take on questions. Operator: [Operator Instructions] Our first question comes from Nathan Jones of Stifel. Nathan Jones: I guess I'll start with some questions on the oil-free compressor side. I don't know how much of that you want to answer today and how much you want to say for the Analyst Day next month, but I'll ask them. Any updates that you can give us on the progress with shipping the first units to train? Any updates you can give us on -- I guess I'll just ask a broad question, the interest levels that you're seeing from other potential customers and how that's progressing? Olivier Rabiller: Yes, indeed. I think we alluded to it a little bit last time because we are fresh from the big congress that's happening every year in Vegas about air conditioning systems. And since then, we've confirmed a lot of inbounds from a lot of people in the industry. To your point about shipping units, I mean shipping the first unit for testing and everything will happen in the coming weeks already. And then what we said is that we would be in production from 2027. So it's on a fast pace. The win we just report, which is in a different system, which is a battery energy storage system. So you have -- you need a lot of cooling to cool these batteries. And these batteries are supplied by the way, this module are supplied by the biggest battery makers in the world. It's a very important one as well because it validates that our technology is not only for the scope that we expressed last time and the discussion we had about our agreement with Trane, but it's ranging beyond that into some other applications. So we'll share indeed more during the Investor Day, but a lot is happening, and you may have seen a lot of points, a lot of communications already from us, whether it's on the BSS, whether it's on our exhibition that we had in China at the leading show for air conditioning. And all of that validates the interest that we see from the industry, the broad industry that's all involved into cooling. Nathan Jones: Is there any update you can give us on -- I know there's some exclusivity with Trane on some products in some markets for some period of time. Is there any update you can give us on what that is. It's certainly been a focus area from investors that we've spoken to. Olivier Rabiller: I've told you that we are having discussions. And by the way, we are announcing a new project with a new customer. So that shows that we are talking to a broad industry scope with a broad industry applications. More to come when we present all of that with real hardware and you can feel and touch it because it's not PowerPoint, clearly not, when we are all in New York. But clearly, the interest goes beyond what we've announced with Trane, although we are working extremely well with Trane and we are cooperating very well. It goes beyond that. XXX Nathan Jones: And then could you say another E-Powertrain win? Is there any details you can give us on that? Talking about the size of it, potential revenue out of it. I think you said start of production in '27, but just any color you can give us on the scale and scope of this award? Olivier Rabiller: The first point, I would say it's not exactly for the same application. The first application was heavy duty. So we are talking about trucks that are more on the medium-duty side. But we are extremely proud because it really reflects that even in the most competitive market in the world, that is China when it comes to electric, our technology is really validated by customers as being a way to differentiate for themselves. We've announced the first partnership with HanDe. HanDe is the biggest player of the industry when it comes to transmissions in China and E-Axle. So that gives you a little bit of a scale. So we'll not share numbers today, but it's a very significant win for the company [indiscernible]. Operator: Our next question comes from James Mulholland of Deutsche Bank. James Mulholland: So I just want to double-click on your industrial sales for the year. Last year, you had guided to about $100 million in sales related to power gen with double-digit growth for this year. Could you give us an update on that progress? And since double digits is a pretty wide range, would you be able to put a bit of a finer point on that? Sean Deason: Yes. So with industrial, we entered -- sequentially, we saw it flat, but we expect that it is going to grow significantly. And I believe we said low double-digits, and so we -- and so that's where we would remain, low double digits. That is very significant anyway. And you see that when you look at the revenue growth bridge that we have into the financials that we published today, it is clear that there is a significant growth on commercial vehicle. Not everything is with industrial indeed, but a significant portion of it. So yes, it will keep on growing. James Mulholland: And then-- Sean Deason: And we are -- James Mulholland: Go ahead. Olivier Rabiller: No, I'm just saying and we are very happy with it. James Mulholland: Great. And then since you brought a broader commercial vehicle, recognizing that North America is more off-highway and Europe is more indexed to Class 8. We've seen some trucking manufacturers come out with pretty good numbers on orders. So could you maybe unpack a bit of what you're seeing in both of those geographies? And is there maybe a little bit of conservatism in that 1% to 2% growth for the year? Olivier Rabiller: Today, I will not relate -- today, commercial vehicle is, as you said, it's a little bit of a mixed bag of several things. So we have off-highway, and you've seen that the off-highway industry is starting to recover. There are some other people publishing results today that our customers that can give you hints about that recovery coming up. But I would say beyond that -- and we think that the recovery is probably, once it starts, it will be for -- if there is no crisis, it will be for a longer period because today, when you look at on-highway and off-highway, we are pretty much on the low point that we reach in 2024, and the industry has not yet recovered that much from that. So we are optimistic that this trend will continue. And I would say the growth that we are seeing is not only driven by Europe on-highway, it's also driven by a recovery that we are seeing on on-highway in China, which is probably more linked to share of demand gains and a significant introduction of new products that we have on that -- in that region. So your analysis is good. I'm just adding China in the mix on top of the rest. Operator: The next question comes from Jake Scholl of BNP. Thomas Scholl: First, profitability in the quarter finished towards the high end of your guidance range for the year. Could you just discuss some of the puts and takes that you see going forward? Olivier Rabiller: The puts and takes for the full year outlook? Thomas Scholl: Yes. Olivier Rabiller: Quite frankly, we are very pleased with what we see in Q1. And quite frankly, at this point in time, we have not seen a material impact of the consequences of the war in the Middle East on what we see in the company. But we are very mindful that on the one hand, we have a very nice trajectory with organic growth that we highlighted in Q1, and on the other hand, we are having a world out there that everybody is looking at and trying to understand where it goes. So one more time, we have not seen anything specific. But it would be, in my view, a little bit too bullish just to give you an outlook that is disconnected from what's happening around us. Thomas Scholl: And then could you talk a little bit more about what's driving some of your success in China? You guys have obviously seen some pretty significant wins, both through e-powertrain and e-compressor in the last few quarters. And then specifically within the e-compressor, can you talk about if there's any difference from your perspective for a liquid-cooled application like this battery storage system with HanDe or air cooling like a traditional HVAC? Olivier Rabiller: So a few dynamics. The first point is to say that when it comes to specific applications that are linked to commercial vehicle electric mobility, so think about e-powertrain for trucks and think about the announcement that we did last quarter about cooling compressor for buses. China is indeed the biggest place in the world that committed with a very high number -- that committed to a very high number of electric trucks, and that drives a lot of development and a lot of demand from customers. When it comes to the specific point of battery energy storage system, you know that the 2 biggest battery makers in the world are in China. So indeed, they are relying not only on global suppliers, but also on local fast-growing company to help them supply what they need in order to develop that battery business and battery energy system storage that we have, the battery cooling that goes on that is clearly linked to that growth. And indeed, it's happening in China, I would say, a little bit faster than anywhere else in the world as a consequence of the 2 major players being in China. But we should not think that all of that comes from China. It's just that China usually works faster and is currently into another -- technology adoption pace that is higher than what we see in the rest of the world. But remember, the first award that we presented for cooling system was coming with Trane. And then we are indeed working with many more customers around the world than Chinese when it comes to e-powertrain, whether it's for passenger vehicle and commercial vehicle. It's just that we -- the speed in China is just faster. Operator: Our next question comes from Hamed Khorsand of BWS Financial. Hamed Khorsand: So first off, these design wins that sparked this increase in sales, when did you win them? And how are you positioned in design wins now for future quarters? Olivier Rabiller: For the wins, we usually win businesses that are translating into volume, that's before we start production. So I would say, when you look at the trend we had, and we've been very consistent with that, where we say that on average, every year, we win about 50% of what's available. We know that the math between the business win rate to the share of demand doesn't go exactly 1:1. But we know that when we win constantly at that level, the share of demand of the company is increasing. And this is exactly what's happening. It was a little bit hidden 3, 4 years ago because we were having some other points that were affecting the top line at the same time when it comes to diesel going down. And you know that we've been doing a massive rebalancing and transformation in this company, moving from revenue at the time of the spin-off that was about 42%, 43% diesel to what it is today, where it's about the same amount on the gasoline side and a significant portion of that into variable geometry. So that rebalancing has probably dampened a little bit the top line. But now you see that coming, and it's all driven by the success of the wins and the programs that we are on with customers. And the trend continues. Hamed Khorsand: And my other question is on 0 emissions. Is it still too early to break it out as to what the composition of that is to total sales? Olivier Rabiller: If you are a little bit patient for a few weeks, you will know much more about it. Hamed Khorsand: Very good. Olivier Rabiller: But we will indeed disclose more information in 3 weeks. Operator: The conference has now concluded. The question-and-answer session has concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to the DT Midstream First Quarter 2026 Earnings Call. My name is Rebecca, and I will be your conference operator today. [Operator Instructions] I will now turn it over to our speaker, Todd Lohrmann, Director of Investor Relations. Please go ahead. Todd Lohrmann: Good morning, and welcome, everyone. Before we get started, I would like to remind you to read the safe harbor statement on Page 2 of the presentation, including the reference to forward-looking statements. Our presentation also includes references to non-GAAP financial measures. Please refer to the reconciliations to GAAP contained in the appendix. Joining me this morning are David Slater, Executive Chairman and CEO; Chris Zona, President and COO; and Jeff Jewell, Executive Vice President and CFO. So with that, I'll go ahead and turn the call over to David. David Slater: Thanks, Todd, and good morning, everyone, and thank you for joining. During today's call, I'll touch on our financial results and provide an update on the latest commercial activity and our growth projects. I'll then close with some commentary on the current market fundamentals before turning it over to Jeff to review our financial performance and outlook. So turning to our financial results. We're off to a strong start in 2026, fueled by a strong demand and cold winter, giving us confidence in our full-year plan. We continue to advance organic opportunities from our $3.4 billion project backlog in a very strong market environment that supports our future growth. We are announcing today that DTM has approved investment in two new projects in our Pipeline segment. The first is a mainline expansion of Vector Pipeline, which increases the total capacity of Vector by approximately 400 million cubic feet per day and is anchored by investment-grade utility customers under 20-year negotiated rate contracts with a Q4 2028 expected in service. The next project DTM has approved investment in is Millennium R2R, which is supported by long-term contracts with two utilities and an existing power plant for 70 million cubic feet per day of capacity and is expected to be fully in service in Q1 2027. These investments are supported by strong market fundamentals backed by utility and power-generation customers and will serve the growing demand in the Upper Midwest and New York and New England markets. In addition, we have entered into an agreement to build a pipeline lateral to serve a new utility-scale power development located just off Midwestern pipeline in Indiana, where the developer plans to construct a 900-megawatt power plant, which we expect to serve under a 20-year demand-based contract for approximately 265 million cubic feet per day of capacity. This project is subject to a customer reaching FID in the power plant, which we expect to occur in 2026. Our expected lateral pipeline in-service date is in the first half of 2028. Also, on Midwestern, we recently recontracted approximately 30% of the system's capacity with term extensions ranging from 5 to 25 years, reflecting the importance of this critical capacity and how the market values it. Finally, we commercialized a new interconnect on NEXUS this quarter, which will have a capacity of 250 million cubic feet per day and will provide supply for our behind-the-meter natural gas-fired power generation facility to power a new data center in Ohio. Adding this load to the mainline of NEXUS strengthens the asset over the long term. We are also seeing strong market interest for additional pipeline projects in the Midwest and Northeast and are advancing these potential opportunities towards commercialization. Midwestern Pipeline closed a successful nonbinding open season at the beginning of April for both northbound and southbound expansions to increase capacity by up to 1.5 billion cubic feet per day, and I'm pleased to report that the open season was oversubscribed. Vector Pipeline also recently closed a nonbinding open season for the 2030 expansion project to increase westbound capacity into Chicago by 300 million to 500 million cubic feet per day, which received very strong customer interest and was also oversubscribed. Our next steps with these two projects are to optimize the pipeline and facility design based on the customer requests and then to work with our customers to reach binding commitments. We will keep you updated as we continue to progress these opportunities. Turning to our construction activity. Our Midwestern gas transmission power plant lateral to serve AES Indiana's gas-fired power plant was placed in service on time and under budget, with commercial operations expected to begin in Q2 this year. All of our other in-flight growth investments remain on track and on budget. Finally, I'd like to take a moment to address the recent market movements and the global geopolitical situation. The first quarter of 2026 was a volatile period for the market with significant cold weather in January, driving extreme prices across the country, highlighting capacity constraints in the North American market driven by demand growth, followed by geopolitical developments in the Middle East that are contributing to the broader energy market instability. These events have renewed both domestic and global focus on reliability and security of supply. Internationally, the discussion has largely centered on oil, yet curtailed and constrained LNG volumes from the Middle East region have underscored the value of U.S. LNG as a stable and dependable supply source. We believe this dynamic will favor increased LNG exports from the U.S. Gulf Coast and create additional expansion opportunities for U.S.-based supply, which our Haynesville system is very well positioned to serve with its high degree of both receipt and delivery connectivity. Our LEAP pipeline is currently running full at its design capacity of 2.1 billion cubic feet per day and has the ability to expand to 4 billion cubic feet per day. Turning to the domestic front. We are seeing growing energy reliability and affordability concerns across many regions with much of the pipeline infrastructure operating at maximum capacity. Many regions cannot access low-cost supplies of natural gas produced domestically in our prolific production basins, which highlights the need for incremental natural gas pipeline and storage investments to unlock these low-cost supplies. In the Midwest and Northeast, power demand fundamentals continue to strengthen, driven by data centers and other large load customers. Utilities in these regions are converting potential opportunities into signed load more quickly than previously expected, with multiple gigawatts of contracted demand now backed by binding agreements and capital plans that materially increase peak load projected through the end of the decade with large load tariff frameworks in place to protect affordability. This level of growth is evolving rapidly as construction is underway, energy is flowing to some projects, such as Phase 1 of Microsoft's Mount Pleasant data center in Wisconsin, reinforcing our growth outlook for increased gas-fired generation and natural gas demand. Our interstate gas pipeline footprint is strategically located in this region to serve this growth and the strong response to the recent open seasons on Midwestern and Vector pipelines support these fundamentals. I'll now pass it over to Jeff to walk you through our quarterly financials and outlook. Jeffrey Jewell: Thanks, David, and good morning, everyone. In the first quarter, we delivered adjusted EBITDA of $308 million, representing a $15 million increase from the prior quarter. Our Pipeline segment results were $14 million higher than the prior quarter, driven by seasonally higher EBITDA from our joint venture and interstate pipelines and higher revenue on Stonewall and LEAP. Gathering segment results were $1 million greater than the prior quarter, reflecting higher volumes on Blue Union and Appalachia gathering. Growth capital investment for the first quarter was $72 million, which is in line with our plan, and we expect a ramp in growth capital weighted towards the second half of this year. Operationally, total gathering volumes increased in both regions from the fourth quarter. Haynesville volumes averaged 2.09 Bcf per day, driven by new volumes and recovery from upstream maintenance completed in the fourth quarter. In the Northeast, volumes averaged 1.42 Bcf per day, driven primarily by the Stonewall Mountain Valley pipeline expansion that was placed into service at the beginning of February. As we look at the balance of the year, we expect the second quarter to be in line with our full-year guidance, but to be lower than the strong first quarter, driven by seasonality across our interstate pipelines, including JVs, a rate step-down on Guardian Pipeline and typical seasonal planned maintenance. We remain confident in our full-year outlook and reaffirm our 2026 adjusted EBITDA guidance range and our 2027 adjusted EBITDA early outlook. As David mentioned, DTM has approved investment in the Vector 2028 pipeline expansion, and we expect total DTM investment of $80 million to $100 million for the project. DTM has also approved investment in the Millennium R2R project, which will be completed under our existing regulatory authorization. We've increased our committed capital in 2026 and 2027 to reflect these new investments. 2026 is approximately $400 million and 2027 is approximately $440 million. Finally, today, we also announced that our Board of Directors approved our first quarter dividend of $0.88 per share, unchanged from the prior quarter, and we remain committed to grow the dividend in line with adjusted EBITDA. I'll now pass it back over to David for closing remarks. David Slater: Thanks, Jeff. So in summary, we remain confident in delivering on our guidance, continuing our track record of strong performance we've maintained since we spun the company in 2021. Our high-quality pure-play natural gas pipeline asset portfolio is very well positioned to take advantage of growth opportunities across our network as we execute on our large organic project backlog. The fundamentals supporting natural gas infrastructure remains stronger than ever with a broader realization of the key role U.S. LNG will need to play as a reliable and stable global energy supply and accelerating power generation needs in the Midwest and Northeast, including data center-driven load. And with that, we can now open up the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Michael Blum with Wells Fargo. Michael Blum: I wanted to start with the MIST project. I wonder if you can just give us a little more detail in terms of where you see progress to FID. Anything you can say in terms of the size of the project, how it's scoping in terms of capital? And then would you expect this project to be expanded in phases? Or do you think it's going to be one big expansion? David Slater: Good morning, Michael, great question. I'd say let me start at the highest level, and then I'm going to pass it over to Chris for a few of the details. Really strong market interest in that open season. We were offering both northerly pathways and southerly pathways. I think as we've talked in the past, Midwestern follows a corridor of power generation between Chicago and Nashville. So there's tremendous power generation assets and infrastructure in that corridor. We can talk about what we announced today on the power generation side on Midwestern. I think a big takeaway is that we've attached 565 million a day of power generation load to Midwestern in the last 12 months, which is material. So really strong market interest, very consistent with our thesis, our fundamentals thesis that we've been sharing with the investors. And maybe I'll pass it over to Chris Zona to talk a little more detail around what I'll call the nuts and bolts of the project. Christopher Zona: Yes, sure. Thanks, David. Yes. And so it's early. I'll start with that, Michael. Right now, we are in the process of, okay, we've got the fantastic response here to the open season. Again, electric and gas utility, data center development, generation, power generation, all of the above. And recall, really this MIST expansion is really trying to put a box around the needs in the early cycle here, the '29, '30 time frame and how do we help kind of quantify what that really looks like for those customers and then go through the detailed engineering, get through kind of the solution and then progressing those conversations to FID or binding PAs that can lead to FID. And that's a process that we'll be in here in the next few months here with the shippers. We've already started those conversations. We've already had our customership, our meeting started this week, and I expect over the next few months, we're going to be going through that in more detail. But again, as David mentioned, really exciting demand on both the northbound path and the southbound path. Michael Blum: Great. Appreciate it. And then an interesting comment on this interconnect on NEXUS to serve behind-the-meter project. We're starting to see some pushback from the data center development from both politicians and some local communities. So curious to get your latest thoughts in terms of how you think the behind-the-meter opportunity set is shaping up. I know that was something you talked about a long time ago, and it sort of went quiet a bit, but maybe it is picking back up. David Slater: Yes. I think our view on the, what I'll call, the aggregate power demand load growth, generally speaking, the utilities are winning more than the independent developers. I'll just start there. We're seeing that across the footprint. Ohio, this particular project in Ohio is well into construction and will go commercial very shortly. And that's just an example of, I think, what we've talked about in the past, where we weren't particularly interested in building the lateral to this facility, but bringing the demand to the mainline of NEXUS, it adds 250 million a day of demand onto the mainline of NEXUS, which obviously fundamentally strengthens that asset over time. So we're very excited to have that demand on the mainline. And the whole dialogue around these data centers has really been around the affordability as it relates to what I'll call the retail power customers in each one of the states that we serve. And we're watching a lot of the developers being very sensitive to that reality and making sure that it's very clear that these investments are going to actually lower cost to the retail customers and not increase cost to the retail customers. And you're seeing that playing out in many of the state regulatory forums. It's a very positive development from our perspective because it's helping to frame these investments in these growth opportunities in a constructive positive light for these states and these communities and ultimately, the retail customers. So I think they're doing them in the proper way right now. They're articulating the value that's created for all the stakeholders, including the local retail stakeholders. I think that's the proper way to approach these growth stories here. Operator: Your next question comes from the line of Theresa Chen with Barclays. Theresa Chen: Going back to Midwestern following the strong demand post the nonbinding open season, are you seeing enough demand for up to 1.5 Bcf of capacity going both north and south the entire way through? And given the competition from other pipelines in the northern part of Midwestern, just from a market dynamics perspective, do you think there's enough demand to absorb multiple large-scale expansions? And if not, what do you think are the key competitive advantages of MIST? David Slater: Yes, Theresa. Great question. So we're not going to get into the granular details of where the demand is on the line for, I guess, obvious reasons. Do I think the market is robust to absorb a lot of expansions? Yes. I think we've laid out that our view is that there's a 5 to 8 Bcf a day addressable growth opportunity in this region. So yes, there is room for multiple pipeline expansions. I think the competitive dynamics is somewhat like real estate, it's location. Existing pipelines that are in the right location adjacent to these demand centers, the growing demand centers are going to have an advantage. Expanding an asset in your existing footprint where you have -- you're not greenfielding a brand-new line, you will have an advantage. So these are some of the criteria that I think will, over time, kind of play out as this market expansion unfolds over the next -- the back end of the decade here. We feel really positive about our asset footprint, the connectivity that we have in the portfolio to provide not only the lateral to the demand center, but as we've talked about in the past, the domino effect across the portfolio where we can provide transportation capacity back towards the basin, the supply basin, augment that with storage out of our Michigan facilities. So there's a whole value-chain proposition here with some of these customers. So we're really excited about the opportunity. Like I said on the year-end call, this is very fluid. It's progressing the way we expected, probably progressing faster and stronger than we expected. And we're just very encouraged. I think our job now is to just unpack all this interest that we've received, like Chris described, engineer out the optimal solutions and then progress and commercialize that. So hopefully, I answered your question. Theresa Chen: That's great color. And turning to your Haynesville footprint. Clearly, there is a pull for U.S. LNG highlighted by the war in the Middle East, echoing the point you made in your prepared remarks. Can you talk about your visibility in commercializing incremental expansions on LEAP, also following very recent positive upstream data points from one of your key customers. Can you talk about the strategic positioning here, visibility you have on additional expansions at this point, but also keeping in mind that the area is fiercely competitive. David Slater: Yes. I mean I think the fundamentals, that's the gravity that's going to drive incremental activity. And the fundamentals are extremely strong, like I stated in my prepared remarks. LEAP is running like absolutely full, so at its designed conditions. So that also is a strong indication that the asset is valued and highly utilized. I'm going to hand over to Chris for some commentary on what I'll call sort of the to and fros of the competitive nature in the basin and maybe he can provide some comments on that. Christopher Zona: Sure. Sure, David. Yes. So I think one of the things, Theresa, that I'll say is recognized widely by the market when you look at DTM's assets is the connectivity in the basin, right? So when you compare the amount of outlet capacity that we have through our Blue Union system, the ability to reach other outlet markets through LEAP, that's, I'll call it, a distinctive advantage that we do have in the basin, and that optionality provides a lot of value for our customers. So I'll start with that. I think the other piece, too, is when you look at our ability, our capability here to expand LEAP in, I'll call it, bite-sized expansions, a couple of hundred million a day, we can do that. And I would say we have extremely competitive pricing in the basin and in a timely manner as we have done here for the last few LEAP expansions. And again, I think that is an advantage that we will also hold here in the region, and there's a lot of activity around that as well. David Slater: And maybe I'd add to that, that from my perspective, we're seeing a very active commercial dialogue occurring right now around the assets, Chris. And that is usually a good signal that we're kind of approaching the next wave, I'll call it, the next wave of expansion opportunity. Operator: Your next question comes from the line of Jeremy Tonet with JPMorgan Chase. Jeremy Tonet: Wanted to come back to MIST, if I could, and kind of come at a slightly different maybe simpler angle. I'm just wondering, there's still items to be settled, as you said, a number of things coming together here. But just at a very high level, if we think about the scope of the project, would we think of this somewhat similar to if Guardian is around half a B and this is 1.5 B, this is 3x the scale? Can we make a high-level thought around that? Or just any color there would be great. David Slater: Yes, Jeremy, I mean, I'd say it was a very strong signal we received from the market given that we were oversubscribed on a very large expansion that we kind of went out there with. 1.5 Bcf a day effectively is the capacity of the existing system. So the fact that we saw an oversubscription is just a strong indication of the depth of the demand growth that's occurring in that corridor. So I'll start there. Obviously, there's a lot of work to do between here and FID-ing a project. We have to engineer out, like Chris said, all the details. Customers gave us all the details of what they're interested in locationally, where the supply is coming from, where the demand is on the system. So there's work to do here. But it's certainly -- we're starting in a very positive situation. I mean, that is just a really strong demand signal, very consistent with the fundamentals that we've been talking about. Size and scale, I think it's a little early for us to try to put size and scale to it. But let's just make it up. If we're 50% successful, yes, it would be north of what Guardian -- the current G3 expansion in terms of size and scale. So like I said, really positive position right now. Our job is to do the work that needs to be done and reel it in and commercialize it. But it's very consistent with what we've been saying at the highest level about what we're observing in the whole region, just very strong demand growth. Jeremy Tonet: Got it. That makes sense. No, twice the size, we'll take that. That works well. Just curious, I guess, and the answer might be it's too early in the year. But if I look at your results and I annualize it, you'd already be over the high end of the guide and granted there was some help maybe in the quarter, but it doesn't seem like there's necessarily a ton of seasonality in the business. And so just wondering if there's some other headwinds developing across the balance of the year we should be contemplating here? David Slater: Yes. Maybe I'll start at the high level, Jeremy, and then I'm going to ask Jeff to kind of fill in the details for you. But at the highest level, if we think we were going north of the high end of our guidance, we would tell you that. So let's start there. The winter was very strong. And I somewhat alluded to it in my opening remarks. I mean, we had a really cold winter that illuminated capacity constraints across the entire country for our assets, we broke all-time high utilization like daily flows across almost every one of our assets in the first quarter, which is unprecedented. I haven't seen that in my -- really my entire career. So that is a really strong signal of how demand has crept into the network. And then you had all this extreme price volatility all over our footprint, which was also highly unusual. So what does that mean in terms of our Q1 results? Our commercial team was doing what they're hired to do, which is eking out every opportunity across the asset footprint in a very volatile basis environment. So some of the results of Q1 are a derivative of that phenomenon that played out across the network. So that's very seasonal, and you shouldn't expect that to repeat. And Jeff, maybe you want to just touch on some of the additional details as to why we don't think that quarter is going to repeat for three more quarters. Jeffrey Jewell: Sure. Well, and good morning, Jeremy. Yes. So Jeremy, like David said, we are -- again, when we provide you our view on our guidance for the year, I take that -- we're providing you that guidance what the range is. And if it's different than that, we'll adjust accordingly. So that's probably the first thing. You're right. First quarter was very strong. And then we do have that seasonality across the interstate pipelines and the JVs. That's always going to be there. You've got a little bit of that. There's a step-down on the Guardian, that was baked in from the last rate case. So that happens here in the second quarter. And then also then you're going to have planned maintenance and those types of things that you wouldn't have had in the first quarter. So combination of those things and David's comments, again, we're feeling very good about the guidance range we provided you guys for the full year. Jeremy Tonet: Got it. Still see some conservatism there, but I understand the gives and takes. Operator: Your next question comes from the line of Keith Stanley with Wolfe Research. Keith Stanley: I want to follow up on this just on the disclosure you provided this morning of customer interest above the 1.5 Bcf a day. Is that on a cumulative basis, so adding the North and South legs? Or was the statement meant to express that there's above 1.5 Bcf of demand kind of across each segment? David Slater: The 1.5 Bcf was the cumulative amount of capacity we offered, Keith. So we're not unpacking it between North and South. We're just telling you the total. And the total interest was north of the total capacity we offered. Keith Stanley: Okay. Great. Given the high level of demand, could MIST be upsized even above 1.5 Bcf a day given it was oversubscribed? Or does that make it less competitive from a cost perspective and so less likely? David Slater: We would love it to be above 1.5 Bcf. And Keith, that's the work that Chris was describing and his team is working on as we're engineering out based on the customer specifics. And yes, typically, more volume is more economic. So we will aim high. Operator: Your next question comes from the line of Jean Ann Salisbury with Bank of America. Jean Ann Salisbury: I just wanted to follow up on the discussion about the LEAP potential expansion to 4 Bcfd and make sure I understood the comments in an answer to another question. Is going from the 2.1 Bcfd to 4 Bcfd basically laying a second parallel pipe? And can you kind of talk about, I guess, whether that is indeed like a bite-sized offering, as I think I heard earlier? Or is that more like a large add that you would have to fill out kind of altogether? David Slater: Chris, do you want to take that? Christopher Zona: Yes. No, I can take that. Yes. So it's -- so our expansion up from where we are today to 4 Bcf would be a combination of pipe and compression. It's not necessarily that entire line is not required. I mean this was built as a high-pressure gathering pipeline here, gathering lateral when we first built this. So it's got a very economic and I'll say, ratable expansion path ahead of it to the 4 Bcf. And I'm sorry, I didn't hear the second part of your question. Jean Ann Salisbury: I think that answers that. So I appreciate it. And then I believe that NEXUS, the expansion, the long-awaited expansion had been waiting on some incremental demand. I guess it kind of depends on where in Ohio, the data center connection is and whether it's in Appalachia kind of far enough into the market. But is this new data center connection enough to potentially help drive that expansion forward? David Slater: Well, I'd say it's helpful, right? It's adding another 0.25 Bcf a day of demand onto the mainline. And locationally, it's in the Northwest section of Ohio. So it's going to be constructive and helpful. Step #1 is to connect it. Step #2 is to provide contract capacity on the mainline. So stay tuned as it evolves. But yes, I mean, we're -- I think as we've talked, NEXUS is one of the few pipelines in the region that has available capacity where we've got a couple of hundred million a day that we didn't term out long term when we built the asset. So clearly, that capacity is in play right now to be termed out. So that would be step 1. And then step 2 would be then an expansion on the mainline. So that's kind of how we think about it, Jean Ann. Hopefully, that helps. Jean Ann Salisbury: Yes that helps. Operator: Your next question comes from the line of Julien Dumoulin-Smith with Jefferies. Robert Mosca: This is Rob Mosca on for Julien. So you touched on affordability in your prepared remarks and capacity constraints in certain regions. Could you perhaps give us some updated thoughts on Millennium Pro and whether you need to see a downstream expansion into New England or whether that project can make sense on a stand-alone basis, acknowledging that the regulatory backdrop is kind of a key constraint here? David Slater: Yes, Rob, great question. So maybe we'll start off with R2R, right? Getting R2R commercialized and over the goal line is demonstrating that there is a market need, an incremental market need. That project percolated for a number of years, as you know, and we just stayed at it. And the market is evolving, and there's that recognition of need. I think you're seeing something similar with Algonquin, where they're looking at potential expansion opportunities as well. So we're beginning to see the market unthaw, for lack of a better word, which I think is encouraging, but we're going to have to be patient. For us, for Pro, there's a few critical ingredients that are really important for that project. Number one is New York-specific support. So that would be number one, from customers in New York. Number two is regional governmental support or lack of opposition to a project like that. So those are pretty critical to us before we would consider deploying capital into that region. I think it's very clear at this stage in the game that the demand need is real and there. I mean, you can just look at the prices that people are paying in that region, and they're paying that price because the infrastructure is constrained. So we're optimistic that we're going to be able to move forward, but we're going to be very careful and patient with that particular project. Robert Mosca: Got it. That's helpful, David. And then maybe switching gears to the recent PJM backstop auction. It seems like we could see some more gas demand around your gathering footprint in the Northeast and some of that may be reflected in the opportunities you're pursuing in the way of laterals. But can you frame how much of an incremental benefit this could provide and how risk-adjusted those opportunities are in the current five-year backlog? David Slater: Yes. I think the historical conundrum in PJM has constrained and limited what I'll call utility scale generation in that region. I think there's been a number of ways that they're trying to address that and fix that. You just mentioned the most recent. It feels like that's going to unlock some of these projects and allow capital to come in. I still think we need to see some projects FID to get more comfortable with that, but it's definitely a positive step. It furthers and strengthens the fundamentals in that region that we've talked a lot about to the investor group. So yes, it's a positive -- again, it goes back to my year-end conversation that this is a very fluid dynamic market right now that we're observing. And I put an up arrow on the fundamentals and the fundamentals continue to strengthen, but it is very fluid. And there's -- as you pointed out, we need some of this regulatory modifications and adjustments to enable capital to pour in. And it feels like we're pointed in the right direction. So I'm encouraged by it. Operator: Your next question comes from the line of Spiro Dounis with Citi. Spiro Dounis: I want to start with the capital plan. David, last call, you suggested that the gross backlog of projects was multiples of that $3.4 billion. And today, from what I'm hearing, it sounds like things are accelerating. So I guess I'm just curious to the extent you're successful in commercializing a lot of these additional projects, how are you thinking about the upper bound of growth capital in any given year that the balance sheet can handle? If you just convert that $3.4 billion at 2x, that's over $1 billion a year. I don't think we're there yet to be clear, but just curious how you're thinking about funding that growth and pacing it for the balance sheet. David Slater: Yes. Great question, Spiro. I'd say let's start with the $3.4 billion. We're just derisking the $3.4 billion. As we announce projects and deploy capital and as the year unfolds, I fully expect we're going to continue to announce more and continue to derisk that $3.4 billion. In a market backdrop where there is probably more opportunity today than there was four months ago. And if the fundamentals continue to play out, that probably continues to evolve over the course of the year. So that's a very encouraging market backdrop to operate a company in. So we'll start there. In terms of our capability to address that market reality, the good news, Jeff, Jeff is smiling right now. We've got a really strong balance sheet, investment grade. We have a lot of dry powder on the balance sheet that could be deployed above and beyond that $3.4 billion. So I think we're in a good position with the asset and the footprint that we have to compete in this evolving market. We have the balance sheet that can allow us to grow that investment agenda. So I don't see the balance sheet or our funding capability today as a constraint. And then I would maybe add one more detail that when you look at what we've FID-ed recently, they would be characterized by investment-grade customers, 20-year demand-based contracts. So if we ever did get to the edge of the balance sheet, those projects will be able to attract additional capital without a lot of anxiety or concern, I'll say it that way. Just the nature of those investments are very solid, strong investments that could attract capital. So I just do not see right now a capital constraint in our investment agenda. And Jeff, I don't know if you have anything to add to that. Jeffrey Jewell: Yes. That also spreads. Again, we're deleveraging as we continue to grow. So that obviously adds more open capacity. Also, just as a reminder, our on-balance-sheet top threshold is at ceiling, it was at 4x, and Moody's just moved us up for the off-balance sheet up to 4.25. So that just added even more headroom to what David is talking about. So again, I'm -- we're feeling very confident we can handle all the projects and all the things we've got coming at us and more. So we're feeling very good about that. Spiro Dounis: Great. That's great to hear. Second question, maybe just regarding Guardian. Just curious how you think about the total expansion potential of that pipeline. It seems like there's already some downstream utility interest to pursue maybe even a Phase 4. And if you look beyond 2030, there's some nuclear contracts that are expiring that maybe result in new gas-fired generation, which may underwrite to Phase 5. So apologies for getting ahead of it. But at what point does Guardian need to maybe be twinned? Do you feel like there's a long runway here before you have to do something more greenfield? David Slater: Yes. Great question, Spiro. We actually are looping Guardian. So G3 is beginning a loop. So I think G4 and G5, you're really getting ahead of us on G5. But I think it's -- from an engineering perspective, it's pretty simple is that we will just continue to extend the loops deeper into Wisconsin. The beauty of Guardian is that it's a modern high-pressure system, which gives it a tremendous advantage in a market like this, an expanding market like this, where we can run modern high-pressure system that makes it very efficient and cost effective to expand. Operator: Your next question comes from the line of John Mackay with Goldman Sachs. John Mackay: Maybe just one on the macro. We have seen, kind of, hub a lot lower recently. I'd love just to hear kind of your view on maybe the kind of gas price backdrop overall, but kind of more specifically, just what you're hearing from your Haynesville gathering customers. David Slater: John, good question. We watched that very closely, as you would expect. I think the Haynesville lines were pretty robust in Q1. I expect they're going to be similar in Q2. But typically, where you see producer recalibrating their production is in Q3, if we roll into the summer here and perhaps don't get the short-term weather that they want. Typically, Q3 is where you get some price dislocations. So we're very mindful of that, both in Haynesville and in Appalachia and watch that closely. We're not seeing or hearing anything imminent from any of the producers. But I think that's always a reality or a situation that can play out in the short term, John. And that's something that we have seen historically, and we factor into our guidance as we lay out our guidance. John Mackay: All right. That's clear. Appreciate that. Maybe just staying kind of down in the Haynesville, but going back to some of your LNG comments earlier. I guess I'd just like to put a finer point on that. Are you guys starting to have kind of explicit conversations with new potential LNG customers that are thinking about adding incremental capacity on the back of what's happened in the last two months or so? And maybe just speaking broadly, if someone is talking about FID-ing a new facility next year, a year from now for early 30s in service, when would you be having the kind of pipeline supply agreement conversations with them? Would it be too early for them to come in and underwrite something on LEAP? Or could that happen now ahead of, again, an early 30s in service? David Slater: Yes. And there's a couple of questions in there, John. I'll try to tackle them. I'd say the first question is, are we seeing active conversations in the Haynesville? I'm going to -- Chris is smiling, so I'm going to let him answer that question. Christopher Zona: Yes. Yes. So, John, absolutely. I mean there's a lot of activity going on around that right now, a lot of conversations, especially given the geopolitical issues that we've had here, and I'll say the reliance and the recognition of the importance of North American LNG supply on a global basis, that's certainly, I'll say, a tailwind. I think that's probably going to drive additional LNG development FID sooner than later. So I think that's kind of the trend I'd say, that we're seeing in the market. Operator: Your next question comes from the line of Samya Jain with UBS. Unknown Analyst: Can you provide more color on the Blue Union gathering well pad expansions and build-out? So with a greater number of pipelines going from Waha Eastward, how would you consider future expansion opportunities at Blue Union given its location in the Carthage Hub? And if you could speak to any data center discussions you're seeing in that area that are new? David Slater: Yes. Maybe I'll start at a higher level. I'd say the Blue Union system is really the wellhead gathering and treating system that we operate in the Haynesville. And Chris kind of alluded to it in the last question, we are seeing renewed interest on the -- what I'll call the producer side, incremental drilling, where they're looking for incremental gathering and treating. So that's been very positive. The volumes, as we disclosed, are strong on that network right now. So we're encouraged by that. I think the fundamentals, the high-level fundamentals of the attention that the U.S. LNG complex is getting is causing, I think, some international players to be more attentive or attuned to vertical integration into the basin to serve those facilities. So I think those are all strong fundamentals that are driving additional activity in the region, which we will benefit from over time. So that's a positive fundamental driver for our existing asset, the utilization of the existing asset, but also incremental expansion opportunities. And then I'd say Carthage, Carthage is becoming a landing zone for a lot of Permian. And we're connected to Carthage. We can pull gas from Carthage. So the network is very well connected there, and we will benefit from incremental Permian supply working its way over to the Carthage Hub. Unknown Analyst: Okay. Great. And then in regard to the Vector open season, could you elaborate on the supply you're seeing coming out of Dawn and how the Washington storage complex is especially set to benefit from that? And given the open season, how would you consider any new opportunities and potentially even expanding that storage complex? David Slater: Yes. So I think I'm going to go back to my dominos illustration that we've used over the quarters here with how we're seeing the expansions kind of domino across our footprint -- so as the Guardian expansion -- as the Vector expansion is moving forward, it's feeding the Guardian expansion. It will create opportunity for more supply to come into Vector on NEXUS, also on Rover, also out of the Dawn hub. It also will create and those shippers are very interested in the -- what I'll call the broad storage complex in Michigan and at Dawn. So both us and our partner are large storage operators in that region. So that domino effect or that synergy that the other assets will realize over time is real. And I think, will play out over time. Like I said, the dominos fall one at a time typically. So more to come on that. Stay tuned on that, but I would fully expect that the storage business will be a beneficiary of the existing vector expansion and potentially additional expansions down the road. Like our NEXUS asset, we fully expect that, that will be also a beneficiary of these expansions over time. And like I said, it's just -- it's a domino effect that comes in stages and in waves. Operator: Your final question comes from the line of Van Everen with TPH. Zackery Van Everen: Maybe another one on Midwestern. I understand that you guys don't want to get into the specifics on capacity, but that pipeline does connect to various other pipes that head all the way down to the Gulf. I was curious on the demand you're seeing. Is it mostly around the pipeline? Or are you also seeing interest from whether it's LNG or utilities all the way in the Gulf? David Slater: Zach, that's a great question. And yes, you are correct that we -- on the Southern pathway, we connect to other pipelines that traverse all the way down to the Gulf and connect to other markets. So we just had a really diverse group of shippers respond to the open season. So that's very positive. And we're not going to get into the details on the call here because it's just too early to talk about that. But yes, it was more than just everybody in the neighborhood, I'll say it that way, which, again, is just a strong indication of the macro fundamentals that are unfolding right now across our footprint. Zackery Van Everen: Got you. That's super helpful. And then maybe one just broad-based contracting. It seems the capacity -- existing capacity on these pipes is becoming more and more valuable. And I know you have a lot of long-term contracts across the pipelines. But as these existing contracts roll, do you see operating leverage to charge higher rates? Or are most of your pipes close to that max tariff rate? David Slater: Yes. Great observation, Zach. I mean we're really pleased with how that wave of renewals on Midwestern unfolded, which is why we shared it with the investor base. I mean it just creates durability to the existing asset. And it also demonstrates, and it's another proof point to the fundamentals that we talk about is that not only are we seeing these fundamentals play out, but the existing shippers are seeing the same fundamentals play out and want to make sure that they maintain control of that valuable capacity in a market area where the demand continues to grow. So the question is how do we do we maximize that opportunity? Number one is by terming it out, right? That would be step #1 is you term it out and we don't have to sell anything unless we're selling it at the maximum tariff rate. So terming it out and terming it out at the maximum allowable tariff rate would be the playbook in a market environment like we're in right now, which is exactly what the team did on Midwestern. And you should expect us to do that on all of our assets across the region over time. Operator: I will now turn the call back over to David Slater for closing remarks. David Slater: Well, thank you, everybody, for joining us today. We certainly appreciate your interest in DTM. Thank you for the great questions today, and look forward to seeing everybody in person at the next event. Have a great day. