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Operator: Good day, and thank you for standing by. Welcome to the A. O. Smith Corporation First Quarter 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Helen E. Gurholt. Please go ahead, ma’am. Helen E. Gurholt: Good morning, everyone, and welcome to the A. O. Smith Corporation First Quarter Conference Call. I am Helen E. Gurholt, Vice President, Investor Relations and Financial Planning and Analysis. Joining me today are Stephen M. Shafer, Chief Executive Officer, and Charles T. Lauber, Chief Financial Officer. In order to provide improved transparency into our operating results, we have provided non-GAAP measures. Free cash flow is defined as cash from operations plus capital expenditures. Adjusted earnings per share excludes the impact of restructuring and impairment expenses. Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and on our website. A friendly reminder that some of our comments and answers during this conference call will be forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include matters that we described in this morning’s press release, among others. Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up per turn. If you have multiple questions, please rejoin the queue. We will be using slides as we move through today’s call. You can access them on our website at investor.aielsmith.com. I will now turn the call over to Stephen M. Shafer to begin our prepared remarks. Please turn to the next slide. Stephen M. Shafer: Thank you, Helen, and good morning, everyone. Before I discuss our first quarter results, I want to sincerely thank all A. O. Smith Corporation employees for their exceptional dedication and resilience during the first quarter. In particular, I would like to recognize our North American water heater team for their swift response to weather-related damage at one of our facilities, as they acted to ensure the safety of their colleagues while at the same time finding a way to recover from our production loss and continue to serve our customers well. I remain grateful for your dedication and teamwork, which continue to strengthen our company and our culture. Now moving on to our first quarter 2026 financial performance. Please turn to Slide 4. North America sales increased 1% to $753 million and Rest of World sales decreased 11% to $201 million, resulting in total company first quarter sales of $946 million, a decrease of 2%. Our EPS was $0.85, a decrease of 11% due to lower volume and transaction-related expenses recognized in the quarter for the Leonard Valve acquisition. Despite these headwinds, diligent working capital management helped to drive strong free cash flow performance in the quarter. Our China sales decreased 17% in local currency in the first quarter, which was in line with our expectations as well as broader market performance. With the discontinuation of most government stimulus programs and continued low consumer confidence, the water heater and water treatment markets remain challenged, especially the premium portion of the market where we compete. We expect this softness to persist. We also believe that our ongoing strategic assessment has created some uncertainty in the market and has delayed certain investments, putting further pressure on our business. We continue to make progress with our assessment and are moving with urgency to provide greater clarity for our customers and employees, with the goal of defining a clear path forward in the coming months. Now I would like to share some additional color on our North America business. North America water heater sales decreased 2% year over year. Production and shipping constraints caused by adverse weather, most notably at our Ashland City, Tennessee facility, combined with softer-than-anticipated residential industry demand early in the year, negatively impacted the quarter. As we discussed on our January earnings call, the wholesale residential channel continues to face challenges, including a soft market in new construction and continued initiatives by retailers to expand into serving the professional. Despite these pressures, we are encouraged by the stabilization of our market share in the wholesale channel in the first quarter, while recognizing there is still work to be done with more improvement to come. Additionally, we are pleased with our share performance within the retail channel and the strength of our retail partnerships. Our strong market leadership and balanced presence across both channels provide us with clear visibility into market trends, supported by robust data, analytics, and deep customer relationships. I am encouraged by the positive momentum we have going into the second quarter. North America boiler sales grew 2% compared to 2025, as residential boiler volume growth and carryover pricing benefit more than offset lower commercial volume. North America water treatment sales increased 1% in the first quarter. Ten percent growth in our priority dealer channel was largely offset by softness in the specialty plumbing wholesale channel. A cautious consumer environment led to flat growth in our more consumer-facing channels, with a general trend towards a trade down to lower-priced products. We expanded operating margin by almost 100 basis points; despite the slower start to the year, we continue to work on improving the profitability of this platform. Leonard Valve contributed $16 million to sales in 2026, led by strong performance. We exited the quarter with a strong backlog, and Leonard remains on track to achieve another year of double-digit growth. I will now turn the call over to Charles T. Lauber, who will provide more details on our first quarter performance. Thank you, and good morning, everyone. Charles T. Lauber: Please turn to Slide 5. First, I would like to highlight two items impacting the quarter. As Stephen noted, we had weather-related headwinds in the quarter, including damage to a portion of our roof at our Ashland City manufacturing facility. Because of our team’s swift response and our insurance coverage, we project minimal impact to our full-year performance. However, we estimate that production and shipping constraints, offset by insurance coverage on direct costs, negatively impacted our first quarter by approximately $0.04 per share. In addition, we acquired Leonard Valve on January 6 and, as a result, recognized $0.03 of transaction-related expenses in corporate expense for the quarter. North America segment first quarter sales of $753 million increased 1% against a tough comp, as carryover pricing benefits and Leonard Valve sales contributions were largely offset by lower residential water heater volumes and weather-related production and shipping constraints. North America segment earnings of $175 million and segment margin of 23.3% decreased by $10 million and 140 basis points, respectively, versus the prior-year period. Lower segment earnings and segment margin were primarily the result of lower residential water heater volumes and more than offset the earnings contribution from Leonard Valve. Carryover pricing benefits more than offset cost inflation in the quarter. 2025 benefited from pull-forward demand ahead of an announced price increase and a stronger mix towards higher-efficiency products. Moving to Slide 6. Rest of World segment sales of $201 million decreased 11% year over year due to continued weak consumer demand in China driving lower sales, which was partially offset by favorable foreign currency exchange. Rest of World first quarter 2026 segment earnings of $12 million and segment margin of 6.2% decreased by $8 million and 250 basis points, respectively, versus the prior-year period. The lower segment earnings and segment margin in 2026 were primarily due to lower sales volumes, which were partially offset by continued cost management in China. Please turn to Slide 7. We generated strong free cash flow of $119 million in the first three months of 2026, a significant increase over 2025, primarily driven by diligent working capital management and the timing of customer payments that more than offset lower earnings. Our cash balance totaled $204 million at the end of March, and our net debt position was $412 million. Our leverage ratio was 24.7% as measured by total debt to total capital, higher than 2025 due to the cash we borrowed under a new term loan used to acquire Leonard Valve. We continue to have significant available capacity for future acquisitions. Turning to Slide 8. In addition to returning capital to shareholders, we continue to drive organic growth through the development of innovative product offerings and productivity through operational excellence—two of our key strategic priorities. Earlier this month, our Board approved our next quarterly dividend of $0.36 per share. We repurchased approximately 700 thousand shares of common stock in the first quarter for a total of $51 million. We expect to repurchase $200 million of our shares during the full year 2026. Consistent with our focus on portfolio management, we continue to actively assess M&A opportunities that meet our strategic and financial criteria. Please turn to Slide 9 for 2026 earnings guidance and outlook. Our revised 2026 outlook includes an adjusted EPS range of $3.70 to $4.00 per share. This excludes a relatively net cash neutral North America water treatment restructuring and impairment charge of approximately $20 million that we expect to recognize in the second quarter. Key assumptions within our outlook include: steel costs have steadily risen throughout the first quarter, leading us to increase our full-year 2026 steel cost assumption to be a year-over-year increase of approximately 15% compared to 2025. In addition, due to recent oil price volatility, our transportation and certain material cost assumptions have also increased since our previous guidance. We now project that freight, non-steel material costs, and tariffs will increase our overall total company cost of goods sold by approximately 3% in 2026. Our guidance assumes oil prices and tariff levels will remain at a similar level to where they are today; we continue to monitor the situation. We maintain our estimate that 2026 CapEx will be between $70 million and $80 million. We continue to expect strong free cash flow of between $525 million and $575 million. Interest expense is projected to be between $30 million and $40 million, an increase over previous years due to the $470 million of additional debt incurred to acquire Leonard Valve. Corporate and other expenses are expected to be between $80 million and $85 million and include $6 million of transaction expenses associated with the Leonard Valve acquisition recognized in the first quarter. Our effective tax rate is estimated to be between 24% and 24.5%. We project our outstanding diluted shares will be 138 million at the end of 2026. I will now turn the call back over to Stephen M. Shafer to expand on our key markets and our 2026 top-line growth outlook for each business. Staying on Slide 9. Stephen M. Shafer: Thank you, Chuck. Within North America, our top-line outlook includes the following assumptions. While the residential water heater industry had a slower-than-expected start to the year, we maintain our view that full-year 2026 industry shipments will be flat to down as softness in new construction persists and proactive replacement remains steady. Due to a recent statement from the Department of Energy indicating a one-year enforcement delay of the October 6 commercial regulatory change, we revised our outlook and now expect less pre-buy activity in the quarters leading up to the original transition. We now project that U.S. commercial industry volumes will be similar to last year. In response to rising steel, freight, and other input cost inflation, we have announced price increases for most of our water heater and boiler products in North America, with increases varying by product, ranging from approximately 4% to 7%. We have seen some cost increases already leading into the second quarter, particularly within transportation. We expect to begin realizing the benefit of these announced price increases beginning in the third quarter. As always, we are maintaining ongoing communication with our suppliers, customers, and stakeholders as we address current market challenges while also implementing diligent cost management strategies. We continue to project our North America boiler sales to grow between 6% to 8% in 2026 due to pricing benefits and a strengthening backlog in commercial and residential boilers. We have reduced our 2026 sales guidance for North America water treatment to growth of 5% to 6%. The decrease in our outlook reflects the impact of cautious consumer behavior in our consumer-facing channels, which is approximately half of our business, where we have experienced soft demand as well as a