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Hello. Good day, and welcome to Diebold Nixdorf's First Quarter 2026 Earnings Call. My name is Carly, and I will be coordinating today's call. [Operator Instructions] I'd now like to turn the call over to our host, Maynard Um, Vice President of Investor Relations. Maynard, please go ahead. Maynard Um: Hello, and welcome to our first quarter 2026 earnings call. To accompany our prepared remarks, we posted our slide presentation to the Investor Relations section of our website. Before we start, I'll remind all participants that you will hear forward-looking statements during this call. These statements reflect the expectations and beliefs of our management team at the time of the call, but they are subject to risks that could cause actual results to differ materially from these statements. You can find additional information on these factors in the company's periodic and annual filings with the SEC. Participants should be mindful that subsequent events may render this information to be out of date. We will also discuss certain non-GAAP financial measures on today's call. As noted on Slide 3, reconciliations between GAAP and non-GAAP financial measures can be found in the supplemental schedules of the presentation. With that, I'll turn the call over to Octavio, who will begin on Slide 4. Octavio Marquez: Good morning, everyone, and thank you for joining us. The first quarter was a strong start to the year and another quarter of delivering on our commitments, continuing the operating momentum we have built. We grew revenues 6% year-over-year to $888 million and adjusted EBITDA increased 14% to $99 million. At the same time, backlog grew sequentially to approximately $790 million, reinforcing the underlying demand we're seeing across both banking and retail. In banking, we continue to build on the strength of our core ATM franchise while expanding our role inside the branch. We are seeing good momentum in teller cash recyclers and broader branch automation, which are increasing our relevance with customers and expanding our opportunity set. In retail, we're seeing growth accelerate as we expected, with revenue up double digits. In North America, we're gaining critical mass with a large and growing pipeline of deals and had important wins in electronic point of sale in the fuel and convenience space and with the regional grocer. And in self-checkout, we delivered initial deployments with a large pharmacy chain. In Europe, we have a large number of electronic point-of-sale wins that drove growth. Free cash flow continues to be a clear point of strength. We generated $21 million in Q1, more than tripling year-over-year. This marks our sixth consecutive quarter of positive free cash flow, and we expect to remain consistently positive each quarter going forward. We maintained our fortress balance sheet, ending the first quarter with a net debt leverage ratio of 1.2x, while remaining fully committed to returning the majority of our free cash flow generation to shareholders through our $200 million share repurchase program. We had a strong quarter. We did what we said we would do. And importantly, this performance reflects the continued compounding of the strategic and operational improvements we have implemented. Let's now turn to Slide 5 to review our banking strategy. In banking, we continue to see supportive secular tailwinds. Financial institutions are investing in their branch networks to improve efficiency and enhance the customer experience, while at the same time, remaining under pressure to lower the cost to serve. Importantly, in the U.S., we're seeing a shift from prior years with leading financial institutions actively expanding their branch footprints. That is creating a clear need for solutions that both improve the customer experience and structurally reduce the operating cost. Our strategy is built for that environment. We go beyond the ATM to help banks automate and run the entire branch ecosystem, combining hardware, software and services to improve customer experience, employee efficiency and overall branch economics. The objective is straightforward: take cost out while improving service levels. Our integrated ecosystem optimizes how cash moves through the branch, reducing the need for cash in transit activity and the expense that comes with it because the best cost is no cost. This is a key differentiator in how we approach the market. We use technology to eliminate cost and improve the customer experience, not just to manage or reallocate it. We're seeing that the strategy translates into results across 3 areas. First, in our core self-service business, recycling ATMs continue to gain momentum across customer segments and geographies. In the U.S., we won a full network upgrade with a major credit union based in the Southeast with more than 1 million members, deploying over 200 DN Series cash recyclers across their footprint. This is a strong proof point that recyclers are gaining traction across a broad range of institutions. Second, inside the branch, we're expanding our footprint with teller cash recyclers and branch automation solutions. During the quarter, we secured a significant competitive displacement with one of the largest financial institutions in the U.S., winning 100% of their teller cash recycler install base. In addition, we were selected by FOREX as the single trusted partner to manage and optimize their ATM network end-to-end, reinforcing our ability to deliver both operational efficiency and service performance at scale. At the same time, we've grown our pipeline and backlog in India for our fit-for-purpose devices, and we have plans to expand this product family into additional markets across Asia. We also plan to extend our teller cash recycler footprint into international markets, further broadening our addressable opportunity. Third, we are increasingly orchestrating how transactions are processed and routed across multiple customer touch points. During the quarter, we won a major engagement with a leading U.S. financial institution to modernize transaction processing across thousands of branches. Our platform supports transactions not only at the ATM, but also at the teller and across digital channels, enabling banks to manage and optimize transaction flow across both physical and digital environments. And importantly, these are not stand-alone wins. They are part of a broader strategy to increase our integration and wallet share within the branch and transaction ecosystem. When customers deploy across ATMs, teller cash recyclers and software, it creates a natural path to broader branch automation, building our relationships and expanding our role over time. Stepping back, we're executing well. We're strengthening our core, expanding inside the branch and using technology to structurally improve cost and performance for our customers, while also extending our reach into new geographies. Now moving to Slide 6. Turning to retail. We delivered a very strong Q1 with revenue growth north of 25% year-over-year, and we continue to see strong momentum building across the business as we move through the year. In North America, the traction we're building continues to strengthen. About a year ago, we identified our top 40 target accounts. And today, we have active projects with the vast majority of them. Our pipeline has grown approximately threefold over that period, and that momentum is converting into wins. During the quarter, we secured a major deployment with a top 10 fuel and convenience retailer for thousands of point-of-sale units. In addition, we won an initial self-checkout deployment with a leading pharmacy chain and scored an electronic point-of-sale win with a regional grocer in the U.S. Both of those opportunities create pathways for much larger rollouts over time. We're encouraged by the quality of the opportunities in front of us and increasingly confident in our ability to convert that pipeline into meaningful growth as the year progresses. In Europe, we continue to see strong execution with solid point-of-sale performance and wins across multiple markets. Now turning to Smart Vision AI. We are positioning Smart Vision as a platform that supports multiple use cases across the store. It delivers strong ROI by reducing shrink, improving operational efficiency and enhancing the checkout experience. What started as a self-checkout has now expanded across additional parts of the store from the aisle to the manned checkout, demonstrating the flexibility and scalability of the platform. We are already seeing early adoption. One of the largest retailers globally has deployed Smart Vision in several stores to address shrink across both the aisle and the point-of-sale. And strategically, this platform is opening doors. It allows us to engage earlier with customers, often starting with a targeted use case and then expanding into broader discussions around self-checkout, point-of-sale and software. That creates a natural path to larger, more strategic programs over time. This also aligns well with where the market is going. Retailers, particularly in North America, are increasingly prioritizing open modular solutions. That's the model we've already proven in Europe. We're pleased with the strong momentum we're seeing across retail. Our focused account strategy is working. Our pipeline is building, and our platform approach is positioning us to continue expanding share. Turning to Slide 7. In services, we're making solid progress. As we previously indicated, margins are modestly down year-over-year as we continue to invest in the business to strengthen execution and service quality. However, these investments are progressing as planned and positioning us for sequential margin expansion as we move through the year. These investments are delivering results. We are now achieving some of the highest service levels in our history in North America with meaningful improvements in SLAs and overall availability. That level of performance is critical as it drives customer satisfaction, supports product growth and increases service attach rate over time. At the same time, as we expand our installed base across banking and retail, we're increasing service density, which drives incremental highly recurring revenue without a proportional increase in costs. We're also entering the next phase of our efficiency journey. With the rollout of our field technician software, we now have much more granular visibility into operations, allowing us to optimize dispatch, routing and parts management. For example, in Chicago, a cross-functional team used these tools to redesign service zones, improving first-time fix rates, reducing drive time and lowering dispatcher requirements. We're now scaling those learnings across additional markets. So overall, we're seeing the right progression, stronger execution, a growing installed base and increasing opportunities to drive efficiency and margin expansion. Now let's turn to Slide 8. Our approach to continuous improvement is now a core part of how we operate the business and has become a meaningful competitive advantage in how we execute. This is not just a set of initiatives. It is an operating rhythm and cultural shift across the organization. We're focused on identifying incremental improvements, scaling them across the enterprise and compounding those things over time to drive margin expansion and reduce complexity. We are seeing that translate into tangible results. During the quarter, we held Kaizen events across our Asia Pacific service and logistics operations, focused on improving repair cycles, dispatch efficiency and billing capture. These efforts are generating both cost savings and incremental revenue. And more importantly, they are repeatable and scalable across our network. In manufacturing, we're also driving meaningful improvements. In North Canton, we reduced our subassembly footprint by about 40%, freeing up space for additional future production capacity. Similarly, in Brazil, we redesigned our manufacturing process, reducing footprint by approximately 50% while increasing capacity and reinforcing our local-for-local strategy. These are good examples on how we're simplifying the business, improving productivity and structurally strengthening margins. To put that in context, remember, when I first took over as CEO and prior to launching Lean, product banking margins were in the low teens. This quarter, they were above 30%. Lean has been a key driver of the margin profile you are seeing today. During the quarter, we received multiple global banking and finance awards, recognizing innovation and the strength of our end-to-end banking solutions. And we were added to the S&P SmallCap 600 Index earlier this month. That inclusion reflects the consistency of our execution, the discipline we've built into the business and the credibility we've gained with the investment community. So overall, this is about building a better company with solid financials, one that is more efficient, has a fortress balance sheet and continues to deliver sustainable value for our shareholders and customers. With that, I'll turn it over to Tom to walk through our financial results. Thomas Timko: Thank you, Octavio, -- beginning on Slide 9. Q1 was a strong start to the year and reinforces that our strategy is working. Our products and solutions solve real problems for our customers and the foundation we've laid out for our growth initiatives is seeing momentum across the portfolio. Non-GAAP revenue was $888 million, up 6% year-over-year, driven by strength in retail, currency and solid execution across services. Backlog increased sequentially, reflecting healthy demand across both segments and giving us stronger visibility as we progress through the year. Non-GAAP gross margin in Q1 expanded 10 basis points year-over-year to 25.4%. Product gross margin increased 60 basis points to 26.3%, driven primarily by disciplined pricing, favorable mix in our banking portfolio and continuing manufacturing cost and productivity improvements. Non-GAAP service margins were 24.8%, down 30 basis points as we continue planned investments into people and technology. And we're on track and starting to realize the early benefits and already seeing tangible improvements in service levels and fleet efficiency. While you will see us continue these investments in North America and expand the rollout of our field technician software internationally, we expect service margins to increase both sequentially and year-over-year moving forward in 2026. Non-GAAP operating profit rose 27% year-over-year to $61 million, and operating margin expanded 120 basis points to 6.9%, reflecting higher volume, better product margin and continued operating expense discipline. In Q1, we held operating expenses flat year-over-year while continuing to invest in areas that support service performance and growth. That's a strong signal of the operating rigor we're building into the company. Operating expense discipline continues to be a major focus across the enterprise, and we're seeing real progress. We have a broad pipeline of over 200 actions that are well underway as part of our $50 million cost reduction program, and we're beginning to see some of the green shoots from that work, both from the traditional cost actions and from lean and technology-enabled simplification that removes work altogether. In 2026, we expect these run rate savings to result in approximately a 1% to 2% reduction in operating expense with benefits building as we move through the year and additional opportunities are identified. Continuing on to Slide 10. We continue to see strong trends across our profitability and cash flow metrics. In Q1, adjusted EBITDA grew 14% year-over-year to $99 million, with margins expanding 80 basis points to 11.2%, demonstrating strong operational execution. We're also making significant progress on non-GAAP EPS, which grew about 81% year-over-year to $0.67, driven by strong operating profit. Turning to cash flow, which is an important measure of earnings quality and supports our capital return priorities. Our free cash flow in Q1 more than tripled versus a year ago to approximately $21 million. We drove strong working capital performance with days inventory outstanding improving by 6 days and day sales outstanding improving by 4 days. Moving to Slide 11. We delivered a solid quarter with gross profit dollars and margins growing year-over-year. Octavio spoke about some of the secular tailwinds in the banking space and our portfolio of solutions for ATMs, teller cash recyclers and our branch automation solutions align very well to help banks transform their branches, enhance the customer experience and achieve their goals of reducing costs and increasing efficiency. Revenue was down slightly year-over-year, primarily reflecting the timing of product deliveries, but our solid order entry and sequential backlog growth, along with encouraging momentum in Latin America gives us very good visibility. Banking services revenue was up slightly year-over-year, and our continued delivery of improved SLAs gives us the opportunity for further wins, both in our product and service businesses. Gross margins in our Banking segment increased 90 basis points year-over-year to 26.6%. Within that, product margins expanded meaningfully to 31.4%, up 370 basis points versus last year, driven by product and geographical mix as well as continued cost control in manufacturing. Service margin was 23.7%, down 80 basis points compared to last year, reflecting the investments in field technicians, our field technician software and the ongoing consolidation of our repair and service centers. Looking ahead, we expect to continue to see steady global ATM shipments with refresh activity in all geographies, and we're encouraged by the momentum in our teller cash recycler adoption, fit-for-purpose rollout and overall branch automation solutions. Turning to Slide 12. Retail delivered strong results with revenue up 26% year-over-year, driven by double-digit growth in both product and services as the recovery in Europe continues as well as revenue growth of nearly 70% in North America. While this is off a small base, these results demonstrate that our growth initiatives are gaining traction and meaningfully advancing us towards the sizable opportunities that we see ahead. Retail customers remain focused on automation, efficiency and lower total cost of ownership, and our platform aligns well with these priorities, supported by complementary software and services that can be layered to fit each store's specific needs. In product, point-of-sale continued to perform well across our markets as customer deployments accelerated, reinforcing our #1 position in Europe. And as Octavio mentioned earlier, we're seeing important early wins across retail verticals in the North American market. This is another example of our multiple ways to win as the strength in retail gave us the flexibility across our portfolio. We would expect the shape of retail product revenue to be more balanced across the year versus prior years. Service revenue benefited from higher installation volumes, which grew year-over-year. Gross profit dollars increased 17% year-over-year to $61 million. Total gross margin was 22.6%, down 180 basis points year-over-year. Product margins declined 330 basis points, primarily driven by mix as point-of-sale devices carry a lower gross margin within our portfolio. We also saw some impact from higher DRAM and memory costs but are taking appropriate pricing actions and adjusting our quoting cadence. This does not change our confidence in our full year guidance. Retail service margin improved 80 basis points year-over-year to 27.7%, driven by higher revenues and benefits from the investments we're making in our service operations. Looking ahead, we expect more favorable product mix in the second half of the year, which will improve product margins and a steady performance in services for the remainder of 2026. Moving to Slide 13. Let's review our 2026 guidance. We had a great start to the year with a very strong Q1, and we're seeing very good momentum in our key growth initiatives. Despite a dynamic macro environment, we feel good about where we are and the diversity of our business that provides us multiple ways to win, both of which give us the confidence in our outlook for 2026. For revenue, we expect a range of $3.86 billion to $3.94 billion. Again, this outlook is supported by our $790 million of product backlog as well as the strong structural work we've implemented to reduce product lead times. We continue to expect total gross margin to increase 25 to 50 basis points year-over-year and service margin to improve up to 50 basis points for the full year as our service initiatives translate into better productivity and performance. As a reminder, after a very strong 2025, with product margins increasing 300 basis points, we expect product margins to remain comparable. In service gross margin, we expect both sequential and year-over-year improvement through the remainder of 2026 as our scale increases and our investments continue to deliver further returns. For adjusted EBITDA, we project a range of $510 million to $535 million, representing growth of approximately 8% at the midpoint. Turning to free cash flow. We forecast free cash flow in the range of $255 million to $270 million, representing roughly 10% growth at the midpoint, supported by continued working capital improvements and disciplined capital allocation. We currently expect to generate positive free cash flow in every quarter of this year. We expect adjusted EPS to be in the range of $5.25 to $5.75, assuming an effective full year tax rate in the range of 35% to 40%. From a shareholder value perspective, we view free cash flow as a more direct measure of the value we're generating as it reflects the cash available to return to shareholders and to strengthen the balance sheet while preserving flexibility for disciplined capital allocation. On that basis, we expect our free cash flow per share for 2026 of approximately mid-$7 would be meaningfully higher than our 2026 adjusted EPS guidance, reflecting strong cash flow generation and working capital performance. As we think about the quarterly cadence, let me give you a little color on how we think about Q2. We expect Q2 revenue to represent approximately 24% of the full year, consistent with 2025. We expect gross margin to be at almost similar levels to prior year, driven more by services, which we said we expect will be up both quarter-over-quarter and year-over-year. Turning to adjusted EBITDA. Though we continue to expect a stronger second half weighted contribution, we now see the first half of the year contributing just above 40% of this year's total adjusted EBITDA. We expect operating expenses to be up slightly quarter-over-quarter, but down on a year-over-year basis. The tax rate in Q2, we expect to rate more in line with our full year rate. And with regard to free cash flow, we expect positive free cash flow comparable to the prior year second quarter in '25 amount. Unlike some of our direct peers in this market, we've been able to generate positive free cash flow every quarter for 6 consecutive quarters, which is a testament to the durability and consistency of our operating model. For adjusted earnings per share, we expect Q2 to compare favorably versus the prior year quarter. Turning to Slide 14. We continue to operate with a fortress balance sheet with approximately $680 million of liquidity at the end of Q1, comprised of $374 million in cash and cash equivalents and a fully undrawn $310 million revolving credit facility. The net debt leverage ratio stood at only 1.2x. And our progress continues to be recognized. Fitch Ratings recently initiated a BB- with a stable outlook, our highest credit rating yet and a notch higher than our other current credit ratings. We view this as a meaningful third-party validation of the progress we've made in strengthening our credit profile, supported by our continued focus on free cash flow generation. During the quarter, we repurchased approximately 747,000 shares at an average price of $73.66 per share. In total, we returned $55 million to shareholders in Q1 under our existing $200 million share repurchase program and have $117 million remaining. In 2026, we're targeting 50% plus free cash flow conversion, and we remain committed to returning the vast majority of our free cash flow to shareholders in the form of share repurchases. We continue to believe that our shares are undervalued and our ability to consistently generate cash flow is underappreciated. Our fortress balance sheet and strengthened financial profile have increased confidence in our ability to achieve our target of $800 million of cumulative free cash flow from 2025 through 2027, while still providing us flexibility for disciplined M&A. With that, I'll turn it back to Octavio for closing remarks. Octavio Marquez: Thank you, Tom. To wrap up, we delivered a strong start to 2026. And importantly, we delivered another quarter of doing what we said we would do. Momentum continues to build across the business. We're seeing consistent execution across the businesses. Our core franchise in banking remains solid, while we continue to expand our role inside the branch through automation, software and services. In retail, momentum continues to build, particularly in North America, with a growing pipeline that is starting to convert into meaningful wins. At the same time, we're continuing to improve the quality of the business. Our operating discipline is driving better margins, stronger cash flow and more consistency quarter-to-quarter. That consistency matters. It is what gives us confidence in our outlook for the year even in a dynamic environment. We're also maintaining a clear and disciplined approach to our capital allocation, supporting a strong balance sheet while returning the majority of our free cash flow to shareholders. Our story is straightforward. We have strong positions in attractive markets, a strategy that is working and an operating model that continues to improve. That combination gives us confidence in our ability to deliver sustainable value over time. With that, operator, please open the line for questions. Operator: [Operator Instructions] Our first question will come from the line of Matt Summerville with D.A. Davidson. Matt Summerville: Can you maybe just talk a little bit about the cadencing of EBITDA? Just doing very quick rudimentary math. It sort of seems like in Q2, your adjusted EBITDA would be roughly flattish relative to the prior year, yet I'm hearing quite a bit of goodness overall on the call across the businesses and with profitability. So can you help me kind of connect the dots there? And then I have a couple of follow-ups. Thomas Timko: Yes. We would -- so for Q2, we would expect slight growth in adjusted EBITDA, whereas if we landed last year at $111 million, we do expect it to be north of that number. Does that answer your question, Matt, directionally? Matt Summerville: YYes. I guess I'm curious, when I look at the EBITDA growth in Q1, and I kind of listen to all of the positivity you guys are talking about, I guess I'm a little surprised that we wouldn't see more adjusted EBITDA growth in Q2. Having said that, I also think it's important to you guys could give maybe a little bit more color on some of the goodness you're seeing in North American retail. If there's a way to quantify the funnel and maybe how we should be thinking about your conversion rate on that funnel as you look out over the next 12 to 24 months or so? And then I have one more. Thomas Timko: Yes. Look, I would -- just to follow up on the adjusted EBITDA, right? If our adjusted EBITDA margins in Q2 of '25 were closer to 12.2%, right? We would expect Q2 to be closer to 13% or just under that as well. So you are seeing that increased growth sequentially and over prior year. And again, that's going to be driven by some of the margins and disciplined CapEx that we have or OpEx that we have. Octavio Marquez: Matt, this is Octavio. To give you a little bit of color on retail. So this quarter, I think it's important to realize we have 3 very significant wins. One of the largest fuel and convenience retailers decided for our electronic point of sale to replace their entire estate. It's literally thousands of point-of-sale devices. A regional grocer, again, a very important win with them, replacing the electronic point-of-sale systems across their footprint as well. And a very large pharmacy chain out our initial orders for our self-checkout products. As you know, these are literally thousands of units that need to be deployed across large geographic regions. So you'll start seeing as we -- every quarter, we keep adding more wins to that, we'll start building even more critical mass that will continue to support the growth that we see in North America. We're very excited. As I mentioned in the prepared remarks, we have a very targeted account strategy on the accounts that are in that process of upgrading their self-checkout, software or point-of-sale. And we see that we're achieving very favorable success rates. If you couple that with all the investments that we've made in our Smart Vision technology, it's really opening doors to more meaningful conversations with retailers on how we truly improve store operations for them. Remember, the opportunity in North America is large. Matt Summerville: Understood. And just last thing for me. Can you maybe, Octavio, talk through the geographic kind of walk around for your ATM business? Octavio Marquez: Sure. I'll throw a little bit of retail as well, Matt, so that the retail side of the house doesn't feel bad as we walk through the geographies. But North America, very -- again, we've been very successful deploying recyclers at large financial institutions. I used the example today, and you'll see a press release from that customer, I think, coming up in the coming days. Recyclers are now finding their way into large credit unions, community banks. So you will start seeing that technology permeate even more into the market. So North America continues to be a strong market. And I would say the most exciting thing about North America is this is where we launched the teller cash recycler for initially. This quarter, we won the complete replacement of a large bank at state for teller cash recyclers. So again, in North America, we're very focused on continue the deployment of recyclers downstream and also expanding the teller cash recycler market. This will start adding to our service density and really improving the profile of our service business. So very, very happy about that. Clearly, we talked a lot about retail in the prior question that you asked. But again, the opportunity is very vast for us in North America retail. Remember, it's still a very small part of our overall revenue portfolio, but one that is growing at a very fast pace. So we continue to be very encouraged by the pipeline, the types of customers that we're talking to and just the overall recognition that we're now getting in the market, where before we had to be knocking on many doors. Today, many retailers are actually calling us to participate in different projects with us. So we're excited about that. Latin America, we moving on Latin America, as you know, very cash-intensive market. We continue to see now a recovery in many of the markets that last year had been a little bit slow due to economic or political things. So Latin America, we're very excited that it's now returning to the type of growth that we've seen in the past. We're still pending some of the large RFPs from Brazil to be concluded, but we're very optimistic that we will win them and that they'll form part of our revenues in the second half of the year. I would say in Europe, when we talk about banking, we're really benefiting from this trend in Europe of pooling ATMs across customer bases. I had the opportunity this past week to be in Europe with 150 of our customers in one of our customer events. And to be honest, I left very energized as we see projects in France from large banks pooling their ATMs together that really creates an opportunity for us to really refresh and modernize their estate. So we're very excited about what's going on in Europe. Also our branch automation solutions, the example I gave about FOREX. FOREX runs all these different exchange stores all over the -- you'll probably see them in airports. They run ATMs, physical stores. We're now managing the entirety of their operation, outsourcing all the parts that they need to run their ATM network. So that is also opening new doors for us in this market that remains very attractive for us. And I would say when we move to Asia Pacific, our fit-for-purpose strategy is gaining momentum. I don't know if I should say this, but we're ahead of our plan on how many devices we plan for the year, strong adoption in India, some of the large tenders we've been able to win. So we're very excited about our fit-for-purpose strategy, and we're actually going to expand our fit-for-purpose strategy, not just to deploy those devices in India, but in other APAC markets where we think that, that product will also be a very good fit. So excited about how that is going, Matt. I hope that helps. Thomas Timko: Hey Matt, just a quick follow-up. As it relates to EBITDA, we -- similar to last year and the linearity, we expect to see a stronger second half weighted contribution. And that mix that we talked about is usually 40, 60, what we see now for the first half of the year is contributing just above 40% of this year's total adjusted EBITDA with the remainder flowing out in the second half of the year. That's kind of what I said on the call. Hopefully, that adds some more clarity to your question. Matt Summerville: Yes, it does. I must have missed that nuance that totally checks out. Operator: Our next question comes from the line of Justin Ages with CJS Securities. Justin Ages: Can we get a little more color on the strong retail growth in the first quarter, 25% plus real. So I wanted to know if we could parse that between growth in Europe versus North America. Octavio Marquez: Yes. So Justin, we mentioned in the call, North America grew 70%. It's a small base still, but very, very fast growth. And in Europe, we had an extraordinary quarter. As we've been saying, we've been seeing the momentum and the recovery in retail in Europe. It started last year, Q2, Q3, Q4, where we kept growing sequentially. Now you can see that this first quarter, again, a very strong quarter for Europe, driven by strength, I would say, across all product lines, whether it was the software, the self-checkout or the EPOS, which was particularly strong, all of them growing. And North America, again, very targeted wins, 3 very strategic ones this first quarter just because of the magnitude and size of the footprint that we will be covering now with point-of-sale and the opportunity in self-checkout. So we're excited. And again, probably one of the areas that I love talking about is our Smart Vision. We continue in the -- with one of the largest retailers globally deploying Smart Vision to test shrink in the aisle, shrink at demand checkout and obtaining really outstanding results with these initial rollouts that will undoubtedly lead to expanding that footprint across the retailer. So we're very excited. Retail is a huge opportunity. Europe is our core -- has been our core franchise. It's stable and growing now. And the opportunity in North America is huge in front of us, and we're very excited on how we can capitalize against it. Justin Ages: And then in some of the disclosures you noted shutting down non-core operations in the APMEA region. Just wanted to get a little more color on the thinking behind that as well as more broadly, any impact to deployments around the Middle East region to some of these fit-for-purpose or cash recyclers just due to the conflict? Thomas Timko: Well, I'll answer the second part of your question first. No, we haven't seen any real logistical problems that we haven't been able to overcome in the quarter, and we don't anticipate any going forward given the situation there. Look, as it relates to what I refer to as the exiting of a non-core business, it's part of our normal sort of portfolio review to streamline the business. We want revenue, but it's got to be good profitable revenue. The business overall is not material to our position in the region, and we don't have any other current plans or any other actions like that, that we're going to be taking. Operator: Our next question comes from the line of Antoine Legault with Wedbush Securities. Antoine Legault: Congrats on the good results and momentum here. I wanted to ask about 2 key input costs, which you briefly touched on earlier, but specifically memory and fuel prices. There's been a lot of chatter around rising memory costs. And I appreciate that memory may not represent a significant part of your hardware bill of materials. But given the sharp increase in memory costs, can you tell us a bit more about how you're managing that? And similarly, we've seen oil prices surpass $100 a barrel, diesel, gas, both up pretty meaningfully over the past few months. How is that impacting you? And how are you managing that? Octavio Marquez: Yes. Thank you, Antoine. And Tom and me are arguing who should answer, but if I jump in, I'll answer first and let Tom elaborate a little bit more. I think when you think about the memory pricing and in general, hard drives and other components, in the ATM side of the house, it's a very small portion of our total bill of materials. So there, I'd say we're well covered. On the retail side, particularly in electronic point of sale, clearly, that is one of the cost drivers there. What we've done, and we are adjusting pricing with our customers. That's why Tom mentioned how you will see our margins continue to improve as we go through the year. So we're working with our customers. We Luckily, we have secured the supply that we need for the year. Now it's just a matter of renegotiating with some customers on existing orders. And in some cases, all new orders are being quoted with the appropriate cost structure now. So I think we're well covered on that side. Thomas Timko: So I will add to that, that the impact of the quarter of that higher cost from memory was probably $3 million to $5 million. So we think that between repricing and the supply chain impact that we'll be able to mitigate the majority of that headwind in Q2. As it relates to the fuel costs, we're managing that. We have a new fleet rollout that's been going on. Our fleet was aging. So think about much higher miles per gallon vehicles that are out there. And then when you couple that with our field technology software rollout, and the routing and the options that it gives and making sure that we're doing one-time visits and being able to repair the machine with the right people and the right parts, we've reduced the overall amount of miles that our fleet is traveling. So the combination of more highly efficient fuel vehicles and better routing technology, our consumption of fuel is actually down year-over-year, and we would expect that to continue on a comparable basis quarterly going forward. So no real impact from the fuel costs in Q1. And depending on where prices remain, we really don't see it as much of a headwind for us and still very confident in our guidance. Antoine Legault: Understood. That's very helpful. And Tom, can you give us an update maybe on your 200 action points to reduce OpEx. How is that going? And how much of the expected $15 million in run rate OpEx improvements exiting 2026? How much of that is reflected in your Q1 results? Is it still early days on that front? Thomas Timko: It's still kind of early days. But look, I think when you're able to grow revenue at 6% in any given quarter year-over-year and hold OpEx flat, that's a win for us. We do have 200 actions that are underway, and we're starting to be able to offset some of the wage inflation that we're seeing in general overall cost inflation. So we're going to take Q1 as a win with the flat OpEx, and we expect to be able to continue to sort of see that throughout the remainder of the year, flat to comparable. Overall, we expect it to be down 1% or 2% as we exit 2026. So we feel like we're in really good shape. We're continuing to execute against it. And it's like anything you do when you start to dive deeper, you have other opportunities that come up, not necessarily all in OpEx, some are in cost of goods sold. But I would say the entire team is very focused on cost takeout, and it's being done through deploying the lean methodology, which allows us to either improve the way we process workflow or altogether just take that work out. So we remain encouraged on those savings. Operator: [Operator Instructions] At this time, we have no further questions. I'll now turn the call over to Maynard Um for his closing remarks. Maynard Um: So thanks, everyone, for joining us and for your interest in Diebold Nixdorf. If you have any follow-up questions, please feel free to reach out to any of us on the Investor Relations team. Thanks again, and have a great day. Operator: Ladies and gentlemen, this concludes today's call. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Vistance Networks 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 speaker today, Jenny Thompson, VP of Investor Relations. Please go ahead. Jenny Thompson: Good morning, and thank you for joining us today to discuss Vistance Networks 2026 First Quarter Results. I'm Jenny Thompson, Vice President of Investor Relations for Vistance Networks. And with me on today's call are Chuck Treadway, President and CEO; and Kyle Lorentzen, Executive Vice President and CFO. You can find the slides that accompany this report on our Investor Relations website. Please note that some of our comments today will contain forward-looking statements based on the current view of our business, and actual future results may differ materially. Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance. Before I turn the call over to Chuck, I have a few housekeeping items to review. Today, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's earnings materials. Reconciliations of our non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website. All references during today's discussion will be to our adjusted results. All quarterly growth rates described during today's presentation are on a year-over-year basis unless otherwise noted. I'll now turn the call over to President and CEO, Chuck Treadway. Charles Treadway: Thank you, Jenny. Good morning, everyone. I'll begin on Slide 3. This morning, we announced that we have entered into a definitive agreement to sell our RUCKUS Networks business to Belden for $1.846 billion in an all-cash transaction. The deal is subject to customary closing conditions, including receipt of applicable regulatory approvals. We currently expect the deal to close in the second half of 2026. After a detailed evaluation of our remaining businesses after the CCS transaction, it became clear that the remaining 2 businesses needed to be separated. Our equity value continued to be impacted by the different business models and valuation profiles. The attractiveness of the RUCKUS business allowed us to achieve the separation in a transaction that we believe further unlocks shareholder equity value. Belden is a favorable buyer of the business for our customers and employees as they will continue to support the investment required to further grow RUCKUS innovative products and services. We expect to distribute a significant portion of the excess cash from this transaction to our shareholders as a special distribution within 60 days following the closing of the proposed transaction. The exact amount and timing of the dividend will be determined by the Board after closing, taking into account all relevant factors. The transaction will leave only our Aurora business in the portfolio. We expect to continue to run Aurora as a public company. As a player of scale in the DOCSIS market, we will evaluate growth opportunities, including potential acquisitions to broaden our technology portfolio and customer relationships. We are excited about the opportunity to dedicate our focus to the Aurora business. As we move through the year, we will provide updates on the pending transaction and positioning of Vistance Networks as appropriate. Now on to first quarter results on Slide 4. I'm pleased to announce that in the first quarter, Vistance Networks delivered net sales of $472 million, a year-over-year increase of 22% and core adjusted EBITDA of $87 million, a year-over-year increase of 38%. For clarification, Vistance Networks results include our 2 remaining businesses, Aurora and RUCKUS. The positive results were generated by stronger-than-expected performance in both segments. We are on track to achieve our 2026 adjusted EBITDA guidepost of $350 million to $400 million. With that, now I'd like to give you an update on each of our businesses. Starting with Aurora Networks. Net sales of $298 million were up 33% in the first quarter compared to the prior year, and adjusted EBITDA was up 32%. These increases were primarily driven by the continued deployment of our DOCSIS 4.0 amplifier and node products. Our FDX amplifier deployment with Comcast continues to go well, and this is reflected in our results. Since the beginning of 2025, we have shipped more than 500,000 FDX amplifiers. We continue to make headway with our suite of next-generation ESD DOCSIS 4.0 amplifiers and are now shipping to multiple large North American MSOs. We expect shipments to ramp up over the next couple of quarters, and these products will continue to ship over multiple years. We are also making progress on the unified products. We expect to start production on unified nodes in the second quarter and expect to start shipping in the second half of 2026. The unified node allows our customers to choose between either the 1.8 gigahertz ESD or FDX technology within a single device. The unified amplifiers have started lab testing, and we expect to start shipping at the beginning of 2027. During the quarter, we began the rollout of our vCCAP solution with Vodafone Germany. This is quite significant as we will be the go-forward solution displacing one of our competitors. The network upgrade includes Aurora Networks cloud-native vCCAP Evo, providing significant enhancements to the operator service offerings, paving the way to DOCSIS 4.0. This deployment demonstrates the flexibility of our standards-based solution to best meet the unique requirements of multiple operator environments. We have now successfully deployed our vCCAP solution with 2 of the largest EMA service providers. In the quarter, we continued development on our next-generation PON products. We are partnering with a Tier 1 CALA customer on their ongoing access and core network evolution through the deployment of our vBNG Evo and PON Evo Series 200 remote OLTs as they upgrade their broadband infrastructure road map. They are migrating to a fiber-to-the-home access architecture based on GPON and XGS-PON technologies with the Aurora PON Evo Series 200 remote OLT, which has been deployed in some of the largest CALA regions, offering both residential and business broadband services. The PON Evo Series 200 remote OLT is being deployed in an outside plant node as a stand-alone OLT, supporting up to 8 GPON ports per node and is designed to support up to 128 subscribers per port. The broadband service edge is being upgraded using the vBNG Evo that allows for both the control and user plane separation architecture, which enhances scalability, operation resilience and traffic management. As stated before, we believe Aurora Networks is well positioned with decades of knowledge of our customers' ecosystems and a broad array of new products for service providers to take advantage of the latest DOCSIS 4.0 upgrade cycle as well as expanding their current DOCSIS 3.1 networks. The new products position Aurora Networks to maintain performance as the market shifts away from our legacy products. With the announcement of the RUCKUS transaction, we're excited to focus our attention on maximizing the value of Aurora, including exploring acquisitions, mergers and investment in new technology that will take us well beyond the DOCSIS 4.0 upgrade cycle. Now moving on to RUCKUS Networks performance. Core RUCKUS Networks revenue was up 14% in the first quarter compared to prior year. Core RUCKUS adjusted EBITDA of $37 million was up 54% versus prior year. We are pleased with both our revenue and core adjusted EBITDA growth in the quarter. First quarter 2026 adjusted EBITDA as a percentage of revenue was 21.3%, which was an approximate 600 basis point improvement over prior year. This is a testament to the team's focus on profitability while growing the top line. We had many strong customer wins in the first quarter, including a collaboration with the Los Angeles Football Club for the deployment of a next-generation WiFi 7 network at BMO Stadium. The early industry installation for Major League Soccer establishes a new benchmark for high-density wireless connectivity and sports venues designed to elevate every facet of the fan journey. The deployment leverages a strategic mix of RUCKUS WiFi 7 Access Points, including the high-performance T670 for under-seat coverage and the T670sn with hyper directional antenna technology for precise high-density targeting in concourses and club spaces. This architecture provides blanket high-speed coverage capable of supporting tens of thousands of concurrent connections. In addition to customer wins, the subscription product, RUCKUS One, continues to be a key priority as we move towards a subscription license and support model. In the quarter, we won our largest ever RUCKUS One deal with a Tier 1 North American service provider. We experienced strong growth in RUCKUS One and our service offerings, driving revenue growth of 12% versus first quarter of 2025. During the quarter, we announced the expansion of our Pro AV ICX network switch portfolio and introduced an AV-enhanced update to its management platforms. These advancements support the global market shift away from legacy video transport solutions towards Ethernet-based systems. Before handing the call over to Kyle, I would like to provide an update on the DDR4 memory chip supply issue that continues to impact most companies in our industry. As you can see from our results, we were able to manage the tight supply and higher pricing on memory chips in the first quarter in both businesses. Our supplier relationships, inventory position, product redesign and pricing were key in our ability to manage the issue in the first quarter. As we move into the second quarter, we are continuing to use these levers. We have good visibility into the second quarter and any impact is included in our second quarter expectations. As we look beyond the second quarter, visibility is limited, both from a supply and pricing perspective. We will continue to use our levers to navigate the challenging memory chip market conditions. And with that, I'd like to turn things over to Kyle to talk more about our first quarter results. Kyle Lorentzen: Thank you, Chuck, and good morning, everyone. I'll start with an overview of our first quarter results on Slide 5. For Vistance Networks' continuing operations, net sales ended at $472 million, up $84 million or 22% year-over-year. Increase in revenue drove continuing operations adjusted EBITDA up $40 million or 85% to $87 million. Adjusted EPS for the first quarter was up 209% to $0.34 per share versus $0.11 per share in the first quarter of 2025. Vistance Networks core adjusted EBITDA for the first quarter was $87 million, up 38% versus prior year as a result of the increase in revenue. First quarter adjusted EBITDA as a percentage of revenue of 18.5% was 230 basis points better than prior year same quarter, driven by stronger leverage in RUCKUS, partially offset by lower margin product mix in Aurora and stranded costs. The first quarter ended stronger than we had expected in both businesses. Order rates were up 37% sequentially in the first quarter of 2026 and up 49% versus prior year. Vistance Networks backlog ended the quarter at $843 million, up $211 million or 33% versus the end of the fourth quarter 2025. Turning now to our first quarter segment highlights on Slide 6. Please refer to Slide 5 to view both the RUCKUS Networks and core RUCKUS Network results. Starting with our Aurora Networks segment. First quarter net sales of $298 million increased 33% from the prior year as shipments of our DOCSIS 4.0 products increased. Aurora Networks adjusted EBITDA of $50 million was up $12 million or 32% from the prior year, driven by higher amplifier revenue. EBITDA as a percentage of sales was essentially flat with last year at 16.9% as lower margins driven by product mix was offset by operating cost management. Sequentially, in the second quarter of 2026, we expect revenue and adjusted EBITDA to be in line with the first quarter. However, we would expect year-over-year 2026 second quarter adjusted EBITDA to be down due to strong legacy license revenue in the second quarter of 2025. We expect the second half Aurora adjusted EBITDA to be stronger than the first half. As we have discussed in the past, Aurora Networks is a project-driven business with timing of projects driving some volatility in quarterly results, both from a revenue and EBITDA perspective. The business remains well positioned to take advantage of upgrade cycles while offsetting declines in the legacy business. With the expected decline in legacy products and the impact of stranded costs, partially offset by improving DOCSIS 4.0 revenue, we continue to expect Aurora adjusted EBITDA to be down in 2026 versus 2025. Core RUCKUS net sales of $173 million increased by 14% versus the first quarter of 2025, driven by market demand as well as our go-to-market and vertical initiatives. Core RUCKUS adjusted EBITDA of $37 million increased 54% from the prior year as a result of higher revenue, improved margins driven by our new switch portfolio and leverage of our fixed costs. We continue to see strong market conditions driven by the WiFi 7 upgrade cycle. In addition to better market conditions, our investment in sales has positioned us to grow faster than the market. Core RUCKUS bookings were up 33% from fourth quarter 2025. We continue to drive our vertical market strategies and new product initiatives and are well positioned to grow faster than market as we move through 2026. Moving forward, the RUCKUS business will be presented as held for sale. Finally, early in the quarter, we completed the divestiture of the CCS segment to Amphenol. Note that the activity of the segment was reported as discontinued operations for the quarter. Turning to Slide 7 for an update on cash flow. As expected in the quarter, cash flow from operations was a use of $227 million and free cash flow, a use of $229 million due to working capital needs and timing of our annual cash incentive payout. As we look at cash for 2026, we expect to end the second quarter of 2026 with approximately $125 million of cash on hand. Our projection for year-end cash on hand, excluding proceeds from the RUCKUS transaction, is $150 million to $200 million. As Chuck mentioned earlier, we are excited about the RUCKUS transaction as it unlocks further shareholder value and provides an opportunity to return additional cash to shareholders. The net cash impact of the transaction after fees and taxes is expected to be approximately $1.7 billion. Turning to Slide 8 for an update on our liquidity and capital structure. During the first quarter, our cash and liquidity remained strong. We ended the quarter with $2.5 billion in cash on hand. During the quarter, our cash balance increased approximately $1.6 billion as we closed the CCS divestiture at the beginning of January and repaid all of our existing debt and redeemed the preferred equity. In the quarter, we did not purchase any equity on the open market. However, we will continue to evaluate opportunities to buy back stock, and the Board of Directors recently approved the buyback of up to $100 million. The company ended the quarter with no outstanding debt. In early April, the company entered into a new revolving credit agreement with Citibank in an aggregate amount up to $300 million, subject to borrowing base availability. Based on forecasted inputs, we expect the borrowing base to be approximately $175 million at the end of the second quarter. The revolving credit facility is scheduled to mature in 2031. Subsequent after the end of the first quarter, the Board approved a special distribution of $10 per share. The distribution was paid on April 27 and is expected to be treated as a return of capital for tax purposes. Although we considered putting modest leverage on the company ahead of the distribution, we decided not to proceed due to challenging debt market conditions and the desire for financial flexibility. This position allows us to evaluate investments in Aurora, including bolt-on accretive acquisitions. I will conclude my prepared remarks with commentary around our expectations for the remainder of 2026. We will continue to focus on completing the sale of RUCKUS and implementing the Aurora strategy. We expect Vistance's second quarter adjusted EBITDA to be essentially flat with the first quarter. Second quarter adjusted EBITDA will be down versus prior year due to favorable project timing in Aurora and some pull-ahead revenue in response to tariffs in the second quarter of 2025. In the first quarter, we began taking action to reduce the $30 million of stranded costs that were associated with the CCS transaction. As mentioned previously, the stranded costs are included in our Vistance Networks adjusted EBITDA guideposts. With the pending sale of RUCKUS, we are continuing to evaluate overall stranded costs. Similar to the CCS transaction, final stranded costs on the RUCKUS transaction will be minimal. However, it may take several quarters to reduce the G&A cost structure to the desired levels as we complete the separation of the RUCKUS business, including managing transition service requirements. As we think about the stand-alone Aurora business, our 2026 adjusted EBITDA guideposts are in the $225 million to $250 million range, excluding stranded costs from the RUCKUS transaction. We look forward to continuing to develop and implement the Aurora strategy focused on taking advantage of the DOCSIS 4.0 upgrade cycle, managing our legacy business and investing in future technologies. And with that, I'd like to give the floor back to Chuck for some closing remarks. Charles Treadway: Thank you, Kyle. In closing, we are very excited about the RUCKUS transaction as it unlocks equity value and returns cash to our shareholders. I want to thank the RUCKUS team for all they have done to make this deal possible and position the business for continued success. The transaction now allows us to focus on Aurora and taking advantage of the current DOCSIS 4.0 upgrade cycle while positioning the business with new technology for future growth. And with that, we'll now open the line for questions. Operator: [Operator Instructions] Our first question comes from Samik Chatterjee with JPMorgan. Samik Chatterjee: Maybe just a couple of questions. For the first one, I'm trying to think of the -- you're guiding Aurora Networks EBITDA to be down year-over-year. Trying to think of the bridge here because you do have the memory cost related headwinds. You do have -- it seems like you're assuming for the rest of the year, software doesn't repeat to be as much of a driver as last year. So maybe if you can help me bridge through the EBITDA decline, which at least in my numbers is more around sort of $15 million looks like in EBITDA. How to think about the moving pieces there? How much are you getting from growth in the business offset by these drivers in terms of memory and others? Kyle Lorentzen: Yes. So I think if we look at the sort of the drag from last year, you look at the stranded cost for the Aurora business, they take about half of the $30 million that we're talking about. So that's $15 million. We've had a decline in the legacy business that we've talked about. And then we have the memory chip issue, which in the latest forecast, we have it at about $30 million of drag versus last year. That essentially gets offset partially by the growth that we have in the business on the DOCSIS 4.0 upgrade products. So if you take the growth minus the drag with memory chips, the stranded cost and the legacy business decline, that's how you're getting the year-over-year decline overall. Samik Chatterjee: Great. And for my follow-up, I mean, you did mention the opportunities to then use the balance sheet for accretive acquisitions. How are you thinking about technology that would sort of bolster what you already have in the portfolio on the Aurora Network side? What would be sort of more of a target technology that you would look to acquire? And how much dry powder do you want to keep on the balance sheet for like what is the typical size and dry powder you would need to then pursue those ambitions in terms of acquisitions? Charles Treadway: Sure. Thanks, Samik. Look, we're not going to get into any specifics, but I would say that the DOCSIS market is an industry that continues to be fragmented with many small suppliers. And we've talked to our larger customers, and there's a desire for them to work with players of scale. And based on our size and strong balance sheet, we're well positioned to bring that stability. So I would say what we're looking at more for is bolt-on accretive acquisitions that can provide us, as you say, product or customer expansion, and we're going to be working with our large customers to really kind of define that. Operator: Our next question comes from Amit Daryanani with Evercore. Amit Daryanani: I have a couple as well. Maybe the first one, just to kind of get this sorted out. The RUCKUS transaction, it sounds like you want to do the distribution within 60 days of close. Can you just talk about what the tax treatment would be? Is it going to be like a return of capital the way the Amphenol was? Or could this be different? Kyle Lorentzen: Yes. At this point, we'd expect it to be a return of basis. Amit Daryanani: Got it. Perfect. And then Chuck, we really looked at sort of Aurora as kind of a key asset in the company right now. Could you maybe spend a little bit of time talking about what are the different assets within Aurora? I think you have like the DOCSIS 4.0 portfolio that's doing really well for you folks. I think amplifiers and PON does fairly well. But then you have these legacy assets that are sort of declining but higher margins. Can you just talk about what is the framework in terms of how to think about the different assets within the portfolio? How big they are? What is the EBITDA profile for each of them look like? It would be good to just be able to level set what's left in the asset right now. Kyle Lorentzen: Yes. I mean, maybe I can answer the question just as we think about the legacy business. So clearly, the legacy business has been in decline over the last few years. We talked about the decline that we've seen from '25 to '26 in our forecasting. So a lot of that decline is behind us. And when you think about the Aurora business, approximately 15% of our revenue and about 25% of our EBITDA is driven by that legacy previous DOCSIS version. So as we sort of move off of '26, and Chuck can provide some detail on the different products, you should think about it as we are getting strong growth in those DOCSIS 4.0 products, the new products, the amplifiers, the RPDs, the nodes, and we expect to see continued decline in the legacy business. But on a relative basis, as we've gone through the decline over the last few years, it is a smaller part of our business now. And we're actually seeing fairly strong growth in the DOCSIS products, particularly on the amplifier side, both from an FDX perspective and an ESD perspective. I don't know if... Charles Treadway: Yes. And related to technology, right, on the legacy, think about the E6000 family and the amplifiers there. But as you say, you know the DOCSIS 4.0 stuff. But besides that, I would say PON, specifically remote OLT technology is where we have a good position, and we're going to be looking more at chassis PON going forward. And then on the video side, we also have -- think about our video as software providing, helping cable operators provide ad-based revenue streams for them. Amit Daryanani: Perfect. The last one, I'll step away after this. The backlog, normally full scale, even $843 million. I apologize if I missed this, but is there a way to split that between RUCKUS and Aurora just so we understand what the base looks like? Kyle Lorentzen: Yes. I think the backlog in Aurora is about $400 million, if that's the question. Operator: Our next question comes from George Notter with Wolfe Research. George Notter: I guess, again, a few more questions on the Aurora business. I'm just curious about what customer concentration looks like there. Obviously, there's a couple of big customers, I presume, but I'm just curious what that would look like. And then also bigger picture, these customers are going through a really significant network upgrade. If you look at sort of the pacing of those upgrades, you've got a couple of years left, it feels like, maybe a bit longer, maybe a bit shorter. But how do you think about the business in the context of these upgrades? And then presumably behind that, there's a step down in those business lines. I'm just curious how you think about that? And does this turn into a maintenance business? How big could that maintenance revenue stream be? Like how do you see the long term? Kyle Lorentzen: Yes. So I'll deal with customer concentration, not unsimilar to the other players in the market. Customer concentration is relatively high. Our top 3 customers represent about 75% of our revenue. George Notter: And then the long-term picture? Charles Treadway: Yes, yes. I'll take the second part. When you think about where we are, you say 2 years, it depends really on which customer you are. I mean some customers are probably in that process where they have a couple of years left. Others may have 3 to 5 years left of just getting that ramped up. But then you have -- after that, you have the whole -- the PON story. Customers are either going to go DOCSIS 4.0, they're going to do remote OLT or they're going to do chassis PON going forward. And that's where we're investing in. Of course, video is really unrelated to those things. And then there's going to be a legacy business that continues. So when you think about the value going forward, I mean, there's going to be significant FDX amplifiers. We talked about putting out 500,000 of them already. There's multiple years left, let's say, 3 to 5 years left of that. Operator: [Operator Instructions] Our next question comes from Tal Liani with Bank of America. Kevin Niederpruem: This is Kevin Niederpruem on for Tal Liani with Bank of America. My first question is revolving around these nodes that you guys announced that you plan to ship in the second half of 2026. Can you help us think about the size of this opportunity? And maybe explain for us how you see these nodes coinciding with the purchasing plans of your customers that have already done their strong upgrades with these amplifiers. Is there a relationship and kind of a way to think about it, how these amplifiers that have seen strong growth coincide with the growth of these nodes that are now coming online? Charles Treadway: Yes. I'd start by saying the new product you're talking about is unified RPD nodes and RPDs and nodes, and that allows the customer to choose either ESD option or FDX option. So when you think about Comcast, they're an FDX path other players have chosen ESD. But as they go forward, as they move forward, they see the value of both, and they want to have that optionality. So it will really be a customer that might have already started ESD, they may decide to replace that with a unified product that allows them to have both options. If you're already with FDX and you're choosing that, you might not go that route. When you think about amplifiers in a relationship to the number of nodes, I mean, think about 6 to 8 amplifiers per node is kind of how to think about that. It could range from 4 to 8, depends on how you design your network. Kevin Niederpruem: Got it. Makes sense. And then my second question for you guys is, last quarter, you talked about how you have visibility into memory supply and you're almost kind of reengineering or reworking these products to help mitigate the impact of memory costs. Can you talk about where you stand today? How does your line of sight look to inventory now? And how is that reengineering or reworking progressed throughout the quarter? Charles Treadway: Right. I'd say with the RUCKUS business, we actually have all the volume we need for '26 right now. But as I want to mention, as we talked about in the last call, RUCKUS requires a different graded chip. It's not the high end -- the really -- heat since -- it's more -- it cannot -- it doesn't have to worry about the heat as much as it does in the Aurora product. On the Aurora side, we're like most companies that are dealing with the tight supply. But I'd say in the first quarter, we managed -- we managed through the challenges. We delivered the strong results. And then we're working with our suppliers and customers on availability and pricing. The good thing for us is we've had orders on the books for multiple years now. And the suppliers are looking at that very favorably because we're not raising the volume to make sure we get a larger allocation. We've been very consistent on that. And they've been very supportive in helping us up to this point. And I say that they're going to most likely continue to be able to do that for us. And we also -- as you say, we are working on designs. I'd say we're a couple of quarters away from having some additional options related to memory chips, but that's where we are there. But I feel good right now about how we've been treated. We've been supported and the fact that we're not AI is helping us in this case. Operator: Our next question comes from Tim Savageaux with Northland Capital Markets. Timothy Savageaux: Congrats on the RUCKUS sale. I want to take kind of the flip side of the legacy question. And that is, I don't know if you'd look at sort of a growth aspect of Aurora and call that vCCAP and PON or do I ask the same type of questions. As we look at that business now, how -- I imagine it's small, but I wonder if you could try and size that in a similar way or talk about growth potential and a target for that business over time? Can it become, say, as big as the legacy business in a few years? And I have a follow-up. Kyle Lorentzen: Yes. So let me -- I mean, I'll just talk a little bit about just the size of the PON and vCMTS business as it sits today in our Aurora business. Think about that as less than 10% of the revenue. And as Chuck mentioned, with the focus on the PON side and on the vCMTS side, where we've announced some wins, particularly in Europe, yes, we would expect that business to grow fairly substantially over the next 3 to 4 years. And we feel like there is some line of sight for us to be able to at least offset our legacy business with those 2 product lines. So I think we're not going to go roll out the detailed forecast by product line. But I think as we think about what I mentioned before on that 15% of our legacy business with PON and vCMTS being less than 10%, yes, we think over the next few years, we can get it to be that size. And when you think about our DOCSIS 4.0 products, the amplifiers and the RPDs in particular, I mean, we are seeing our projection within our forecast is to see those products year-over-year from '25 to '26 to grow in the 20% range. So I mean, there is strong growth on that side of the business. Charles Treadway: And the other thing I could add to that, Tal, is more in line with the inorganic opportunities. As I shared earlier in the call, with speaking to our large customers, there are opportunities for consolidators that could get us some additional product lines, that these customers may need that we don't have today as well as additional customers that we don't have today. And obviously, we'd be looking at not just products we could use right now, but products that we could use for the future. Timothy Savageaux: Great. And if I could follow up with that 20% growth in amplifiers and nodes and offset by legacy declines, does that translate into maybe double-digit revenue growth for Aurora in '26 despite the EBITDA decline? And that's it for me. Kyle Lorentzen: Yes, you're probably somewhere in the low double digits. Operator: Thank you. I'm showing no further questions at this time. I would now like to turn it back to Chuck Treadway for closing remarks. Charles Treadway: Yes. Thank you for your time today. And obviously, we appreciate the interest in our company, and have a great rest of your week. Thank you very much. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Welcome to the FTI Consulting First Quarter of 2026 Earnings Conference Call. [Operator Instructions] Please also note that this event is being recorded today. I would now like to turn the conference over to Mollie Hawkes, Head of Investor Relations. Please go ahead. Mollie Hawkes: Good morning. Welcome to the FTI Consulting conference call to discuss the company's first quarter 2026 earnings results as reported this morning. Management will begin with formal remarks, after which they will take your questions. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including the company's outlook and expectations for the full year 2026 based on management's current beliefs and expectations. These forward-looking statements involve many risks and uncertainties, assumptions and estimates and other factors that could cause actual results to differ materially from such statements. For a discussion of risks and other factors that may cause actual results or events to differ from those contemplated by forward-looking statements, investors should review the safe harbor statement in the earnings press release issued this morning, a copy of which is available on our website at www.fticonsulting.com as well as other disclosures under the headings of Risk Factors and forward-looking information in our annual report on Form 10-K for the year ended December 31, 2025, our quarterly reports on Form 10-Q and in our other filings with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this earnings call and will not be updated. FTI Consulting assumes no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. During the call, we will discuss certain non-GAAP financial measures. A discussion of any non-GAAP financial measures addressed on this call and reconciliations to the most directly comparable GAAP measures are included in the press release and the accompanying financial tables that we issued this morning. Lastly, there are 2 items that have been posted to the Investor Relations section of our website for your reference. These include a quarterly earnings presentation and an Excel and PDF of our historical financial and operating data, which have been updated to include our first quarter 2026 results. These formalities out of the way, I'm joined today by Steve Gunby, our CEO and Chairman; and Paul Linton, our Interim Chief Financial Officer and Chief Strategy and Transformation Officer. At this time, I will turn the call over to our CEO and Chairman, Steve Gunpy. Steve Gunby: Thank you, Mollie. Welcome, everybody, and thank you all for joining us today. As you may have seen this morning, we reported once again solid results for the quarter. I will talk to those results in a moment briefly. And then Paul, of course, will talk to them somewhat more extensively. With your permission today, I'd like to start this discussion, however, in a somewhat different place. Typically, in these sessions, I start with some perspectives on the quarter or on the last few quarters and then try to zoom out from those to see if I can draw from them any lessons as to why we've been successful and then some lessons about the future, why typically, I at least continue to believe that, that experience suggests an extraordinarily bright future. Today, let me reverse that order, drawing on some of what we just experienced at our all SMD meeting a couple of weeks ago to see if I can use that experience to perhaps share some perspective on this year and on this quarter. We finished that all SMD meeting just a few days ago. At every one of these meetings, so many people come up to me or others after the meeting and say, just how terrific a meeting they felt it was in terms of the work that got done, but I think for most people, even more powerfully in terms of the sense of pride, sense of excitement, the sense of conviction about the future of the company that people emerge from that meetings with. That's been true at prior meetings. But after this one, my ex co-colleagues and I were struck by just how many people came up to us and shared those thoughts and just how deeply they seem to be feeling them. So I thought I might share a little bit about that, why that might be and why it is that after such a meeting like this, that so many people leave with the conviction about the magnitude of the opportunities yet in front of this company and the conviction that this company is still so much closer to the beginning of the powerful journey we're on in the end. So why was this meeting so good? I think actually, part of the power of the meeting had nothing to do with the meeting itself. It had to do with just how pumped up so many people were coming into the meeting, pumped up particularly about what they had each individually and collectively accomplished over the prior 18 months. Paul and I today will talk about all the stuff we still have to do because there's always stuff to do. We have a long way to go on Compass Lexecon. This quarter, we did also had some of the normal blips. For example, FLC didn't quite perform as we intended. Our tax rate was a little higher than we expected. We had some higher SG&A expenses and so forth. But if you go back 18 months, you might just recall just how many of our businesses were facing truly tough challenges exiting 2024 and heading into 2025. If you remember, Corp Fin has been down 2 quarters in a row. FLC was facing fundamental uncertainty because of tremendous new regulatory changes. Tech was facing a major second request headwind. And StratCom was coming off probably the most challenging 18 months that it faced in a while. People coming into this meeting in Orlando knew that notwithstanding those multitudes of headwinds, in the end, they -- we have managed to deliver a record level of performance as a company in 2025 as a whole and in the bulk of our businesses. And we ended the year with tremendous momentum in most of our businesses. The fact that we have gotten through 2025 and turned every business, Compass Lexecon aside, but every other business back on to its long-term tremendously positive trajectory created, I believe, a powerful sense of pride, motivation and importantly, confidence that people brought into the meeting, even if they credited Mollie and others for creating it in the meeting. So that was one cause. I do think those feelings were powerfully reinforced by some of the stories told in the meeting. The stories of the actions and activities in 2024 and 2025 that led to those results, but also some of the powerful multiyear success stories that were brought to life once again in the meeting. Those stories at an aggregate level were powerful, and they are powerful. I can't talk about all of them. But an example is Mike Eisenband talking about the fact that Corp FIS today is 3x the size it was 8 years ago or perhaps even more powerfully, he and others talking about how folks in the room made that happen. The extension of our restructuring practice around the world, the doubling down of the restructuring practice in the U.S. and U.K., even though it had always been strong, the extension into new businesses and transactions and transformation. or analogous stories about the people in this room in other segments or geographies. For example, Sophie, talking about all the efforts tech -- that took tech from a struggling business that one to one that is in the face of very challenging market conditions is continuing to win and at least in my measure, is growing faster than any other competitor. So I think people came in really motivated, but that motivation got tremendous reinforcement by plenary presentations, but also, I think at least as powerfully by sharing stories with colleagues about the actions that each person had taken, the actions that led to those overall results embedded in the plenary presentations. It suggested it wasn't magic wands that somebody waived. It wasn't markets that gave us those results. It was what people in that room individually and collectively have done that got us to where we are. The third reason that people highlighted and actually, I think probably highlighted more than the first 2 as motivating was just the group of the people in the room. Somebody said to me, you look around and just the group we were proud to be associated with. group of people, some of whom I've known for a while and I've loved working with, but then you also see this terrific group of promotions and these people we have managed to attract. At the end of the opening speech, we asked people to think back to the all-SMD meeting we had at the end of 2018 and ask everyone in the room who had been in that room in 2018 from a bunch of geographies to stand. So we asked anybody from Italy who was in the room today and had been there in 2018 to stand as well as the Nordics and Amsterdam and the Middle East. We started with that group. 0 people stood. Then we asked people from Germany to join them and a few folks stood. I did a few more when we went through the rest of the continent of Europe and the continent of Australia and Asia and Latin America. But in the aggregate, in the room of 700 people, there are a few handfuls of people standing. And then we asked everybody from those markets today to stand and over 200 people got up. We did a similar exercise for the U.S. and U.K. And of course, we had powerful position in the U.S. and the U.K. in 2018. But when we had the entire group of SMBs in the U.S. and U.K. today, it was double the ones that had been there in 2018. We talked about that, the transformation of our capabilities represented by those changes in terms of geography, position in those geographies. We also talked about the fact that we could do the same exercise by segment or practice and see the power of the growth of our capabilities in areas like cyber or transactions or aviation or financial crimes investigations. That standup exercise triggered tremendous terrific capability conversations. But I think actually even more powerful for most of us was at the end of 3 days when people have had working session with the folks who stood, working sessions with long-time colleagues, but also new colleagues, which allowed in a much more tangible sense, not just seeing people stand in the room, but in a tangible sense of just how much capability we have in this firm and how much capability we continue to add to this firm. So my speculation is the reason we got that feedback at the end of the meeting is a combination of those. People brought in pride and conviction to the meeting because what they had accomplished over the prior 18 to 24 months. That pride was reinforced by the stories they heard, but also the stories they shared about the number of places around the world where our teams are building businesses, creating adjacencies, reinforcing core positions, turning around difficult positions. And that, in turn, was reinforced by the power that always comes from deep connection with long-time colleagues who respect people who have inspired confidence for extended periods of time as well as exposure to fabulous new colleagues who are bringing new expertise and new energy. All of that energy ended up getting devoted into work sessions, not only celebrating where we're great today, but importantly, confidence and conviction as to where we can take this business further. I think not surprisingly, people came out of a meeting like that finding myriad opportunities in every practice and every geography, which I think left a lot of people in a position that I've been in for a while, which is the sense of the extraordinary opportunity yet in front of us and feeling incredibly strongly the company is much closer to the beginning of our journey than the end. Let me turn back to the quarter. I think our performance this quarter, the forecast we have for this year are simply consistent with the story. It is a story of a firm that I believe has proven that our essential DNA is a simple one, to support great professionals to help them build businesses that they are passionate about to build and a firm that understands that if we do that, if we find those professionals, support them in their ambitions, though there will be zigs and zags. If we do that, we ultimately control our destiny. We grow market share. We support clients more fully, and we deliver for you, our shareholders. This quarter is consistent with that story. Like all quarters, it doesn't mean we didn't have some zags. Our FLC business, which has been performing incredibly this last while, had a short-term zag this quarter. It doesn't mean that anybody in FLC is less bullish about its future or the capabilities we've built, the aspirations we have or the future we believe we can target. Our tax rate happened to be higher than we expected this quarter. We had some SG&A expenses that exceeded our expectations. These are things we have to look at and can address. We do have one longer-term issue that we've been talking about and that we are still working through, which is Compass Lexecon. Compass Lexecon's performance was in line with where we thought it was going to be this quarter, but that certainly leaves us with multi quarters of work yet to do. But of course, that has also always been true for this company in prior -- in many prior years. We have not always had every business every year set up exactly to soar. This year, we have work to do in Compass Lexecon, and we are doing that work. So we have headwinds, particularly in Econ, but in the face of those headwinds, I hope you saw we grew close to double-digit revenue this quarter. I hope you saw that StratCom delivered yet another record quarter. In corporate delivered double-digit revenue growth year-over-year in all 3 of its sub-businesses. And Tech came out of the other side of the headwinds it faced last year and the non-Compass Lexecon team in Econ is having another great quarter. So Paul will go through the quarter in more detail. To me, what is more powerful than the fact that we delivered yet another solid quarter, and we believe we're on track for the year is that in the context of the last 8 years, 8 years in which we've had some solid quarters, some extraordinary quarters and some quarters that weren't so good, all of which added up, however, to an incredible run of growth in multiple geographies and multiple segments around the world, building a stronger, more capable group of people with a set of leaders with a conviction of where they can take us and putting us on a solidly, with zig zags, but solidly upward sloping set of lines. My view is that if we continue to invest in the ways we know behind great people with ambition and the sort of conviction and drive and energy that was demonstrated at this meeting of people who take responsibility for turning that into results. This firm is and will be much closer to the beginning of this journey than the end. With then, Paul, let me turn this over to you. Paul Linton: Thank you, Steve. Good morning, everybody. In my prepared remarks, I will take you through our company-wide and segment results for the quarter. First quarter 2026 revenues of $983.3 million increased $85.1 million or 9.5% compared to the first quarter of 2025. The increase was primarily driven by revenue growth in our Corporate Finance, Strategic Communications and Technology segments that partially offset by a revenue decline in our Economic Consulting segment. Excluding an estimated positive impact of FX, revenues increased $60.8 million or 6.8% compared to the prior year quarter. Net income was $57.6 million compared to $61.8 million in the prior year quarter. The decrease was primarily due to higher direct costs and SG&A expenses, which included legal settlement in the prior year quarter as well as an increase in interest expense and a higher effective tax rate compared to the prior year quarter, which more than offset the increase in revenues. Direct costs of $676.5 million compared to $608.9 million in the prior year quarter, primarily due to higher compensation expenses, which included an increase in variable compensation, salaries and forgivable loan amortization compared to Q1 2025. SG&A of $222.3 million or 22.6% of revenues increased $38 million from $184.3 million or 20.5% of revenues in the prior year quarter. The increase was primarily due to higher legal expenses this quarter as compared to Q1 of 2025, which included the benefit from legal settlements that did not recur in Q1 of 2026 as well as higher compensation and T&E expenses. Excluding an estimated negative impact of FX, SG&A increased approximately $32.4 million compared to the prior year quarter. First quarter 2026 adjusted EBITDA of $96.8 million or 9.8% of revenues compared to $115.2 million or 12.8% of revenues in the prior year quarter. Our first quarter 2026 effective tax rate of 26.6% compared to 23.3% in the prior year quarter, primarily due to a less favorable tax benefit related to share-based compensation as fewer shares vested as well as an increase in valuation allowance recorded against current period losses compared to the prior year quarter. While our tax rate this quarter of 26.6% was higher than expected, we continue to expect our full year tax rate to be between 22% and 24%. Weighted average shares outstanding, or WASO, for Q1 of 30.3 million shares compared to 35.5 million shares in the prior year quarter. a 14.6% decrease. Earnings per share of $1.90 compared to $1.74 in the prior year quarter. As a reminder, in Q1 2025, our EPS included a $25.3 million special charge related to severance and other employee-related costs, which reduced GAAP EPS by $0.55. Excluding the $0.55 Q1 2025 special charge, adjusted EPS was $2.29 in Q1 2025. Billable headcount increased by 1.1% with growth in our CorpFin and FLC segments being partially offset by declines in StratCom, Econ and Tech. Non-billable headcount decreased by 0.4% compared to the prior year quarter. Now turning to performance at the segment level. In Corporate Finance, revenues of $409.5 million increased 19.2%, primarily due to higher demand and realized bill rates in turnaround and restructuring, which grew 19%, transactions, which grew 18% and transformation, which grew 20% compared to the prior year quarter. Excluding an estimated positive impact of FX, revenues increased 16.7%. In turnaround and restructuring, revenue growth was driven by roles in some of the largest bankruptcies globally from Spirit Airlines to Saks in the U.S. to Prax Oil Refinery in the U.K. and Azul Airlines in Brazil. Notably, in transactions, our engagements have expanded in size and as we continue to bring more of our services to clients across the deal life cycle. In addition to working for PE-backed clients, we are working on some of the largest mergers, integrations and carve-outs in the market, including Omnicom's merger with IPG, Skyworks Solutions merger with Qorvo and Lumen's sale of their fiber-to-the-home business to AT&T, among many other brand-building cases. In transformation, our performance this quarter exceeded our expectations. In fact, the number of million-plus engagements nearly doubled compared to Q1 2025. We continue to win our share of end-to-end cost takeout, supply chain and operational efficiency mandates in key industries where our experts bring deep real-world expertise such as health care, industrial, communication services and financial services. Segment operating income of $85.2 million compared to $41 million in the prior year quarter. Adjusted segment EBITDA of $88.7 million or 21.6% of segment revenues compared to $55.9 million or 16.3% of segment revenues in the prior year quarter. The increase in adjusted segment EBITDA was primarily due to higher revenues, which was partially offset by higher compensation. Sequentially, Corporate Finance revenues decreased 3.2%, primarily due to lower success fees and lower pass-through revenues. Adjusted segment EBITDA increased $8.5 million, primarily due to lower compensation. Turning to FLC. Revenues of $192.9 million increased 1.2% due to higher realized bill rates for risk investigation and construction solutions services, which was partially offset by lower demand for dispute advisory services. Excluding an estimated positive impact of FX, revenues decreased by 0.9%. Segment operating income of $23.1 million compared to $30.1 million in the prior year quarter. Adjusted segment EBITDA of $25.3 million or 13.1% of segment revenues compared to $37.5 million or 19.7% of segment revenues in the prior year quarter. The decrease in adjusted segment EBITDA was primarily due to higher compensation and SG&A expenses, which included an increase in hiring-related expenses and an increase in bad debt. Sequentially, FLC revenues were flat and adjusted segment EBITDA increased by $1.4 million, primarily due to lower compensation expenses, which was partially offset by an increase in hiring-related costs. In general, disruption the world is facing increases the need for our expertise from national security and cyber threats to AI-related risk compliance to shifting geopolitical issues, among others. That, of course, does not play in our favor every quarter. And this quarter, FLC underperformed our expectations. Some of this underperformance is timing driven as there are always quarter-to-quarter volatility in our business. As we've discussed during the last several calls, our team is supporting complex headline and brand-building matters, but those engagements are often large and lumpy with starts and stops that are often driven by factors that are outside of our control. In Economic Consulting, revenues of $175.6 million decreased 2.3%, primarily due to lower demand for antitrust services, which was partially offset by higher demand for financial economic services and higher realized bill rates. Excluding an estimated positive impact of FX, revenues decreased 5.7%. Segment operating loss of $7.3 million compared to segment operating income of $12.1 million in the prior year quarter. Adjusted segment EBITDA was a loss of $5.9 million compared to $14.4 million or 8% of segment revenues in the prior year quarter. The decrease in adjusted segment EBITDA was primarily due to higher compensation, largely related to the increase in forgivable loan amortization and low. Sequentially, Economic Consulting's revenues were essentially flat and adjusted segment EBITDA decreased $2.9 million, primarily due to higher compensation expenses, which was partially offset by lower bad debt. We have, as expected, made some good progress over the past months in Europe, in particular, and we expect that to begin to show up in the P&L as this year goes on. Although we've added terrific talent to our Compass Lexecon antitrust business in North America, we are just beginning to rebuild that revenue base. Technology revenues of $102.3 million increased 5.3%, primarily due to higher demand for litigation and information governance, privacy and security services, which was partially offset by lower demand for investigations and M&A-related second request services. Excluding an estimated positive impact of FX, revenues increased 2.8%. Higher demand for litigation was largely driven by clients in the health care, media and technology industries and demand for information governance, privacy and security services was driven by a large privacy breach. So the complexity of data is compounding. Our tech business combines domain experts, operators, attorneys and investigators with deep technical experts who have worked with artificial intelligence for over a decade to solve their clients' most complex high-stakes issues at the intersection of law and regulation. This combination of experience and expertise has long been a core differentiator for our tech business. And that's why the world's leading AI companies are turning to us for their most complex matters from IP and copyright to privacy, security and data monitoring to building custom depeensable tools for specific client uses and workflows based on our expertise collecting and analyzing massive scale AI system data from activity logs to RAG databases. Segment operating income was $7.7 million compared to $6.6 million in the prior year quarter. Adjusted segment EBITDA was $11.8 million or 11.6% of segment revenues compared to $11.6 million or 11.9% of segment revenues in the prior year quarter. The increase in adjusted segment EBITDA was primarily due to higher revenues, which was partially offset by an increase in compensation. Sequentially, technology revenues increased 3.3%, primarily due to demand for information governance, privacy and security services, which was partially offset by lower demand for investigation services. Adjusted segment EBITDA decreased $3 million sequentially, primarily due to higher compensation, which more than offset the increase in revenues. Strategic Communications record revenues of $103 million increased 18.4%, primarily due to higher demand for corporate reputation, public affairs and financial communications services. Excluding an estimated positive impact of FX, revenues increased 14.5%. Worth noting, StratCom's continued powerful results reflect the strength of our multiyear investments to build out our higher-margin event-driven offerings in areas such as crisis, cyber, transactions and activism as well as frequently teaming with the other segment to address complex client issues in our largest global cases. Segment operating income of $20.8 million compared to $8.7 million in the prior year quarter. Record adjusted segment EBITDA of $21.9 million or 21.3% of segment revenues compared to $12.9 million or 14.8% of segment revenues in the prior year quarter. The increase in adjusted segment EBITDA was primarily due to higher revenues, which was partially offset by an increase in compensation expenses largely related to variable compensation. Sequentially, Strategic Communications revenues were up 3.6%, primarily due to higher demand for financial communications and public affairs services. Adjusted segment EBITDA increased 15% sequentially, primarily due to higher revenue. Let me now discuss a few cash flow and balance sheet items. As is typical, we paid the bulk of our annual bonuses in the first quarter. Net cash used in operating activities of $310 million compared to $455.2 million used in the prior year quarter. The year-over-year decrease in net cash used in operating activities was primarily due to a decline in forgivable loan issuances, higher cash collections and lower income tax payments, which was partially offset by an increase in compensation payments. During the quarter, we repurchased 787,098 shares at an average price per share of $161.11 for a total cost of $126.8 million. As of March 31, 2026, approximately $354.9 million remained available for common stock repurchases under the company's stock repurchase program. Total debt net of cash of $556.7 million at March 31, 2026, compared to $8.9 million as of March 31, 2025, and $99.9 million at December 31, 2025. The sequential increase in total debt net of cash was primarily due to annual bonus payments and share repurchases. Turning to our outlook. First, let me remind you of the guidance ranges for 2026 that we provided in February. Revenues of between $3.94 billion and $4.1 billion, EPS of between $8.90 and $9.60. Based on our solid Q1 performance, we are maintaining our guidance ranges, which incorporates the following considerations. First, in our Compass Lexecon business, though we believe our adjusted segment EBITDA in Economic Consulting has hit its low point this quarter, as Steve said, we have multiple quarters of work ahead to get the P&L back to the levels we are happy with. Second, we're an event-driven business, and therefore, our results can be lumpy. As mentioned, we had several jobs in FLC that rolled off during the quarter or started later than expected. We have some large jobs rolling off in other segments where our work is event-driven. However, as mentioned previously, our ability to win the largest headline-making jobs in the market reflects the continued power of our platform and the relevance of our people. Third, the M&A market has had a strong start to the year in terms of deal volume and mega deals. We saw solid demand for our businesses that support M&A-related activity in Corp Fin, Econ, Tech and StratComs. However, we can never be certain how activity will continue through the remainder of the year, particularly amid continued market uncertainties. Fourth, we continue to invest in talent. In 2025, we announced 85 senior hires. In 2026, we plan to add more senior professionals where we see the right opportunities. We have announced 29 SMD and affiliate hires year-to-date in key geographies such as Australia and the Middle East, where we are benefiting from competitive disruptions as well as in key adjacencies such as transaction, transformation, public affairs, cybersecurity, data privacy and AI. We also intend to build teams around these leaders. And in the second half of the year, we expect to increase junior hiring in parts of the business that lagged in hiring in 2025. Fifth, we now expect SG&A expenses for 2026 to be approximately $60 million higher than 2025. The increase is largely due to higher legal and compensation expenses. As a reminder, as Steve mentioned, we held our all SMD meeting in April. We expect Q2 2026 to be the high point for SG&A or approximately $5 million higher than Q1 2026. Before I close, I want to reiterate 4 key themes that I believe continue to underscore the attractiveness of our business. First, in an increasingly uncertain and disruptive world, our powerful platform and unique set of offerings allow us to deliver impactful results for our clients as they navigate their most significant crises and transformations from bankruptcies and M&A transactions to investigations and cyber breaches regardless of business cycles. Second, we continue to attract top talent when the right people are available regardless of short-term economic impacts, particularly in the backdrop when many competitors are facing major challenges from expensive debt and poor liquidity, the heightened client skepticism around the quality of their core offering. Third, as we continue to hire, our management team remains focused on both growth and utilization. And fourth, our business generates excellent free cash flow, and we have a strong balance sheet that provides us the flexibility to boost shareholder value through organic growth, share buybacks and acquisitions when we see the right ones. Before we open the call to your questions, I want to take one more opportunity to welcome our new Chief Financial Officer, Angela Nam, who will join us on May 1. We're looking forward to introducing Angela on our next earnings call in July. With that, let's open up the call for your questions. Operator: [Operator Instructions] And at this time, we will take our first question, which will come from Andrew Nicholas with William Blair. Andrew Nicholas: The first one is just kind of on the macro environment. A lot of helpful color on the puts and takes at the segment level. But I just wanted to ask kind of at a big picture level, CFR, you saw really good growth on both the restructuring side and the transaction side. How feasible is it, whether it's over the course of this year or even multiple years for both of those businesses to grow at such strong rates simultaneously. Typically, you'd expect a little bit of conflict between a restructuring environment or a strong restructuring environment and a strong M&A environment. Just kind of interested in whether or not you see those conflicting in the coming quarters and years. Steve Gunby: Yes. Let me take a crack at that, Paul, you probably have views on that, too, if you want to add. Look, I would say there are a couple of different forces going on there. There's the market forces, which I think you're right, markets that tend to support lots of M&A will often not be markets that are big restructuring markets. And so you have some macroeconomic forces that have historically suggested that these don't all go aligned. I think the other thing that goes on here is that we've actually -- our teams have done a fabulous job of adding talent and expanding the businesses. These are not just U.S. businesses today. They're global businesses where we have powerful positions overseas, and we continue to be attracting talent. So some of what you see here is the market forces come in coalescing in an unusual way and all supportive. I think some of it has to do with actually us gaining share, particularly in like transactions and transformation. And look, that just depends on us doing the right things and the right talent come available and us being bold enough to jump on that talent when it's available. So I think one of them says they're inconsistent, they shouldn't all grow together. The other one says, if we do the right things, we can defy those market realities a bit. Does that help, Andrew? Andrew Nicholas: Yes. No, that's helpful. I appreciate the color. And then for my follow-up on kind of segment margins. I think both FLC and StratCom kind of the first quarter results were a decent bit different than what we've seen over the past several quarters. So just kind of curious how we should think about those 2 segments margins. And with FLC more specifically, last year was a really good year for profitability. I understand that the top line is a little bit lumpy, but is there a margin profile that you think is "normal" for this business that we should kind of gear our models to? Paul Linton: Yes. So I don't think we're going to give any specific guidance on margins, but maybe I can help a little bit with FLC. I mean we have been adding talent in FLC and particularly over the last little while, a lot of the talent we've added has been at the top with -- in terms of SMD. So that investment in building out our expert model, which will allow us to continue to drive the revenue in some of these higher-margin services, we feel is kind of the right investment for the business. There's also some onetime stuff that we talked about in the -- earlier in the call that drove some margin to be a little bit lower than our expectations. But I think in the long term, we feel pretty confident in the business. Steve Gunby: And then StratCom, to the point, has had a fabulous quarter, and we never project people to take the best quarter and multiply it and extend it forever. But let me say this, I think -- so you never want to take a quarter where everything is on fire and just make that the normal quarter. I will say there's stuff underlying in StratCom that is powerful going on. There's been a move over now a number of years, but that starts to show up in the numbers towards much more of the highest value part of its business, crisis, transformation, cyber deals and so forth. And that is a -- it's a lumpier business, but it's, of course, a crisis business, which tends to be a higher-margin business for us. The other thing is I think that's a business that has adjusted its leverage ratio and taking account AI. The high end of that business, the core advisory business is like the rest of our business where crisis is why people are hiring us. We used to need a lot of people to help summarize things like EU regulations. You need fewer of those. So some of the leverage ratios have changed. So look, I think that business is headed in a great trajectory, but you never want to take the quarter where -- I mean, even Paul sounded rapturous about the numbers. We never want to take that and just say, oh, that's the new normal. Does that help, Andrew? Andrew Nicholas: Yes, that's perfect. Operator: And our next question will come from James Yaro with Goldman Sachs. James Yaro: So maybe I just want to -- maybe just starting first on restructuring. I just want to touch a little bit more on that and dig in a little bit on some of the things you've already alluded to. But I'd love to just get your perspective on what the disruptions in private credit and software. And obviously, the 2 are related, but basically, the nexus of those 2 things means for the business. I think a number of investment banks out there have talked about the liability management opportunity potentially over time. Obviously, that's not where your restructuring business is lies. And so I just love to get your perspective on whether private credit and software could have a positive impact or impulse on your restructuring business. Steve Gunby: You want me to take that or you want to take that? Okay. So look, I think we have good relationships with private credit, our business is helping companies that have challenges and private credit in general tends to be companies that lend money to more risky, more venturesome activity. And so they're taking risk. And so when things get stressed, that's where we are the strongest, okay? I would say that has not been the major driver of our growth so far. We have very good relationships there. And we have also relationships that are important, not just in, but in FLC and investigating -- some of these are very covenant-light loans and therefore, covenant-light loans on average have more susceptibility to the statement of frauds and so forth. And we have an FLC business that specializes in fraud investigation. So I would say that depending on how that market evolves, it could be a terrific source of revenue growth for us. I think our private equity clients are hoping it's not that the world is calm going forward. But we are well positioned if it is. You're right, we don't do liability management exercises. But as you know, James, not every liability management exercise works out. And a number of the bankruptcies we're working on now were liability management exercises a couple of years ago. So look, we know these clients well. We think they're valuable clients. We stay close to them, and we stand ready to serve if and when they need us. And I think if they need us, we will get significant revenue from them. Does that help, James? James Yaro: Super helpful, as always. Maybe just zooming out on a somewhat related topic, but Steve, I'd just love to get your perspective on what you think are the businesses that could be most impacted by the disruptions we're seeing, whether it's AI, software, private credit and the global conflict and perhaps in which ways? Steve Gunby: You're talking about our end customers? Or are you talking about our businesses? James Yaro: I guess your business yes, your business. Steve Gunby: Let me think about that... James Yaro: Sorry, Steve, let me just clarify the point. I just want to clarify the point, my apologies. That was imprecise with me. So just to clarify, how do you think those large items could impact your end customers and therefore, drive more business for you? Steve Gunby: Yes. Look, it's -- I think it's true for all of our businesses. I mean our business -- maybe when we acquired all these businesses 15 years ago or 20 years ago now, they were somewhat different. I mean maybe our StratCom people wrote annual reports at that point in time. I mean at this point, so many of our businesses really are businesses that designed to serve companies at their biggest times of change and potential disruption in the marketplace or transformations they're in. And to the extent the world is more disruptive or in response to anticipate disruption, people are transforming their businesses with greater rapidity and more frequently, it's a boon to the businesses. And it's hard for me to pick favorite children out of that because you can see that in StratCom right now. You can see that in restructuring right now. It leads -- all of those things lead to litigation, which we're expert witnesses and testifier. Sometimes people misrepresent things and that leads to fraud. And so I'm pretty bullish about our position to help companies in -- as I think I said once, if the world were the kind of world that we tried to describe to our 2-year-olds, wonderful world, everybody gets along. You're trying to tell your 2-year-old back because he or she is beating up on the 4-year-old. But a peaceful world where everybody is getting along, there's no litigation, there's no crisis and the world isn't changing, that's not what we're set up to serve. To the extent the world has other aspects, it's a pretty big driver for us. Does that respond, James? James Yaro: Yes. Yes. Extremely helpful. And last one just for you, both. Just as you think about hiring, you talked about accelerating hiring towards the back half of this year, you also highlighted a number of -- a substantial number of recent senior hires. I just would love to get your perspective on what gives you the confidence or the ability to accelerate the hiring so substantially? Is it greater disruption -- even greater disruptions among the firms from which you hire or just even more investment on your side or maybe a combination of both? Steve Gunby: Yes. Let me distinguish between the junior hires and the senior hires. The junior hires we're forecasting for the second half of the year is to catch up because we have been so fortunate in the number of senior hires that we've been bringing on that our ratios in a number of our businesses are below where we've historically been, okay? So I think the junior hires in the second half of the year is not based on some forecast of disruption in the world. It's -- we got senior hires. We have to bring in some people below them. The senior hires is really a supply side-driven thing. I think as we've had -- I'll give you an example of Australia. At one point in Australia, we had several good leaders down there, and they couldn't attract anybody. We were not #1 or #2 in any market position. Nobody believed the global network was worth anything. We had really good people trying to recruit people and nobody would come. And it just transformed itself. I think today, we may have more SMDs per capita for GDP, whatever in Australia than any place else because what happened is there was a breakthrough, some of the number of leading restructuring people came over, and they founded a tremendous platform. We made the global network work. That went around the market. Now that led a few additions, but then you're right, competitors had real missteps. And when competitors have real missteps, now we were the destination that everybody wanted to talk to. It didn't mean only us, but everybody wanted to talk to. And then they talked to us and they talk to the people and said, "Wow, these are people I want to join. And then when they join, that gets around the market as well. And so we've gone from a position where nobody would take our calls 10 years ago or 8 years ago, the phone is ringing off the hook. And I don't know if we released the exact number of SMBs, Mollie, she's taking her head, but where it's ringing off the hook. And I think that's what we bet on because if we can get those people, maybe we get those people 3 quarters ahead of where they can bring in revenue or sometimes they have restrictions. And so it's 6 quarters before they can bring in a lot of revenue. But that, we think, is the single best fuel of long-term growth for us, what we bet on. And then what we showed at -- what people were talking about in this all-SMD meeting is why we have driven this. So on the senior headcount, that's the reason, James. Does that respond? James Yaro: Extremely helpful. Paul Linton: Maybe I'll just add to that just a little bit. Part of your question was why do we have the confidence. And I'd point you to StratCom and CorpFin. The growth that you saw in Q1 of 2026, those are investments that were made 3 years ago, 2 years ago, 1 year ago that enabled -- now some of it is pricing, but without the heads, that growth is not possible. So the confidence we're seeing -- the performance we're seeing in those businesses gives us confidence to continue to invest behind those businesses to drive not only restructuring but transactions and transformation and in StratCom, not just financial communications, but all those other event-driven services such as cyber. So we're going to continue to invest if we find the right people in the market because that's the way we delivered the growth you saw this quarter. Operator: And our next question will come from Tobey Sommer with Truist. Tobey Sommer: We've heard from some other management at various consulting firms think that one of the impacts of AI could be a move towards some more fixed pricing structures as well as potentially changes in ratios of juniors to seniors. You made a couple of comments on the leverage ratio of juniors to seniors in different directions or hiring a little bit more in the back half to support some of your new senior hires. How do you see fixed price and changing ratios evolving over a little longer stretch of time? Steve Gunby: Look, it's a good question, Tobey. I think it's one that I talk with the managing partners of a number of law firms. I talk with managing partners of other professional services firm. I mean everybody is thinking through what the pricing dynamics are in an AI environment. I would say nobody has a perfect answer for any of them, and there's lots of experiments going on. In our tech business, where we're using -- we have a really leading set of offerings, AI related. They do require then really smart senior overview to make sure that you don't have the sort of AI hallucination legal issues that some people have. So that has reduced some of the junior most work, but it has required some of the more senior work, which is build out at higher rates. How that nets out, I don't know. Right now, I would say it's probably netting out with fewer hours but us gaining share because we're leading edge. And so there's all these dynamics that are going on. We're clearly, in some places, looking at fixed price contracts because we're focused on trying to use AI to make sure we're delivering more value, which typically means fast the value faster, either broader with deeper sources or faster. And that has more value for your clients as well. But we're experimenting with multiple models in multiple places. Like on most things on AI, the -- it's moving so fast that you have to be ahead of it, but the immediate impact of those pricing decisions right now is muted. It's just that we're staying on top of it because it's pretty damn critical for going ahead. And so we're looking at lots of different versions. Does that help, Tobey? Tobey Sommer: Sure. Yes, it does. So with Economic Consulting, you kind of described a multi-quarter path to trying to grow that business and improve profitability. Could you dig into what the likely path is to improve profitability? Because last year, you handed out a bunch of forgivable loans, and that's going to weigh on things. And I'm just wondering as you placed some of those bets on people who weren't necessarily commercially proven, as they -- some of them do prove themselves and become successful, how do they not get sort of marked to market for that new improved condition? Steve Gunby: Yes. So I don't think we're really too worried about the people getting commercial, that's not going to be a problem for us. We're worried about those who don't get commercial, Tobey. The -- what we did was we bet on some very proven rainmakers, and they've come in and generally been driving revenue, and that's pretty straightforward. We have bet on some very leading-edge academics. I think we've talked about the Meda case that came out and one of the academics from the University of Chicago was behavioral economist was cited by the judge multiple times in that case. Those people are incredible assets for the biggest states litigation, which is the place where we still win we're the leading player in that. And that's -- but those people are not necessarily automatically economic for us because you sign them up and then over time, behavioral economics gets accepted in the courts and then behavioral economics gets used more. We have structures for each of those people as they get used more, they will get paid more, but their forgivable loan doesn't go up. So the economics of them getting used more are positive for us, not worse for us. And we made a lot of those bets, and some of them will take quarters to start to prove out, and some of them will take years to start to prove out. They were very intelligent bets. These are bets on people who -- some of our people are the leading academic journals in economics. and they have insight into people who are really leading edge in the way -- which is the foundation of Compass Lexecon. But many of those bets are not near-term payback. And therefore, we're saying it's a multi-quarter journey for us. Does that help a little bit, Tobey? Tobey Sommer: It does. If I could ask one follow-up. Is there a path or strategy for you to regain your position in competition consulting domestically? Steve Gunby: Yes. Let me just separate out a few things. So as we might imagine, there's like 3 or 4 different parts of our business. Our Europe business was not particularly hard hit by the competitive disruption. Last year, it happened to have a tough year, partly because of distraction by some of this. I think they're on their way back to the position, and they are still the leaders, to my knowledge, of -- we are the leaders in global antitrust based on a terrific team over there. And that's starting to show up as this year goes on, I believe. In the U.S., we've always been the leader, I believe, in the finance practice. And I think our revenue year-on-year has been up in the finance practice. And we still win the largest cases, and I don't think we lost anybody of significance in the competitive disruption. The hit we had was to the U.S. antitrust business. But even there, it's nuanced. The biggest cases in the U.S., when it goes to litigation, people want the depth of expertise we have. And I don't think -- and we have people like Dennis Carlton. We have the people like I just mentioned these affiliates like John List, who were on the Medicase. We have added to that some tremendous people like Doug Bernheim. So we, I think, are still the go-to person for the leading litigation-related cases in antitrust in the U.S. And I think you can check that out with different sources on that. Where we've gotten hit is surprisingly is on the more routine standard merger clearance cases, where we lost some people. And the people we have, we still have some very good people, but they tend to be pretty academics and shy, and they don't -- they're not out there marketing, and we've lost a lot of share on that in the U.S. And that's rebuildable. It's not a unique characteristic, but it does require us going out and meeting the attorneys and so forth, and we've got a ways to go on that. So I think that's doable. But even that, when people have entrenched relationships, it takes a while to get a crack and then approve yourself. And so we've got a ways to go in the more routine -- particularly in the more routine merger agency-related clearances in the United States. Does that help, Tobey? Tobey Sommer: Thank you. Steve Gunby: I want to say thank you to everyone for attendance. And I think since I won't say thank you to Paul for being the CFO yet because we'll wait until Angela is here, and she can thank you, but also because you are not going any place, right? You're going to come back and still be our Chief Transformation Officer. But thank you, everybody, for your time and your support, and I hope this meeting was helpful. Have a great week. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Operator: Good day. My name is Ali, and I will be your conference operator today. I would like to welcome everyone to the Insperity First Quarter 2026 Earnings Conference Call. [Operator Instructions] And please note, this conference call is being recorded. At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Jim Allison, Executive Vice President of Finance, Chief Financial Officer and Treasurer. At this time, I'd like to turn the call over to Jim Allison. Mr. Allison, please go ahead. James Allison: Thank you. We appreciate you joining us today. Let me begin by outlining our plan for this afternoon's call. First, I'm going to discuss the details behind our first quarter 2026 financial results. Paul will then comment on 3 strategic initiatives in 2026: Our margin recovery plan, our efforts to rebuild growth momentum, including the HRScale rollout and our AI initiatives. I will return to provide financial guidance for the second quarter and full year 2026. We will then end the call with a question-and-answer session. Before we begin, I would like to remind you that Paul or I may make forward-looking statements during today's call, which are subject to risks, uncertainties and assumptions. In addition, some of our discussion may include non-GAAP financial measures. For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any such forward-looking statements and reconciliations of non-GAAP financial measures to their comparable GAAP measures, please see the company's public filings, including the Form 8-K filed today, which are available on our website. Today, we reported adjusted EPS for the first quarter of $1.31 and adjusted EBITDA of $103 million. Each of these results exceeded the midpoint of our expected range. Our quarterly results included outperformance in gross profit and operating expense management, partially offset by slightly lower-than-expected unit growth. The average number of paid worksite employees came in at the low end of our forecasted range at 303,049, a 1.0% decrease versus Q1 2025. As you may recall from last quarter's call, our fall campaign sales and year-end client retention were both impacted by our margin recovery efforts, which we included in our paid worksite employee guidance. Worksite employees paid from new client sales declined by 7% compared to Q1 2025. Client attrition totaled 11% in Q1 2026, within our historical range of 9% to 12%. Net hiring within the client base was in line with our forecast and slightly higher than Q1 2025, but the hiring occurred later in the quarter than we had expected, which impacted the average worksite employees paid for the quarter. Paul will discuss our worksite employee results in more detail in a few minutes. Total gross profit in Q1 2026 decreased by 3% to $302 million. This represents a significant improvement compared to the 21% decline that we experienced in Q4 2025 and demonstrates the progress of our margin recovery plan. Gross profit per worksite employee in Q1 2026 was $332 per month, which is slightly above our forecast and within our range of expectations. The favorability was primarily driven by lower-than-expected benefit costs, partially offset by the lower worksite employee volume. Benefit cost per covered employee increased 5% over Q1 2025, which is a solid improvement compared to the 9% level we encountered throughout last year. Much of this improvement was expected, driven by the positive impacts of a favorable client mix change during our year-end client transition that was influenced by our pricing and client retention strategy, our plan design changes and our new contract terms with UnitedHealthcare. It is important to note that the new UnitedHealthcare contract is anticipated to have a positive impact of helping to flatten our quarterly earnings pattern starting this year with less expected earnings early in the year and more expected earnings later in the year. This is primarily the result of the pooling level change from $1 million per member per year down to $500,000. The new pooling limit includes a higher fixed premium that is charged evenly on a PEPM basis throughout the year, while the claims reimbursements are likely to be significantly weighted towards the latter quarters of the year. While it is still early in the year, we are pleased with the progress of our margin recovery plan and the lower-than-expected Q1 benefits cost. We have seen several positive signs contributing to these results, including slightly favorable runoff of prior period claims, reduced large claim activity and lower-than-expected pharmacy claims. At the same time, we remain cautious about the range of potential outcomes for the remainder of the year, which I will discuss later in the call. Total operating expenses decreased by 1% to $240 million in Q1 2026, which includes a $9 million restructuring charge primarily related to severance costs associated with the recent workforce realignment. Excluding the impact of the restructuring charge, our operating expenses decreased by 5%. During Q1 2026, we invested a total of $13 million in HRScale, including $8 million in operating expenses and $5 million in capitalized costs. This compares with $13 million in Q1 of 2025, all of which was expensed. For Q1 2026, the effective income tax rate for purposes of adjusted EPS was 41% versus 29% in Q1 2025. This significant change was the result of our lower stock price, which reduces our tax reduction related to the vesting of stock compensation. Since the vast majority of our stock compensation vests in Q1 of each year, our effective tax rate is expected to normalize for the remainder of the year. The higher effective tax rate for Q1 2026 had a negative impact on adjusted EPS. Our adjusted EPS of $1.31 was 17% lower than the $1.57 we reported in Q1 2025, while our adjusted EBITDA of $103 million was 1% higher than the $102 million we reported in Q1 2025. During the first quarter, we continued to return capital to our shareholders through our regular dividend program, paying $23 million in dividends, along with the repurchase of 171,000 shares of stock at a cost of $4 million. We ended the quarter with $36 million of adjusted cash. The decrease in adjusted cash was primarily the result of various seasonal working capital fluctuations including the timing of certain corporate payroll, health care and software maintenance contract funding. As of March 31, 2026, we had $380 million in unused capacity under our credit facility, of which approximately $330 million is available to borrow. At this time, I'd like to turn the call over to Paul. Paul Sarvadi: Thank you, Jim. Thank you all for joining our call. Today, I plan to cover 3 main areas. First, I'll share insights on our strong earnings results in Q1 and how we're executing our strategy for margin recovery this year. Next, I'll talk about our actions to regain growth momentum throughout the remainder of the year, especially as we navigate macroeconomic challenges in the SMB sector. Lastly, I'll provide our perspective on the evolving AI landscape and highlight the opportunities ahead for Insperity's strategic HR services, technology and expertise. We are pleased with our Q1 earnings results, which reflect the effectiveness of our efforts to overcome the health care claims margin pressure experienced in 2025. As we discussed last quarter, our 3-year plan prioritizes margin recovery in year 1. The main drivers behind our successful margin recovery are our new agreement with UnitedHealthcare, our benefit plan design changes, our strategic pricing and client selection and our improvements in operating efficiency. We believe these strategies and tactics provided the desired step-up in margin to begin the year, and we continued these actions throughout Q1. We plan to continue this emphasis throughout the balance of the year with the objective of achieving a substantially full recovery as we move into 2027. Our second priority for this year after margin recovery is regaining our growth momentum as we work to build the foundation for balanced growth and profitability in year 2 of our 3-year plan. Worksite employee growth is driven by our client sales and retention and the net change in employment within the client base. So let's look at each one of these to understand our outlook for the timing of regaining growth momentum coming out of Q1. I mentioned last quarter as we focused on margin recovery, we expanded our tools, processes and client-sponsored benefit options to support client selection and pricing for new and renewing accounts. While we can clearly see these steps supported our gross profit recovery, they also contributed to lower-than-expected booked sales and client retention. The effect on sales continued in Q1 as booked sales came in below our internal targets, except for our 3 HR360 mid-market sales. We have evaluated the processes and the outcomes and have recently implemented key learnings we believe will improve our booked sales results over the balance of the year. Our ongoing efforts to improve HR360 and HRCore sales, combined with our new growth catalyst, HRScale, are expected to contribute to our growth momentum. I'm very pleased to report today our initial HRScale beta clients were effectively onboarded in March and payrolls and invoices were processed in April as scheduled. We are off and running and the pipeline for HRScale clients is building. We believe HRScale is an unparalleled comprehensive solution that combines Insperity's flagship HR services and compliance expertise with Workday client-facing technology. We believe it's a growth catalyst for 2 reasons. First, it addresses our historical success penalty where clients we have helped grow and mature decide to leave Insperity for technology built for larger firms. Second, we believe we will sell many more new larger accounts since this combination of technology and services are a hand-in-glove fit for the mid-market space of businesses with 150 to 5,000 employees. Our early sales effort indicates that we are right on track. We currently have signed commitments for nearly 6,000 worksite employees to be on board within the next 6 months. We also have sales activity ramping up significantly, including meetings, demos, bids and closing negotiations for both current clients planning to upgrade and new clients attracted to our unique comprehensive HRScale service and technology solution. Our sales and marketing efforts for HRScale have also been refined based on the specific advantages that have resonated with business leaders. In particular, they view HRScale as a lower-risk decision due to the lower upfront investment, reduced time to value and lower ongoing costs compared to typical HCM and HR service vendor combination in the mid-market space. We are actively engaged in the HRScale sales process with new and renewing accounts, targeting start dates of January 1 and each quarter of next year. We believe our HRScale ramp-up could play a significant role in regaining growth momentum as we move into 2027. On the client retention side, while our strategy resulted in persistent attrition at the higher end of historical levels, we are seeing the desired impact as a greater percentage of departed clients were less profitable accounts, resulting in overall improvement in client profitability. We expect the slightly higher attrition to continue but moderate over the course of the year due to the smaller number of accounts renewing monthly and improvements we have put in place. The third contributor to our worksite employee growth metric is the net change in the existing clients' employee base. This continued to show volatility in Q1, turning negative in February and positive in March. We are cautious about the potential impact of the ongoing international conflicts and macroeconomic factors, including inflation fears and lingering uncertainty about tariffs, which could affect small business expansion or hiring. Consistent with recent NFIB surveys, results from our business outlook survey shows a notable shift in sentiment with small- and medium-sized businesses becoming more cautious since January, particularly regarding the wider economy. More clients now anticipate economic challenges in the coming year. Worries about the economy have grown significantly as 54% of respondents expect a negative impact on their businesses, an increase from 42% in January, while only 25% foresee positive effects, down from 37%. Optimism among clients has decreased compared to previous quarters. Nevertheless, most, 64% still believe they'll perform better in 2026 than 2025, although this figure has modestly dropped from 70% in January. Our survey reveals that clients are showing less confidence regarding increases in compensation, hiring, net earnings and sales volume. There's also a marked rise in expectations for higher capital asset costs compared to January, indicating greater sensitivity to cost and inflation awareness. The actual small- and medium-sized business data that we monitor as employment indicators align with this decline in business leader sentiment. Overtime, as a percentage of base payroll and commissions paid to the sales staff of our clients were both below historical thresholds that typically have preceded increases in hiring and pay raises. So in this environment, our paid worksite employee growth came in at the low end of our range. Based on the starting point for Q2, combined with our continued emphasis on margin recovery and the sentiment in the small- to medium-sized business community, we expect the low point of our previous worksite employee range to be closer to the midpoint of our new guidance. However, we expect continued progress on margin recovery to offset the shortfall from lower worksite employee volume. And as a result, we are reiterating our original adjusted EBITDA guidance for the year. Now I'd like to discuss how artificial intelligence is changing the landscape and could become a driving force for Insperity in the years ahead. First, we'll look at broad employment challenges and how AI might affect the workforce. While the labor market faces risk of displacement, there are also exciting growth opportunities as AI sparks the rise of new businesses. AI is actively transforming the workplace by automating various tasks, which is expected to impact many roles, although white collar and entry-level positions are widely expected to experience the most upheaval. AI is also boosting productivity and generating new roles. So far, this shift has only slightly affected overall employment. This shift has the potential to contribute to a decline in traditional employment, while significant disruption in other roles such as coding may drive changes that require employees to acquire new skill sets to leverage AI effectively. We believe disruption and a high rate of change in employment can possibly affect the overall level of employment growth and volatility in the SMB sector. However, it also potentially magnifies the need for sophisticated HR services, technology and insights, which could substantially increase demand for Insperity's comprehensive HR solutions. AI is driving new business formation in the U.S. with applications reaching nearly 500,000 a month in Q1, especially in AI-focused sectors. Growth remained strong at about 12% year-over-year for Q1. AI appears to be expanding opportunities and making starting a business easier, leading to record entrepreneurship among small and midsized companies. While past technology shifts like PCs and the Internet replaced jobs, they also boosted employment by fostering new businesses. Now as we drill down into our target of the SMB community, we see exciting possibilities for our HR solution offerings. As we roll out new AI agents alongside our AI-assisted HR experts, our strategy is to provide the flexibility to service our clients and worksite employees according to their preferences, while also streamlining our operations and accelerating our product development. SMB owners wear many hats and solution providers are increasingly becoming the principal avenue as channel partners for AI adoption among SMBs, utilizing established relationships to deliver secure and practical AI solutions that these businesses may find challenging to implement independently. Insperity is exceptionally well positioned as a premium HR channel partner to assist top-performing small- and medium-sized businesses in managing disruptions and personnel challenges resulting from AI-driven transformations. Our recent survey of our small and medium-sized business clients indicates that AI adoption is progressing. However, it does not appear to be driving widespread workforce changes yet. 62% of our clients are piloting or integrating AI primarily to support staff, facilitate routine operations and improve customer service. We're leveraging our service using AI with our proprietary agent strategy. We started by implementing this solution internally in HR and payroll, resulting in higher productivity and service quality. We will soon expand this HR360 agent to help HR360 clients navigate the platform, find answers they need and boost engagement. This tool acts as a copilot, removing barriers and increasing value for PEO customers. The next HR360 agent release will further improve client and employee experiences during major events, offering personalized support, faster onboarding and immediate access to expertise, while reducing our service workload and maintaining security. Our third HR360 agent version will include introduce conversational reporting using demographic and transaction data, shifting from static reports to real-time insights for better decision-making without the need for users to have advanced analytics skills. We're also applying AI across the software development cycle in an effort to accelerate product launches, improve developer productivity and enhance code quality through AI-enabled methodologies. As we look further ahead, we believe the nature of our business offers an exciting future for Insperity as the AI transformation continues to unfold. Despite technological advances, we believe human-to-human interaction remains essential and valuable in the human resource business. AI can deliver powerful data and insights, but when it's time to make the decision that affects the company and its people, there's no substitute for experienced human judgment and having Insperity standing shoulder to shoulder makes a profound difference. Our highest value for our SMB clients is the advice and support we provide through a lens of trust, judgment, care and protection of their company and their people, both employees and their families. We believe AI will likely add value to the strategic HR services, technology and expertise provided by Insperity. At this point, I'd like to pass the call back to Jim. James Allison: Thanks, Paul. Our updated outlook for the full year 2026 is comprised of 3 primary drivers. First, we are revising our unit growth down to reflect both the weakening in small business economic sentiment and a slightly larger impact of our margin recovery plan on new client sales and client retention. Second, we believe that our margin recovery plan is slightly ahead of schedule, and we expect some continued improvement from favorable client mix changes related to our pricing and client renewal strategy. Third, we expect some continuation of the operating expense savings that we experienced in Q1. As a result, we continue to forecast adjusted EBITDA in a range of $170 million to $230 million for the full year 2026. With regards to worksite employee growth, we are forecasting a range of 303,000 to 307,000 for the full year 2026, which represents a decrease of 1% to 2.3% from 2025. We have adjusted each of the drivers of our unit growth in our forecast. After being at the low end of our forecasted range in Q1, our starting point for the second quarter is a little lower than previously expected. In addition, as Paul discussed, our new client sales and client retention have been revised due to weakness in small business economic sentiment and the impact of our pricing and client renewal strategy. We continue to analyze and revise our strategies to achieve our margin recovery goals while also focusing on regaining our growth momentum, and we have implemented some changes that we believe can have a positive impact on our sales and retention results as we progress through the year. We continue to expect net hiring within the client base to be in the low single-digit range, similar to last year, with some positive benefit of summer help in Q2 that should revert in Q3. Moving to margin recovery. We are pleased with the progress we have made to date, and we are forecasting some continuing improvement as we continue executing the plan throughout 2026. Some of the sales and client retention results that are a headwind to worksite employee growth also create a potential tailwind for margin recovery. We continue to see that the profitability of terminating clients, including the client terminations we know about for Q2 and Q3, has been significantly lower than the profitability of those we are retaining, producing a favorable change in client mix. We are also cautiously optimistic regarding the pricing and risk profile of our new client sales. It's important to note that many of the factors that drive our pricing results have the potential to positively impact cost trends over time. As I mentioned earlier, our Q1 benefit cost results were slightly better than expected, including lower runoff of prior period claims, reduced large claim activity and lower-than-expected pharmacy claims. While those results are generally consistent with the plan design changes and client mix changes that we've made, we are forecasting somewhat less favorability than we experienced in Q1. With regards to operating expenses, we continue to expect year-over-year reductions in 2026, driven primarily by lower headcount and lower HRScale expenses, partially offset by some increase in marketing spend and growth in the number of Business Performance Advisors, along with other inflationary cost increases. At this point, we expect continuing favorability in the remaining quarters of the year, but at a slightly lower level than in Q1 due to a few timing-related items. HRScale operating expenses are expected to be generally in line with our budget. We expect our full year effective tax rate for adjusted EPS purposes to be 36%. The effective tax rate for GAAP purposes could fluctuate from that based on the level of nondeductible expenses as a proportion of pretax income. We expect our weighted average outstanding shares to be approximately 38.5 million for the remainder of the year, primarily reflecting the recent stock compensation vesting. As a result of the revised effective tax rate and number of outstanding shares, our full year 2026 adjusted EPS guidance range is now $1.60 to $2.60. As for Q2 2026, we expect the average number of paid worksite employees to be in a range of 302,500 to 304,500, a decline of 1.5% to 2.1% from Q2 2025. We are forecasting adjusted EBITDA in a range of $18 million to $46 million and adjusted EPS in a range of $0.02 to $0.50. As I mentioned earlier, our quarterly earnings pattern is expected to be somewhat flatter than our typical historical pattern for 2 primary reasons. First, our pooling level change with UnitedHealthcare from $1 million per covered member per year down to $500,000 resulted in significantly higher premium charged evenly on a PEPM basis throughout the year, whereas the expected claims reimbursements in that program will likely be significantly weighted towards the later quarters in the year. In addition, as we execute our margin recovery plan throughout 2026, the positive impacts are expected to be more pronounced as we move through the year. At this time, I'd like to open up the call for questions. Operator: [Operator Instructions] Our first question is coming from Andrew Nicholas with William Blair. Daniel Maxwell: This is Daniel on for Andrew today. Just to start off, there's obviously a lot of moving pieces in guidance. But taking it all together, do you have any change to your expectation for gross profit per WSE? I know last quarter, you said you don't expect a recovery to pre-2025 levels, but would you still anticipate a year-over-year improvement on that line or more so in line with 2025? James Allison: Yes. So our original guidance included an increase in gross profit per employee compared to 2025 levels. We had mentioned last time that we didn't expect it to get back fully to 2024 levels. As we look at kind of where we are now compared to where we were coming into the year, we do think we're a little bit ahead of schedule on the profit recovery efforts. So we do think the gross profit per employee is likely to be a little bit higher than what we had in our original guidance. And between that and some additional favorability on the operating expense side, we expect that to be an offset to the lower worksite employee levels that we've guided to this quarter. Daniel Maxwell: Okay. Very helpful. And then maybe switching to more specifically on the WSEE front and the lowered guidance. It seems to imply that we're likely looking at year-over-year contractions in all of the remaining quarters of the year. Is that fair to say? Or do you have any other insight on what the sequential cadence of WSE declines might look like over the course of the remaining quarters? Paul Sarvadi: I think the best is to look at the big picture. We were forecasting minus 1.5% to plus 1.5% when we started the year. But based on the sales and retention levels in Q1 and in addition, the sentiment change that was quite dramatic that we saw based on macroeconomic and international conflicts, et cetera, causing a pause in the small, midsized business community mindset. That's what's driving us down to the range that we have now, which is -- makes that low end of minus 1.5% to be more like the midpoint. But we have a fairly narrow range on that for the year in number of worksite employees is what's in the press release, the range. And that's because once you get to this point of the year, the sales and retention levels, the attrition is not like the year-end when you have so many that are attriting. And we're able to track that fairly well for what we are expecting. So there's not a lot of further reduction. It looks like the total year's midpoint of our range is around minus 1.5% growth. Daniel Maxwell: Okay. Understood. And if I could squeeze one more open-ended one in. I was wondering if you could just kind of frame any dynamics that you're seeing in the competitive environment, if there's anything worth calling out on the pricing front or any indication that competitors are being more aggressive on price or otherwise? Paul Sarvadi: Well, I think the competitive environment has had quite a bit of pressure over the last 1.5 years or so. And it's normal when you have the higher pricing that's going on, on benefit costs and other things to cause more shopping. And when that happens, that just causes more competitive pricing. But we are in a position where we continue to compare well and are able to give customers