shift toward lower-priced products. We are pleased with the progress of our priority dealer network expansion efforts and expect sales in that channel to achieve double-digit growth in 2026. Our guidance that Leonard Valve will achieve double-digit growth and contribute approximately $70 million in sales in 2026 is unchanged. Integration efforts are on track, and we are pleased with the reception we are receiving as we explore ways to go to market together. Moving to our Rest of World outlook and assumptions, we have updated our full-year guidance for China sales, which we now expect to be down low double digits in local currency compared to last year, with sales in Q2 down approximately 15% compared to Q1, as we balance channel inventories for the current environment. This revised guidance reflects our updated view of the China market, where we expect persistent headwinds throughout the year due to continued low consumer demand, severely limited government stimulus, and ongoing competitive pressures. We continue to advance our China assessment, evaluating strategic alternatives to strengthen our long-term competitive position. The evaluation is providing valuable insights into both the advantages and challenges facing our business. Many actions we have identified to improve the performance of our China business are pending the conclusion of our assessment, which is impacting our expected recovery timeframe. We are looking to provide greater clarity within the next few months. We project our India business, inclusive of Spirit, will have top-line growth of approximately 10%, and this is unchanged. Based on these 2026 assumptions, we expect total top-line growth of approximately 2% to 4%. We expect our North America segment margin to be approximately 24%, and Rest of World segment margin to be between 6% and 7%. Please turn to Slide 10. This morning, I would like to provide additional color on our operational excellence value creation opportunities. Our focus is to provide sustainable margin improvement in mid-cycle markets and protect our profitable growth in times of less market certainty. Over many years, we have looked to drive continuous improvement throughout our operations with our AOS operating system. Today, we are building on that foundation with new tools and making more strategic moves to help prioritize around our strengths and drive improved profitability. The tool sets we are now bringing to operations include enhanced stability for process intelligence and AI capabilities to drive better customer experiences at greater levels of productivity. Initial application examples include order management, warranty claims processing, and technical service support, where we are identifying opportunities, developing process improvement, and using AI agents to drive that improvement. Still early days, but we are excited by the potential of what we see. The streamlining of our North America water treatment business is an example of focusing on our strengths to drive more profitable growth. As we announced this morning, we are taking actions to continue improving our profitability and accelerate long-term growth through footprint optimization and brand rationalization. These steps are part of our ongoing water treatment strategy evolution and allow us to further focus on the areas where we expect to be most competitive going forward. We expect to recognize a restructuring charge of approximately $20 million in the second quarter and a projected annual savings of between $6 million and $8 million beginning in 2027. These exciting new tools that help us reimagine our operating processes and our continued strategic focus on prioritizing around our strengths are two ways in which we are bringing operational excellence to life at A. O. Smith Corporation. I look forward to sharing more details as this focus area for us matures going forward. Moving to Slide 11. Our team responded well when faced with pressure in several of our key markets in the first quarter. I am pleased with the market share improvement we saw in residential water heating, the double-digit valve sales growth that Leonard Valve contributed to the quarter, and the strong free cash flow achieved through diligent working capital management. With the strategic actions that we are taking, supported by our consistent operational discipline, I believe A. O. Smith Corporation will continue to strengthen its leadership position and be well equipped to capitalize on future opportunities. With that, we conclude our prepared remarks. We will now open the call for questions. Operator: Thank you. We ask that you please limit yourself to one question and one follow-up. One moment for our first question. Our first question will come from the line of Susan Marie Maklari with Goldman Sachs. Your line is open. Please go ahead. Susan Marie Maklari: Thank you. Good morning, everyone. Thanks for taking the questions. My first question is on the channel inventories in residential. You mentioned that you did have some pull forward around the pricing that you announced. Can you talk a bit more about how much you are seeing in there and how you are thinking about the channel going into the second quarter? And how we should think of the flow-through in the next couple of quarters as a result of that? Charles T. Lauber: Good morning, Susan. The reference that I made to pull forward in the first quarter was to last year, so we really have not seen any pull forward in 2026. By the way, the channel inventories we think are kind of in line with what we would expect coming out of the first quarter. Susan Marie Maklari: Okay. So you have not seen anything from the pricing you announced this year yet? Charles T. Lauber: Not meaningful. The price increase that we have is effective mid-May, roughly, so it is pretty early days. Susan Marie Maklari: Okay. That is helpful. And then, turning to commercial, you mentioned that the regulatory change got pushed out for a year. Can you give us more color on what drove that and how you are thinking about the demand there now for the balance of this year and then even into next year as the channel positions for that? Charles T. Lauber: Sure, Susan. The DOE commercial rule that was set to take effect in October has been challenged through the court system, and it has been held up so far, but it is pending and waiting to see if the Supreme Court will review it. We do not know whether the Supreme Court will take on that challenge or not. What the DOE issued late last week, because of that uncertainty and because we are getting closer to the October 6 date, was, in essence, a letter stating they would not be enforcing the rule until October 2027. However, that might also change as things play out both in the court system as well as how DOE thinks about the rule going forward. There is still a lot of uncertainty out there, but it has us feeling like it was more prudent to think that the industry may do less buy-ahead because of that announcement. Operator: Thank you. One moment for our next question. Our next question will come from the line of Matt J. Summerville with D.A. Davidson. Your line is open. Please go ahead. Matt J. Summerville: Thanks. A couple of questions. On the water treatment side of things, I was under the impression that getting out of the retailer big-box channel was the reset for that business, and it sounds like you are initiating yet another reset in water treatment. Remind us how big that business is and help us understand a little bit more around how we should be thinking about that looking ahead. Then, as a follow-up, you expect your China business to now be down low double digits. How does that sync up to what is actually happening in the market? Are you losing share? How do you justify the length of this review process with the potential that you are continuing to bleed share in that business because of how long the process has taken to unfold? Stephen M. Shafer: Good morning, Matt. The water treatment business is just over $250 million, roughly. Last time we talked about a reset, it was the exiting of on-the-shelf retail, and that was one ingredient of the reset. This is the next step of focus. It is really about leveraging our brands—focusing on our A. O. Smith Corporation brand more than some of the brands that we acquired—and rationalizing our manufacturing footprint. Think of it this way: in 2026, we are looking to expand margins by about 200 basis points to move to about 15% operating margins in North America water treatment. In 2027, with this next restructuring, we would expect an incremental couple hundred basis points. It is the next step in moving that profitability up. Regarding the China market environment and our performance, the whole market saw challenges in the first quarter, many of which we highlighted—stimulus has run its course and consumer confidence remains low—so it was a challenging quarter in the categories we participate in. From the third-party data we track, we did not lose meaningful share; we actually maintained our share in the first quarter, but it was certainly a down market condition. That environment is probably the biggest driver to why the assessment is taking a bit longer than we had hoped. There are still a lot of positive things coming out of the assessment for us. Third-party assessments validate that our brand and pricing power are very strong, and there is a lot of interest from potential partners. The dialogue is maturing, and I am hoping that in the coming months we will be able to provide clarity on our path forward, but it is occurring against a challenging market backdrop. Operator: Thank you. One moment for our next question. Our next question comes from the line of Tomohiko Sano with JPMorgan. Your line is open. Please go ahead. Tomohiko Sano: Hi. Good morning, everyone. We understand the guidance revision was mainly driven by external factors in China and North America. In this challenging environment, have you observed any changes in your market share across key regions? And as a follow-up, on Leonard Valve, how is the integration progressing, and are you on track to realize the expected synergies? Stephen M. Shafer: Good morning. In China, in the last few years there has been some market share loss, but in Q1 we do not see any meaningful market share loss; we think we are holding our own in a challenging market. Within the U.S., on the water heater side, we have stabilized our share position in the wholesale channel, which was a big focus over the last quarter. There is still more work to be done. On the retail side, we are very pleased with our share position and the strength of our partnerships. Regarding Leonard Valve, we are very pleased with the first quarter. It is a great fit with our portfolio and serves as the foundation for our water management strategy going forward. Integration is on track with the plan. Most of our opportunity is in ways to go to market together. We have been out talking to customers, and it has been very well received. Operator: Thank you. One moment for our next question. Our next question will come from the line of Joseph Nolan with Longbow Research. Your line is open. Please go ahead. Joseph Nolan: Good morning. I wanted to focus on the margin and price/cost outlook over the remainder of the year. In the second quarter, you will be feeling the impact of higher steel and freight costs, but it sounds like you are not expecting to get price benefit until Q3. Can you walk through margin cadence over the remaining quarters of the year? And as a clarification, on the commercial water heater industry outlook coming down to flat now, is that really just a reflection of the regulatory change, or are there other moving pieces? Charles T. Lauber: Sure. We were happy with our price/cost relationship in Q1; pricing overcame the costs we incurred plus a little bit of margin, so we are walking into the second quarter in a good position for the costs behind us. However, we are seeing incremental costs in the second quarter—transportation is up, diesel fuel is up, and steel costs continue to rise. We have an announced price increase that takes effect in the third quarter. So we will see a little pressure in Q2 before pricing benefits begin, and that should be overcome in Q3 and Q4 with the pricing we expect to have in place. We feel comfortable with our positioning but are watching costs closely, especially those related to oil and transportation. On commercial water heaters, the biggest driver of the outlook change to flat is the DOE regulatory timing and the related reduction in anticipated pre-buy. Operator: Thank you. One moment as we move on to our next question. Our next question comes from the line of Mike Halloran with Baird. Your line is open. Please go ahead. Mike Halloran: Good morning, everyone. Can you help put this in context on how you expect earnings to