options for how to look at their future. And we have a significant competitive differentiation that is just launched in HRScale, which puts us in a completely different category. And that, we think, is going to be really significant as we go forward. Operator: Our next question is coming from Jeff Martin with ROTH Capital Partners. Jeff Martin: Paul, I wanted to dive into your sentiment survey results. Specifically, how are you seeing that affect, if you are seeing it affect the sales cycle for HRScale at all? Paul Sarvadi: On the HRScale front, it's kind of a little early for us to have a comparative -- to compare against some of the sentiment type issues. But no, we definitely have a significant pipeline building. There's quite a bit of enthusiasm around the uniqueness of this offering. And as I mentioned in my remarks, the part of our sales effort that actually hit budget was the mid-market area, where there's a lot of conversation, even though that area involves both HR360 for mid-market and HRScale. There's definitely tremendous energy around that, and we feel really good about that. The decision for HRScale and for mid-market HR360 customers is more of a longer-term decision. So generally not as affected by the immediate circumstances as the smaller companies. Jeff Martin: Great. And then for my follow-up, I wanted to dive into the sales productivity. If you could break that down between HR360 and HRCore? And then tied to that, how has the adoption of client-sponsored benefit programs been trending? Are you seeing that continue to be more commonplace than historically? Paul Sarvadi: Yes. Well, certainly, as we talked about on our last call in the fourth quarter, we really made a change in the sales process and some of the tools that we're using to identify customers and to look at how we wanted to offer components of what we do. We want to be more value-based talking about the full picture on the benefit side. We would determine whether being in our comprehensive plan is the right approach for that particular client. And these are new sales motions, new processes. So it took more in the first quarter to get these things working in a way and understood by the sales team and internally by those that are supporting the organization. So when you have a new sales motion, that takes some time to think things through and figure out exactly how to go about it. Now we did some real assessment of what worked, what didn't work, and we recently put in some new practices and tweaked, adjusted things, and we actually believe that's going to have some dramatic effect. But that's what you have to do when you are focused on margin recovery as the priority. Now having this very successful quarter where you can see what happened and see how that worked that is a breath of fresh air for everybody and immediately moves attitudes and activity back to positive direction. Operator: Our next question is coming from Mark Marcon with Baird. Mark Marcon: Paul, just with regards to HRScale, how many clients do you now have on it? And what are your expectations with regards to having it fully ramped and when the associated costs with that ramping will start falling off? How should we think about that? And then I've got a couple of follow-ups. Paul Sarvadi: Sure. Well, let me describe, first of all, the stage that we're at. Obviously, we just brought on. The first clients are on that new platform, that new entity on HRScale. And we are in that ramp-up phase of selling new accounts and selling current accounts to upgrade from HR360. So we have a significant pipeline already. And as I mentioned on my remarks, we have nearly 6,000 scheduled to be on board in the next 6 months on that program. We also, of course, are now beginning to sell accounts to be scheduled in because it's a 6-month period for us to do the deployment and enablement to bring them on board. So the way to look at it for now, of course, is that we are converting current accounts onto the platform. That doesn't add worksite employee count, but it adds retention for those customers for multiyear accounts and many were focused on the larger accounts. So it's a very positive foundational effect on retention going forward and pricing. Now in addition to that, we are now selling new accounts that are coming straight on to HRScale. And over the balance of this year, those accounts will largely be set to start January 1 or April 1 next year, July 1. There will be -- we will start literally filling the pipeline for those quarterly starts. And we'll, of course, start the deployment enablement as we sign those contracts. Now that will feed in directly into the growth momentum that we see for 2027 and beyond. So that should give you a picture of how to think about it. So in terms of how that offsets cost, obviously, we have the cost in here now for being able to do the deployment enablement. And as we ramp up this employee count, there's your revenue to offset those costs in addition to the actual deployment enablement fees, which is a new element that we have not had to offset those costs before. So it's -- again, it's a start-up of that business, but it's on a great track, and we really see it being a hand-in-glove fit for these target clients. The other point I wanted to make that I made in my remarks is that we have already seen a very clear picture in the business leadership evaluating this, they can readily see and feel that there's less risk to this decision than they've had to consider doing these things in a different way. Going through the traditional effort to have an HCM system and multi-vendors to provide the support services. There's a lot of risk around that because of the size of the investment, the length of time it takes to actually get to some realized value and ongoing ultimate cost. HRScale is very easy for them to understand how it has changed that equation. Mark Marcon: That's really encouraging. I was referring to just the implementation costs that you had outlined when you first announced the partnership and you talked about the incremental expense just on your end to implement it and to get the system up and running. I was just wondering if we could see some costs falling away either later this year or next year, just purely from your own systems development perspective now that you've got some clients on it and that you're getting ready to bring on more. James Allison: Yes. So we definitely expect that investment costs related to HRScale are going to decline in the second half of the year. We're kind of in a little bit of a stabilization period right now that we talked about in our last couple of quarters. But as we get through the second quarter, a lot of people and their time are going to be going to other things. I think that we'll still have a typical pipeline that you would have for any product from an investment standpoint going forward. One of the things that's happening is that people that have been involved in the investment side of this deal now transition to becoming the service providers, the onboarding resources, the service provider resources that actually go along with the revenue that is being generated. Other costs that are third-party costs, we expect to taper away. And then the third piece being some internal technology resources that get reprioritized on to other key initiatives that we're working on -- kind of working on next, if you will. So there's a variety of different places that those resources go. Mark Marcon: Got it. And then just on the health care costs and the benefit costs, if I heard you correctly, I think they were up like 5% year-over-year, which is a really good outcome given the level of inflation. Is that basically due to plan design changes that you were able to set through? And is it your expectation that over the balance of the year, that 5% will kind of hold in terms of benefit cost inflation on a per user basis? James Allison: Yes. I would say that the biggest impact is the client mix. So obviously, we've increased our pricing. And then you have the client mix change that comes from lower profitability, clients terminating higher profitability, clients staying, and that's kind of an embedded feature of the way we're playing out our strategy. I think that's a little bit bigger than of an impact on Q1 benefits cost and the plan design changes themselves. But the plan design changes also have an additive cost savings there. And then the third component being the new contract with UnitedHealthcare. And I think the one thing that we wanted to try to make sure we pointed out today is the impact of that is more back-end loaded than I think probably we have maybe clearly communicated in the past and are in some earnings estimates that are out there on the analyst side. We are paying a higher premium for the $500,000 coverage. The claim reimbursements and the exposure that we're not going to have on claims going forward is more back-end loaded in the year. So we are expecting there to be a little flatter impact to our quarterly earnings pattern. So that's a smaller impact on Q1, the new contract, and it will be significantly larger as we go through the year. Operator: Our next question is coming from Tobey Sommer with Truist. Tobey Sommer: I wanted to ask about your sales counselors and advisers, how you're thinking about growing those to drive growth beyond this year into '27 and '28. I'm sure you've been busy training, but trying to figure out how you can brute force some growth by getting more feet on the street. Paul Sarvadi: Thank you. We will be, over the balance of this year, modestly increasing the number of BPAs, BPCs, but we do not have to increase that as many to regain growth momentum substantially because of the average size of the HRScale accounts and how even have an HRScale available is increasing interest in HR360 mid-market accounts. So we believe there's a built-in factor that helps drive the growth based on the average size of clients where it doesn't take as many BPAs and BPCs. But we are expecting once we get into 2027 to have a more steady, continuous uptrend in the number of BPAs for the target small business market. James Allison: And I would add, we saw some solid growth in the BPA count even in Q1. So that process has already started underway, and we expect to add more as we go through the year. Tobey Sommer: And from a balance sheet and capital allocation standpoint, what are the priorities and expectations as you work your way through the balance of '26? Paul Sarvadi: So pretty much the same as it has been in terms of our prioritization, obviously, for investment. We've invested heavily the last couple of years in our new offering. And now we're at that breakpoint where the investment is tapering down, and we're about to see revenue start coming in. So that's the exciting part about that picture. But we also continue to have the same priorities with the Board on capital allocation and not seeing that change at this time. Operator: Our final question today is coming from Brendan Biles with JPMorgan. Brendan Biles: Appreciate you guys going through all the detail with us. Two questions for you guys. One probably more interesting and one boring one. So first of all, I'm curious, when you get a result back like you guys heard in the survey from your customers that everyone is a little bit more worried about the environment, people are concerned that their business might not do as well this year than it did last year, what levers are available to you to adjust your go-to-market to ensure that you're still kind of providing the most value possible to your clients and helping them through this time, so you can maybe maintain a little bit more share of wallet? And to what extent are you guys able to put that into place this year? And now my boring question, I'm sorry if I missed it. Just -- I know you called out the 2 things that led to the guidance revision? It was like macro and then also a little bit more churn from the pricing initiatives. To what extent are you able to attribute the revision between those? I know it might be tough and maybe just comes from some of both or is it coming from more one or the other? That would be great. Paul Sarvadi: Sure. No, we looked at -- on the 3 drivers for growth, remember, it's sales, retention and the net change in the client base. And all 3 of those are slightly lower than we were expecting when the year started. And so when you factor all those in, that's just going to affect you as the year goes on. We do change the messaging. We do emphasize different aspects of what we're doing to help client by client. We also, though, have on the sales and retention side, having this good quarter under our belt changes the dynamic for the environment for the selling and retention effort as the year progresses. And as I mentioned in the call, we have fewer to contend with on the renewal side because the heavy renewal period is behind us now. And so we see some optimism on moving forward. But it is affected. The lower starting point already makes the year -- you have to take down that projection for growth for the year like I said, so that means that, that low end of our previous range is now about the midpoint of our range for the year. So that kind of gives you a feel for that aspect. James Allison: And I think the one thing that I would add to that is if you look at the guidance range, obviously, we took a little bit more off the top side of that more than the bottom side of that. So the sentiment change has some impact on, I think, the top end, kind of where we are and what we've experienced so far changes the lower end a little bit more than the sentiment changes more at the top end. Paul Sarvadi: I think one more aspect on that, that's probably worth putting in there is that some of these things that affect that slightly lower growth on all 3 of those areas actually enhance the profit recovery mode that we're in. And actually, that's why there's a great offset between those 2 factors that were changing and still have very strong feelings about our recovery for the full year. Brendan Biles: Yes, absolutely right. No, great to hear that the retained clients are the ones you want to hold on to anyway. Paul Sarvadi: Absolutely. Operator: Ladies and gentlemen, we have reached the end of our question-and-answer session. So I would like to turn the call back over to Mr. Sarvadi for any closing remarks. Paul Sarvadi: We just want to thank everybody for participating today, and we're excited that we have reached that first milestone of our profit recovery, and we will be working to regain growth momentum as the year progresses. Thank you for your participation today, and we look forward to being in touch with you either out in the marketplace or on our next call. Thank you. Operator: Thank you, ladies and gentlemen. This does conclude today's call, and you may disconnect your lines at this time. And we thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Q1 2026 Laureate Education, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Adam Morse, Senior Vice President of Finance. Please go ahead. Adam Morse: Good morning, and thank you for joining us on today's call to discuss Laureate Education's First Quarter 2026 Results. Joining me on the call today are Eilif Serck-Hanssen, President and Chief Executive Officer; and Rick Buskirk, Chief Financial Officer. Our earnings press release is available on the Investor Relations section of our website at laureate.net. We have also posted a supplementary presentation to the website, which we will be referring to during today's call. The call is being webcast, and a complete recording will be available after the call. I'd like to remind you that some of the information we are providing today, including, but not limited to, our financial and operational guidance constitutes forward-looking statements within the meaning of applicable U.S. securities laws. Forward-looking statements are subject to risks and uncertainties that may change at any time, and therefore, our actual results may differ materially from those we expected. Important factors that could cause actual results to differ materially from our expectations are disclosed in our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission, our 10-Q filed earlier this morning as well as other filings made with the SEC. In addition, all forward-looking statements are based on current expectations as of the date of this conference call, and we undertake no obligation to update any forward-looking statements. Additionally, non-GAAP measures that we discuss, including and among others, adjusted EBITDA and its related margin, adjusted net income, adjusted earnings per share, total debt net of cash and cash equivalents and free cash flow are also detailed and reconciled to their GAAP counterparts in our press release or supplementary presentation. Let me now turn the call over to Eilif. Eilif Serck-Hanssen: Thank you, Adam, and good morning, everyone. 2026 is off to a good start, and we are encouraged by the results from our recently completed enrollment intake cycles, which included Peru's primary intake and a smaller secondary intake for Mexico. Enrollment results came in line with our expectations for both markets with year-over-year new enrollment growth of 13% in Peru and 4% in Mexico through completion of the intake cycles by the middle of April. With the intakes now finalized, we have good visibility into the remainder of the year, and we are reaffirming our full year guidance for enrollments, revenue and adjusted EBITDA. We are increasing our guidance for adjusted earnings per share to reflect the $105 million in share buybacks completed during the first quarter, and we anticipate further share buybacks through the remainder of 2026 as return of excess capital remains a priority for the company. The enrollment intake results for the first cycle were in line with the macroeconomic trends we discussed during our last call for both Mexico and Peru. In addition, Peru is benefiting from continued strong penetration for our online offerings for working adult students. As a reminder, our business model is loosely correlated with economic cycles. In periods of robust GDP growth, such as the current environment in Peru, we have historically benefited from strong enrollment momentum. During a softer macroeconomic backdrop, as we are currently experiencing in Mexico, our growth tends to moderate a bit, but we are still doing well as families continue to prioritize spending on higher education due to the strong value proposition. In Mexico, GDP growth for 2026 is expected to remain relatively modest, albeit slightly better than 2025. President Sheinbaum's pragmatic leadership has helped preserve stability in the U.S.-Mexico relationship, providing for a constructive backdrop for the upcoming USMCA trade negotiations. Many economists are projecting an increase in economic activity for Mexico starting in the second half of 2026, setting the stage for a more robust GDP growth in 2027. In Peru, the economy continues to perform solidly, bolstered by robust domestic demand, new mining projects and strong commodity prices. The Peruvians just elected a new Congress, which reaffirmed a business-friendly center right majority and their presidential run-off election is set for June. Regardless of the outcome of the presidential election, Peru has historically demonstrated economic strength and stability, underpinned by strong underlying governmental institutions, a representative Congress, an independent Central Bank and a history of strong fiscal discipline. The foundation of our strong track record of performance is our mission, a mission to deliver affordable, high-quality education to prepare students for successful career and lifelong achievement while building pride, trust and respect within the communities we serve. We remain committed to transparency and accountability, measuring the outcomes that matter most and continuously improving how we track and report these results to all of our stakeholders. Earlier this month, we published our 2025 impact report. I encourage you to visit our website and download a copy to learn more about the impact of the outstanding work of our students, faculty and institutions are currently doing in their communities throughout Mexico and Peru. Let me briefly highlight some of the most important measurable outcomes we delivered. Half of our newly enrolled students are first-generation university attendees for whom a degree leads to their first professional role and a long-term economic upward mobility for their families. 9 out of 10 of our job seeking graduates secure employment within 12 months of graduation, underscoring the relevance of our programs, strong alignment with industry needs and the expertise and commitment of our faculty and staff to prepare students for successful careers. And graduates of Laureate Universities in on-campus programs recover the nominal cost of their education in approximately 3 years through increased earnings compared to high school graduates of the same age and the payback period is even shorter for working adults in our fully online programs. These measurable outcomes align perfectly with our mission, which is focused on quality, affordability and lifelong achievement. This concludes my prepared remarks, and I will now turn the call over to Rick Buskirk for a more detailed financial overview of our first quarter performance as well as further details on our 2026 full year outlook. Rick? Richard Buskirk: Thank you, Eilif. Before I discuss our financial performance for the quarter, let me provide a few important reminders on seasonality. First, campus-based higher education is a seasonal business. The first and third quarters represent our 2 largest intake periods, which traditionally account for approximately 80% of our total new enrollment activity for the year. From a P&L perspective, both are seasonally low periods as classes are out of session for most of those months. In contrast, the second and fourth quarters are not large enrollment intake periods, but generate higher revenue and adjusted EBITDA for the year. In addition, in terms of seasonality for 2026, we will have some intra-year calendar timing as outlined on Slide 22 in our presentation. For the first quarter specifically, approximately $9 million of revenue and related profitability is expected to shift out of the first quarter to the second half of the year. As I review our operating results for the first quarter, I will provide some additional color on these and other timing-related impacts and discuss enrollments in context of the cycle completion through mid-April. Let me now move to the operating and financial performance for the first quarter, starting on Page 11. Enrollment results for the cycle were in line with our expectations in both markets. New and total enrollment volumes increased 9% and 6%, respectively, through completion of the intake cycle in April as compared to the corresponding intake period in the prior year. Revenue in the seasonally low first quarter was $273 million with adjusted EBITDA of negative $2 million. Both metrics were ahead of the guidance provided 3 months ago due to favorable FX rates as well as some timing of expenses, which benefited adjusted EBITDA. On a constant currency basis and adjusted for the academic calendar shift discussed earlier, revenue for the first quarter was up 5% year-over-year and adjusted EBITDA was essentially flat, with a slight $2 million decrease from prior year due to timing of expenses and investments for new campuses in a low seasonal quarter. First quarter net loss was $22 million, resulting in a loss per share of $0.15. First quarter adjusted net loss was $24 million and adjusted loss per share was $0.17. Given some timing items affecting both revenue and adjusted EBITDA for the quarter, we are providing an outlook for both the first half and second half of 2026 to help investors better understand the trend line in the business. I'll discuss that a bit further when we review guidance in a few minutes. Let me now provide some additional color on the performance of Mexico and Peru, starting with Page 13. Please note that all comparisons versus the prior year quarter are on a constant currency basis. Let's start with Mexico. The first quarter reflects a smaller secondary intake as Mexico's primary enrollment cycle occurs in September, aligned with the Northern Hemisphere calendar. Mexico's new and total enrollments increased 4% versus the comparable intake cycle period through April in the prior year. These results are a continuation of the performance we saw during the primary intake last September and are aligned with the softer macroeconomic conditions we are currently experiencing in that market. Overall, pricing for the intake was in line with inflation for our traditional face-to-face programs. We were a little less aggressive with pricing for online, but still with an increase year-over-year as we continue to focus on driving strong volume growth in those programs. Adjusted for academic calendar timing, Mexico's first quarter revenue increased 2% versus the prior year period, with volume growth offset by timing of other revenue items. Revenue growth in Mexico for the first half of the year is expected to be fairly consistent with guided total company growth rate expectations for the year as those timing items will wash out in the second quarter. Adjusted EBITDA was down 16% year-over-year in the first quarter, largely reflecting the out-of-session period, investments in new campuses and other timing items. Let's now transition to Peru on Slide 14. The first quarter represents the primary intake for Peru as they are a Southern Hemisphere institution. Peru's new enrollments increased 13% versus last year's comparable intake led by strong growth in working adult-focused fully online programs. Total enrollments were up 8% for the cycle. The rapid scaling of fully online offerings will drive the majority of our enrollment growth in Peru this year as our series of planned new campus launches for face-to-face students won't start to ramp until 2027 and beyond. As discussed in our prior call, this will create a price mix impact on average revenue per student in 2026, resulting in similar revenue and volume growth rates this year in that market. Pricing during the intake was largely in line with inflation for traditional face-to-face programs. For online programs, given that we are still in an early-stage market, we are keeping prices relatively flat for the time being as we continue to focus on scaling that business and further enhancing our market-leading position. Adjusted for timing of the academic calendar, Peru's revenue for the seasonally low first quarter increased by 13% versus the prior year period and was aided by timing of other revenue during the seasonally low quarter. Adjusted EBITDA for the quarter was negative $35 million as Peru is out of session for most of the quarter as it is in their summer period. Adjusted for timing of the academic calendar, this represents $5 million improvement versus the prior year period. Let me now briefly discuss our balance sheet position. Laureate ended March with $217 million in gross debt and $157 million in cash for a net debt position of $60 million. Our balance sheet remains strong. During the first quarter, we repurchased $105 million of stock and at quarter end had $76 million remaining under our stock repurchase authorization. Supported by a strong balance sheet and our cash accretive business model, we remain committed to continuing to return excess capital to shareholders. Moving on to our outlook for 2026, starting on Page 18. We remain excited about the growth opportunities in Mexico and Peru and expect continued operating momentum in both markets during 2026. Following the results from our recently completed intake, today, we are reaffirming our guidance for total enrollments, revenue and adjusted EBITDA and are increasing our adjusted earnings per share guidance by $0.05 per share to reflect the impact of share repurchases during the first quarter. We did recognize a slight foreign currency translation benefit versus expectations in the first quarter, but are maintaining our existing FX rate assumptions for the year given some of the recent volatility in currency rates caused by global events. With that context, let me now move to our guidance ranges. Based on our assumed FX rates, we expect full year 2026 results to be as follows: total enrollments to still be in the range of 516,000 to 521,000 students, reflecting growth of 4% to 5% versus 2025. Revenues to be in the range of $1.890 billion to $1.905 billion, reflecting growth of 11% to 12% on an as-reported basis and 6% to 7% on a constant currency basis versus 2025. Adjusted EBITDA to be in the range of $583 million to $593 million, reflecting growth of 12% to 14% on an as-reported basis and 7% to 9% on a constant currency basis versus 2025. This would result in an increase in adjusted EBITDA margins of approximately 50 basis points at the midpoint of guidance on a reported basis. For 2026, we expect adjusted EBITDA to unlevered free cash flow conversion of approximately 50% on a reported basis, supporting our continued emphasis on return of capital to shareholders. Adjusted earnings per share guidance for 2026 is now expected at $2 to $2.08 per share, reflecting growth of 16% to 21% versus 2025 on a reported basis. This guidance reflects a diluted weighted average share count of approximately 141 million shares, incorporating the impact of share repurchases completed during the first quarter. Now moving to guidance for the second quarter implied first and second half of the year. For the second quarter of 2026, we expect revenue between $597 million and $601 million, adjusted EBITDA between $239 million to $243 million. This would result in first and second half of 2026 trends as shown on Slide #26. Let me just highlight a few points. Constant currency revenue growth rate expectations for the first and second half of the year are pretty similar with a slight uptick in the second half as we expect to start to see some macro recovery in Mexico. From an EBITDA perspective, you will note that our margin accretion is weighted towards the second half of the year. That is resulting from timing of investments as well as the new campus for Mexico that will open starting in September. That concludes my remarks. Eilif, I'm handing it back to you for closing comments. Eilif Serck-Hanssen: Thank you, Rick. The key points of promotable differentiation for Laureate are our leading brands, strong culture of innovation and student centricity and track record of delivering quality education at scale. These assets drive our long-term value creation for all our stakeholders. I'm honored to be part of an organization so deeply committed to expanding the middle class in Mexico and Peru through high-quality, affordable higher education. I extend my sincere gratitude to the faculty and staff, past and present, whose dedication has been essential to our success. Operator, that concludes our prepared remarks, and we are now happy to take any questions from the participants. Operator: [Operator Instructions] Our first question comes from the line of Jeff Silber of BMO Capital Markets. Ryan Griffin: This is Ryan on for Jeff. The new enrollment in Peru was really solid this quarter. I understand it was within your expectation, but certainly a lot better than ours. Wondering if it gives you a little bit more tension towards the upper end of the enrollment range. Eilif Serck-Hanssen: This is Eilif. Yes, we are very pleased with the performance in Peru. It's driven by our focused effort to penetrate the fully online working adult market as well as benefiting from robust macro conditions in Peru. But we have really -- over the last 18 months -- 18, 24 months, we have launched a broad suite of fully online products. We have done a great job in executing operationally to deliver quality experience for our students. And our commercial efforts has also really resonated with the consumers given the convenient product and the strong value proposition. Ryan Griffin: And then just for a follow-up, has your view on the macro changed at all since last quarter? And has the recent geopolitical volatility in the U.S. dampened the consumer in Mexico and Peru at all? Eilif Serck-Hanssen: No, not really. I mean the Peruvian economy is really driven by natural resources, mining, farming, fishing, tourism and a very broad set of trading partners, both the Americas, Asia, China and Europe. So that has benefited from really stable macro conditions. And Mexico is more closely tied to the U.S. The U.S. has also been fairly resilient given some of the geopolitical challenges. And we are seeing improvements in GDP. We are seeing improvements in consumer confidence, and we are seeing improvement in employment, albeit all at relatively small marginal magnitudes, but the trend lines are encouraging. Operator: Our next question comes from the line of Marcelo Santos of JP Morgan. Marcelo Santos: I have two. The first is the expansion of online education in Peru, how is that going through the market? I mean it's a new -- recently new development? And how is market discipline around it? Like where you see your competitors? You commented on what you're doing, but I just want to know how the market is behaving. The second question is like your student enrollment outlook is ahead of what you posted in the -- is below what you posted in the first quarter, right, and what you're promising. Is that because you expect kind of a slowdown in Mexico? [Technical Difficulty] That would be my questions. Eilif Serck-Hanssen: This is Eilif. Marcelo, I'll start with the Peru online market and then Rick will take the guidance and the enrollment outlook. In terms of the online performance in Peru, very consistent with what I shared with Ryan in the prior question. The market is responding very favorable to our product offering. Of course, we are seeing competitors launching similar products, following our lead. But the market is very disciplined. This is fully online offering is really dedicated for the working adult 25 to 50-year-old students. It's largely driven by degree completion. There is no meaningful cannibalization between the working adult students that want a fully online experience versus young students who want and need a campus experience where they are supervised by faculty and staff and collaborating and getting durable life skills in addition to the academic experience on the ground. So I view the fishing pond, so to speak, between the young students in the campus setting, very distinct and separate from the fully online offering which are providing enormous convenience and flexibility for the working adult students. Richard Buskirk: Yes. And Marcelo, just -- this is Rick. Just to comment on -- we still feel on the enrollment expectations for the year and the full year. We still feel comfortable with the guidance on the full year of 4% to 5% revenue growth. Yes, on a weighted basis, we were higher in the first intake this year, but that is driven by Peru, and we still have the secondary impact or the impact from the primary intake of Mexico in the second half. So when you weigh those together, we're still looking at the enrollment volume growth of 4% to 5%. The only other data point that I would add to you is the growth, we're very pleased, as Eilif said, with the trend rate of expanding and fully online. Fully online does come with a higher attrition rate as expected and will create a bit of a difference between our new enrollment and our total enrollment growth for the full year relative to some of our historical trends. But overall, very positive, and we feel very comfortable about our enrollment outlook for the year. Operator: [Operator Instructions] Our next question comes from Lucas Nagano of Morgan Stanley. Lucas Nagano: First question is about the intake in Mexico. If it's fully comparable in terms of campuses. How much of the 2% intake growth was due to the UNITEC campus launch and how much was dragged by the closure of UPN campuses? Eilif Serck-Hanssen: Lucas, at C1 in Mexico, the intake -- the first quarter intake in Mexico is a secondary intake. So it is primarily non-traditional students, so largely working adults. So a big portion of it is online. So the growth really is -- you can view it essentially all as organic. Lucas Nagano: Got it. And about the 50 basis point increase in margin outlook, is it more concentrated in Mexico, Peru or both? Because Mexico may have some more opportunity to raise margins as the new campus matures, but Peru may -- we think it may experience some benefit from online. Richard Buskirk: This is Rick. We expect -- in short, we expect margin expansion in both markets. We expect margin expansion in Peru. Peru ended the year last year right at about 40%. So you will see some margin accretion happen in that market as well as Mexico, we do expect to continue to expand our operating leverage, as we've talked about in the past and see margin expansion in Mexico. That's despite the fact that we are investing in new campuses that do have a drag -- slight drag of 50 basis points in Mexico, we're still able to beat that drag and expand margins. So we feel very good that we'll get expansion in both markets. What you will see, as we called out in the script, is you will see on top of what I just mentioned on a segment level, that margin expansion will largely come in the second half as we are making investments in some of these new campuses, including Puebla that will launch in the second half, and we're not generating revenue off. So you'll see more revenue expansion come in the second half of the year versus the first half. Eilif Serck-Hanssen: So I would just supplement that by saying, had it not been for the new campus investments largely in Mexico that we are launching this year, the campus -- the EBITDA margin expansion instead of being 50 basis points would have been 75 basis points. And that delta of 25 basis points is largely attributable to Mexico. So we're seeing continued margin expansion opportunity in Peru from scale, and we are seeing significant margin opportunity in Mexico, both from scale and continued operational efficiencies. Operator: Thank you. I'm showing no further questions at this time. I'd like to thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Upbound Group Q1 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, Steven Kos of Upbound Investor Relations. Please go ahead. Steven Kos: Good morning, and thank you all for joining to discuss the company's performance for the first quarter of 2026. We issued our earnings release this morning before the market opened and the release and all related materials, including a link to the live webcast are available on our website at investor.upbound.com. On the call today from Upbound Group, we have Fahmi Karam, our Chief Executive Officer; and Hal Khouri, our Chief Financial Officer. As a reminder, some of the statements provided on this call are forward-looking and are subject to factors that could cause actual results to differ materially and adversely from our expectations. These factors are described in our earnings release as well as in the company's most recent Form 10-K, upcoming Form 10-Q and other SEC filings. Upbound Group undertakes no obligation to publicly update or revise any forward-looking statements, except as required by law. This call will also include references to non-GAAP financial measures. Please refer to today's earnings release, which can be found on our website for a description of the non-GAAP financial measures and the reconciliations to the most comparable GAAP financial measures. Finally, Upbound Group is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. Please refer to our website for the only authorized webcast. With that, I'll turn the call over to Fahmi. Fahmi Karam: Thank you, Steven, and good morning, everyone. I'll start with a review of our first quarter performance and the progress we're making on our 2026 priorities. I'll then hand it over to Hal for a more detailed discussion of our financial results and outlook. After that, we'll take some of your questions. Our first quarter represented a solid start to 2026 for Upbound. We executed well in a difficult operating environment, delivered results in line with our financial targets, generated robust cash flow and deleveraged our balance sheet while continuing to advance key initiatives that support long-term value creation. We believe Upbound's expanded and increasingly digital portfolio is well suited to meet consumers' needs in this environment as consumers seek flexible, convenient and affordable financial solutions. With our Brigit acquisition last year, we have 3 complementary brands that deliver a wide range of financial solutions to a similar and sizable target consumer base. And that diversification helps us manage through category swings, creates multiple paths to growth and gives us more opportunities to deepen relationships with customers over time. Our work is guided by a set of clear priorities for 2026. We're building Upbound into a more connected, tech-enabled financial platform while fostering sustainable, profitable growth. Across the company, our focus is on using data, advanced analytics and AI to improve personalization, strengthen underwriting and enhance operating efficiency across our organization. When we talk about becoming more connected, this refers to creating a better, deeper experience for customers and a more efficient operating model for the company. That means meeting customers where they are, providing a broader set of solutions across their financial journeys and using data collected at any and every interaction across our brands and channels to make smarter decisions from product development, value proposition, customer acquisition, conversion and underwriting to account management and retention. Over time, this stronger connection should translate into enhanced customer engagement, better outcomes and higher returns on capital. We're also advancing a more unified operating structure for the company. In practical terms, that means a common delivery model, shared resources and shared data foundations that allow each brand to move faster without recreating the same work in multiple places. Ultimately, this operating model helps ensure teams have the clarity, focus and tools necessary to execute effectively across key enterprise initiatives. Alongside that, we're applying analytics and AI in practical ways across the enterprise. Our initial focus is on use cases that improve outcomes in underwriting, customer communications, operating efficiency and enhanced servicing and collections. These are targeted initiatives aimed at enabling better decisions, higher productivity and a better customer experience and we're prioritizing areas where we can measure impact and scale what works. We expect to improve merchant experience and onboarding and to remove friction points, which will enhance both merchant and consumer conversion. These efforts should translate into more loyal customers, repeat interactions, higher LTV per customer and overall lower customer acquisition costs. A big part of delivering on those priorities is leadership and organizational clarity. We've continued investing in key senior leadership roles and talent and we're thrilled to welcome our new Chief Technology Officer, Balaji Kumar. Balaji brings more than 25 years of technology leadership experience across financial services and retail. Bringing Balaji on board strengthens our ability to modernize systems, accelerate execution and build scalable technology capabilities that support the road map we've laid out. With the recent leadership additions of Hal, our CFO; Rebecca Wooters, our Chief Growth Officer; and now Balaji in place, along with the balance of our seasoned executive team, we believe we are well positioned for 2026 and for the long-term future growth. Now let's turn to our segments and how our first quarter performance exemplifies this approach. Beginning with Brigit, we're pleased with the segment's growth and momentum to start the year. In the first quarter, paying subscribers and monthly average revenue per user both increased double digits year-over-year, driving a revenue increase of over 40% year-over-year. This performance reflects strong demand and solid execution. And as a result, the segment remains on track to hit its financial targets for 2026. Brigit continues to invest prudently in the products and marketing that will enable additional growth and profitability in future years as the business continues to enhance its value proposition, driving increased engagement and monetization across the platform. As the brand scales, more and more users are finding value in Brigit's flexible and transparent financial wellness and liquidity solutions and we're excited about the opportunities ahead for Brigit as we continue expanding how and where customers can use the platform. In particular, product development remains an important focus at Brigit with the line of credit pilot continuing to advance. We're preparing for a broader rollout later this year, taking a measured approach that prioritizes unit economics, customer outcomes and long-term value creation. Turning to Acima. The positive results of our targeted efforts to strengthen portfolio health given the challenging operating environment became even clearer in the first quarter as the prudent underwriting actions taken over the past year have proven effective. Lease charge-offs were approximately 8.8% in the first quarter, representing a meaningful improvement from the elevated levels in the second half of last year, including a 130 basis point improvement compared to the fourth quarter. This improvement validates the data-driven approach our team has adopted to protect portfolio quality and improve long-term economics and it supports the foundation for continued investment in the business as we move through 2026. Tightening underwriting, coupled with macro headwinds, which impacted demand, pressured our GMV in the first quarter. GMV finished the quarter below our expectations coming in lower than last year's first quarter performance, which was prior to us making meaningful underwriting changes. In a moment, Hal will go over our guidance and how GMV and the stronger Q1 loss performance are expected to impact our results for the balance of 2026. Acima will continue to be disciplined in its approach and we will continue building toward meaningful growth opportunities. We're sharpening the value proposition of our flexible leasing solutions and expanding our digital capabilities. At the same time, we're investing in merchant relationships and strengthening the customer experience at tens of thousands of retailers across the country as well as online through our direct-to-consumer marketplace, which grew approximately 9% year-over-year in the first quarter. We also remain encouraged by the merchant pipeline across small, medium and large retailers and by the diversity of the merchant base, which helps support resilience when demand varies across categories. During the quarter, we signed a new agreement with an existing merchant partner that furthers our partnership and is expected to drive meaningful GMV in the second half of the year. The revised agreement enhances our integration and provides Acima exclusive rights as a checkout option at the largest e-commerce furniture retailer in the country. At Rent-A-Center, our focus remains on continued cost optimization while strengthening the foundation for more consistent performance. That progress was evident in the first quarter with the segment achieving year-over-year same-store sales growth for the second consecutive quarter following our strategic tightening over the past several months. The team continues to prioritize portfolio quality while advancing initiatives aimed at improving the customer experience and store level execution. This is not a single initiative. It's a consistent integrated operating approach that combines investment in expanding digital capabilities with targeted work to strengthen engagement and execution in the field. In particular, we are focused on measurable initiatives expected to improve performance over time, from reinforcing coworker training and execution in the field to expanding relevant product offering for Rent-A-Center's strongest and most loyal customers. We're also excited about the Amazon partnership we announced last week. While still early, this collaboration enables convenient Amazon order pickup and returns at more than 1,700 Rent-A-Center corporate-owned stores, increasing store relevance, driving brand awareness and in-store traffic and supporting new customer acquisition. These are the type of initiatives that leverage our existing footprint, enhance the customer experience and help us introduce our portfolio of flexible financial solutions to an even greater number of consumers. Before turning to consolidated financial highlights, I want to briefly step back and tie together what we're seeing across the business. Across the enterprise, we continue to strengthen the platform by connecting data, capabilities and teams in more deliberate ways. We are improving personalization, making more targeted data-driven risk decisions and identifying opportunities to engage customers more effectively across brands. This work is focused on execution fundamentals, targeting the right customers across channels while delivering value and service that drives repeat business and then scaling those improvements consistently over time. It's also important to acknowledge the operating environment we're navigating. The non-prime consumer continues to face pressure from elevated costs in essential categories such as groceries, rent, utilities and energy, which influences purchasing behavior and weighs on discretionary spending, particularly for larger ticket items. At the same time, the first quarter featured a stronger-than-normal tax refund season. While that supported liquidity for many consumers, it was partially offset by higher energy prices following recent geopolitical developments. Despite this challenging backdrop in the first quarter, our consolidated results were solid and in line with our expectations. Revenue was $1.2 billion, up 3.7% year-over-year. Adjusted EBITDA increased nearly 8% to $136 million and non-GAAP diluted EPS was $1.08, up 8% from the prior year. These results reflect disciplined execution and improving outcomes across the platform. Cash flow and deleveraging were also strong in the quarter. Net cash provided by operating activities was $171 million, up $23 million year-over-year and free cash flow was $136 million, up from $127 million in the prior year quarter. Strong cash generation supports reinvestment in the business, disciplined deleveraging and our broader capital allocation priorities. We're encouraged by our first quarter results and by the progress the teams are making across the company. We're investing where it matters most, staying disciplined on investments, cost and underwriting and scaling capabilities to support operating leverage over time. As we look ahead, our priorities are clear. Our leadership team is in place and we'll stay focused on execution throughout the rest of 2026. With that, I'll turn the call over to Hal to walk through the financials in more detail. Hal Khouri: Thank you, Fahmi, and good morning, everyone. I'll begin with a review of our segment results for the first quarter, then spend time on capital allocation and liquidity before closing with our outlook and guidance. As you heard from Fahmi, we are executing well in a challenging operating environment, demonstrated through improving portfolio performance and strong cash generation. Those 2 factors are central to how we think about sustainable long-term value creation. Starting with Brigit. The first quarter demonstrated strong performance across the