cadence through the year? The $0.03 from Leonard goes away, price/cost dynamics in Q2 are a little less favorable with more favorable in the back half, and timing around headwinds and demand dynamics—do you get a catch-up in Q2 from the weather? How does that key into the year? And on pricing, are you expecting any pull-forward of demand ahead of the 4%–7% price increases, and how do you think channel acceptance will go given the moving pieces in the water heater space? Charles T. Lauber: There are a couple of moving parts since our last outlook. Starting with China, Q2 is expected to be down roughly 15% from Q1, with decremental margins of 35% to 40%, so we expect a difficult quarter there. We expect to come out of Q2 with better balance of channel inventories; they are relatively the same as last year, but we would like to be leaner in this environment. In North America, costs are ahead of us in Q2 before we see pricing in Q3, which is a headwind to margin in Q2. On DOE, previously we would have expected a meaningful amount of pull-forward in Q2 and Q3; we have softened that, so commercial volume cadence is now expected to be pretty similar to other years with flat volume year over year. Overall, Q2 EPS is expected to be roughly 25% of our full-year guidance midpoint. That includes a little help in Q2 from some pricing pull-forward. We expect a solid performance in North America in Q2 based on a little pull-forward. The back half should be a little stronger on boilers—Q3 is always stronger—and China typically has its strongest quarter in Q4 after a muted Q1. So, stronger Q2 on the top line, some headwinds on cost, real headwinds in China, and more normalization in the back half. Stephen M. Shafer: On pull-forward ahead of the 4%–7% price increases, there is usually a little of that, and we work closely with our customers to navigate these transitions, serving them well while being smart operationally. Ultimately, we remain committed to keeping our customers competitive, even as we manage through cost pressures and market uncertainty. Operator: Thank you. One moment for our next question. Our next question will come from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is open. Please go ahead. Jeff Hammond: Hey, good morning. It seems like you are just cutting EPS $0.15, but a lot of the macro assumptions are moving the wrong way. Can you talk about offsets to that—price, restructuring savings, or catch-up from the plant issue—that would mitigate the EPS impact? And on dynamics between wholesale, retail, and this price increase: have you seen other players announce similar pricing around steel and fuel inflation, and any changes you are seeing in the wholesale channel? Charles T. Lauber: We had a little bit of catch-up on the plant issues—not a lot—but that will help a bit in the second quarter. From our last guidance, the big changes were China and the DOE policy statement. Teams continue to look at cost management in China and North America as we watch the market play out. Costs are volatile right now with oil and transportation. That is the biggest driver we are keeping an eye on. Stephen M. Shafer: We will not comment on competitor pricing, but historically we have been successful offsetting costs over time, and we feel good about our positioning. It remains a competitive environment, and we would expect the industry to experience similar cost inputs. Our commitment is to make sure we keep our customers competitive. Operator: Thank you. One moment for our next question. Our next question will come from the line of Adam Farley with Stifel, on behalf of Nathan Jones. Your line is open. Please go ahead. Adam Farley: Good morning. Following up on the commercial water heating regulatory impact, does that change how you are planning to ramp capacity for that commercial change? And more broadly, can you update us on capacity plans for this year and into next year? Also, on tariffs, was there any incremental change to the gross tariff impact with recent rule changes, and what is contemplated in the guide? Stephen M. Shafer: We were prepared for the transition from a capacity standpoint and made investments to get ready. If demand is pushed out and customers delay orders, and if the regulatory rule goes into effect later, we will be ready with those investments. Many have been made, and some that were still in front of us we are delaying until we have certainty of the demand need. On tariffs, we saw some relief in certain areas and increases in others. Overall, the tariff outlook is maybe net neutral to slightly favorable, but that is overshadowed by other costs related to oil, diesel fuel, transportation, and resilient steel prices. Net-net, it is a bit of a cost headwind, which is why we have pricing out there. Operator: Thank you. One moment for our next question. Our next question comes from the line of Andrew Alec Kaplowitz with Citi. Your line is open. Please go ahead. Analyst: Hi. Good morning. This is Natalia on behalf of Andy Kaplowitz. First, you held the outlook for boilers despite lowering expectations across most other product categories. Can you unpack what you are seeing in underlying demand—how much is volume versus pricing? And second, as you think about capital deployment, how are you viewing the current M&A pipeline, particularly in terms of opportunities within your core business versus adjacency areas? Charles T. Lauber: Our boiler growth for the year has a big price component, including carryover pricing from last year. Q1 was a little softer on commercial, which we highlighted, but we see orders coming up, and that business has typical seasonality. We remain confident in the 6% to 8% growth forecast. Commercial is catching up based on the order book, and price remains a big component of the growth. Stephen M. Shafer: There are opportunities to strengthen our core via M&A, alongside significant organic investment to maintain our leadership. Getting scale and profitability in our water treatment platform has been a big focus for us over the last seven to eight years, and there are still a few opportunities to strengthen that business through M&A. A big focus for us is on the water management platform. Leonard Valve, which we closed in January, is in that category, and we think it is probably the richest area for us from an M&A standpoint as we build out and expand in water management. Operator: Thank you. I am showing no further questions. I would like to hand the conference back over to Helen E. Gurholt for closing remarks. Helen E. Gurholt: Thank you for joining us today. We look forward to updating you on our progress in quarters to come. Please mark your calendars to join us at four conferences this quarter: Oppenheimer on May 5, KeyBanc on May 27, Stifel on June 2, and Wells Fargo on June 9. Thank you, and enjoy the rest of your day. Operator: This concludes today’s conference call. Thank you for participating, and you may now disconnect. Everyone have a great day.
Operator: Hello, and welcome to WESCO International, Inc.'s 2026 First Quarter Earnings Call. If you would like to ask a question, please press star followed by 1 on your telephone keypad. Please note that this event is being recorded. I would now hand the call over to Scott Louis Gaffner, Senior Vice President, Investor Relations, to begin. Thank you, and good morning, everyone. Scott Louis Gaffner: Before we get started, I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not guarantees of performance and by their nature are subject to uncertainties. Actual results may differ materially. Please see our webcast slides and the company's SEC filings for additional risk factors and disclosures. Any forward-looking information speaks only as of this date, and the company undertakes no obligation to update the information to reflect changed circumstances. Additionally, today we will use certain non-GAAP financial measures. Required information about these measures is available on our webcast slides and in our press release, both of which are posted on our website at wesco.com. On the call this morning, we have John J. Engel, WESCO International, Inc.'s Chairman, President, and CEO, and our Executive Vice President and Chief Financial Officer. I will now turn the call over to John. John J. Engel: Thank you, Scott. Good morning, everyone. Thank you for joining our call today. We delivered an exceptional start to 2026, building on last year's market outperformance and accelerating business momentum. In the first quarter, sales, backlog, operating margin, adjusted earnings per share, and free cash flow all increased versus the prior year and exceeded our expectations. Record first-quarter sales of $6.1 billion were up 14%, marking our third quarter in a row of double-digit sales growth. Booming data center demand remains a significant growth driver of our business. Data center sales of $1.4 billion were up approximately 70% versus prior year and represented 24% of total company sales in the quarter. Overall, our business momentum continued to accelerate in the quarter with organic sales up sequentially, outpacing normal seasonality and reinforcing the strength and durability of demand across our end markets. This performance reflects broad-based strength across our entire portfolio led by continued strong momentum in CSS and EES, along with improving trends in UBS. We again ended this quarter with a record backlog, up 22% versus prior year, reflecting the continued effectiveness of our cross-selling program and providing clear visibility of the secular growth trends in our business. Profit growth, margin improvement, and free cash flow generation were also excellent in the first quarter. Adjusted EBITDA grew 25% and adjusted EBITDA margin expanded 60 basis points driven by gross margin expansion and strong operating cost leverage on our double-digit sales growth. Adjusted diluted earnings per share was up 52% versus the prior year. Free cash flow generation at 128% of adjusted net income was also very strong, underscoring our disciplined execution and continued focus on working capital management. We are very pleased with our first-quarter results. While we remain mindful of the volatility of the broader macroeconomic environment, we see positive momentum continuing across our business. As a result, we are raising our full-year outlook for 2026. As the market leader and with positive momentum building, I am confident that WESCO International, Inc. will continue to outperform our markets through disciplined execution, our differentiated value proposition, and the strength of our global platform. Our team remains focused on driving strong growth and margin expansion and delivering superior value to our customers and shareholders. One final comment: as we announced earlier this year, Dave Schulz is retiring from WESCO International, Inc., and our new CFO has joined our team. I would like to thank Dave for his outstanding leadership, his dedicated service, and his tremendous contributions to WESCO International, Inc. and our overall success over the past ten years. We wish Dave and his family our very best. Our new CFO is off to a great start. I will now turn it over to him to take you through our excellent first-quarter results and raised full-year outlook in more detail. Unknown Speaker: Thank you, John, and good morning, everyone. I would like to thank John and the board for the opportunity, and I want to recognize Dave for his leadership and thank him for his partnership during this transition. Before turning to our results, I will take a minute to touch on my near-term priorities. I intend to focus on partnering with the leadership team to scale our business in attractive end markets, drive profitable growth, continued market outperformance, and deliver strong cash flow with disciplined capital allocation. That mindset has been shaped by working across both public and private companies, often in complex global, highly competitive technology and capital-intensive businesses. John and I are aligned on the initial focus areas where we have the potential for taking our existing great capabilities to the next level. First, driving operating leverage and margin expansion as we scale, particularly in data centers and other high-growth end markets. This will be accomplished by a combination of partnering with our business leaders to ensure that our commercial and go-to-market strategy reflects our enhanced value proposition and partnering with our functional leaders on continuing to improve our cost structure. It is all about profitable growth. Second, improving working capital efficiency and cash conversion through tighter processes, analytics, and execution discipline. This is not just about back office. It is about optimizing our end-to-end capabilities from sales funnel to cash collection. Transitioning to our results, let me start with the highlights for the quarter. We delivered strong organic sales growth year over year, with sequential performance better than typical seasonality. Profitability improved with meaningful EBITDA margin expansion. EPS was up more than 50%, and free cash flow generation was strong at 128% of net income. With that, let me turn to our first-quarter results starting on Slide 4. We delivered an excellent first quarter with reported sales of $6.1 billion, up 14% year over year, including 12% organic growth. We delivered volume growth across all three SBUs and realized an estimated price benefit of approximately three points. Gross margin was 21.2%, up approximately 20 basis points year over year, and SG&A operating leverage improved by 40 basis points. As a result, adjusted EBITDA increased 25% to $389 million and adjusted EBITDA margin expanded 60 basis points to 6.4% of sales. Turning to Slide 5, adjusted EPS increased 52% year over year to $3.37. The year-over-year improvement was driven primarily by stronger operating performance in the quarter, reflecting higher sales and improved profitability. Additionally, EPS growth benefited from a lower tax rate and from the absence of the preferred stock dividend following last year's redemption. Turning to Slide 6, CSS delivered another excellent quarter with organic sales up 22% year over year and reported sales up 24%. This growth was driven by continued strength in WESCO Data Center Solutions, which delivered a record quarter with sales up over 60%. Within the rest of the portfolio, security delivered high single-digit growth, while enterprise network infrastructure declined mid-single digits due to weakness in the service provider market. However, including data center-related sales, enterprise network infrastructure grew high teens year over year. Overall, organic growth was driven primarily by volume, up about 21%, with price contributing approximately 1%. Backlog ended the quarter at a record level and was up approximately 40% versus the prior year, reflecting continued strong data center project activity and order rates. Profitability also improved meaningfully and our focus remains on margin expansion as we scale the business, particularly in our data center markets. Adjusted EBITDA increased 41% to $223 million and adjusted EBITDA margin expanded 110 basis points to 9%. Importantly, despite some modest pressure on gross margin from large data center projects, we generally see healthy and accretive EBITDA margins for WESCO International, Inc. data center solutions. Moving to Slide 7, EES delivered solid growth in the quarter with organic sales up 7% and reported sales up 9% year over year. Growth was driven by strong execution in OEM and construction. OEM was up mid-teens, driven by strength in semiconductor and data center markets. Construction was up low double digits, supported by robust wire and cable demand and continued infrastructure project activity. Industrial was down low single digits, primarily reflecting project timing impacts. However, our industrial stock-and-flow business grew mid-single digits in the first quarter, and backlog was up double digits supporting an improving trend. Data center sales in EES were up over 100% year over year and represented about 10% of EES sales, highlighting the continued scaling of our exposure to this secular growth trend. Overall, organic growth was driven by solid underlying demand, with volume contributing approximately 3% and pricing contributing about 4%. Importantly, backlog ended the quarter at a record level, up 14% versus the prior year, supported by strong order activity and pipeline conversion. Profitability improved meaningfully in the quarter. Adjusted EBITDA increased 30% to $185 million, and adjusted EBITDA margin expanded 130 basis points to 8.2%, driven by higher gross margins and strong operating leverage. Turning to Slide 8, UBS delivered 6% organic sales growth in the first quarter supported by improving demand and an increasing backlog. Utility delivered high single-digit growth driven by strong double-digit growth in investor-owned utilities and continued positive momentum in grid services. Public power was flat year over year, which is encouraging. However, the market remains highly competitive, and gross margins are expected to remain under pressure given weak sales in transformers and wire and cable, consistent with our prior commentary. Broadband delivered mid-single-digit growth year over year, supported by strength in the U.S. Overall, organic sales growth reflected approximately 3% volume growth and about 3% pricing. Backlog increased 16% year over year. We are seeing increasing interest in our grid services-enabled power capabilities from hyperscalers and other data center customers. We have a growing funnel of sales opportunities and we are bullish that we will benefit from AI-driven data center investments and other major power-related infrastructure projects over the long term. Adjusted EBITDA was $131 million, down 5% versus the prior year, and adjusted EBITDA margin decreased 120 basis points to 9.6%, primarily driven by gross margin pressure and higher SG&A as a percentage of sales. Recall that UBS is accretive to total company adjusted EBITDA margin; given its higher margin profile, the improved growth rates will lead to even higher margins over time given the operating leverage. Turning to Slide 9, I want to take a moment to further review the continued momentum we are seeing in the broader data center market and WESCO International, Inc.'s role in that growth. Data center sales continued to scale in the first quarter, reaching approximately $1.4 billion, up about 70% year over year and representing 24% of total company sales in the quarter. Notably, the data center end market is now WESCO International, Inc.'s largest end market across all three SBUs and supports a diverse set of customers with a diverse set of capabilities. On a trailing twelve-month basis, data center sales are now approximately $4.8 billion, or 20% of total sales. This underscores both the strength of the secular demand environment and the expanding scope of what we provide customers across all business units and across the full life cycle. Turning to Slide 10, this highlights our end-to-end data center offering and the role we play across the full life cycle, with exposure across CSS, EES, and UBS. WESCO International, Inc. supports hyperscale, multitenant, colocation, and enterprise customers with a comprehensive portfolio of products, services, and solutions that span power, connectivity, and ongoing operations. Our expanding capabilities and global ecosystem position us as a trusted partner as customers build, scale, and operate increasingly complex data center environments. Turning to Slide 11, we delivered strong free cash flow of $213 million in the first quarter. Free cash flow was 128% of adjusted net income. Despite sequential sales growth, net working capital was a source of cash in the quarter, largely driven by timing of inventory purchases and accounts payable. Moving to Slide 12, during the quarter, we executed a highly successful $1.5 billion bond refinancing that was upsized relative to the initial launch, reflecting strong investor demand and record pricing. Notably, we achieved the lowest coupon WESCO International, Inc. has ever achieved on a senior notes offering and the lowest for a double-B rated five-year note issued since 2021. The net proceeds will be used to redeem our 2028 senior notes, improve liquidity, and further strengthen the balance sheet. This refinancing meaningfully improves our debt maturity profile and is expected to generate more than $20 million in annualized interest expense savings. We exited the quarter at 3.2x net debt to adjusted EBITDA. Additionally, we repurchased $25 million of shares during the quarter towards offsetting dilution. Moving to Slide 13, within CSS, we have raised our 2026 outlook to low double-digit growth, reflecting the continued strength and visibility we are seeing in data centers. Data center sales are now expected to be up 20%+ for the year. Given the size of the market, we intend to continue to focus on healthy EBITDA margin business. Our outlook for EES and UBS remains unchanged. Moving to Slide 14, we are increasing our outlook for the full year given strong first-quarter results. Before I get into the details, I want to address our position relative to the current macroeconomic uncertainty. Through the first quarter and into April, we have seen no meaningful disruption to our revenue or profitability, but we continue to monitor the situation closely and kept this backdrop in mind for our outlook. In the Middle East, I am pleased to report that all of our employees are safe. From a company perspective, we generate less than 1% of our sales in the region, with the majority of those sales related to our CSS business. The secondary impacts on transportation costs are more tangible but have so far been manageable. Our teams are focused on passing these cost increases to our customers where appropriate and limiting the time that transportation quotes are valid to minimize overall risk. On the tariff front, the overall impact to WESCO International, Inc. is not material. As a reminder, WESCO International, Inc. is the importer of record for a small percentage of our cost of goods sold, typically low single digits. We typically increase prices when needed to maintain margins. At this point, we do not expect any material recoveries from the IEEPA decision. Based on the strong start to the year, we are raising our full-year 2026 outlook. We now expect reported sales growth of 6% to 9%, with organic sales growth of 5% to 8%, which implies reported sales of approximately $24.9 to $25.6 billion. Our assumptions around foreign exchange and pricing remain unchanged. On profitability, we continue to expect adjusted EBITDA margin in the range of 6.6% to 7%, essentially increasing our EBITDA guidance in dollar terms. We are raising our adjusted diluted EPS outlook to $15 to $17 per share, reflecting earnings leverage demonstrated in the first quarter as well as slight adjustments to the expected tax rate for the year. There is no change to our outlook on interest expense, based on our current view of no rate cuts this year and factoring in timing of the debt raise and subsequent paydown. Finally, we continue to expect free cash flow of $500 to $800 million as we maintain working capital discipline supporting higher growth. As a reminder, our historical pattern is typically about 70% of our annual cash flow is generated in the second half of the year. Turning to Slide 15, while April is not entirely closed out, month-to-date sales per workday are up about 10% year over year, with growth continuing to be led by CSS. For the quarter, we expect reported sales to be up high single digits. Recall that more than 50% of our sales are related to project activity and the mix of project sales is higher in the second and third quarter due to increased construction activity. The timing of project billings at the end of the quarter will determine where we land in the high single-digit range. On margins, second-quarter EBITDA margin is expected to be about flat year over year and within our full-year guidance range. Higher incentive compensation, approximately 25 basis points, accounts for most of the year-over-year pressure, and we continue to expect double-digit growth in adjusted EPS. As you think about our outlook, keep in mind that we had strong sales growth and good EBITDA margins in the second, third, and fourth quarter of last year. On a two-year stacked basis, growth is expected to remain strong and consistent with the outlook we have provided. We have covered a lot of material this morning, so let me briefly recap the key points before we open the call to your questions. In summary, we delivered an excellent start to the year with double-digit sales growth, margin expansion, and over 50% earnings-per-share growth. AI-driven data centers and related investments from our customers remain a key driver of growth across several product categories and verticals. We generated strong cash flow and improved our leverage and debt maturity profile during the quarter. Despite macroeconomic uncertainty, we are confident in our positive business momentum and are raising our full-year outlook. As we lean in to support organic growth, there is no change to our previously communicated capital allocation priorities and guiding principles. With that, operator, we can now open the call to questions. Thank you. Operator: We will now open the call for questions. If you would like to ask a question, please press star followed by 1. Our first question today comes from David John Manthey with Baird. Please go ahead. David John Manthey: All right, thank you. Good morning, guys. Good morning, John. CSS is doing amazing, so