business. Revenue was $68 million, more than double Brigit's revenue contribution to our consolidated results in the first quarter of 2025. As a reminder, Upbound acquired Brigit at the end of January 2025 and did not include Brigit revenue for the first month of last year in its reporting. Excluding timing impact of the acquisition last year, Brigit comparative revenue grew more than 40%, in line with recent performance trends. Revenue growth in the quarter reflected continued expansion in paying users and improved monthly ARPU, which increased nearly 12% year-over-year to $14.41, supported by increased shift towards Brigit's premium tier, deeper engagement with marketplace offers and higher optional expedited transfer revenue. Paying users were approximately 1.6 million at quarter end, up approximately 27% year-over-year. Net advance loss rate was approximately 3.5%, consistent with recent quarters and within expectations. Brigit's adjusted EBITDA contribution in the first quarter, approximately $22.9 million, more than doubled year-over-year as scale benefits continue to build. In the year ahead, we remain focused on disciplined growth and measured product rollout with a clear emphasis on unit economics as we expand capabilities over time. Turning to Acima. First quarter revenue was $649 million, up approximately 2% year-over-year, driven primarily by a nearly 3% increase in rental and fee revenue, partially offset by a 1% decrease in merchandise sales revenue. GMV was approximately $427 million, down approximately 6% year-over-year. This outcome reflects a couple of factors, including tighter consumer conditions that limit discretionary spending, particularly for durable goods and the deliberate underwriting tightening actions taken in 2025 as we remain prudent in customer acquisition. These tightening actions were intentional and focused on improving long-term portfolio economics rather than maximizing near-term volume, particularly given the broader nonprime consumer landscape. That brings us to the other side of that trade-off, loss performance, which was a clear success story in the first quarter. Acima lease charge-offs were approximately 8.8%, representing roughly 130 basis points of sequential improvement and 10 basis points lower year-over-year. The early indicators we monitor, including payment behavior and delinquency trends support our confidence that the portfolio is benefiting from the underwriting actions implemented last year. In the year ahead, we will continue to track macroeconomic trends and focus on optimizing our models accordingly. Adjusted EBITDA for Acima was $89 million, up approximately 4% year-over-year, while adjusted EBITDA margin was 13.7%, an increase of 40 basis points year-over-year. Revenue growth, coupled with a 60 basis point increase in gross margin and improved cost performance outcomes were each contributors to the increase in Acima profitability. As we move through the year, we remain focused on maintaining a balance of sustainable growth paired with solid portfolio performance and profitability. At Rent-A-Center, our disciplined approach led to same-store sales increasing approximately 40 basis points in the first quarter, following its return to same-store sales growth last quarter. First quarter revenue was $482 million, down approximately 2% year-over-year, driven by a decrease in merchandise sales, partially offset by an improvement in rentals and fees revenues and lower revenue contribution from our franchisees. We remain prudent in our approach to underwriting at Rent-A-Center. And as a result, lease charge-offs were approximately 4.7% in the first quarter, representing a 20 basis point sequential decrease and a 10 basis point increase year-over-year, reflecting stable performance within our target range and slightly better than expectations. Adjusted EBITDA for Rent-A-Center was $67 million, down approximately 6% year-over-year. The decline was driven by lower revenue and profit contribution from our franchise business and inflationary pressure on margins. We remain encouraged by initiatives the team is executing, including continued progress on the digital customer experience, the expansion of product offerings to Rent-A-Center's strongest customers and efforts to increase store traffic, such as the Amazon partnership that Fahmi mentioned earlier. Stepping back across the organization, we are pleased with overall performance in the quarter given the broader operating environment. At Brigit, we continue to see strong growth and engagement, while our lease-to-own business continued to adjust dynamically to shifts in consumer demand and payment behaviors. The actions we've taken over the past year are translating into loss performance that is running better than our expectations within Acima and Rent-A-Center. And while some volume-related metrics reflect those actions, taken together, our performance reinforces our confidence in the resilience of our model and our ability to serve our core consumer in an uncertain environment. Turning to cash flow, liquidity and capital allocation. One of the enduring strengths of our model continues to be the ability to convert earnings into cash and the first quarter is another example of that. Net cash provided by operating activities was approximately $171 million, up from $148 million in the prior year quarter and free cash flow was approximately $136 million, up from $127 million a year ago. While the first quarter trends to be a seasonally stronger period for cash flow due in part to the timing of tax refunds and following the holiday shopping season, these figures reflect solid underlying performance and do not yet include all of the anticipated cash tax benefits we discussed on our fourth quarter call. As those benefits materialize later in the year, we expect cash generation to be further supported. We continue to invest capital on key initiatives, which are aligned with the strategy Fahmi outlined and are focused on technology modernization data platform initiatives and digital capabilities that support underwriting, personalization and operating efficiency. We remain selective and returns-oriented in how we deploy capital. Over the full year, we expect capital expenditures to be similar to 2025 and we continue to evaluate pacing and return on investment as we continue to move through 2026. We also drove shareholder return by funding a quarterly dividend of $0.39 per share, which amounted to approximately $23 million during the quarter and represents an approximately 8% dividend yield. The dividend remains an important component of our capital allocation framework. Strong free cash flow allows to support the dividend while also pursuing our other priorities, including reinvesting and deleveraging. Turning to liquidity and debt. Quarter end liquidity was approximately $465 million, reflecting cash on hand and available revolver capacity. Net debt was approximately $1.4 billion and leverage was 2.6x trailing 12-month adjusted EBITDA, a meaningful sequential reduction from 2.9x at year-end 2025. While the leverage ratio may fluctuate slightly due to timing of cash inflow and outflow over the course of the year, we are pleased with the debt reduction achieved in the first quarter. We continue to prioritize disciplined deleveraging as a primary use of incremental cash, targeting leverage in the 2x range over the long term. Taken together, our capital allocation actions during the quarter reflect a disciplined, consistent framework focused on strengthening the balance sheet, supporting returns to shareholders and reinvesting selectively to drive long-term value. That discipline gives us flexibility and positions the company well as we move into the remainder of the year. With that context, let me turn to our outlook and guidance. As we look ahead, our expectations reflect continued prudence in underwriting, disciplined operating execution and steady progress against our strategic priorities. Our outlook assumes a continuation of the current challenging external operating environment, uneven macro factors that pressure our core consumers' discretionary income and demand levels, but also tend to make our complementary range of flexible financial solutions even more relevant to these customers. Considering the trajectory of our business, including first quarter financial results that were generally in line with or above our expectations, we believe that we are well positioned to achieve the target ranges we shared for 2026 revenue, adjusted EBITDA and non-GAAP diluted EPS on our previous earnings call. As a reminder, those targets are consolidated revenue of approximately $4.7 billion to $4.95 billion, adjusted EBITDA of $500 million to $535 million and non-GAAP diluted earnings per share of $4 to $4.35. We also expect free cash flow of approximately $200 million in 2026. As mentioned on our prior earnings call, this guidance is inclusive in an estimated 2026 payment outflow of approximately $70 million in non-ordinary course legal and regulatory settlements and assumes relatively flat CapEx spend to support business growth initiatives. These factors position Upbound favorably to advance its capital allocation priorities as we focus on delivering compelling and sustainable returns for shareholders. I'll now move on to share updated segment level commentary. At Acima, we revised our outlook to account for first quarter results, the deliberate underwriting tightening we've completed and our expectation of continued macro headwinds. We expect 2026 GMV and revenue to be flat to up to low single digits year-over-year. Losses for the year should be slightly better than our original expectations, stabilizing in the low 9% area for the year. Our outlook for Acima margins has improved relative to our previous guidance and we now expect Acima adjusted EBITDA margin to finish the year up slightly relative to 2025, offsetting revenue pressures. Turning to Brigit. Our outlook remains unchanged with annualized revenue growth of over 30% in the $265 million to $285 million range and an adjusted EBITDA in the $50 million to $60 million range. These expectations assume continued growth in paying users while maintaining net advance loss rate around current levels for the year. We remain focused on disciplined growth and measured rollout of new products and capabilities as the year unfolds. At Rent-A-Center, while trends with the company-owned segment have stabilized, lower revenue and profit contribution from our franchise business are expected to have a modest impact on full year performance. As a result, we expect Rent-A-Center segment revenue to be flat to down low single digits for the year. No change to adjusted EBITDA margin, which should remain relatively flat to 2025. Looking to the second quarter of 2026, we expect consolidated revenue of $1.1 billion to $1.2 billion, adjusted EBITDA of $120 million to $130 million and non-GAAP diluted earnings per share of $1 to $1.10. These expectations reflect typical seasonal dynamics and continued underwriting discipline. With respect to loss rates, we expect both Rent-A-Center's and Acima's lease charge-off rate to remain flat to slightly higher sequentially. Second quarter GMV should improve sequentially and be down low to mid-single digits year-over-year with continued improvement over the balance of the year and returning to year-over-year growth in the second half of the year. Brigit's net advance loss rate in the second quarter should be in the mid-3% range, in line with historical quarter-over-quarter trends. Now as we wrap up, I'd like to reinforce a couple of points Fahmi mentioned earlier. During the first quarter, the company continued to execute against its strategic priorities, delivering solid operating and financial performance while maintaining discipline in how we balance growth, risk and returns. The actions taken over the past year to strengthen portfolio performance are showing up in the results, particularly in loss trends and cash generation. Looking ahead, we remain confident in our ability to navigate the current environment and continue building long-term value for shareholders. Our diversified and complementary portfolio, strong cash flow generation and disciplined approach to capital allocation position us well as we move through the remainder of 2026. Thank you for your time this morning. Operator, you may now open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Kyle Joseph with Stephens. Kyle Joseph: A lot of moving parts there in the first quarter, obviously, going into it, everyone was focused on elevated tax refunds. And then in March, we got the spike in gas prices. But just kind of hoping if you guys can walk through each segment and kind of walk us through performance and give us a cadence and how the customer was impacted throughout the quarter by those kind of 2 big macro factors. Fahmi Karam: It's Fahmi. I'll start and Hal can chime in. I'll try to cover most of the segments, but just kind of give you just a high-level overview of maybe the consumer because they're directionally the same between the businesses, even though they're impact slightly differently and same with seasonality in our business as well. But maybe I'll start with just the high-level macro and then go into the impacts on the businesses. But we're -- as we said in the prepared remarks, the operating environment is pretty tough for our core consumer. The labor market seems to be cooling a bit. Wage growth slowed a bit throughout the quarter and inflation seems to be pretty sticky. And one of the measures that we follow very closely is fuel prices and that's been obviously very volatile over the last couple of months. So think about a cash-strapped consumer that's going paycheck to paycheck already and that puts a lot of pressure on their discretionary spending. And so people were very cautious with their dollars looking for value, looking to stretch its ability to -- especially on bigger ticket items, which should lend well for our consumer base and as well as -- sorry, as far as our products go. So the non-prime consumer has been resilient and has done that over several cycles. And why it's important for us to get our underwriting right, which we've done over the last several months, especially on Acima, which improved 130 basis points. As far as tax season goes, a little bit of a mixed bag, came in about 10% on average a little higher than year past, which is on the low end of what people were talking about coming into tax season. Start off a little bit slower in February and then caught up in March. And by the time some of the money started to hit, you started having some of the fuel price implications. And so what we saw was people started to still clean up delinquencies and losses, but definitely didn't exercise the payout options as much as they had in years past. And what that does is it has an impact on revenue, but also an impact on our gross profit margin, lesser so on Rent-A-Center, but much more so on Acima and you saw that in our gross profit increasing by about 60 basis points year-over-year. So tax season, in line with what we expected, a little bit of betterment from a gross profit standpoint at Acima. And then with Brigit, tax season seasonality for Brigit, it's our most profitable quarter given that consumers are usually flushed with cash in the first quarter given tax season, we take a light on the marketing spend, and you saw that we generated almost 35% EBITDA margins in the quarter. So a really strong start to the year on Brigit. So try to cover as much as I could, Kyle, in kind of the first question, but I'll leave it for you on a follow-up. Kyle Joseph: Yes. No, that's great. Appreciate it. And then just digging into Acima a little bit, kind of remind us exactly the timing on the underwriting changes. Obviously, they're having their desired effects. But just as we think about kind of the growth trajectory, recognizing GMV is the leading indicator for ultimately revenue over time. Fahmi Karam: Sure. Yes, we really started tightening, I would say, in the second quarter of last year and into the summer months into the third quarter. So we'll start lapping some of the changes, I would say, by Q3 in earnest once we've kind of gotten through most of the changes. But look, we're very pleased with where the portfolio health is at Acima. We were able to recognize some of the softness pretty quickly and within few quarters, get it back in line with our expectations. As we said, it was going to peak around 10% in the fourth quarter. It did that and it dropped 130 basis points into Q1. So the first quarter GMV was a little bit below what we had thought. We were hoping to be flat year-over-year. But given some of the underwriting changes, given some of that macro pressure I just mentioned on the consumer, you couple those together, we were down about 6%. If you take a big step back and look at what Acima has done over the last few years, that GMV growth has been a great story at Acima. If you just take it over the last 2 years, the first quarter is still positive almost mid-single digits for the first quarter in GMV growth. So a little bit soft on GMV, but very, very happy with where the portfolio is and the health of the portfolio. And as you saw on the revised guide, we think the margin will be better than we thought coming into the year. And so again, good news, delinquencies are down, losses are in line. The health of the portfolio is good. And if things get better from here, we know exactly where to go get some GMV and we're exactly to go get some of that growth. But if things get worse from here, we also have a recession playbook that we can activate and be even tighter. Good news is I think we're pretty conservative as it is right now. So if something were to deteriorate and we had to get a little bit tighter, you would expect to see some trade down come our way, which obviously would help with GMV. So I would say, Kyle, by the second half of this year, we should return to growth at GMV. Operator: Your next call comes from the line of Bobby Griffin with Raymond James. Robert Griffin: I guess, Fahmi, I wanted to stay on Acima. Is there any way you can help put some context around like how much of the GMV decline is from the tightening actions versus anything else in the industry? And I'm kind of asking, I guess, in context of the other peers that we look at and fully understanding everyone goes through different customer transitions and stuff at different times and as well as tightening actions. But is there metrics like app growth or active doors or anything like that just to help us understand Acima's positioning remaining kind of strong and nothing else bleeding off to cause the GMV decline? Fahmi Karam: Yes. Look, I think it's a combination of the things I mentioned already, Bobby, between underwriting and just general softness with the consumer. I would say the majority of what we saw in the first quarter is around the underwriting tightness. I think we -- again, we identified where the softness was pretty quickly. We took swift action and you saw that reflected in our GMV, both in the fourth quarter and the first quarter. And just given the uncertainty in the environment, we think that's the right position to take, not knowing exactly how long or the impacts of the volatility in the market and the rising cost, how that's going to impact the consumer. So most of it is on the underwriting side. We feel like that's the right approach given the uncertainty in the market. As far as the categories and maybe where the GMV is coming from, I would say most categories were down year-over-year in the kind of low single digit area. But for us, when you look at when we tightened, we really tightened around the jewelry category, and that was down probably low to mid-teens. But generally, I would say it's an underwriting story around first quarter GMV performance. Robert Griffin: That's helpful. And then maybe just pivoting over to Brigit. We don't have the full context of last year's 1Q, but it looks like it's off to a great start here with $23 million of adjusted EBITDA. Can you just remind us like what's built in, in terms of new products? I know there was a little bit of delay with getting some of the new products out we talked about last quarter, but like what's in the guide again for '26 from a new product introduction? Anything update there as we think about the strong start to 1Q? Fahmi Karam: Sure. Yes, very pleased with Brigit's performance in the quarter. As Hal mentioned, revenue up on a comparative period over 40%, subscriber growth at 27% for the quarter and then ARPU up 12% which is a great sign. EBITDA contribution of $23 million at almost 35% margin. With a loss rate in line with what we thought, a little bit elevated year-over-year as we test out some of those new products and ramping up on the subscribers and just testing out. We have multiple tests in the market with pricing. We've recently increased from the max from 250 to 500 on the EWA. We had that new line of credit product that we've talked about in quarters past that's still scaling, performing in line with our expectations. We're poised to launch that later in the year more broadly than we have today. I've mentioned it a couple of times on past calls for folks that we approve in the pilot, over 90% of them are actually opening an account, which just tells you the level of demand and the level of conversion that product is going to do. We're taking a cautious approach, as we said last quarter, given the uncertainty in the market, any time you roll out a new product, you're focused on customer experience, making sure the underwriting is right, performance is right and the economics, the unit economics are right. So we're making progress there. The guide for the year has us continuing to do those pricing tests and have the line of credit kind of come online later in the year. It's going to be more of a 2027 story than a 2026 story. Just again, being cautious around making sure that we get the early reads on performance before we launch it more broadly. Operator: Your next call comes from the line of Vincent Caintic with BTIG. Vincent Caintic: First, wanted to talk about your human talent. So first, welcome to your new Chief Technology Officer. I was just wondering, you've added a couple of new talents so far, if there's any more talent that you'd like to add to the Upbound team. And then I also saw that there was a turnover at Brigit. So I'm just wondering if there's any change to expectations on the earnouts. Fahmi Karam: Yes, happy to touch on both. I'll start with our new CTO, Balaji, and mention building the team out over the last 6 or 7 months since I've taken over from Mitch. We've got a new CFO and Hal. We have our new Chief Growth Officer, Rebecca. And now we have our new Chief Technology Officer as we continue to try to find -- accelerate our transformation, accelerate our growth and our digital transformation in a pretty competitive and dynamic landscape. And that's what this team is being built to do. And it was important for us to make sure that we have somebody who can tag along with the growth organization and really, again, advance our abilities, both on the AI front as well as the data analytics front and then overall automation and digital platform front across the board. And then Balaji, we're excited to have him in the building and look for big things from him going forward. On the Brigit side, yes, we -- both of the founders are still in the business, but are going to transition into more of an advisory and consulting role in 2026. The CTO Hamel transitioned into advisory role this month in April and Zuben, the CEO, will transition in the second half of the year. And this is a natural evolution that you would expect coming out of the transaction that the founders would eventually move on. They've been fantastic partners throughout the process and feel lucky to have them as long as we had them. Most founders don't stick around this long and want to move on to their next big and exciting thing. And they've been great partners with us so far. And the good news is they built a great business that we have. A lot of different things that we can do with from a synergy standpoint, a cross-sell standpoint and we're just on the forefront of all those things. So we're extremely bullish on our ability to take that business and grow even further from here. And as part of building that great business, as most companies do, they also built a great bench. And so we're excited that we're going to be able to promote from within and have leaders who have been in the business now for several years take on more and more responsibilities and keep the momentum that we have with Brigit going. So again, to me, this is a natural evolution with the founders. They've been fantastic to-date and we look forward to kind of continuing the integration plan with Brigit moving forward. Hal Khouri: It's Hal here. Maybe just to bolt on to Fahmi's point around a strong bench. Obviously, bringing in fantastic leadership at the top of the house across the enterprise. But I'd also say it goes beyond that as we look to bring on additional talent in support of the business across our leadership organization as well, particularly in the areas of digital technology and advancement that we've been talking about, specialized expertise in AI, underwriting and across the platform overall. So very excited by -- to echo Fahmi's point around the broader talent that we have in the organization to kind of continue the momentum that we have going. Vincent Caintic: Okay. Great. Very helpful. Secondly, I actually wanted to switch over to Rent-A-Center. So just kind of seeing the revenues and the EBITDA versus the GMV growth. I'm just wondering when kind of what gets that business growing again in terms of the revenues and EBITDA? And then I also did want to talk about the Amazon partnership. I thought that was really interesting. If you can maybe talk about what we should be expecting in terms of, I don't know, foot traffic or if there's any economics that you can talk about there, that would be great. Fahmi Karam: Yes, happy to switch over to Rent-A-Center a bit. Another strong quarter for the Rent-A-Center business, second consecutive quarter of same-store sales growth coming off 80 basis points in Q4, growing at 40 basis points in Q1. And then again, a tough operating environment. I mean you look at our loss performance improved 20 basis points sequentially, relatively flat year-over-year. And if you compare that for the other businesses, the Rent-A-Center consumer probably has the lowest amount of income and is the most cash strapped. So we have to be very mindful of where the consumer is on the Rent-A-Center business. So in a difficult operating environment to grow 40 basis points, we're very pleased with that and the segment continues to produce significant free cash flow. As far as the Amazon partnership goes, yes, we're super excited about announcing that last week. We've been piloting this concept with them now for several months and tested different ways to go to market. We started out with some lockers, then shifted over to just having it at the counter on both sides, agreeing that, that was the better move. So we'll be up and running in over 1,700 of our corporate-owned stores in June. And as I mentioned in our prepared remarks, this is a way for us to really leverage our footprint, create some new brand awareness, especially with the younger generation, add traffic to the stores and add a bunch of new customers or potential customers. And we know when people walk into our stores, our coworkers are fantastic salespeople along with underwriters and account managers and everything else that we ask them to do. But first and foremost, they are a sales organization and getting folks to walk in the door is going to be great for them. In the pilot, we had about a little over 20 stores, almost 25 stores that were scattered across the country. And what we saw from a traffic standpoint is that we saw about a little over 50 customers come in or consumers come in per store per week. And so heavy traffic and most of them were actually new to the Rent-A-Center business. So you can do the math on that 50 per week per store at 1,700 stores, that's millions of customers coming into the Rent-A-Center business over the year and it's on us to convert those folks into leases. And something that we didn't have the pilot that we have up and running now and will be part of our launch in June. When someone selects Rent-A-Center as their pick-up or drop-off option, we're going to be able to actually, in real time, give them a promotional item right there on the Amazon app. So very real-time marketing. So we're super excited about it. It's a little early to kind of quantify the impacts for us, but it's a great place to start with a partner like Amazon and hopefully also introduce them to some of the other Upbound brands as we move forward. Operator: Your next question comes from the line of Anthony Chukumba with Loop Capital Markets. Anthony Chukumba: So I just wanted to see if I could get a little more color on that partnership that you mentioned with a large online furniture retailer. I'm assuming that's Wayfair. Specifically, if you can just give a little bit more color in terms of the semi-exclusive checkout partner, what exactly does that mean? Fahmi Karam: Yes, another one that's an existing partner of ours that we're going to trying to further expand our relationship with. And what this exclusivity gives us is a checkout option at the face of their website and it gives our ability for consumers to select Acima directly and have our own checkout button versus going through a waterfall where we would obviously have to compete for those applications, but also what this gives us is first look. So it should give us hopefully not just more apps and more leases, but also better quality looks as well so we get rid of some of the competition and some of the adverse selection. So that will be up and running later this quarter and should hopefully produce some nice tailwind for GMV into the second half of the year. Anthony Chukumba: That's helpful. And then just one real quick one on Brigit. So you talked about on a pro forma basis, revenues were up, I think that was pro forma 40%. I thought that the EBITDA margin was down a little -- a couple of hundred basis points on a GAAP basis. I was just wondering what that would be on a kind of a pro forma basis for the adjusted EBITDA margin? Fahmi Karam: It's pretty close, Anthony, as far as we're moving just 1 month that's month of January, it's actually fairly close. Look, the -- between a 33% and a 35%, some of that is just timing of marketing spend and marketing dollars. But very happy with being able to generate that kind of EBITDA and that kind of cash flow, if you will, for Brigit in the first quarter. As I said, seasonally, that's going to be our big quarter. Going into the next quarter, given some of the traction that we're seeing on the marketing side, both from the fourth quarter spend and what we spent in the first quarter, we're going to lean into that into the second quarter. And so we'll get back into the low teens to mid-teens EBITDA margin on Brigit in the second quarter, where if you recall last year, when we got to the second quarter, we didn't see that same level of conversion and traction on the marketing spend. And so we didn't actually spend much last year. Given where we are, we're trying to grow that business and some of the conversion rates that we're seeing and the customer acquisition costs that we're seeing in today's environment, we're going to lean into that in the second quarter. And as you go -- as you look at the guide for the year for Brigit, we're right in line with our targets in the second quarter. It's going to come off that mid-30s and be more in the mid-teens from an EBITDA margin standpoint. Operator: Your next question comes from the line of John Hecht with Jefferies. John Hecht: Most of them have been actually asked and answered. But Acima, focusing on there, the DTC marketplace is showing good momentum. I think it's like 10% GMV growth. How does that cohort compare to the merchant-generated cohort? And how do we think about the focus there? Fahmi Karam: Yes. It's a big focus for us and it's been a nice growth story for us over the last several quarters, John. I think we're starting to lap some of the onboarding of some of the bigger retailers, Amazon, Walmarts that we put on the marketplace a year ago, but still a very nice channel for us that's mostly 99% returning customers. And so it performs relatively well compared to the general population because we're able to market to returning customers. It's a little bit buffered from the overall macro environment. So that's the distinction between maybe just the regular population of retailers and the direct-to-consumers. They're returning customers, so we can market to them better. They're engaged with us already. We still are dabbling in the personalization offers, both Rent-A-Center and Acima. Once we get that dialed in, that channel for both businesses is going to be really strong for us and a theme that you'll hear us talk about going forward. John Hecht: Okay. That's very helpful. And then a follow-up is you expressed your longer-term goals for leverage on the balance sheet. How fast -- like how big of that is a priority for you? Is that something that you think is going to happen in the near term? Or is that just a gradual deployment? And how do we think about just, call it, the capital allocation plans in the meantime? Hal Khouri: Yes. It's Hal here. Maybe I'll take that one. Obviously, our goal and desire is to continue to bring down debt and our overall leverage position. But first and foremost, it's continuing to lean into fueling the overall business. And I think that subject to where we land through the back end of this year around GMV growth, the total overall demand is going to play into the equation as we look at overall free cash flow. But certainly, we do have some distinct headwinds and tailwinds coming in. Certainly, from a tax standpoint, we're seeing some refunds come in as well as the benefits of accelerated tax depreciation from the One Big Beautiful Bill. That's going to be a tailwind. And we're going to leverage and use our cash flow to pay off some of the outstanding litigation that's out there, regulatory liabilities that are there. So we're contemplating paying that off and then aggressively paying down the debt. And so our goal would still be to be in the 2x overall leverage range over time. But there's no real clock on that, I would say, but just ensuring that the sources and uses of cash are being used appropriately. Fahmi Karam: One of the benefits, Hal, if I can just add on to that of being a little bit tighter from an underwriting standpoint is the higher cash flow generation and it gives us the ability to pay down debt if we're not getting the right risk-adjusted margin. And that's the trade-off that we're going to make from an underwriting standpoint is we're focused on maximizing risk-adjusted margin. And if it's there, we'll lean into GMV. And if it's not there, then we'll benefit from the cash flows. Hal Khouri: And maybe just lastly, we've given a view and an outlook of roughly $200 million of free cash flow this year, again, subject to the performance on the overall business and the volumes, there may be some upside to that number as well as we look at the contribution to the balance sheet through the balance of the year. Operator: Your next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Bradley Thomas: Fahmi, I wanted to just ask again about the underwriting trends. And if you could just help us get a better understanding of maybe what level of conservatism is in sort of the underwriting trends today. I think we're all fearful of an environment where gasoline prices remain higher for longer and that, that just grinds away a bit at consumer spending. And so can you help us think about what kind of buffer you may have in the current underwriting and how that's tied to your guidance? And then maybe just as a quick follow-up to that. Obviously, we have a long history with Rent-A-Center and a medium history with Acima, but just any thoughts on the kind of sensitivity of the Brigit customer to a world where higher gas prices may go on for longer? Fahmi Karam: Sure, Brad. Look, on the underwriting side, we remain highly disciplined, highly, I would say, conservative in our posture. And I just kind of mentioned it on the risk-adjusted margin piece. We are focused on making sure that from a capital allocation standpoint that we actually get the right risk-adjusted margin part of it. So I would say we're fairly conservative right now and the guide has us remaining fairly conservative. I would say from a portfolio yield standpoint on the Acima side, when you have lower 90-day buyouts, you typically have higher yields on those vintages. We're not really forecasting that into the guide. We're taking even a conservative approach there as well. But we think that's the right thing right now in this environment. And as I mentioned earlier, if things get better, we know exactly where to go to get the growth. And if things get worse, we also have a playbook there that we can activate. But going into -- whatever we're going into for the second half of the year, we feel like the portfolio is in a really good spot and we have the right tools and folks around the table to make sure that we stay very disciplined in our approach. As far as the sentiment with the Brigit side, I think very similar to our other businesses around being paycheck to paycheck and cash strapped and that's one of the main benefits of us acquiring Brigit was for us to be more relevant to our consumers and have these liquidity solutions. And I've mentioned a little bit around some of the traction we're getting with our marketing spend. I think it's because people are feeling that pressure and need that extra cash and that extra liquidity. So that bodes well for subscriber growth, that bodes well for our margin profile. And as we test more and more expansion in -- from $250 to $500, the line of credit being $500 over a longer period of time, all those things point to more subscriber growth and hopefully better retention going forward. And the macro backdrop, I think, also supports that thesis as far as those consumers go on the Brigit level. Hal Khouri: And -- it's Hal here. Maybe if I could just tack on there. There is quite a bit of sophistication that goes into our credit and underwriting modeling. Looking at that by business segment, obviously, the customer profiles will look a little bit different in terms of how they perform, looking at that across risk tiers, looking at that across categories as well, looking at that in terms of the origination source that's coming through. But to say we've been prudent around our overall credit management in this operating environment, I think, is the right call. Certainly, there's areas of opportunity for us, particularly as I think about the Brigit business that you referenced in there as well. We could be a little bit more aggressive given the margins there, but we'll monitor that as the next few months unfold and get a better read on the broader environment and that will allow us to get a sense of the ability to kind of loosen up a little bit. Bradley Thomas: That's helpful. And as a clarification question on the new furniture partner agreement that you talked about, I just want to try and be clear. Fahmi, I think you referenced the phrase being exclusive. I'm just trying to understand, is that the exclusivity with the new checkout features? Or do you become the sole rent-to-own provider for this retailer with no other competitors in that tier for them? Fahmi Karam: It's the former, Brad. It's just on having the checkout button. Not exclusively, so just on the button. Operator: Your next question comes from the line of Hoang Nguyen with TD Cowen. Hoang Nguyen: Most of it have been asked, but maybe I want to dig a little bit deeper on Brigit. Obviously, very, very strong growth there. But you continue to reiterate your expectation that some of that growth will get pushed out from '26 to '27. I guess, in the context of more volatile macro environment, I mean, how do you think about that with respect to your product launches at this point, the cadence of growth this year and next year? And what could make you feel more confident to launch these new products earlier or maybe have to push them back? Fahmi Karam: I wouldn't say we're going to push it back. I think we're being pretty cautious right now. The easy thing for us to do is to turn it on broadly right now and add a bunch of subscribers and -- but we're not there yet. We think it's more prudent to take a cautious approach and roll it out over time. The market environment, as I said, it lends itself to more and more subscribers taking us up on our offer. So in one sense, the environment is great for our existing products and we should see some hopefully upside from what we're guiding to now. But the environment doesn't lend us to be really aggressive on the new products. So I think it just -- it's too uncertain for us to go out with new products to new customers, especially when you're going again, we talked about this, the earned wage access product is a -- typically get paid back in 10 to 12 days and it's on average of $75 to $100 exposure per subscriber. The line of credit, it's -- you're up to $500 over a much longer period of time. And so we just want to be very cautious and careful before we roll it out. So like I said, the demand is there. Now we've just got to make sure the performance follows suit and then we'll roll it out. So the environment doesn't lend itself to being more aggressive on new products. But I think what we've guided to between the end of this year and going into 2027 is appropriate. Hoang Nguyen: Got it. And maybe another one. On the legal accrual, I saw that you guys added a couple of million dollars. I think the bulk of it was last quarter when you expected most of these to be resolved pretty soon. So I mean, can you give an update on that? Fahmi Karam: Sure. Yes. It's -- I would say the accrual this quarter was more in the normal course where in quarters past, you saw a much bigger increase because the cases between the multistate and the one that -- the McBurnie one that we've already settled just hadn't paid off yet. We actually paid off post quarter end. But the $2 million that we added this quarter, I think, was just normal course, not related to some of the bigger cases that we've talked about in quarters past. Hal Khouri: Maybe just to bolt on though, that we do feel that the provision and reserve that we do have on the balance sheet for legal settlements is appropriate. And again, cautiously optimistic that we'll look to actually resolve those in the coming months. Operator: Your next question comes from the line of William Reuter. Are you there, William with Bank of America? William Reuter: Sorry, I was on mute. Given it's late in the call, I'll just ask one. When you did see the spike in fuel prices, have you seen an immediate reaction from your customers in terms of reduced activity? I'm wondering how quickly you actually see changes in their behavior. That's it. Fahmi Karam: I would say it was an immediate response to it, probably more gradual. But we definitely saw the impacts of it. We talked about the lower payouts and the people exercising the 90-day buyouts. We definitely -- it was noticeable. But I wouldn't say it was an immediate shock just because people have to also get their arms around where it's going, the impact, how long it's going to be, those kind of things. So it wasn't an immediate spike, but definitely a noticeable change in how they spent their tax refunds this year. Operator: Your next question comes from the line of Casey Coates with Loop Capital Markets. Casey Coates: I just wanted to ask on updates on the product mix. I know furniture continues to be pressured and I believe you mentioned fashion jewelry, but are you seeing any strength in other categories? Fahmi Karam: Yes, I think across the board, I would say, given that most of the reduction in GMV came from us underwriting tightening -- from tightening underwriting that it was pretty broad-based. And as I said earlier in the call, most categories were down low single digits to mid-single digits, but jewelry, given it's the highest loss content and the riskiest segment, that's the one that probably dropped the most when you look at it year-over-year. Operator: I'm showing no further questions at this time. I would now like to turn it back to Fahmi Karam for closing remarks. Fahmi Karam: Thank you, operator, and thank you to everyone who joined us today for an update on our Q1 performance. I'm very thankful for the collective efforts of our exceptionally talented and dedicated coworkers and our merchants who helped deliver strong first quarter results while laying the foundation for the transformational year ahead. We're grateful for your interest and support, and we look forward to updating you all again next quarter. Have a great day, everyone. Operator: Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Greetings. Welcome to the USA TODAY Company Q1 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Matt Esposito, Head of Investor Relations. You may begin. Matthew Esposito: Thank you. Good morning, everyone, and thank you for joining our call today to discuss USA TODAY Company's First quarter 2026 financial results. Presenting on today's call will be Mike Reed, Chairman and Chief Executive Officer; Trisha Gosser, Chief Financial Officer; and Kristin Roberts, President of USA TODAY Media. If you navigate to the USA TODAY Company website, you will find that we have posted an earnings supplement in addition to our earlier press release. We will be referencing it today on the call as it provides you with additional detail on this quarter's performance. Before we begin, please let me remind you that this call is being recorded. In addition, certain statements made during this call are or may be deemed to be forward-looking statements as defined under the U.S. federal securities laws, including those with respect to future results and events and are based upon current expectations. These statements involve risks and uncertainties that may cause actual results and events to differ materially from those discussed today. We encourage you to read the cautionary statement regarding forward-looking statements in the earnings supplement as well as the risk factors described in our filings made with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to publicly update or correct any of the forward-looking statements made during this call. Please keep in mind all comparisons are on a year-over-year basis unless otherwise noted. In addition, we will be discussing non-GAAP financial information during the call, including same-store revenues, free cash flow, total adjusted EBITDA, total adjusted EBITDA margin, segment adjusted EBITDA, segment adjusted EBITDA margin and adjusted net income attributable to USA TODAY Company. You can find reconciliations of our non-GAAP measures to the most comparable U.S. GAAP measures in the earnings supplement. Lastly, I would like to remind you that nothing on this call constitutes an offer to sell or solicitation of offer to purchase any USA TODAY Company securities. The webcast and audio cast are copyrighted material of USA TODAY Company and may not be duplicated, reproduced or rebroadcasted without our prior written consent. With that, I would like to turn the call over to Mike Reed, Chairman and CEO of USA TODAY Company. Michael Reed: Thank you, Matt. Good morning, and thanks to all of you for joining our first quarter earnings call. I am pleased to report that we had an excellent start to the year. In our last call, we laid out our expected path to growth. A critical part of that strategy is improving total revenue trends through digital revenue growth. And in Q1, we saw meaningful progress on both fronts. As you will hear throughout the call this morning, our momentum continues to build, and we believe our first quarter results have set the tone for a promising 2026. Year-over-year, total revenue trends were a bright spot in the quarter, with same-store declines improving to less than 2%, representing our strongest performance in 4 years. This improvement was driven by a return to year-over-year growth in digital-only subscription revenues and continued contributions from our AI partnership agreements. As a result, total digital revenues increased 5% on a same-store basis versus Q1 of last year and accounted for 48% of total revenues, representing an all-time high. In addition to our top line momentum, we drove a marked improvement across several key financial metrics in Q1. Adjusted EBITDA increased 45% year-over-year. Net income increased $27 million over the prior year period. First lien net leverage decreased to 2.3x and we generated positive free cash flow in the quarter. Overall, we believe our strong execution against our most important strategic actions is leading to the results we had anticipated. And therefore, we are reaffirming our full year business outlook. Now with that, I would like to review the operational highlights from the first quarter. Our digital strategy continues to focus on our large organic audience, deepening engagement and improving the revenue of each digital user on our platform. In the first quarter, we continued to attract one of the largest digital audiences in the media industry with 180 million average monthly unique visitors coming to our platforms, which is up slightly from 179 million in Q4. That scale, combined with our ability to stay closely aligned with our readers' preferences, drove 1.4 billion total page views per month across our digital platforms at Newsquest and USA TODAY Media. We believe our large and highly engaged audience positions us well to accelerate total digital revenue growth through highly diversified and predictable revenue streams. One area worth highlighting is our digital-only subscription business. In the first quarter, digital-only subscription revenue returned to year-over-year growth and recorded its third consecutive quarter of sequential growth. We also saw continued strength in digital-only ARPU, reaching a new high and growing 43% year-over-year and 5% sequentially. Regarding digital-only subscription volumes, we are starting to see signs of stabilization. Our start-to-stop ratio is quickly approaching parity, an important inflection point, and as we sustain that trajectory, it sets the stage for sequential volume growth over time. Overall, we feel really good about the progress we have made in our subscription journey. Digital-only ARPU continues to grow, and we expect that momentum to carry through the year. Volumes are stabilizing with a return to sequential growth expected in the next few quarters, and we expect digital-only subscription revenue to continue growing on a year-over-year basis. Now with that, I'll turn the call to Kristin to outline some of the exciting initiatives underway to drive monetization through the expansion of our content experiences and product portfolio. Kristin? Kristin Roberts: Thank you, Mike. USA TODAY Media continues to lead as an organization that prioritizes its audience, experiments with purpose and intent and delivers content that is both relevant and essential. And we're seeing that reflected in our scale as we continue to reach one of the largest digital audiences among content creators in the country. Two verticals that continue to reinforce our position as a leading media organization are sports and entertainment. In sports, we recently expanded our High School Sports hub into 12 additional markets, bringing our total footprint to 35 markets nationwide. These hubs deepen our connection with local communities while enabling us to scale