I will focus on EES and UBS with my questions first thing here. First, on lead times, I know within the industrial business you mentioned project timing as the reason for that small decline there. With switchgear components stretching well a year and medium voltage switchgear sometimes 40 to 60 week lead times, you are clearly navigating any shortages in the market well overall. But could you just talk about the specific issues? Where are the pinch points, and is that what you mean by project timing? John J. Engel: Yes. Great question, Dave, and your lead-time comments are accurate. We are still seeing extended lead times in a couple of critical categories, but honestly we have been facing those extended lead times since the pandemic, and we have been managing the business well. I think this is more of a very specific intra-quarter project timing issue. I will give you my views of industrial. I have mentioned this before. I really believe we are at the beginning of an industrial super cycle in the U.S. in particular. It is driven by AI-driven infrastructure investments, clearly the need for increased power generation not just for AI data centers but for all these mega projects, and a fundamental secular trend that I think is becoming more apparent every day regarding reshoring. These secular trends are going to play out over many years, and they really expand WESCO International, Inc.'s opportunity set. Specifically relative to your question in Q1, I would ask you to look at our short-cycle business. Our industrial stock-and-flow, the short-cycle business, MRO supplies and such, was up in line with mid-single-digit growth with the recent recovery in industrial production. That is a good and important leading indicator. It was offset for us with some project timing issues. Relative to the project timing issues, however, our book-to-bills were exceptionally strong in EES and particularly in industrial in the first quarter, and we have double-digit backlog growth in the industrial portion of EES. That supports a future improving trend for industrial, again consistent with my overall views of the cycle. David John Manthey: Thanks for that, John, and I agree. Maybe I could ask the CFO: from the first conversation that you and I had, I get the impression that you are a deal guy at heart. Could you discuss, as you settle in here, how you find the WESCO International, Inc. M&A process, and as you think about the pipeline, your general thoughts on consolidation going forward? Unknown Speaker: Yes, Dave. I have spent a lot of time on operations. One thing I would mention: I am more of an operations guy than a deal guy. But I do like to get into the operations side of deals. I would say we have a great team here evaluating deals, and we are going to be very active, but also very disciplined. We want to make sure that there is fit in terms of our strategy and where we want to take the business, and we want to play into a lot of the megatrends that we are seeing in the marketplace. It is all about how a deal accelerates our overall growth and profitability, and not just something that we would buy to leave standalone. Like we have talked about, the margin profile is another real important driver for us. We are very focused on it. We have launched a number of initiatives on that front, and M&A will be another lever. One thing back on your earlier question, not specific to EES and UBS: I came from the infrastructure side, building a lot of infrastructure. One of the things that we see—and we will see some of the secondary effects here—is the throttling factor for building infrastructure really are two things: lead time and skilled labor. That has been true for a number of years and will continue to be true going forward. It is not the appetite for investment; it is not the allocation of capital; it is really those two things that are calibrating the spend quarter over quarter from a customer's perspective, not our perspective. David John Manthey: I appreciate your thoughts. Thank you, and thanks, John. Unknown Speaker: Thanks, Dave. Operator: The next question comes from Analyst with RBC Capital Markets. Please go ahead. Analyst: Hi. This is Kenny Stemen for Deane today. I wanted to ask you about data centers. Can you unpack data center strength given you are clearly outperforming peers here? Where are you gaining share of wallet? How is the growth rate different across the gray space, white space, and services? And related to that, what is driving the step down in data center growth rate in the back half in your guidance? Thank you. John J. Engel: Good morning. We have outlined white space and gray space growth rates. White space, ostensibly supported and provided by our CSS business with deep roots that go back decades, grew north of 60% in the quarter and is the driver of the backlog growth in CSS, a major driver. Very strong growth rates in white space. Services are embedded in that; we do not break that out separately. For the gray space, ostensibly served by EES, that was up over 100% in the quarter, and again services are baked into that. We are very confident that we are outperforming the market meaningfully. We are uniquely positioned with our portfolio because we have the datacom-related solutions—white space with CSS—we have the core electrical infrastructure and connectivity solutions supported by our EES business, and we have the power solutions supported by our UBS business, which is our grid services in particular tucked under UBS. Relative to the outlook, we took investors through that when we provided our full-year guide. We think it was appropriate originally; we have stepped it up meaningfully now given this exceptional start to Q1. Analyst: Thank you. I appreciate that. Sticking with CSS, another really good double-digit incremental margin for this segment this quarter. What needs to happen for these double-digit incremental margins to be sustainable and potentially move toward the mid-teens given you are still executing on large projects? John J. Engel: We have been very clear on how we are managing that business. We have a new CSS leader who has been at the helm for four quarters. He took a business that had positive momentum and accelerated that momentum and stepped up the performance meaningfully. You see that in the results. We are very aggressively managing our gross margins, and you can see they remain stable. We are trying to expand gross margins too, and we would love to do that over time, but we have stable gross margins in CSS and outstanding operating cost leverage. To be at 9% EBITDA for Q1—we are thrilled with that. It is a huge step up. We have been north of a nine-handle on EBITDA margins more than one quarter in a row; we had it in Q4 as well. You are seeing the power of our portfolio, our execution, and the inherent operating leverage in our business model showing up in the EBITDA expansion for CSS. We are very focused on gross margins—every single basis point matters—and we will ensure the operating cost leverage, and we have very strong top-line momentum. The backlog is at an all-time record level, growing at 40% that is well in excess of our first-quarter sales growth rate. As a side note, the backlog growth for all three businesses and segments was well in excess of our first-quarter sales rates for each of the three SBUs. Analyst: Appreciate that. Thank you. Operator: The next question comes from Sam Darkatsh with Raymond James. Please go ahead. Sam Darkatsh: Good morning, John. Good morning, CFO. How are you? John J. Engel: Good. I am good, Sam. How are you? Sam Darkatsh: I am well. Thank you for asking. Two questions. It looks like Slide 15 shows April coming in maybe better than March. The comparisons year on year are pretty similar, and you are saying April is up 10%. Can you give a little color on what you are seeing, John? Are you seeing stock-and-flow improving over the last month or two, or is that just timing of projects? John J. Engel: Good question, Sam. First, I would say mix. We are seeing a consistent mix with what we had in the first quarter. We still have two days to go—we are in the last day—but by the time we see the final numbers for yesterday and then we have today, which will close the quarter, we will have the full view. We have very strong book-to-bill rates continuing, again mix consistent with Q1. In Q1, we had very nice stock-based sales momentum. Projects kicked in very nicely. Relative to my comments on EES industrial, we had very good stock-and-flow momentum there; it was project timing that resulted in that not being a net growth in Q1. I feel good about our stock momentum, Sam. I will make that comment. Sam Darkatsh: Thank you. Second question: I think there was a recent presidential determination that authorizes federal purchasing and financing for the electrical grid. How material might this be for you, and when or where would it materialize first? John J. Engel: First, the various associations we are part of have been working across the industry and with industry partners and association members, of which we are a participant, proactively with the federal government on addressing the core issues around supporting this infrastructure buildout in the U.S. The biggest driver is power and the power chain. We would see that as supportive of what I see as fundamentally secular growth trends in utility. I have made a strong statement that utility was classically a cyclical industry and has now moved secular growth even though we are not seeing that manifest in all the numbers yet. We would see it in our UBS business and in our EES business—supportive of the secular trends. Sam Darkatsh: Thank you much. Operator: The next question comes from Guy Drummond Hardwick with Barclays. Please go ahead. Guy Drummond Hardwick: Good morning. John, I want to click on the point you brought up earlier about backlog growing faster than sales in Q1. So organic sales up 12%, backlog up 22%. At what point do sales catch up with backlog, or does backlog really underpin 2027 revenues to the extent that they are lengthening somewhat? John J. Engel: Great question, Guy. Good morning. Backlog only represents a piece of our business. Long-term multiyear alliance agreements for utility customers and multiyear national and global account agreements in industrial—there are also some in CSS—do not all get loaded in the backlog because we are loading in the actual POs. We may have a multiyear agreement but only load in the POs when we get them. That said, we have been reporting consistently the trend on backlog. The fact that that growth rate is materially higher than our sales growth rate bodes well for the balance of 2026, but it is also a look into 2027, which is the heart of your question. When you look at the projects that are in the backlog, a number of them also ship in 2027, and there are some longer-lead items that we are quoting for 2027–2028—like some transformer business in utility. Think about the trend and the relative growth rate of backlog versus sales; it speaks to the rising demand curve that our portfolio is capturing. Guy Drummond Hardwick: And just a follow-up: the 14% backlog growth in EES is the fastest in three years. How much of that was driven by data center projects? John J. Engel: We have not disclosed that number, but think about the math. Data centers for the gray space—EES’s exposure—was up 100% year over year but is only 10% of EES sales. You should think about that 14% as being a very healthy number for EES overall. Two of our three SBU leaders are new in their jobs in the last year. CSS, we promoted from within four quarters ago. EES, we hired a leader from outside who returned to the electrical industry; he has now been at the helm for three quarters and is off to an outstanding start, as is our CSS leader. Look at the momentum vector and the profit quality improvement of EES starting in Q3 last year, Q4, and now Q1. This is his third quarter since joining us. It is a big deal to have two of your three business leaders new in the saddle in the last year; we are seeing stepped-up execution in both businesses. Guy Drummond Hardwick: Thank you. Operator: The next question comes from Christopher D. Glynn with Oppenheimer. Please go ahead. Christopher D. Glynn: Thanks. Good morning. Exciting start to the year. Feeding off that last topic, you were going into the EES margin trends and execution there. The gross margin sequentially has been a really strong trend and now year over year standing out, and nice outperformance on the EBITDA margin this quarter, particularly from a normal sequential seasonal pattern that we have long seen. I think the normal seasonality of the 2Q profitability ramp from EES is sort of downplayed in the suggested enterprise margin for the second quarter. Are you seeing those seasonal margin swings level off, and is that moderating the 2Q forecast