high-impact, locally relevant content that drives audience growth and attracts premium sponsorship opportunities. High School Sports also underscores a key differentiator for us, the ability to follow an athlete throughout their entire career from high school and clubs to college and into professional sports. That continuity allows us to engage fans earlier, sustain engagement over time and drive stronger monetization. In Q1, we also launched our USA TODAY soccer hub, bringing together our domestic and international soccer coverage into a single cohesive destination. We believe this creates a more immersive experience for fans, supports higher time spent on platform and better positions us to capture both audience and advertiser demand, especially as we move into the 2026 World Cup cycle. Our entertainment team also rolled out an exciting initiative in Q1, with the USA TODAY Style Meter. Aligned with the Oscars, Style Meter created a fashion-forward way for audiences to engage by rating red carpet looks through an interactive voting experience. As a result, this feature was part of a strong Oscar season that generated approximately 20 million page views. That's up more than 5% year-over-year. Experiences like Style Meter helped deepen our connection with audiences around key cultural moments while creating incremental e-commerce opportunities. They also opened the door for additional engagement and visibility during high interest events, such as the Met Gala next month. Shifting to our digital-only subscription business. As Mike mentioned, we made meaningful progress in Q1 with digital-only subscription revenues returning to year-over-year growth and marking the third consecutive quarter of sequential growth. As we move through 2026, we will continue to evolve how we monetize our audience with a more deliberate approach in how and where we introduce subscription opportunities across the platform. This comes with an intentional trade-off in page views, but over time, we expect to expand digital revenue per user and ultimately maximize monetization across the customer journey. On that note, we're encouraged by the strong performance in digital-only ARPU in Q1. Moving forward, we believe there is meaningful upside ahead through additional pricing power and stacked products. Introduced late last year, stacking represents a foundational step in our shift toward a more flexible, value-driven subscription model. It provides subscribers with greater flexibility by enabling them to combine complementary offerings such as USA TODAY Play and local publications, into a single tailored experience. As our digital users adopt a more personalized mix, we expect to see increased engagement, improved retention and higher overall revenue contribution relative to single product subscribers. Importantly, second is already showing meaningful potential with digital subscribers who add a second product to their bundle, demonstrating a 20-point improvement in pay-up rates versus single product subscribers. In other words, these users are significantly more likely to choose a paid premium offering rather than remain on free or promotional access. As a result, we view stacked products as a powerful lever to drive continued growth in digital-only subscription revenue, especially as we add more products to the stack this year and next, including Golfweek. We have also moved into a phase of disciplined experimentation focused on monetizing consumers' engagement on their terms. Rather than forcing a single subscription model, we're testing multiple pathways that align with different levels of interest and commitment. This includes a range of pathways from free access to registration and from article level purchases to broader topic or season-based offerings. A clear example is the introduction of our first limited series and single payment subscription offering around the Kentucky Derby, which delivers a 90-day premium event-driven experience. This USA TODAY front aggregates high-intent content, including live race updates, fashion and culture coverage and exclusive on-site reporting within a premium advertising environment designed for both dedicated fans and casual audiences. More broadly, this initiative represents a key step in developing a limited series product model, enabling us to package existing network content into premium time-bound offerings. We believe this approach will drive incremental engagement, first-party data and monetization around major tentpole events, including the World Cup. To recap, our progress in the first quarter was a team effort. I want to express my sincere gratitude to the entire team. We have important work ahead of us to sustain this momentum, but we are executing on our strategy to expand our content and product portfolio, amplify our journalism and drive diversified revenue streams. Back to you, Mike. Michael Reed: Thanks, Kristin. It's encouraging to see these initiatives taking shape, and we believe they will strengthen engagement and enhance monetization across our platform. And as Kristin detailed, through the experiences we're creating and the introduction of more modern payment methods, we are driving registrations and expanding our known user base, which grows our first-party database and over time, should support higher CPMs across our advertising business. At the same time, we are increasingly leveraging AI-driven personalization, combining dynamic paywall decisioning with personalized [ 4U ] placements on the homepage to deliver the right content and subscription prompts to the right users at the right time while balancing engagement, advertising and subscriber growth. These capabilities allow us to translate user behavior signals in real time and surface more relevant offers to audiences with a higher propensity to convert. Now this is a good segue into AI. Over the past 18 months, we have positioned ourselves as a trusted content provider while building the capabilities to act quickly as opportunities emerge. We are doing this through valued and unique content creation on a daily basis at scale, digitizing more of our very large archived content base and deploying blocking technology on our platform to prevent unauthorized use of our valuable content. We have been at the forefront for our industry in terms of putting together licensing deals, and we see this as a continued significant future growth opportunity. Our existing AI agreements, such as with Meta and Microsoft, had a notable impact on our Q1 results, and we continue to maintain an active pipeline across the AI ecosystem, including foundational model providers, start-ups and emerging licensing platforms. As a result, we expect this category to contribute meaningfully to our growth over time. We expect these deals to be lumpy in nature. But when you step back and take a longer term view, this opportunity remains significant. Now turning to LocaliQ. While the return to growth has been slower than anticipated, this business remains an important solution for our advertisers, and we believe having it as a part of our portfolio allows us to capture a broader share of advertising spend across our media platform. The foundational actions we have put in place to shift from a traditional search agency business to a results-driven approach are beginning to take hold, and we can see that progress. As we diversify search, we are expanding higher growth areas like our social offerings, our owned inventory and targeted e-mail, while also deepening CRM integrations. We continue to make Dash a more comprehensive AI-powered platform that helps customers turn more leads into paying customers faster. We are encouraged by the progress and expect these initiatives to improve our revenue trends and position this business for growth in the second half of the year. I'd now like to turn the call over to Trisha to provide additional details and color around our 2026 first quarter financials. Trisha? Trisha Gosser: Thank you, Mike. Good morning, everyone. Please keep in mind, all comparisons are on a year-over-year basis unless otherwise noted. As Mike mentioned, we're very pleased by our business momentum and the progress we made in the first quarter, which is evident in our financial results. In the first quarter, total revenues were $548.5 million, a decrease of 4% or 1.8% on a same-store basis. This represents a same-store improvement of 210 basis points over Q4 and is the second consecutive quarter of top line trend improvement. The strength in total revenues was primarily driven by the expansion of our digital revenues, which delivered solid growth compared to the prior year. Total adjusted EBITDA was $73.1 million in the first quarter, an increase of 44.7% or $22.6 million. Total adjusted EBITDA margin expanded to 13.3% in Q1 compared to 8.8% in the prior year quarter. The growth in total adjusted EBITDA was driven by the improving revenue trends, the impact of the 2025 cost reduction program, along with ongoing cost discipline and the continued execution against our operational priorities. Expense management remains a critical priority. And in the first quarter, we drove an 8.8% reduction in operating costs and SG&A expenses compared to the prior year. Total digital revenues in the first quarter were $261.9 million, up 5.2% on a same-store basis, representing the second consecutive quarter of growth. In the first quarter, total digital revenues accounted for 47.8% of total revenues, an increase of 400 basis points compared to the prior year. Digital advertising revenues decreased 3% in Q1 due to some softness in page views and programmatic revenue. That said, we delivered our strongest quarter of new digital business signings in Q1, which combined with stabilizing retention trends, is expected to drive a notable improvement in our Q2 digital advertising and digital marketing services revenue trends. Page views were down modestly year-over-year, primarily on our local sites. This was driven by lower referrals from Google Discover as well as the deliberate actions we've taken to increase paywall encounters and shift traffic toward higher-value monetizable experiences. As a result, we're seeing improved conversion rates and believe this is the right trade-off as we optimize for revenue per user rather than raw traffic volume. Digital-only subscription revenues totaled $45.9 million in the first quarter, up 6.2% year-over-year and marks the third consecutive quarter of sequential growth. Digital-only subscription volumes continue to reflect the intentional actions to optimize sustainable and predictable profitability by prioritizing long-term monetization over short-term volume. Volume decline slowed in Q1 with new starts approaching parity with stops late in the quarter, indicating stabilization and a potential return to volume growth. In Q1, digital-only ARPU also reached a record high of $10.30, up 42.7% year-over-year. In the first quarter, our digital other revenues, which includes digital content syndication, affiliate content and AI partnerships and licensing revenues, grew 125.6% or $18.8 million. As we noted last quarter, we expect variability in timing and recognition given the structure of these agreements, with Q1 reflecting a strong contribution. We continue to optimize our print and commercial business. And in Q1, print and commercial revenue trends were largely unchanged from Q4 on a same-store basis, and our results reflect the shuttering of a substantial advertising mailer whose closure had no impact on total adjusted EBITDA. Turning to the USA TODAY Media segment. Segment adjusted EBITDA totaled $59.5 million, increasing 89.9%, while segment adjusted EBITDA margin expanded 720 basis points to 14.3%. For Q1, total revenues decreased 5.4%, representing an improvement of 180 basis points from Q4 sequentially. Turning to the Newsquest segment. Total revenues in the first quarter were $59.8 million, up 7%, representing the fourth consecutive quarter of revenue growth. In the first quarter, segment adjusted EBITDA was $14.9 million, up 6.6%, while segment adjusted EBITDA margin totaled 24.9%. And looking at our LocaliQ segment, for Q1, core platform revenue totaled $99.3 million. Segment adjusted EBITDA totaled $6.8 million and reflected the inherent seasonality associated with the first quarter in our LocaliQ business. We ended the quarter with approximately 11,900 core platform average customer count and core platform ARPU remained near record highs at approximately $2,800. Let's now turn to the balance sheets. At the end of the first quarter, our cash balance was $85.2 million and net debt stood at $903.1 million. Free cash flow in the first quarter totaled $6.4 million, and we ended Q1 with $988.3 million of total debt, reflecting $4 million of total debt paydown in the quarter, which combined with our strong total adjusted EBITDA growth, further reduced our first lien net leverage by 12% to 2.3x. On the bottom line, net income totaled $19.9 million, up $27.2 million or 371.3%. As we look forward to the second quarter, we expect to largely sustain the top line momentum with total revenue figures and same-store revenue trends remaining largely in line with Q1. We believe our strong new business activity, combined with stabilizing retention trends, continued growth in digital-only subscription revenue and year-over-year growth in digital other, supports ongoing digital revenue growth. With respect to total adjusted EBITDA, we expect continued year-over-year growth in Q2, though at a notably more moderate pace than Q1. Adjusted EBITDA in Q2 will be impacted by the mix of digital revenue with a higher contribution of DMS revenue and a lower contribution of licensing revenue. We view Q2 as a continuation of the progress we made in Q1, along with significantly higher free cash flow generation quarter-over-quarter. We are reaffirming our full year 2026 business outlook and remain confident in delivering year-over-year free cash flow and profit growth on the back of improving revenue performance. Overall, I'm very excited about the progress achieved through the first quarter. The start of 2026 was successful from both an operational and financial perspective, and we are entering the second quarter with a great deal of optimism. I will now hand it back to the operator for questions, and then we will go back to Mike for some closing thoughts. Operator: [Operator Instructions] Your first question for today is from Giuliano Bologna with Compass Point. Giuliano Anderes-Bologna: Congratulations on the impressive results in the first quarter. As a first question, it seems like you're making very strong progress, especially early in the year, and it's great to see the outlook reiterated. I'm curious if there are any specific drivers that we should be focused on that are driving the results early in the year and how sustainable a lot of those drivers are throughout the year? I'm thinking about the AI potential deals and other things around that, that are obviously great positive contributors at this point? Michael Reed: Yes. Giuliano, thank you. Yes, the -- there is a -- there are a lot of drivers in the first quarter and then there are -- and those are sustainable not only this year, but throughout the coming years. We have -- licensing deals were definitely strong in the first quarter following a strong fourth quarter. And on top of that, their digital subscription revenues have really turned the corner and were a strong performer in the first quarter. Obviously, we expect that to continue not only this year, but for years to come. And our affiliate revenue has really started to turn and grow as well, which is also captured in that digital other category. And we feel really good about the progress we're making on the audience side in terms of engagement, which leads to digital advertising growth. And finally, we feel good about the progress we're making underneath the DMS business, which will also lead to growth in the back half of the year soon. When we look out over the rest of this year, Giuliano, we see all those factors contributing to digital revenue growth, starting with DMS, digital advertising, digital subscription and then digital other with contributions from both licensing and from affiliate revenue. So all of those will be contributors. Giuliano Anderes-Bologna: That's very helpful. And then there's obviously been a lot of progress when it comes to AI licensing deals. I'm curious where things stand in terms of the opportunity set that's still out there and the potential for more transactions or more deals on that front? Michael Reed: Yes, Giuliano, we think there's a lot of opportunity for more deals. As I mentioned on the last call, and I'll say again on this call, it's hard to predict the timing of those deals, so they will be a bit lumpy. However, we are taking all of the appropriate actions in our view, which start with creating really unique, at scale, valuable content every single day, combine that with we're digitizing more and more of our archived content so that we have a larger offering of archived content. And then finally, we're blocking those that don't have licensing deals with us from being able to scrape our content. So creating new content at scale, blocking those that want to scrape and then digitizing more of our archived content, we think make us one of -- probably the premier news media company for AI tech companies to partner with. There are a lot of big companies out there, as you all know, that we have not partnered with yet. We have ongoing conversations with many of them. There are also new entrants and new marketplaces coming on board. So this opportunity is really massive in our view. We're taking a long-term approach rather than near term because in the very near term, it's a little bit lumpy or unpredictable. But over the long term, lots of opportunity. We think we're the premier partner, and we're doing, we think, all the right things to make sure that we are the right partner for those companies. Giuliano Anderes-Bologna: That's very helpful. And there's obviously a great improvement when it comes to your EBITDA margin as well. And I'm curious if there's still any opportunities on the cost side to continue working on your cost structure and other cost improvements around the company? Trisha Gosser: Yes, absolutely. Giuliano, it's Trisha. We think there is opportunity there. We were very smart in the way that we addressed costs last year, took $100 million out of the business. And I think you can see that we're still improving our revenue trends at a pretty good clip even with those expenses coming out of the business. And we'd look to be balanced and thoughtful in how we do it going forward. We're always optimizing our costs around our print infrastructure. We'll continue to do that. You've heard us talk about changes that we're making to our delivery structure, for example. We'll continue to explore those type of things. The other things, we are seeing efficiencies, whether it comes from things like AI licensing or using vendors and partners, outsourced vendors. We're getting efficiencies within the organization. I think more so, those will eventually drive revenue upside for us, but they should also help us manage costs like software or outsourcing with our partners as well. So I would say, yes, long answer, but yes, we have the opportunity to continue to manage our expenses. You saw it in Q1, you'll see it for the rest of the year as well. Giuliano Anderes-Bologna: That's very helpful. And then maybe one final one. I'm just curious if there's any update or changes to kind of the timing or process around litigation and if you have any opinion around that? Michael Reed: Yes. No changes. Obviously, we remain very optimistic there. The next big things are really the -- outside of our case, the DOJ case, we expect the remedies to be ruled on by the judge here any day now. And then that would, we think then lead to the state of Texas's case going to trial probably within 60 days after the remedies ruling. And then with regard to our case specifically, the next big milestones are the judge ruling on Google summary judgment filing, which we expect in the next few months and then a trial date being set, which we expect for either late this year or early next year. Giuliano Anderes-Bologna: That's very helpful. Operator: Your next question is from Matt Condon with Citizens. Matthew Condon: My first one is just on the DMS side of the business. You obviously are seeing some underlying trends that give you confidence in the acceleration of growth in the back half of this year. Can you maybe just dig in on what a few of those catalysts or products that should drive that growth in the back half of this year are? Trisha Gosser: Matt, it's Trisha. Thanks for the question. Yes, we see a lot of promise in our DMS business. I think the first big thing to point out is that it's a product that our advertisers really view as a critical component of their marketing spend. And so we think that having it as part of our portfolio really allows us to capture more dollars across the advertising ecosystem, including on our own platforms. So the things that we've done over the past year or so, things like integrating CRMs, leveraging AI search capabilities with Google on the platform, as well as bringing our own inventory or our owned and operated inventory into the Local IQ platform, really gives us confidence that we can continue to grow our customer account in our business. I think one of the things that we've seen is that we're maintaining near record high ARPU at about $2,800. And so our customers are seeing a lot of value in what we're providing to them. Now the work is really about growing our client count. And the other thing I would highlight is that we're continuing to invest in Dash, which is our AI-driven platform, which allows our customers to address their leads and turn those leads into revenue much faster. As we build out capabilities on that platform, build out CRM-type solutions on that platform, we are finding that customers are stickier, and we should see that play out in our results as well. Michael Reed: Matt, I would add one thing, too, and Trisha mentioned this in her remarks before the Q&A. Both in our O&O on the media side as well as DMS in the first quarter, we saw really nice increases in new client count, but also in budgeted spend with us. And so what we saw specifically in the DMS business that we're referring to that give us a lot of confidence in outward look on revenue trends, a leading indicator for us is the budgeted spend from all of our clients. And we saw a really significant uptick every single month from January through April here, now that we're at the end of April. So the underlying work we're doing, improving retention and becoming stickier with the clients and leading to bigger budgeted spend with us, has all materialized here in the first 4 months of the year. So we're pretty excited about what we're seeing underneath and expect that to really show up in the financials in the back half of the year. Matthew Condon: That's helpful color. Maybe another question just on AI licensing. I think this is a big question is just the sustainability of AI licensing revenue going forward. Specifically, if you have lots of your content archived and used to train these models, on a go-forward basis, just how do you think about the sustainability of that revenue trend? Obviously, there needs to be the refresh of the new content that comes on. Do the value of those contracts go down over time? Again, obviously, it was a key driver in the quarter. I think people are just trying to wrap their minds around just how sustainable that is going forward? Michael Reed: Yes. No, I don't think that they go down. I think they go up. I think the real value in the content we produce is we produce it at scale and it's unique and it's valuable and it's new every single day. And you're right, these models and all of the AI programs out there, products out there need to be refreshed and updated on an ongoing basis. So I actually think the real-time content on a go-forward basis is much more valuable than the archived content, which theoretically can be used one time to train a model. So I actually think that the value of our licensing agreements will grow over time. We are expanding the amount of content we have that is digitized in our archives, which hasn't been available for training. So we think that's also an opportunity for more revenue, but the real value in our eyes is the ongoing kind of new content we create every day. And we're in a lead position because we create more content than most anybody, and it's unique, right, because of the local aspect. So where we feel really good about the sustainability and the ability to grow the AI licensing category over the long-term. Matthew Condon: That's very helpful. And then maybe just a final one. On digital advertising, it sounds like there were some contracts that were signed in the quarter that just give you confidence that, that can accelerate here or improve in 2Q. Maybe just to dig in on just the underlying trends that are going on in digital advertising, what happened in the quarter? And what are the improvements that are taking place under the hood? Kristin Roberts: [indiscernible] Trisha Gosser: Sure, Trisha -- Yes, go ahead Kristin. You can take this. Kristin Roberts: Sure. I'd say that the impact that we're seeing in digital advertising, it has something to do with AI overviews, but it's been much more muted than what much of the industry has been reporting. That said, we have always expected some headwinds in this category in digital advertising, and we've been prepping for it, Matt. I think what's more impactful in Q1 for us has been the shift in Google Discover, and that's been surfacing less local content this quarter. So when we look at these numbers, we expect Google to recalibrate over time, but it does reinforce the point that we've been making for a while now, which is the importance of reducing our reliance on any single traffic source. And a good -- I'd say a good illustration of this was our coverage this weekend of the White House correspondent dinner event. Roughly half of our audience came to us from search referrals, but the other half came from direct visits and social and e-mail and other referral sources. And that indicates that we are building that direct relationship with the audience, and that has been our deliberate focus. We also have the ability to turn the dial a little bit from programmatic revenue to subscription revenue in local, especially now that we have a more profitable subscription strategy. And as we layer in these new AI-driven smart tech insights, new tools, we can really target the right user at the right time with an offer that makes sense for that person, and we can choose to turn the dial more towards subscription. So that's the value of having an audience and a portfolio like ours. We're not overly reliant on any one source of traffic or any one revenue stream for revenue growth. And when you look out longer term, you can see this model gives us the opportunity for more significant overall digital revenue growth of our data and our insights, and importantly, our orchestration capabilities mature, and that includes our digital advertising. I hope that helps. Matthew Condon: Very helpful. Operator: Your next question for today is from Barton Crockett with Rosenblatt. Barton Crockett: I wanted to just drill in a little bit more into the Google Discover thing that you were talking about. And just to be clear, you're saying that this is not related to AI overviews. This is a separate mechanism? I just want to be clear on that. And then could you give us a little bit more kind of quantification of how much of an impact this had? And given that it seems to be like a choice that Google has made, I mean, what can you do about it? Kristin Roberts: I'm happy to take that, Barton, and it's nice to hear from you. Google Discover and the AI overviews are separate issues for us. And so AI overviews have had an impact primarily in local, but not uniformly. Google Discover also has seen -- also is surfacing less of our local content. But what we've been seeing over the course of Q1 has been sort of a new norm. So we've begun to see some calibration, some normalization in what we're seeing from Google. The impact varies. It varies by market, depending on market size, on total number of audience we already have. It also varies between local and USA TODAY. And it is why we have begun moving and shifting our content-related resources to things that we see working in real time. So for example, there are some content categories that continue to overperform for us, whether they're overperforming on local page views or for geo-neutral audience, we are shifting resources to those places. And you can see the impact of that both in local and the USA TODAY. So for example, for local, the things that continue to work for us are obviously sports, from high school all the way through college and pro sports. Also breaking news, also local opinions, these are content categories for us in addition to service journalism that continue to drive significant audience for us. And so we're leaning into those places. And where we see content categories that are not working or not appearing in Google Discover, for example, we are shifting those resources to develop a kind of exclusive and distinctive content that Mike just referenced in his answer to what is the future value of AI deals. Right? On USA TODAY, what we're seeing is we have ongoing ability to drive significant audience via Google, right? And that is around content categories that we have a right to win, where we are, if not the dominant player, in contention to be the dominant player. So think about sports, think about entertainment, again, think about breaking news and think about lifestyle. These are content categories for us that continue to drive significant audience. And it's the reason why, according to Comscore, we are still serving the largest audience in America among content creators. The other piece that I will just throw in here before giving you the mic back Barton is, that video is increasingly driving audience for us, especially on USA TODAY. And so we took a deliberate step last year to begin expanding our catalog of video content, and that's paying off now as Google begins to shift what it is surfacing. Barton Crockett: Okay. And then Mike, I don't know if there's anything to say on this question, but as you guys are aware, a Google executive made a blog post earlier this year about presumably in response to some U.K. proceedings about being open to separating the search crawl from the AI crawl, allowing people essentially to opt out, which presumably would, maybe that happened would give you leverage. Has there been any advancement on that front? Or is there anything happening in the U.K.? Any developments there? Or is that just kind of a post and then follow through? Michael Reed: Yes. No, Barton. To state the obvious, Barton, we're very supportive of that, and we'd like to see that be followed through on. There hasn't been any movement at this case at this point in time, but we're hopeful that, that moves forward. I think it's more likely to move forward in the U.K. before there's any traction here in the U.S., but that's obviously something we would like to see. And Barton, just on the last question, too, because I don't want to overplay anything here on the downside in terms of audience. One of the reasons we mentioned the 180 million uniques and 1.4 billion page views on the call this morning is that those are higher numbers than we saw in the Q4. And so, I know there's so many in the media industry that are seeing overall audience declines, page view declines, things of that nature. We have not seen that. We've been very proactive in driving this business, driving our audience. And our audience does have scale and our biggest opportunity is engagement with that audience. More engagement with that audience is obviously is our biggest opportunity, but we're not seeing any large declines. Google does adjust algorithms all the time, and we have to adjust our strategy based on those changes, and that's what Kristin outlined, and we're confident we'll be able to do that. But the biggest driver for us over the last 2 years in audience growth has been what Kristin mentioned, which is really recognizing you can't be too dependent on one source of referral traffic. And so we've been very aggressive in building traffic from a lot of different sources, including direct, and we really reap the benefit of that. And so we're pretty excited even about the digital advertising strategy going forward and don't view anything that happened in Q1 as permanent or long-term. Operator: We have reached the end of the question-and-answer session, and I will now turn the call over to Mike for closing remarks. Michael Reed: Yes. Thanks. And before we wrap this morning, let me just quickly recap a few important things. First of all, Q1 was a great quarter. It's the strongest start to the year that we've had in several years. And the truth is what you're seeing in the results reflects the work we have been doing over the last 24 months to strengthen the foundation of the business and to execute against a clear strategy. That work is paying off, and Q1 is a clear signal of that. A few highlights, I think, worth calling out because we're really getting very, very closer tied to some important inflection points that we've been talking about over the last couple of years. First of all, in Q1, total revenue trends were the best we've had in nearly 4 years. And we're nearing that inflection point at down 1.8% to being down 3.9% in Q4 and down -- over 6% in Q3 last year or near around 6% last year in Q3. So we're really nearing that inflection point, and we expect that to come here in 2026. We also saw total digital revenues grow at over 5% in the first quarter and reach 48% of total revenues. We've been talking about inflection point of total digital revenue being 50% of total revenues. We're really nearing that inflection point as well, which we also expect to happen here in 2026. But importantly, with this revenue mix shift and the growth in digital and the improvement in same-store, we're also seeing growth in EBITDA and free cash flow and expanding margins. So this is good profitable revenue, which is very important. And then finally, we're seeing leverage continue to come down, and we've been aiming to get under 2x. We finished the first quarter at 2.3x. So we're getting very close to that 2x mark, too. So a lot of things going in the right direction and a lot of inflection points here to be reached in 2026. You put all that together, we got improving revenue trends, expanding margins, strong and growing cash generation and a healthier balance sheet. A lot for us to be excited about. We're looking ahead to a really strong second quarter as well. And our digital-only subscription business has really turned a great corner. We saw the results in the first quarter, and that will continue to be a big contributor as the year goes on, as will the digital other category, which contains our licensing agreements as well as our affiliate deals. And that's a really nice category for us as well. So expecting a strong second quarter with even stronger free cash flow generation and look forward to updating you all in 3 months with our progress on Q2. And again, thanks for joining us this morning, and thanks for your support. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Adamas Trust First Quarter 2026 Results Conference Call. [Operator Instructions] This conference is being recorded on Thursday, April 30, 2026. I would now like to turn the call over to Kristen Mussallem, Investor Relations. Please go ahead. Kristi Mussallem: Good morning, and welcome to the First Quarter 2026 Earnings Call for Adamas Trust. A press release and supplemental financial presentation with Adamas Trust first quarter 2026 results was released yesterday. Both the press release and supplemental financial presentation are available on the company's website at www.adamasreit.com. Additionally, we are hosting a live webcast of today's call, which you can access in the Events and Presentations section of the company's website. At this time, management would like me to inform you that certain statements made during the conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Adamas Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's press release and from time to time in the company's filings with the Securities and Exchange Commission. Now at this time, I would like to introduce Jason Serrano, Chief Executive Officer. Jason, please go ahead. Jason Serrano: Good morning. Thank you for joining us today to discuss our first quarter 2026 results. With me is our executive leadership team, President, Nick Mah; and CFO, Kristine Nario. We entered 2026 with strong momentum on what we described last quarter as a strategic inflection point for the company. And I'm pleased to report that our first quarter results reflect both the continuation and acceleration of that trajectory. Let me begin with the macro environment. The first quarter was defined by heightened volatility defined by geopolitical developments in the Middle East resulting in increased rate volatility, periodic spread widening and shifting monetary policy expectations. The Iran conflict introduces the potential for another supply-driven stagflation shock, further complicating the Fed's dual mandate as upside risk to both inflation and unemployment remain elevated. Despite this backdrop, we maintain a positive outlook on the broader fixed income environment. We continue to see a Fed bias towards rate cuts later this year, notwithstanding near-term inflation pressure, also improving technicals for Agency MBS as volatility begins to normalize and attractive value across residential credit on a solid demand base. The current environment reinforces our strategy, pairing stability with scalable earnings growth. Against this volatile backdrop, -- we delivered strong performance across all aspects of our business, generating meaningful book value growth alongside solid earnings expansion, further validating the strength and durability of our business model. The earnings profile of the company continues to build. We delivered GAAP earnings per share of $0.41 and EAD of $0.29 per share, representing a 26% increase from prior quarter and well in excess of our $0.23 dividend. This reflects a clear step-up in earnings power. Based on our earnings trend over the past year, we believe we are operating from a position where EAD is scaling ahead of distributions, demonstrating the operating leverage of the company, durable long-term earnings capacity and the potential for supporting future distribution growth. On the balance sheet side, in the first quarter, GAAP book value increased 4% quarter-over-quarter with adjusted book value up 1.6% -- despite wider spreads into the quarter end, performance was supported by stable trends within our credit assets, improving profitability at constructive, continued positive results and payoffs of our mezzanine lending portfolio and strategic hedges that outperformed as macro conditions evolved in the quarter. Importantly, we were able to grow both earnings and book value in a challenging market environment. The outcome was by design. Our flexible capital allocation framework enables us to actively navigate volatility and optimize risk-adjusted returns relative to more static portfolio structures. Our investment strategy remains anchored in three core pillars: Agency RMBS representing 56% of the equity capital, providing stable earnings and strong downside protection, continued growth in our single-family credit portfolio through BPL rental loans under a disciplined underwriting framework and scaling of our constructive platform, -- as anticipated, we have transitioned constructive to profitability from integration in the fourth quarter to an earnings contributor in the first quarter as operating efficiencies were realized. Our evolution from pairing agency exposure, mortgage credit assets and now a scaled origination platform positions the company to perform through volatility while capturing value as conditions normalize. A diversified allocation strategy is a core strength of the company. Despite this performance and trajectory, our common stock continues to trade at a meaningful discount to what we consider its intrinsic value. Shares began the quarter trading at approximately 32% discount to adjusted book value and notably, a 15% discount to the value of our equity capital invested in agencies alone. We believe this price disconnect sales to reflect the strength of our earnings growth over the past 5 quarters, represented by a 31% year-over-year increase in EAD, the scaling of origination platform for EAD expansion and the durability of our portfolio as illustrated by book value growth. We believe continued execution of our strategy can drive convergence between market price and intrinsic value, which support our decision to repurchase shares during the quarter. We are highly optimistic about the year ahead. Our priorities remain clear: EAD growth through scaling the constructive platform and our loan investment portfolio to expand reoccurring income, grow book value with disciplined investment selection and active portfolio management. And as Jose mentioned, we are focused on closing the valuation gap of Adamas' shares with consistent execution and disciplined capital allocation. We believe Adamas today is positioned for sustainable growth under a more diversified and stable earnings profile. We see several factors that are supportive of our capital allocation plan, which include a meaningful increase in demand for mortgage credit, particularly from insurance capital, alongside renewed GSE MBS purchase activity and a more accommodative capital framework supporting bank demand. Against this backdrop, our balance sheet flexibility positions us to capitalize on the strength of the market to continue delivering exceptional value. I'll now turn the call over to Nick to discuss our portfolio investment activity. Nicholas Mah: Thank you, Jason. We took advantage of the first quarter's market volatility to deploy capital steadily across our residential investment strategies, surpassing $1 billion in acquisitions. In terms of product mix, we invested $510 million in our agency strategy and $502 million in residential credit, with BPL rental making up the bulk of residential credit purchases at $400 million. Our quarterly investment activity in BPL rental reached a record high, reinforcing the strategy's expanding role within our core asset portfolio. It also demonstrates the value of Constructive's integration into our broader organization with its origination and underwriting capabilities providing a direct pipeline of investment. Under current market conditions, we expect to allocate a higher percentage share of capital to BPL rental given its relative value advantage. Our investment portfolio reached $10.9 billion at the end of the first quarter, with further growth expected as we continue to deploy capital through the remainder of 2026. The agency market saw significant volatility in the first quarter. Agency current coupon spreads to treasuries reached multiyear tights of 94 basis points in late January, driven by the administration's mandate for the GSEs to ramp up MBS purchases. The dynamic reversed sharply in late February as the conflict with Iran came to the fore. Agency spreads peaked at 131 basis points in late March before settling back down to 124 basis points by quarter end. Our agency portfolio expanded from $6.6 billion to $6.8 billion. Agency leverage was at 7.8x, slightly above the prior quarter's 7.7x. Within our Agency [ capital ] investments, all purchases this quarter were in 6.0 coupon pools. We rotated up the coupon stack early in the quarter to reduce duration, taking a more defensive posture given especially tight spreads and low rates at the start of the year. That positioning benefited the agency book as rates backed up and spreads widened in the second half of the quarter. Going forward, we are returning to our original stance of adding current coupon spec pools at minimal pay-ups. As Jason mentioned, our expectation is that volatility will eventually moderate, while we aim to opportunistically increase our capital deployment during episodic bouts of price dislocation. At quarter end, Agency MBS comprised roughly 56% of our investment portfolio's capital, and we expect that allocation to remain relatively stable in the near term. Following the rapid repricing of agency spreads quarter-to-date, our view on the agency basis has become more neutral with more attractive relative value emerging in residential credit. We nonetheless anticipate continued agency purchases, albeit at a slower pace than in residential credit. From a hedge positioning perspective, we rotated out of longer tenure swaps into treasury futures in January, a trade that contributed positively to returns under the developing macro backdrop in the quarter. Treasuries underperformed swaps during the quarter, driven by ongoing treasury supply concerns alongside inflation fears. With swap spreads now tightening, we are reversing a meaningful portion of treasury futures hedges back to swaps in the second quarter for more cost-efficient hedging. Alongside our rate hedges, we also employ a range of additional hedge strategies to protect book value against tail events. Amidst softening structural demand for U.S. treasuries and escalating geopolitical tensions, these hedges performed favorably in the first quarter. The price movements of these hedges resulted in positive realized gains contributing to the company's overall quarterly performance. BPL rental remains our largest residential credit asset exposure at $1.8 billion. The portfolio is built on the strong underwriting standards that anchor our purchase program, resulting in minimal tail risks across key credit metrics. Loans with DSCR below 1x represent less than 2% of the portfolio as to those with LTVs above 80%. FICOs below 675 account for less than 3% of the portfolio. Securitization execution was volatile during the quarter, moving in tandem with broader risk markets. Our first BPL rental deal of the year priced in January at around 105 basis points blended AAA spread. Generic non-QM AAA spreads widened to as much as 145 basis points at the end of the first quarter before settling at 120 basis points to 125 basis points today as volatility has since subsided. Despite these larger market fluctuations, the securitization markets have remained well functioning throughout with a broad investor base continuing to allocate capital into bonds backed by residential credit. We are taking advantage of stable capital markets to be on pace to issue 5 BPL to 6 BPL rental securitizations this year, supported primarily by collateral originated by constructive. Our securitization program is supported by a deep and loyal investor base and is well recognized in the market for its underwriting discipline and consistent performance. Collectively, these factors have allowed us to price securitizations at the tighter end of the execution range. Moving to the origination business. Constructive originated $422 million of business purpose loans in the first quarter, modestly below the $439 million produced in Q1 of last year. The slight decline reflects Adamas' influence of a more selective origination posture to better align with our investment program rather than any pullback in capacity. Since onboarding Constructive, we are focused on further aligning production with Adamas' underwriting standards, building on an existing foundation of strong credit quality while maximizing secondary market liquidity. In the quarter, Adamas purchased approximately 2/3 of Constructor's overall loan production. We continue to balance the development of Constructor's third-party distribution channels alongside Adamas' investment portfolio objectives. Constructive's distribution model emphasizes locking loans with end investors early in the process rather than aggregating for bulk sale. This approach reduces monthly pricing risk and enhances our ability to adapt as market conditions evolve. Close coordination with Adamas' trading team to surmise real-time visibility into securitization execution and secondary pricing enables dynamic adjustment of forward pipeline coupons as the market shift. This responsiveness proved particularly valuable amid the rate volatility experienced during the quarter. As we are nearing the end of Constructive's integration into Adamas, our focus has shifted from transition management to optimizing technology, capital and processes across the origination business. We expect these initiatives to translate to improved operating results over time. In the multifamily portfolio, the redemption activity has been substantial with an annualized payoff rate of 30% experienced in the first quarter, higher than the historical average of 26%. During the quarter, one property in our cross-collateralized mezzanine lending portfolio sold and netted a realized gain of $13.8 million to Adamas, a successful execution outcome. Given the seasoning of the portfolio and the stable performance, we expect heightened resolution activity for the remainder of the year, providing us additional capital to reinvest into our core strategies. I will now turn it over to Kristine for commentary on our quarterly financials. Kristine Nario: Thank you, Nick, and good morning, everyone. Jason and Nick touched on some of the major items that contributed to our strong results this quarter, so I will focus on a few additional highlights. For the first quarter, we reported GAAP net income attributable to common stockholders of $36.9 million or $0.41 per share and earnings available for distribution of $0.29 per share, which increased by 26% quarter-over-quarter and 45% year-over-year. After accounting for a $0.23 dividend, we generated a 6.35% economic return on GAAP book value and a 3.76% economic return on adjusted book value. Our GAAP book value increased 4% to $9.98 and adjusted book value rose 1.6% to $10.80 during the quarter. These results reflect continued momentum across our investment portfolio and origination platform. Adjusted net interest income increased to $48.2 million in the first quarter from $46.3 million in the fourth quarter, and net interest spread was at 145 basis points, down from 152 basis points in the fourth quarter. The change in net interest spread reflects the continued transition of our portfolio toward Agency RMBS and BPL rental loans, which carry a lower yield than higher coupon BPL bridge loans that continue to run off, partially offset by improved financing costs. Turning to Constructive. The platform delivered a strong performance this quarter. Mortgage banking income was $15.3 million for the quarter, driven by $9.2 million in gains on residential loans held for sale and $6.1 million in loan origination and other fees. Constructive also generated net interest income of $0.5 million. After direct loan origination costs of $4 million and direct G&A expenses of $9.3 million, Constructive generated approximately $2.5 million profit for the quarter on a stand-alone basis. This marks a meaningful improvement from approximately $2 million stand-alone loss in the prior quarter and reflects the near completion of our integration efforts. We are pleased with Constructive's progress this quarter with ROE of approximately 13%, representing a significant improvement from the prior period and moving closer to our original underwriting target of 15% Total consolidated Adamas G&A were $24.5 million for the quarter, down slightly from $25.1 million in the last quarter. We estimate our quarterly G&A ratio to be approximately 7% to 7.5% in 2026, depending on Constructive's origination volumes. From a capital markets perspective, we continue to strengthen our balance sheet. During the quarter, we issued $90 million of senior unsecured notes due 2031 and redeemed our $100 million senior unsecured notes due 2026 at par, fully retiring the obligation ahead of maturity. We now have no near-term corporate debt maturities, which provides meaningful flexibility and positions us to focus our capital on growing the investment portfolio. At quarter end, we maintained $199 million of available cash and approximately $418 million of total liquidity capacity, including financing available on unencumbered assets and underlevered assets. Our company recourse leverage ratio was 5.2x and portfolio recourse leverage was 4.9x, with leverage primarily concentrated on agency financing. Overall, our first quarter results reflect the continued execution of our strategy and our growing earnings power. We remain focused on disciplined portfolio growth, increasing Constructive's earnings contribution and prudent capital allocation as we look to build on this momentum through the balance of 2026. We are committed to delivering sustainable long-term returns for our stockholders. That concludes our prepared remarks. Operator, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Marissa Lobo of UBS. Marissa Lobo: On your EAD trajectory, can you give us a framework on how you're thinking about dividend coverage relative to EAD going forward? And you mentioned increasing distributions, but is that on the table near term? Or will you continue accumulating retained earnings? Jason Serrano: This is Jason. Look, we're pleased by the EAD performance exceeding dividend by 26% in the first quarter. We recognize dividend growth is a key priority for shareholders. With the Board, we evaluate a range of factors in assessing appropriate distribution levels. And our focus is sustainably growing earnings while preserving book value. So we delivered on these objectives in the first quarter and look forward to continuing this momentum alongside with our ongoing Board discussions regarding our distribution rate. Our goal is to keep stability and sustainably increase the EAD, which is going to be the discussions that we have with the Board on the dividend discussion. So that's as far as I can go in that direction. Marissa Lobo: Appreciate that. And on the book value gain, what was the relative contribution from? Was it mostly the multifamily sale? Or was it the strategic hedge performance? Just a little color on the drivers. Kristine Nario: Yes. We had a strong quarter across the board. EAD came in at $0.29, up 26% quarter-over-quarter, which reflects really our earnings power through continued portfolio growth and improved financing costs in the quarter. On top of that, we benefited from two additional items that drove net income and book value higher. As you mentioned, we generated -- as you've seen, we generated about $87.8 million in derivative gains, both from mark-to-market due to higher valuations on our hedges as well as realized gains on settlement of derivative instruments during the period. We also recognized gain on sale on a property within our cross-collateralized mezzanine lending, of which $13.8 million is attributable to Adamas. And it was a quarter where both recurring income or EAD and nonrecurring items worked in our favor. Operator: Our next question comes from the line of Bose George of KBW. Bose George: Just a follow-up on the book value question. What's -- any changes to the book value quarter-to-date? Jason Serrano: We estimate adjusted book value being up between 2% to 2.5% quarter-to-date. Bose George: Okay. Great. And then on the multifamily portfolio, actually, how much is the capital that's remaining? Jason Serrano: I saw the assets, but I might have missed how much the capital... The capital and the assets are very similar. We have -- these assets are unlevered on our balance sheet. One of the back pages of our supplemental will show you those numbers. So that's a -- yes, it's generally dollar for dollar. Bose George: Okay. And have you given sort of the time line in terms of the potential runoff of that portfolio? Jason Serrano: Yes. So we've mentioned this on previous calls where it's a very seasoned portfolio. We control rights within many of the assets to -- in the mezzanine loan portfolio to accelerate maturity. So in utilizing those rights, given the seasoning and the ability for the sponsors to pay off the loans to refinance or sale of the property, we can help shorten our duration on these assets, which we've been effectively doing over the course of the last year, 1.5 years. Nick mentioned that the prepayment rate was accelerated in the quarter, and we do expect to continue seeing that through the course of the year. Operator: Our next question comes from the line of Jason Weaver of JonesTrading. Jason Weaver: I wanted to ask, as it pertains to constructive, what's sort of the right baseline for quarterly mortgage banking income for the rest of the year? How much of that is gain on sale versus origination fees? Kristine Nario: Well, majority of it is going to be gain on sale, as you've seen, and that's always been the case for Constructive. We are 13% return on a stand-alone basis, we're pleased with that performance. And as Jason mentioned, our priority is really to increase volume to increase earnings. So that's really our goal for 2026. Jason Weaver: Got it. That makes sense. And then on the BPL rental securitizations, I could be wrong on these numbers, but I think the 1Q deal priced at about 490. And then subsequently, the April deal priced at around 550, quite a bit wider. Is that just market volatility? Or is it sort of deal-specific nature, pool quality? What can you tell me there? Nicholas Mah: Yes, this is Nick. The majority of it is market movements. So rates were higher at the point that we executed the second transaction as well as spreads. So in terms of AAA spreads, for example, in our first securitization, the weighted average AAA spread was around 105 basis points. I mentioned in my prepared remarks, it went out to as much as 140 basis points, 145 basis points. We priced at the tighter end of that range. But still, it was more market conditions. But we were happy with the fact that there was still a well-functioning securitization market, number one. And number two, that our story resonated with the fact that we have strong underwriting quality and performance, which allowed us to price at the tighter end of the range. Operator: Our next question comes from the line of Doug Harter of BTIG. Douglas Harter: You mentioned looking to grow the volume at Constructive. Can you talk -- does that need more capital? Or can you be efficient -- more efficient in turning over the existing capital for Constructive? Nicholas Mah: Doug, so Constructive, we expect the volumes to first stabilize and then continue to grow. As I mentioned in my remarks earlier, the decline year-over-year in terms of Q1 volume was really driven by our influence in terms of making sure that the credit box better aligns with what we put into our securitizations and what the market expects of us. Now Constructive already has a very, very strong collateral profile, which is why the differential wasn't that meaningful. On a go-forward basis, a lot of it has to do with better efficiencies. I would say capital is less of a concern there. Constructive is, at this point, not even utilizing all the capital that is available to them to continue to grow. They continue to expand their broker network. They continue to expand their retail origination platform. They continue to drive more cost efficiencies through better processes. And then also the integration with Adamas has also been helpful in terms of just better capital efficiency in terms of the speed by which trades occur, but not only that also setting up better financing lines and just improving their capital structure and their cost of capital just generally. So there's a few things that we're pushing on. We're going to continue to look at the overall makeup of their originations. The one thing that is very true today is that there is an exceptionally strong institutional demand for this paper and not only the volume, but in particular, the stronger parts of the market and the better credit profiles get stronger bids. And there's going to be an opportunity for us to be able to deliver into that by us growing our platform. That's one of the reasons why we also believe that having a strong distribution network away from just selling to Adamas is an exceptionally important thing, and we hope to capitalize that more in the future. Douglas Harter: Yes. Just a follow-up on that last point. Nick, as volume kind of ultimately grows there, how do you think about the right balance between retaining and selling the production? Nicholas Mah: Yes. So it does fluctuate over time. Last quarter, we purchased about 2/3 of their overall production. I would say in the next couple of quarters, that's a good baseline in terms of where it will be, although obviously, market conditions can change and obviously, the volume can change as well. We expect to continue to sell to the market. We're going to be on the upper end above 50%, but there are other strong relationships that Constructive has with the market, and those relationships have been important in the past, and we believe will be important in the future, and it's -- we're going to make sure that there is some carve-out of volume that is available to them. Operator: I am showing no further questions at this time. So I would like to turn it back to Jason Serrano for closing remarks. Jason Serrano: Yes. Thanks, everybody, for joining us today. We appreciate your time and continued support. We look forward to speaking with you on our July second quarter update. Have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, and welcome to the Bel Fuse First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please go ahead. Jean Young: Thank you, and good morning, everyone. Before we begin, I'd like to remind everyone that during today's conference call we will make statements relating to our business that will be considered forward-looking statements under federal securities laws, such as statements regarding the company's expected operating and financial performance for future periods, including guidance for future periods in 2026. These statements are based on the company's current expectations and reflect the company's views only as of today and should not be considered representative of the company's views as of any subsequent date. The company disclaims any obligations to update any forward-looking statements or outlook. Actual results for future periods may differ materially from those projected by those forward-looking statements due to a number of risks, uncertainties or other factors. These material risks are summarized in the press release that we issued after market close yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations is discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our quarterly reports and other documents that we have filed or may file with the SEC from time to time. We may also discuss non-GAAP results during this call, and reconciliations of our GAAP results to non-GAAP results have been included in our press release. Our press release and our SEC filings are available in the IR section of our website. Joining me on the call today is Farouq Tuweiq, President and CEO; and Lynn Hutkin, CFO. With that, I'd like to turn the call over to Farouq. Farouq? Farouq Tuweiq: Thank you, Jean, and good morning, everyone. We appreciate you joining our call today. We delivered a strong start to fiscal 2026. First quarter performance reflected broad-based momentum across the business and continued execution, both operationally and commercially. We also delivered solid profitability, supported by disciplined operational performance and favorable mix. Before we get into the quarter in more detail, I want to highlight an important step we took during Q1 to better position Bel for continued growth. We completed a business unit realignment designed to align our teams around how our customers buy and how we win, enabling greater customer intimacy, faster decision-making and a more coordinated approach to delivering our full portfolio of solutions across connectivity, power and magnetics. This structure strengthens our ability to bring more of Bel to each customer, expanding share of wallet through integrated selling, improved program execution and tighter alignment between engineering, operations and the commercial teams. Accordingly, Bel now operates 2 focused business units. First one, Aerospace Defense & Rugged Solutions, or ADRS, which combines our legacy connectivity business with Enercon, focused on mission-critical applications across commercial aerospace, defense, space and rugged industrial environments, and Industrial Technology and Solutions, or ITDS, which integrates our pre-Enercon power and magnetics businesses, focused on data solutions, transportation and industrial markets where performance, reliability and scale matter. This structure sharpens accountability, accelerates decision-making and increases the speed at which we translate engineering into customer wins but also enables product-agnostic access to Bel's full portfolio, so customers engage with us as a solutions partner aligned to their end market requirements. In that context, I am pleased to share that we closed the acquisition of dataMate from Methode Electronics in March for $16 million. dataMate adds approximately $18 million in annual sales with margins in line with Bel and is expected to be immediately accretive. It will operate within our Industrial Technology & Data Solutions business unit. Strategically, this expands our ethernet and broadband portfolio in a highly complementary way and positions us to grow in data centers, industrial automation, smart buildings and broadband deployment. It also strengthens our U.S.-based manufacturing and engineering footprint. We're excited to welcome the dataMate team. They bring new customers, differentiated technology and strong talent, and we look forward to what we'll accomplish together. Turning to business performance. Within ADRS, results were driven by robust demand in defense and commercial aerospace with continued strength across key platforms and programs, supported by strong demand and stable OEM build rates. We also saw ongoing progress in space as production schedules and program content continue to expand. Robust bookings during the first quarter within ADRS were driven by both sustained program demand and continued traction with our channel partners, resulting in a strong foundation heading into the back half of the year. We're also beginning to see the fruits of our organic growth initiatives over the past year. In Slovakia, for example, we secured 2 new defense design wins that are progressing through final certification steps and remain on track to complete in the second quarter. The win was initiated by Enercon with ramping up the Slovakia entity to produce an Enercon design, highlighting our global ability to deliver to our customers locally. In addition, we achieved our first bundled Cinch and Enercon win on a new design in Israel, which is a great early proof point of that -- of what this broader integrated portfolio can do when our teams collaborate across the organization. Within ITDS, we continue to see healthy demand signals across networking and data infrastructure with momentum improving in data center connectivity and high-performance compute applications. Customer activity remains elevated as the industry invests in AI-oriented architectures, driving opportunities for power conversion and protection as well as high-speed interconnect solutions that support next-generation switching and server platforms. We are expanding our design win funnel and investing in engineering and operational capabilities to support these growth vectors, including manufacturing resilience and multisite capacity to serve global data center customers. As we think about the broader environment, we remain mindful of trade policy and tariff dynamics as well as demand variability by end market. We continue to work closely with customers to manage these conditions, including pricing and supply chain actions where appropriate. We are seeing some general upward pressure in certain material and logistics inputs, and we remain prepared to use the levers within our control, procurement actions, pricing discipline and operational execution to support the overall direction we've laid out. With that overview, I'll turn it over to Lynn to walk through the financial results in more detail. Lynn? Lynn Hutkin: Thank you, Farouq. From a financial standpoint, we had a solid quarter with continued sales growth, margin expansion at the gross profit line and healthy cash generation. Before walking through the results, I want to cover a couple of points of clarification related to our new segment structure. First, the realignment that Farouq mentioned became effective March 31, 2026. And as a result, our Q1 reporting and all prior periods presented have been recast to reflect the new structure. Further, we filed recast segment information by quarter for 2024 and 2025 in an 8-K filed on April 6 for reference. Second, beginning in Q1 2026, our end market sales figures will capture all sales into a given end market, including both direct-to-customer shipments and sales through the distribution channel. In the past, distribution channel sales were called out separately in total rather than allocated to individual end markets. We will provide prior period comparable figures where appropriate to help investors evaluate performance on a consistent basis. With those points in mind, let me turn to the quarter. In the first quarter, total sales were $178.5 million, up 17.2% from the prior year period. Gross profit margin was 39%, up 40 basis points from Q1 '25. The gross margin performance improved leverage of our fixed costs on the higher sales volume, partially offset by higher material costs and impacts from foreign currency fluctuation. Below the gross profit line, GAAP operating income was $23.7 million compared to $25 million last year, while adjusted EBITDA was $34.5 million versus $30.9 million in the prior year period. Now turning to results by reportable segment. In the Aerospace Defense & Rugged Solutions, or ADRS segment, sales for Q1 '26 were $99.8 million, up 20.1% versus Q1 '25. Growth was led by a $9.4 million increase in defense market sales, up 19% from Q1 '25 and a $3.9 million increase in commercial aerospace sales, up 22% from Q1 '25. ADRS gross profit margin was 41.5%, an improvement of 140 basis points from Q1 '25. This margin expansion was largely driven by improved leverage of fixed costs on the higher sales volume and a favorable shift in product mix. These benefits were partially offset by unfavorable foreign exchange movements, primarily related to the weakening of the U.S. dollar against the Israeli shekel and the Mexican peso. Within the Industrial Technology & Data Solutions segment, or ITDS, sales amounted to $78.7 million, up 13.8% from Q1 '25. Growth was primarily resulted from AI-driven strength in data solutions, coupled with the continued year-over-year recovery of sales into our enterprise networking customers. This growth was partially offset by lower transportation sales versus Q1 '25, particularly within the rail and e-mobility markets. ITDS gross profit margin was 36.6% compared to 37.3% in Q1 '25. The margin decline was primarily driven by higher material costs, particularly related to gold, copper and PCBs and unfavorable foreign exchange movements, particularly with the Chinese renminbi. Turning to operating expenses and cash flow. R&D expense increased to $8.5 million from $7.2 million last year, reflecting continued investment in technologies aligned with our targeted end markets. Of this increase in cost, we estimate approximately $400,000 related to foreign currency movements as we have a large engineering population in China and Israel. We anticipate R&D will run in the range of approximately $8 million on a quarterly basis going forward. SG&A increased to $36.7 million, up from $29.5 million in Q1 '25. Of the $7.2 million increase, we are estimating approximately $3 million was onetime in nature, including acquisition-related costs related to dataMate, segment leadership transition costs and a prior year benefit which was nonrecurring in the 2026 quarter. The remaining $4 million of the increase reflects targeted commercial and infrastructure investments to support growth in addition to an increase in commissions on higher sales and unfavorable foreign exchange impacts. On a go-forward basis, we expect SG&A expense to run at approximately $33 million to $35 million per quarter. We ended the quarter with $59.4 million of cash and securities. Net cash provided by operating activities was $13.8 million, up from $8.1 million during the first quarter of 2025. Capital expenditures were $2.6 million, generally in line with the prior period. During the quarter, we closed the dataMate acquisition, investing $15.2 million. To help fund that transaction while maintaining balance sheet flexibility, we had $7 million of net borrowings from the credit facility during the first quarter of 2026. To close on the financials, we delivered a very strong quarter, driven by solid execution and healthy demand across the business. Looking ahead, we see continued strength and momentum for the balance of the year and remain confident in our ability to perform. We are also operating in an environment of higher input costs, and we're actively managing that pressure by focusing on the levers we can control, pricing discipline, procurement actions and operational efficiencies. At the same time, we're enhancing our focus on the cash conversion cycle, improving inventory turns, receivables and payables discipline as a key enabler to generate cash, strengthen flexibility and accelerate Bel's growth strategy. With a strong quarter behind us and clear priorities in front of us, we're executing with urgency and discipline. With that, I'll turn the call back over to Farouq. Farouq Tuweiq: Thanks, Lynn. As we look forward ahead, our focus remains on executing our commercial and operational priorities while navigating the external environment, including ongoing tariff and trade-related uncertainties and demand variability across our various end markets. Looking ahead, we have a strong outlook for the second quarter. We are guiding sales in the range of $195 million to $215 million with gross margin in the range of 38% to 40%. This outlook is supported by robust bookings across the business in recent quarters and is driven by higher demand from our defense, commercial aerospace and data solutions customers. Before we open the line for questions, I want to recognize Pete Bittner on his retirement after 35 years with Bel. Under Pete's leadership, we strengthened our connectivity platform and delivered meaningful profitability improvement while deepening customer relations. We are grateful for Pete's contributions and wish him and his family all the best. With that, I'll turn the call back over to Kerri to open up the line for questions. Operator: [Operator Instructions] And our first question will come from Luke Junk with Baird. Luke Junk: Farouq, maybe hoping you could just provide some comments on book-to-bill trends. You mentioned robust bookings were one of the things that is supportive of the guidance. And within that, if there'd be any end market highlights you want to call out as well? Lynn Hutkin: So on book-to-bill trends, I would characterize them as robust in the first quarter here. And that was really seen across the full business, both in both segments and across most of our subsegments. I think the only exception would be in transportation. But when it comes to aerospace, defense, data solutions, a very robust book-to-bill in Q1. Luke Junk: Got it. Second, you mentioned that the ITDS growth was primarily AI-driven with strength in data solutions. Just hoping you could provide a little more color on what you're seeing. And I don't know if you're going to be speaking out the AI dollars specifically going forward. And Farouq, you mentioned serving global data center customers as well. I was hoping we can maybe double-click on that trend too. Farouq Tuweiq: Yes. I think we obviously have seen our customers benefit from all things, data center build-out, obviously, AI and data generation and everything that we're reading out in the world is additive to that effort. And we're seeing that across our portfolio. Specifically on the AI customers that we service, we're definitely seeing a very healthy pickup in their bookings and customers and orders, and therefore that downstreams to us. So I think we would say that we characterize it as a very, very healthy environment. The bookings continue to be more robust. The outlook continues to strengthen and all the good things. And I'll defer to Lynn here on more specifics around that. Lynn Hutkin: Yes. And Luke, so I know in the past we had called out AI-specific sales. As we're entering 2026 here, things are getting a little more blurred, and we had alluded to this last year where we had AI-specific customers, but also selling into our regular way enterprise networking customers where their demand was increasing due to AI demand as well. So I think going forward, we will be talking more generally about data solutions. But we did see it across both of those platforms, I would say, the AI-specific customers and into our more general enterprise networking customers where we saw strength in Q1 that, that was AI-driven. Luke Junk: Understood. Last question for me. Just curious to get your perspective on posture right now at U.S. and Israeli defense trends. It seems like there's a fairly obvious replenishment opportunity. Just how much of that is baked into the 2Q guidance sequentially. And as you look into the back half of the year, just qualitatively, the potential for some additional upside or just clarity on that opportunity. Farouq Tuweiq: Yes. And we talked about, obviously, the geopolitical events for us from an A&D business is helpful and additive. And we've said this in the past where we tend to be levered and a fair amount of exposure to all things on the missile side of the business. So whether it be things that are deploying or the launchers themselves, that's all additive to us. So as you had alluded to here, with the replenishment and the talk about national stockpiles and all that kind of discussion points, that is all additive to us. We agree that we think there has been a replenishment cycle going on starting out back in kind of the Ukraine days, it never felt like we caught up. And now we saw a lot of more usage of the stockpile. So we agree this will probably be a medium-term vector of growth and replenishment. Obviously, we are also seeing more overall investments going into new business and new platforms as the whole industrial A&D complex is being challenged to step up across the technological spectrum. So that all is additive to us. And we see in our business, whether the funneling and the opportunities are becoming a little bit more, a little bit bigger. So we do see more shots on goal. So whether it be the replenishment on existing platforms or new, we think that that's all additive. And also, as a reminder, we're not just seeing that, obviously, in the U.S. side of the business, but we're also seeing that in our European Israel business as well. Operator: And our next question comes from Bobby Brooks with Northland Capital Markets. Robert Brooks: It was great to hear about the first Cinch Enercon package win. Could you just discuss more how that win came about? And maybe what you felt was the piece that pushed the customer to give you that order? Farouq Tuweiq: Yes. I mean, I think, listen, it's -- I'm not sure -- I don't believe in one magical solutions in the sense that we didn't change one thing and it all worked out, right? We sell highly engineered complicated systems, whether it be on the components or on the system side of things. So we -- I would say, people are very busy, right? As we can imagine, A&D is -- our organization is very stretched in. And on top of that, we started partnering to make sure we deliver holistic solutions. So we were alluding to a couple of opportunities here to maybe just kind of expand the point. We had talked when we acquired Enercon potentially using our Slovakia facility to become our A&D footprint into Europe. And obviously, that takes a while to get certifications and sharing the drawings and ramping up the skill set. We had to invest in some CapEx. So we did do that. In conjunction with that, we were able to move some of the products. We had a European customer that wanted to have manufacturing done on the continent. That's where Slovakia came in. So all that effort, we were able to get the customer out to Slovakia. They saw the facility, they saw a signal capacity. Obviously, they know the products from the Enercon and engineering. So it was a very good team effort, both from engineering and operations and Enercon supporting Slovakia to get that facility up and going. And the customer saw it and was thoroughly impressed and we got a couple of POs thereafter. Now with the first one here, obviously, is the win, this becomes a very great one. On the other opportunity I was talking about basically -- can you hear me, Bobby? Robert Brooks: Just curious, is that like, first, is that a specific drone company or... Operator: Bobby, your line is open. Robert Brooks: -- making drones second... Operator: I think he's taking a phone call. Farouq Tuweiq: I'm not sure what's going on, so no worries. You can all appreciate how this goes. But I'll continue to answer your question. The other opportunity was taking an Enercon box, a power unit, and we put a Cinch component on it on the connector and cabling piece of it. So we're able to do the connectivity there. Now we end up solving obviously a few problems because we had both the power supply and the cable solution. So I think we got very good compliments from the customer. I think more importantly, it showed the team the art of the possible. And more importantly than these 2 wins, to be honest, is we are definitely seeing a more robust collaboration across the organization of ADRS. So when we hear the discussion that they're going through and the opportunities, I think people are significantly much more aware of the whole portfolio and going after it. I would also take a step further and say that we're seeing some of the A&D customers looking for more hardened industrial solutions. And now with our non-Enercon products, it's able to fill that gap. So we're able to fulfill the customer needs from a few different angles, I would say. But the discussion bottom line was significantly ahead of where it was, I would say, in the recent memory. I don't know if you're back, Bobby, but hopefully that answers your question. Operator: Our next question comes from Christopher Glynn with Oppenheimer. Christopher Glynn: I'm going to ask a question and try to stick around. Just if there's background noise, just tell me to mute it, please. So just continuing with the defense because it's such a large proportion of your business in such a dynamic area and then you're generating your own dynamism within that. I'd say with these initial kind of greenfield design wins in the defense sector in Europe, is that kind of consistent with the time line you would have anticipated from an integration pathway or maybe pulling ahead a little bit? Just kind of curious of the actuals versus your expectations. Farouq Tuweiq: Yes. I'd say maybe a little bit ahead/on time. If you recall back to kind of Q4 2024, when we did do the Enercon acquisition, we said I don't think we're going to see anything probably until at least '26, probably towards the end of '26. So if that is the correct metric, we said back then, here we are roughly in Q1, we're seeing some of the early wins. I would say what took a little bit longer than anticipated was getting all the certifications and facility approvals. Obviously A&D is a heavily, heavily, heavily regulated market. You can't just be moving things around globally and in e-mails and so on. So as a result of that, the approval process from the local authorities in Slovakia was longer than we anticipated, partially because they're seeing a lot more investment in the overall country. But putting that aside, we're sitting here, let's call it, April, we had some nice wins. We had customers come through this. So like I said, I would say we're probably slightly ahead of schedule on schedule, somewhere in the middle of that. Christopher Glynn: Okay. Makes sense. And just given the obvious dynamism in defense procurement and everything and hot regions, these kind of design wins to revenue, are they pretty quick? Farouq Tuweiq: I would say a lot of good things about defense, but quick might not be the characterization of the world. I would generally say, right, because also when you win a program, you got to prove it out, they got to do all their testing and then it kind of scales over time. But the key is when there's a lot of investment and, let's say, spotlight and all things defense, you got to make sure you're getting into these things early. So as they scale, you're there. I would say if we were to paint a very potentially let's say, range, if it's an existing product, I'd say you generally get an initial order, but I would probably say before you start seeing kind of volumes 12 to 18 months. And if it's a brand-new kind of product or technology that's being developed by the customer, then it could be a little bit longer. But the key is being getting the award side of it, right? Because then you're going to there -- it might go through a couple of iterations along the way. But if it's an existing product or slightly existing, maybe it's a modified, I'd probably say 12 to 18 months before you start seeing some real dollars. That's just the nature of defense design cycles. Christopher Glynn: Right, right. So the replenishment orders are more kind of the quicker lead time drivers that you're seeing right now? Farouq Tuweiq: Correct. And I will also caveat is my earlier commentary on defense, not necessarily the fastest movers, I would say that is probably still true. I would say we are seeing areas where things are moving faster, right? So there it seems to be some buckling of maybe the historical norms. I'd also say there's regional nuances, right? So I think maybe we're seeing some different speeds in Europe versus the U.S., maybe Israel will be the fastest. So I think it's changing a little bit, but I would say, largely speaking, it is a slower moving industry. Christopher Glynn: Okay. And yes, just a quick check on how we think about the back half. Second quarter is obviously a pretty striking step change upward in the run rates. And I think you had some nice latency to some market trends that's showing through. So I'm not particularly thinking that the second quarter guide has some surge demand kind of factored in. Maybe there's a little onetime, but you talked about almost $30 million sequentially and is just a sliver of that. So is that really just a fundamental step in the -- how the run rates are developing with your end market exposure? Farouq Tuweiq: Yes. As Lynn said, we are fortunate to play in a lot of great end markets. So much more than not are in moving in growth mode. And as we closed out the quarter and headed into April, we're just seeing that continued robustness across the portfolio. I would also say that distribution is one of the things we're talking about. It started off very good in April. So as we look at backlog, customer chatter, outlook and the kind of nature of the world, we think we'd expect a very healthy second half. Obviously, keeping in mind, we do hit with some seasonality in Q3 and Q4, right? So Q3, we hit kind of the European slowdown a little bit throughout the summer months and some Labor Day and 4th of July type events. And then we head into Q4, we start getting into some of the holidays, whether it be Golden Week or some of the ones in Israel and overall holidays. But putting that aside, we expect a very healthy second half and continued strength. Operator: And our next question will come from Greg Palm with Craig-Hallum. Jackson Schroeder: This is Jackson Schroeder on for Greg Palm. I want to start out with -- you guys talked on gross margin a little bit and the cost there, but curious how you're feeling about the levers you're pulling on that. I don't know if there's any kind of timing-related things on that, how we might see that play throughout the year, especially as it relates to new bundled design win in Israel and some of the organic initiatives that you have. So curious if you're doing anything within those new contracts or investments to kind of offset that going forward? Lynn Hutkin: Yes. So I think as we look across the full year of 2026, we're a little bit of a disconnect. As just mathematically, as sales grow, we will have better leverage on our fixed costs within COGS, leading to margin expansion. That's with all other things staying consistent. What we're seeing this year is a rise in input costs, primarily related to material costs. We do have some minimum wage increases around the world. And we are in an unusually unfavorable, I would say, FX environment where all 3 of the currencies that impact Bel are all moving in the wrong direction for us. So that's the Mexican peso, the Israeli shekel and the Chinese renminbi. So we do have things moving against us as sales are increasing. We are taking actions that are within our control, whether it's through pricing discipline or procurement initiatives or operational efficiencies, but those things take time to put in place. So what we're seeing is probably Q1, Q2, where there's more of a disconnect where we're paying those higher input costs, and we have not yet seeing the benefits of the initiatives that we're doing to offset those, so. Farouq Tuweiq: And then I'd also say, as we -- obviously we have done some pricing actions to offset these input costs. One of the things we got to be mindful about is touching the backlog. To some extent, to Lynn's point, we got to work through the backlog. So anything new, we've put price increases through. So we'll start seeing the benefit of that as -- maybe we might see some of that in Q2, but I think about it as Q3, Q4, where we'll start offsetting some of that. So I think that's a testament to the business here. We got a higher margin given the operational leverage and things we can control. And then the pricing elements that we did put through, we'll start seeing the benefits of those into Q3, Q4. Jackson Schroeder: Got it. Super helpful. And then I also wanted to talk on the new business structure here, strategic realignment. Curious how you're processing that as it goes through the P&L as you look at inorganic -- sorry, organic growth specifically as we lap Enercon, looking at like the geographic breakdown where we can kind of size where we should be seeing growth here by segment, by geography, if you could do that. Farouq Tuweiq: Yes. I'd say we haven't given forward guidance on the growth piece of it. We, at the end of the day, are in a very unusual environment. So we haven't given any kind of long-term guidance on that. I think the overall message, we expect -- we've always said we're an end market-driven business, and we obviously want to be a little bit ahead of that. So as we think of the end markets, we think there's robustness in there. I would also say that when we look at our A&D business, it's been growing for a bunch of quarters sequentially, right, from a growth rate perspective, and we expect some of that to continue. But by definition, right, maybe some things, the hot percentages start to go up. But overall, we expect robustness and continued top line growth. So I'll leave it at that. On the ITDS side, the data solutions, data centers, AI, kind of all the infrastructure around data generation and transmission and some of the broadband and kind of the other things we've talked about just now, we also expect robustness there. Obviously we have a little bit more nuanced game and strategy in that market where we can make sure we can drive margins and get good return on our business. I would say our industrial technology part of it, which would include some of our transportation and e-mobility type applications and other industrial, I would say that one is a little -- kind of a little bit later to the game, but we're seeing some nice things in that part of the ITDS business. So all in all, we expect the growth piece of it, but I'll leave it at that. Operator: And moving next to Hendi Susanto with Gabelli Funds. Hendi Susanto: Congrats on strong results. Farouq, I would like to understand more about your data center footprint and post the acquisition of dataMate. Like I think my first question is, is dataMate a growing business? What kind of sales trend? And then second one is when you talk about data center, AI data center, anything new, any new areas that you want to address, any new product portfolio that you want to develop? Farouq Tuweiq: Yes. So maybe the first question on dataMate, yes, we bought it with the expectation of growth. I would say we are a better home for it in terms of the end markets that they play in, the customers they serve and the kind of language that we do use. I would say, in certain of the products, which is their core products, they were the, let's call it, the dominant great reputation in our industry. So we're very excited for that team to join us. And when we look at the development product portfolio and things that they're working on, we're very impressed by. So yes, our expectation is that it grows or else I'm not sure we do the acquisition. And I think also what's the nice thing about dataMate, it gives us a footprint into manufacturing in the U.S. Obviously the team there, kudos to the dataMate team, it was a carve-out. So we had to relocate facilities, and those things are always bring a certain level of complexity, but we are in the new facility. We're up and going. The team did a great job. It was much more seamless than I probably had anticipated. So thank you to the team there. So that's the expectation of dataMate. I would say dataMate, there are some customers that they bring that we just haven't had inroads with historically that we hope to kind of land and expand the broader Bel portfolio. We have a much broader sales organization and reach globally that we think we can effectuate their growth. And I'd say more importantly, I think people are very excited internally to have access to that portfolio set and also just great engineering. The other thing I would say to your other question on the data centers, AI, I mean, look, we have a lot of SKUs that we're always seemingly winning new things. But at the end of the day, the drivers remain the same, which is AI build-out, AI deployment, data center build-out, data center deployment, routers and switches, right? That's kind of where we play. I would say that effectuates our legacy power and magnetics businesses from both sides. So I would say it's pretty broad-based. And as we've talked about, when we say AI, we think of that as a floor versus ceiling because sometimes we lose visibility to where our products are going. But when we look at the floor, which is the clear AI, we're seeing robustness in that growth. And so that's, let's call it the clear AI, if you will. Lynn Hutkin: And just to add on to that, so within Data Solutions, we've talked in the past how our AI exposure is largely within our power products. So if we isolate Data Solutions just within power products, that increased by $4.8 million or about 27% from Q1 last year to Q1 this year. And much of that was driven by AI. Hendi Susanto: Yes. And a then Farouq, a number of companies have talked about the possibility of price increases in the second half. You mentioned pricing action. What are the puts and takes in terms of expectation on price increase in general in your industries in the second half? Farouq Tuweiq: Yes. I mean, let's be honest, I don't think everybody welcomes us or anybody in the industry with open arms around price increases. But I think there's a general understanding and appreciation for the fact that things are going up. I would also say from an industry-wise, you are correct. It's become normal. I shouldn't say normal, but people have done it, and it's part of the world that we live in. So from our perspective, we need to do the right thing by our investors and make sure that we are passing on cost. Obviously, we try to mitigate where we can. But if not, then we will need to pass that on. And I think you hit on it correctly as we took pricing actions in Q1, but that's on the new business, right? So obviously, we have backlog, so we don't want to necessarily -- barring it being egregious or something really kind of crazy, generally, you want to update your price sheets and pricing for all the new stuff. So that's why we earlier said we'll start seeing the benefits of that, some of it in Q2, but we think about it more by Q3, Q4. Hendi Susanto: Got it. And then, Farouq, any insight into market recovery in industrials, especially on customers' and distributors' inventories? Farouq Tuweiq: Yes. So we're seeing -- I'd say distribution is a pretty broad -- obviously we touch a lot of end markets and a lot of customers, right? But I would say we've seen pockets of definitely robust strength, and we've seen pockets of still recovery side of things. So as a result of that, when we stitch it all together, we'd say it started getting a little bit more stronger as we can -- headed out of the quarter into April. So I would say we are seeing the strength in distribution, the recovery part of it, which I think is additive to our efforts and to earlier commentary as well. Operator: We'll go next to Theodore O'Neill with Litchfield Hills Research. Theodore O'Neill: Congratulations on the quarter. Two questions for you. The first one, last quarter you talked about weakness in the rail and e-mobility, and I'm wondering if anything has changed there? And my second question is about the strength in Q1. In the last 20 years, you companies reported a sequential growth in Q1 over Q4 only 3 other times. So what was driving the strength here in this sequential increase? Lynn Hutkin: So I'll cover the initial question first. So on e-mobility and rail, it's, I would say it's relatively more of the same from Q4. I think on the e-mobility side, Q4 was probably the bottom that we saw. There was a slight uptick from Q4 to Q1, but nothing meaningful. Both of those areas, I would call them still depressed in Q1, similar to Q4. And then what was the other -- I'm sorry, the other part of the question? Farouq Tuweiq: The broader industrial. Theodore O'Neill: The sequential increase in Q1 over Q4. Farouq Tuweiq: That's really rare. Lynn Hutkin: In general, right. So as our end market mix is changing, so you're correct that historically Q4 to Q1 we always saw a -- or generally saw a decline. And that was largely due to the Chinese New Year holiday and production interruption that we would see in the January, February time frame with our large dependence on the China workforce. As more of our business is becoming aerospace and defense-centric, we are less reliant on China. So it's just having less of an impact. So we're becoming less seasonal as our end market mix shifts more towards A&D. Operator: And we'll take a follow-up question from Bobby Brooks with Northland Capital Markets. Robert Brooks: I was just curious on diving a little bit more into the guide. Obviously really nice sequential growth. And even if you back out the benefit from dataMate, we're still looking at like really nice double-digit year-over-year growth. So could you just expand a little bit on the factors that underpin that outlook? And do you have a visibility with the strong bookings already year-to-date, that type of sequential growth can keep occurring in the back half? Farouq Tuweiq: Yes. So I'll just answer kind of generally before I turn it over back to Lynn, Bobby. Yes, our backlog continues to build and grow from year-end, strength to strength, Q1 was very healthy. Obviously delivery could be kind of spread out. From our perspective, yes, we're seeing that. We're also seeing the robustness of the funnel opportunity and new opportunities and also just general, let's say, industry chatter with whether it be our customers or distribution partners. But yes, we put a guide here based on some very good orders that need to be shipped and scheduled to ship in Q2. Obviously, not all of our backlog is for Q2. So we have backlog into Q3 and Q4. Obviously it starts to scale down post Q2, a quarter out roughly. So but when we look at again the forecast, the guidance, the discussions, what we have in the backlog, right, that's how we think about it. That's why we said, yes, we do expect robustness. Now to the specific level, I think it will be largely kind of very healthy, putting aside some of the seasonality that comes in Q3 and Q4. So we expect to have a very good year. I think I'll kind of leave it at that. Lynn, I don't know if you want anything to add. Lynn Hutkin: Yes. So Bobby, on the question about the Q2 guide, I think if you're comparing Q2 last year to what we're guiding for Q2 this year, the strength is really seen across both segments. Within ITDS, I would point to the Data Solutions portion, which is largely AI-driven. And then within ADRS, it's really commercial air, space, defense. We just have several of our end markets that are running very strong right now. So those are the key drivers, and it is supported by the orders received. Robert Brooks: Awesome. That's super helpful color. And then just one last one for me is you guys have done a really good job kind of finding strong acquisition targets. Obviously just the dataMate looks like more of that. Just was curious to get your -- get a feel on capital allocation and your appetite for more M&A moving forward? Or maybe is it a pause just to let the dataMate get the integration, or? Just curious to hear that. Farouq Tuweiq: Yes. No pause here. We are always out and active on the M&A front. Obviously, if you were to kind of set aside a little bit the dataMate acquisition, the cash flow even for -- usually Q1 is our biggest cash, let's say, usage of the year, given its bonus and we pay our big IT and insurance and all other kind of good stuff. But putting that aside, I think it was a very good cash flow, and we obviously were able to pay for dataMate. As we look out to the balance of the year, we expect healthy cash flow generation. We have a good amount of opportunity on the access to capital side of things. So when we look at that married up with internal bandwidth and ability to execute upon an acquisition, we like both of the sides. So we are open for M&A. We're actively looking at M&A. It feels like we always have some kind of discussion going on around M&A. So we are not hitting the pause by any stretch of the imagination. I think what we would need to be mindful of, maybe how messy it is and how much integration and the M&A needs to stand on its own merits. So from our perspective, we're wide open for M&A. Robert Brooks: And again, congrats on the great quarter. Operator: And this now concludes our question-and-answer session. I would like to turn the floor back over to Farouq Tuweiq for closing comments. Farouq Tuweiq: Yes. Thanks, Kerri, and thank you, everyone, for joining us today. A very important thank you to all of our team globally that delivered this outstanding Q1 and what we think will be a very healthy balance of the year starting out with Q2. So thanks, everybody, and looking forward to speaking again in July. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.