over the first quarter given that the baseline shifted upward in the first quarter? John J. Engel: First, on EES specifically, we are not guiding gross margins or op margins by SBU for Q2; we do not guide at that level. Relative to our overall outlook of flattish EBITDA margins for the enterprise in Q2, there are some interesting timing dynamics when you look at sequentials. I will hand it to our CFO to take you through. Unknown Speaker: Thanks, John. A few things to highlight. As I said in my prepared remarks, if you look at our incentive comp and performance last year versus this year, that is about 25 to 30 basis points of overall headwind in terms of the EBITDA margin at the enterprise level. Typically we see a step down in revenue Q4 to Q1, so a lot of the operating leverage that you see in the business in terms of sequential improvement in EBITDA margin was accelerated into the first quarter of this year. Sequentially, the improvement is muted. A couple of other things: we are in an inflationary environment, but we are doing a pretty good job managing that and passing along where appropriate. Also, with the growth of our data center business, we are making some very disciplined investments in facility expansion and capability expansions. That shows up on our cost side. Think about those as small step-function investments; we will see the benefit over several quarters and the operating leverage from that investment. That also mutes a little bit of the margin expansion year over year. Christopher D. Glynn: Great color. Thanks. One on WDCS: I think you mentioned that is now mix accretive in CSS. Curious to double click on that. I imagine if we look at your historical top five to 10 suppliers for the enterprise, there has probably been some swapping as WDCS has ramped so prolifically. Anything interesting there? John J. Engel: We thought it was important for investors to understand that WDCS—the exceptional growth we are getting and the way we are managing the margin profile of the business we are taking on—we are being very judicious in terms of what we bid and then applying our value proposition. We are getting very good margin pull-through; it is accretive, as outlined, to CSS. That is very encouraging given the strong secular growth trend. We have had some movement in the top five to 10 suppliers for overall WESCO International, Inc. I am not going to go through that on this call, but clearly a number of those suppliers are experiencing meaningfully greater growth given CSS growth rates. Look at our overall momentum as a company: third quarter in a row of double-digit growth for the enterprise. The rising tide we are creating with our suppliers is raising a number of their boats. Christopher D. Glynn: Appreciate the color, and talk soon. Thanks. Operator: The next question comes from Kenneth Newman with KeyBanc Capital Markets. Please go ahead. Kenneth Newman: Thanks. Good morning, guys. Welcome to the team, looking forward to working with you. Maybe first on pricing: the 3% net price—can you help quantify how much of that was from carryover benefits from last year versus incremental pricing that I know was not baked into the outlook? And any color you are seeing from supplier pushes on pricing as we exited the quarter? Unknown Speaker: Most of that is carryover benefit, because of the timing of when we get notices and the actual yield and what flows through. A couple of things to keep in mind: CSS is our largest business unit right now, in which the price impact has been small compared to the other two business units, and increasingly we are doing a lot of projects where pricing is negotiated with special pricing agreements. Just a comment as you think about our outlook. Kenneth Newman: Understood. Follow-up on data centers: really strong growth, particularly in white space. Can you contextualize what you saw in gray space versus white space? How much of the white space growth was a transition from projects you won in gray space a few years ago? And how should we think about the potential of that 100% growth in gray space this quarter transitioning to white space activity over the next 12 to 18 months? John J. Engel: Very good question. We are working the OneWESCO solution on all future bid opportunities. It may be for a portion of white space, gray space, or a piece of the power solution with UBS. We are pulling in all three SBUs and, irrespective of what the RFP is for, going in with our full value prop. That has excellent momentum. Specifically, the EES growth we got—the majority in Q1—was not linked to a prior CSS or white space win. The market today procures gray space and white space at different times in the build cycle, and power is addressed much earlier and by different decision makers. What that means for our mix in real time is we are not seeing a lot of that linkage yet, but we are putting a lot of shots on goal with our broader value proposition, and we are very confident that has huge needle-moving potential for WESCO International, Inc. going forward as we aggressively go after this secular trend. I could not be more pleased with the 100% growth in gray space in Q1 for EES. That shows we are putting an awful lot of shots on goal. It is roughly 20% of our overall sales mix, but still a very encouraging growth rate. Unknown Speaker: One minor point to add: as the new guy coming in, I have been super impressed with the coordinated effort across all three SBUs in our go-to-market on data centers. We really go to market as OneWESCO across white and gray space, but every customer buys differently, and we let the customer decide where our value proposition resonates. Kenneth Newman: Very helpful. Appreciate it. Operator: The last question today will be from Patrick Michael Baumann with JPMorgan. Please go ahead. Patrick Michael Baumann: Good morning. I had one on digital transformation. It seems like those costs are stepping up here in the first quarter in terms of what is outside the P&L. What are you spending that on—what are those costs for? What is the path and timing of the ERP rollout? Your confidence in execution on that? And what happens to those costs on day one when ERP systems turn on? How long does it take you to realize the benefits? John J. Engel: Our last fulsome update was at our Investor Day year before last. We outlined that program and laid out extensive activities remaining for design/build; we had not really begun deployment then. We have not given a fulsome update—which we will do at our next Investor Day—but I will address your question. Outstanding progress on the design/build; we continue to grind away at that and have begun deployment. We have a very small number of locations in each of the three businesses that have been deployed. That has been part of our agile design/build process with increasing capabilities being brought to bear and released into those locations. We had a notable milestone in the first quarter where we have one operation—one end-to-end P&L operation as part of CSS—fully deployed on our new digital platform. That occurred at the very end of the first quarter. Now we have an end-to-end operation with the latest instance and most capabilities deployed to date. We still have design/build activities that continue through this year and into the beginning of next year, but then our deployment phases in and accelerates, completely consistent with what we outlined at Investor Day. It is a phased deployment; unlike a knife-edge ERP transition that puts the enterprise at risk, we control the phasing to ensure we do not disrupt the business and can manage change effectively. It is our utmost priority that we do not disrupt our current business momentum. We have excellent improving momentum and want to execute against that, as evidenced by our first-quarter results. No change to program design/build/deployment schema. Huge milestone in Q1 with one end-to-end operation now deployed, and we are seeing how that is operating. The benefits will phase in over a multiyear period similar to what we outlined at Investor Day, where we said it is a two-speed EBITDA margin improvement profile going forward. We are grinding away to get operating margin expansion as we complete design/build and deployment, but once that is complete, there is a step-function increase in margin expansion because all the one-time investments are done. We very much look forward to those benefits. They are not hitting our P&L yet; that is all to come. Unknown Speaker: On your question on the disclosures, we provide a fair amount of disclosure in terms of what is excluded from EBITDA to get to adjusted EBITDA. Like most companies, the objective is to give you visibility to things that, like John mentioned, are one-time in nature. We will reevaluate that every year when we do our reporting, but you have full visibility. Patrick Michael Baumann: Thanks for that. My last question—this was asked earlier in the call, but bear with me: your data center revenue in the quarter was $1.4 billion. Annualized, you are at $5.6 billion, which would be up about 30% versus what you reported last year. In the quarter, you are up 70%. You have hyperscaler CapEx going up 70% this year. Help us understand what tails off. Is it some big projects or jobs that top out in the first quarter? The 20% growth is great, but in context of what you have been putting up, something seems like maybe it is project timing. Can you help us understand? Unknown Speaker: We addressed it earlier in the call, and you gave the answer in the last part of your question—project timing. That is the answer. It was project timing then; it is project timing now. With that said, it is an exceptional start to Q1. We are thrilled with the start. Patrick Michael Baumann: Thanks a lot. Best of luck. Operator: This concludes our question-and-answer session. We have addressed all your questions, so we are going to bring the call to a close. There is no one left in the queue, which is great. We have a lot of calls lined up for today and tomorrow. We look forward to speaking with you in the follow-ups. Thank you all for your support. It is very much appreciated. We expect to announce our second quarter earnings on Thursday, July 30. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the NWPX Infrastructure, Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, press 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Scott J. Montross, President and CEO. Please go ahead, sir. Scott J. Montross: Good morning, and welcome to the NWPX Infrastructure, Inc. First Quarter 2026 Earnings Conference Call. My name is Scott J. Montross, and I am President and CEO of NWPX Infrastructure, Inc. I am joined today by Aaron Wilkins, our Chief Financial Officer. By now, all of you should have access to our earnings press release, which was issued yesterday, April 29, at approximately 4:00 p.m. Eastern Time. This call is being webcast and it is available for replay. As we begin, I would like to remind everyone that statements made on this call regarding our expectations for the future are forward-looking statements, and actual results could differ materially. Please refer to our most recent Form 10-K for the year ended 12/31/2025 and our other SEC filings for discussion of such risk factors that could cause actual results to differ materially from our expectations. We undertake no obligation to update any forward-looking statements. Thank you all for joining us today. I will begin with a review of our first quarter performance and our outlook for 2026, and then Aaron will walk you through our financials in more detail. We delivered a strong start to 2026. Net sales were up 19% year-over-year to $138.3 million, reflecting meaningful growth across both our Water Transmission Systems (WTS) and Precast businesses. Our strategy delivered record first quarter consolidated gross profit of $26.7 million, up 38% from last year, with our gross margin expanding 260 basis points year-over-year to 19.3%. That strength carried through to the bottom line, highlighting the operating leverage in our model and continued execution across the organization. We generated record first quarter profitability with earnings of $1.08 per share, and produced strong free cash flow of $25.7 million, or $2.62 per share, reinforcing the strength and consistency of our earnings profile and the resilience of our cash flows. Turning to our WTS segment, revenue reached a first quarter record of $93.5 million, up 19% year-over-year with strong margin improvement. Our performance reflected higher production volume, with tons produced up 18%, supported by strong project execution. This growth came despite adverse weather that caused unscheduled downtime across three WTS facilities early in the quarter. Selling prices were up 1% year-over-year driven by changes in product mix, and we also benefited from favorable project timing across several large water transmission jobs. In addition, we saw one of our strongest booking quarters to date with robust bidding activity and the emergence of a significant previously unplanned project that is under NDA, which will contribute positively to our 2026 result, all of which contributed to a substantial increase in our backlog, reinforcing the strength of demand across our markets. WTS backlog, including confirmed orders, ended the quarter at a record $430 million, up from $346 million at year-end and well above the $289 million level we reported this time last year. Looking ahead, we expect the 2026 bidding environment to be moderately stronger than 2025. WTS gross profit increased 42% year-over-year to $17.3 million, resulting in a gross margin of 18.5%, up 300 basis points from last year. This improvement reflects higher volume supported by strong customer demand, and the related efficiency gains and higher overhead absorption that come with that level of production, favorable product mix, and the overall solid operational execution across the segment. Now turning to our Precast segment. Precast revenue increased 19% year-over-year to a new record first quarter level of $44.8 million. Our performance was driven by a 14% increase in selling prices from a favorable change in product mix, and increased sales volume reflecting continued growth in the nonresidential portion of our business. At Park, production increased 30% year-over-year with strong growth in revenue per yard shipped. Despite borrowing costs that remain elevated as the Fed held interest rates steady in 2026, we are continuing to see signs of improvement in the nonresidential demand trajectory as we progress through 2026, specifically related to data center projects that have been instrumental in buoying the commercial construction demand. At Geneva, production and shipments had solid year-over-year gains of 78% respectively, despite seeing a moderate slowdown in the residential construction market, which has more than been offset by growth in Geneva’s nonresidential business. Leading indicators remain solid early in 2026 with the Dodge Momentum Index up 26% in March versus March 2025. The commercial sector was up 29% and institutional was up 20%, indicating positive signals for nonresidential construction activity this year and into 2027. Our Precast order book ended the quarter at $55 million, down modestly from $57 million at year-end and below the $64 million level at March 31. The Precast order book has remained stable for the last several quarters and continues to keep pace with higher levels of production and customer shipments. Stronger volumes and pricing drove a 30% year-over-year increase in Precast gross profit to $9.3 million, resulting in a gross margin of 20.9%, up from 19.1% last year. These results show that absorption rates are improving with higher throughput. We expect margins to continue recovering as nonresidential demand builds. Now turning to our strategic growth initiatives. As previously discussed, we are making solid progress expanding Precast capabilities across our network. We are also looking at where it makes sense to bring Precast into additional WTS facilities through our product spread strategy, which remains an integral part of our long-term growth plan. As part of that endeavor, we are seeing better capacity utilization at our Precast plants, strong momentum at our Geneva operations in Utah, and steady progress as we introduce Park and other Precast-related products into more WTS locations. At the same time, we continue to evaluate M&A opportunities in the Precast-related space that can accelerate our strategy, expand our manufacturing capabilities and efficiencies, and broaden our geographic reach and product portfolio. Consistent with this approach, we are looking at both single-plant acquisitions and larger opportunities that can support long-term growth and help us advance our Precast expansion. As previously announced, we completed the acquisition of Bouton Precast, a single-site producer in the high-growth Pueblo, Colorado market during 2026. The integration is off to a strong start and we are encouraged by the long-term growth potential we see in the Colorado market. I will now turn to our outlook for 2026. In our Water Transmission Systems segment, we expect higher revenue and margins compared to both 2025 and the prior quarter, driven by more favorable volume and product mix and the emergence of a significant previously unplanned project. We entered 2026 with a robust WTS backlog and elevated bidding levels, and both strengthened further in the first quarter, providing even greater visibility into near-term demand. Based on what we are seeing today, we expect full-year bidding levels to be stronger than what we saw in 2025 and we expect backlog to stay elevated throughout 2026. We remain encouraged by the level of activity across current and upcoming water transmission projects, which continue to come with improved economics and margins. For a more complete view of these projects, please refer to our investor presentation on our website. Turning to Precast, we maintained a stable and healthy order book in 2026 and we expect a stronger year for the Precast business overall. Demand remains healthy in the nonresidential market, supporting continued momentum across our Park and Geneva platforms. For the second quarter, we expect Precast revenue to be higher than the second quarter of last year and the prior quarter with stable margins driven by solid demand, higher production levels with improved absorption, and a strengthening order book. On a consolidated basis, we expect the second quarter to be stronger than we have seen in recent years. We believe 2026 is shaping up to be a historic year for NWPX Infrastructure, Inc. Continued momentum in our Precast business combined with strong bidding activity in our WTS business is indicating the potential for another record year. In addition, the significant previously unplanned WTS project noted earlier is additive to what we already expect for a record year. In closing, I am very pleased with our results, which set new first quarter records across nearly every metric. Our teams delivered exceptional execution throughout the quarter, and I want to thank everyone at NWPX Infrastructure, Inc. for their commitment to our strategy and to maintaining a strong safety culture. With the WTS backlog that is stronger than ever, a healthy bidding environment, and solid momentum in our Precast order book, we feel well positioned to carry this performance forward and continue building on the progress we have made across both segments. As we look ahead, our near-term priorities remain: one, maintaining a safe and rewarding workplace; two, focusing on margin over volume; three, intensifying our pursuit of strategic acquisitions; four, implementing cost efficiencies across the organization; and five, returning value to our shareholders when M&A opportunities are limited. I will now turn the call over to Aaron, who will walk through our results in greater detail. Aaron Wilkins: Thank you, Scott, and good morning to everyone joining the call today. Before I begin, I would like to mention that unless otherwise stated, all financial measures in my remarks refer to 2026, and all comparisons will be year-over-year comparisons versus 2025. I will begin with our profitability. We delivered record first quarter consolidated net income of $10.5 million, or $1.08 per diluted share, up from $4 million, or $0.39 per diluted share, reflecting the improving operating leverage on higher revenues and the continued strength in execution across the business. On the top line, consolidated net sales grew 19.1% to $138.3 million from $116.1 million last year. Our Water Transmission Systems segment also posted a record first quarter, with sales rising 19.1% to $93.5 million versus $78.4 million. This growth was driven by an 18% increase in tons produced due largely to project timing and a 1% improvement in selling price per ton due to product mix. Precast delivered a record first quarter as well, with sales up 18.9% to $44.8 million compared to $37.7 million. The results benefited from a 14% increase in selling prices due to product mix and a 4% increase in volume shipped. As a reminder, the products we manufacture are unique, and the average sales prices for both of our operating segments, as well as the Precast shipment volumes and WTS production volumes, cannot always be relied upon as comparable metrics due to variations in the mix between periods. We also achieved record first quarter consolidated gross profit supported by higher volume and favorable pricing and mix. Gross profit was $26.7 million, up 37.7%, representing 19.3% of sales, a 260 basis point improvement from $19.4 million or 16.7% of sales. In Water Transmission Systems, gross profit increased 42.3% to $17.3 million, or 18.5% of segment sales, a 300 basis point improvement from $12.2 million or 15.5% of sales. The increase reflects higher production volume and the associated operational efficiency gains, as well as favorable changes in product mix. Precast gross profit also reached a record first quarter, rising 30% to $9.3 million or 20.9% of segment sales, compared to $7.2 million or 19.1% of sales. The 180 basis point improvement in gross margin was largely driven by higher selling prices tied to product mix. Selling, general and administrative expenses were $14 million, up 1.5%, and represented 10.1% of net sales, a 180 basis point improvement from 11.9% of net sales a year ago, even with modest increases in incentive compensation expense. For the full year 2026, we now expect consolidated SG&A to range between $53 million and $55 million. Depreciation and amortization expense was $4.8 million compared to $4.4 million, and we continue to expect a full-year expense of approximately $20 million to $22 million. Interest expense declined to $0.3 million from $0.6 million, reflecting lower average daily borrowings. Income tax expense was $2 million, resulting in an effective income tax rate of 16% compared to $1 million or a rate of 19.8% last year. The effective rates for both quarters were primarily impacted by tax windfalls recognized upon the vesting of equity awards. Our tax rate can vary based on the level of total permanent differences relative to pre-tax income. For the full year, we currently expect an effective tax rate of approximately 24% to 26%. I will now turn to our financial condition. At 03/31/2026, cash and cash equivalents improved to $14.3 million from $2.3 million at year-end. Our debt balance totaled $10.7 million, and there were no outstanding borrowings on our credit facility at March 31. This resulted in a net cash position of $3.5 million as we continue to drive cash to the balance sheet to support our growth and shareholder return priorities. Our improved profitability, coupled with favorable changes in working capital, drove strong net cash provided by operating activities of $29.2 million, reflecting a more than 500% increase from $4.8 million last year. Capital expenditures were $3.5 million compared to $3.7 million last year. For the full year 2026, we continue to expect CapEx in the $20 million to $24 million range, including approximately $6 million for investment projects to support our Precast product spread strategy and broader Precast growth initiatives. As a result, we generated $25.7 million of free cash in the quarter compared to $1.2 million last year. For 2026, we are raising our full-year free cash flow outlook to $50 million to $56 million, up from a prior range of $40 million to $46 million. In terms of capital deployment for the quarter, we spent $8.9 million to complete the purchase of Bouton Precast, repurchased approximately 33 thousand shares of our common stock at an average price of $67.17 for a total of $2.2 million, and repaid $1 million in debt. These activities highlight our ability to continue to grow NWPX Infrastructure, Inc. while concurrently returning value to our shareholders. To close, we delivered a strong start to the year, with first quarter records for revenue under the current configuration, gross profit, and earnings. We also generated very strong free cash flow, further strengthened our balance sheet, and remained disciplined in our capital deployment. Our record Water Transmission Systems backlog and our solid Precast order book, coupled with the commercial team’s focus on pricing and our track record of superb operational execution, position us to achieve new heights in financial performance as we move through the remainder of 2026. Thank you to our employees for their continued concentration on workplace safety and to our shareholders for their continued support. I will now turn it over to the operator to begin the question-and-answer session. Operator: We will now open the call for questions. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question today comes from Julio Alberto Romero with Sidoti & Company. Julio Alberto Romero: Thanks. Good morning, Scott and Aaron. Scott, I appreciate the significant previously unplanned project is under NDA, so to the extent that you can, could you maybe help us understand, at a high level, how additive the project is to your 2026 outlook? Does it go beyond 2026, potentially to 2027? And then secondly, should we think of this as kind of a one-off, or does it have the potential to lead to additional phases or repeat business with that customer? Scott J. Montross: Yes, and like you said, we are under NDA. It is a government-related project. It is being produced at multiple of our plants. What I would tell you is it looks like this piece of the project, because there are, from what we understand, multiple other pieces of this project as we go forward into the future, is right in the area of about $50 million. The real question is it is a relatively short-fuse job that is scheduled to be produced in the late second quarter, third quarter, going into about the mid-fourth quarter of this year, and that segment is expected to be done. I think one of the challenging things right now is there is a little bit more of a question on how quickly you can get all the steel to do it, so there is a potential that some of it could leak into next year. But the understanding we have of these projects is there are multiple phases that are planned right now that go out into the future that could be additive to other years as we go into the future, and I think that is probably as clean of a look as I can give you, Julio, on the thing. Julio Alberto Romero: Absolutely. I really appreciate the color you gave with that answer. On your cash flow in the quarter, it was very strong, and it looks like your net contract asset position improved pretty meaningfully, driven by contract liabilities. Can you give us any more color on what drove that increase, and is it tied to that project, or any other larger WTS projects? Aaron Wilkins: Yes, hi, Julio. The cash flows for the business obviously can be a little bit challenging to forecast because they can at times be a little lumpy, which is normal. Really what happened, and what continues to be a focus for our Water Transmission Systems commercial teams, is to drive what I call special billings—trying to get the steel billed in advance of the project, get MOH payments and progress payments throughout the job. That is something that over the span of the last three years we are seeing growing success at. It is still negotiated individually with specific customers, but we are able to do that more often than we used to be able to do it. What happened was we had a $20 million collection on one of those special billings come in in the month of February or March. You will notice that our accounts receivable remains elevated, which means that we are still doing a great job of billing customers. That is because we have, also on a completely separate job, billed another customer for a little over $20 million, and that has since been received. The business model really has been driven to get the cash flows as a focus, and that is why, in part at least, I raised our guidance range for free cash for 2026. I think we are going to be more successful. I think there are more opportunities for the WTS team to do these special billings in the year compared to 2025, which was also a very successful year, by the way. And I think that the new job that Scott just talked to you about, those two elements were worthwhile for raising the range so quickly into the year. I will tell you, though, Julio, the thing that could still come, depending on the success—there is always timing, right? You could always be paid on January 1 for something that really was attributed this year, which is why I may be a little bit gun-shy. But it is very possible that cash flows could go up another clip of $10 million or more in the ranges to be broadcast in the future. So it is not unheard of to think of $60 million or more of free cash this year for the company. Julio Alberto Romero: Understood. Very helpful there. And one more for me: you have record backlog of $430 million in WTS, including confirmed orders. Can you help us think about where your capacity utilization stands for that segment, and would you be able to take on additional work from here? Scott J. Montross: Yes. We can take on a lot more work than we have right now with the capacity we have spread across the country in our plants. We would need to move stuff between plants, but we have plenty more room to take on additional work as we go forward. Capacity utilization—if we are much over probably 70% or 72% in the Water Transmission Systems business—that is probably about a high point for us at this point. You can obviously add additional shifts too if we need to, which we do at certain plants at certain times when it is busy enough. So yes, we have a lot more room to produce a lot more, Julio, and are ready to do so. Julio Alberto Romero: Excellent. Thanks for all the color, and best of luck. Scott J. Montross: Thank you. Thanks, Julio. Operator: As a reminder, if you would like to ask a question, please press star 1 at this time. We will pause for just a moment. At this time, there are no further questions. I would like to turn the call back over to Scott J. Montross for closing remarks. Scott J. Montross: I would just like to wrap up by saying thank you to everybody for joining the call, like always. We delivered a very strong start to 2026. I think we are at a point now where we can say that NWPX Infrastructure, Inc. is hitting on all cylinders with the things that we are seeing. The bidding, outside of the project that is under NDA, in the first quarter in Water Transmission was probably the strongest we have seen, and really probably the strongest booking quarter that we have ever had on the Water Transmission side of the business. So we have significant momentum going forward on the Water Transmission side. On the Precast side, again, we are seeing a lot of work around data centers. Data centers are one of the things that are really buoying the commercial construction side of the business now, and the two states that we are in on the Precast side—primarily in Texas and in Utah—are very strong data center centers. I think there are something like 140 projects going on in Texas that we are taking part in, and other projects going on in Utah, which is becoming more of almost a giga site for data centers where there are really large ones being built. Even with a little bit of the slowdown that has been discussed in the press on the residential side of the business, we are still seeing very strong Precast business, and where we have seen slowdown on the residential side—for example, at our Geneva business—that is being picked right up on the nonresidential side, and the Precast business continues to grow. The biggest thing is we continue to advance our strategy going forward with both organic growth and M&A; we are going to continue to do that. We expect a strong second quarter. When we looked at the projections for 2026, even before we had this special project come forward, we were projecting another record year and stronger than 2025, and this big project is just additive to that. We are hitting on all cylinders. We appreciate your support as shareholders and our analyst support. Thank you, and we will see you in late July. Operator: Thank you. This does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time.
Operator: Greetings, and welcome to the Axos Bank Third Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Johnny Lai, Senior Vice President, Corporate Development and Investor Relations. Thank you. You may begin. Johnny Lai: Thank you, Diego. Good afternoon, everyone, and thank you for your interest in Axos. Joining us today for Axos Financial, Inc.'s Third Quarter 2026 Financial Results Conference Call are the company's President and Chief Executive Officer, Greg Garrabrants; and Executive Vice President and Chief Financial Officer, Derrick Walsh. Greg and Derrick will provide prepared remarks on the financial and operational results for the quarter ended March 31, 2026, then open up the call to a Q&A. Before I begin, I'd like to remind listeners that prepared remarks made on this call may contain forward-looking statements that are subject to risks and uncertainties and that management may make additional forward-looking statements in response to your questions. Please refer to the safe harbor statement found in today's earnings press release and in our investor presentation for additional details. This call is being webcast, and there will be an audio replay available in the Investor Relations section of the company's website located at axosfinancial.com for 30 days. Details for this call were provided on the conference call announcement and in today's earnings press release. Before handing over the call to Greg, I'd like to remind listeners that in addition to the earnings press release, we also issued an earnings supplement and 10-Q for this call. All of these documents can be found on axosfinancial.com. With that, I'd like to turn the call over to Greg. Gregory Garrabrants: Thank you, Johnny. Good afternoon, everyone, and thank you for joining us. I'd like to welcome everyone to Axos Financial's conference call for the third quarter of fiscal 2026 ended March 31, 2026. I thank you for your interest in Axos Financial. We generated another quarter of double-digit year-over-year growth in net interest income, ending loan and deposit balances, earnings per share and book value. We generated almost $700 million in net loan growth linked quarter, resulting in an 11.2% year-over-year increase in net interest income. Excluding the interest income impact of FDIC-purchased loans and 2 fewer days in the March 31, 2026 quarter compared to December 31, 2025 quarter, net interest income increased by $5.7 million on that linked quarter basis. We continue to generate high returns as evidenced by the over 16% return on average common equity and 1.8% return on assets in the 3 months ended March 31, 2026. Other highlights in the quarter include: noninterest income was $86 million for the quarter ended March 31, 2026, up from $53 million in the prior quarter and $33.4 million in the corresponding quarter a year ago. Excluding the benefit of the $22 million legal settlement this quarter, noninterest income was up approximately $10 million linked quarter due to higher mortgage banking income, advisory fee and the addition of rental income from the commercial office building we purchased in January of 2026 that will be used as our future headquarters. Net interest margin was 4.57% for the quarter ended March 31, 2026, compared to 4.94% in the prior quarter. Excluding the impact from the prepayments of FDIC-purchased loans and 2 fewer days in the quarter ended March 31, our net interest margin was down in line with last quarter's guidance of around 10 basis points. We continue to maintain a strong net interest margin with and without the benefit of the accretion from loans purchased from the FDIC, which has now dwindled to around 5 basis points of positive impact. Noninterest expenses were up $1.4 million linked quarter to $186 million. We are seeing some of the benefits from our operational efficiency initiatives and artificial intelligence on our salaries and benefits, data processing and other G&A expenses. The pending completion of the Jenius Bank deposit acquisition also allowed us to moderate growth in advertising and promotional expenses in the March quarter. Net income was approximately $124.7 million in the quarter ended March 31, up 18.5% from $105.2 million in the prior year's third quarter. Diluted EPS was $2.15 for the quarter ended March 31 compared to $1.81 in the third quarter of 2025, representing an 18.7% year-over-year increase. Total originations for investment, excluding single-family warehouse lending, were $5.1 billion for the 3 months ended March 31. Loan growth was strong across a number of lending businesses, including capital calls, real estate lender finance and equipment finance. Jumbo single-family loan balances were up slightly, while single-family warehouse had a seasonal decline of approximately $123 million. Ending loan balances grew by approximately $800 million linked quarter, excluding single-family warehouse. Average loan yields from non-purchased loans for the 3 months ended March 31 were 7.23%, down from 7.63% in the prior quarter. The sequential decline was driven primarily by the full impact from the 2 25 basis point rate cuts in the calendar Q4 2025. Average loan yields for purchased loans were 12.39% compared to 23.32% in the December 31 quarter. Purchased loan yields from the quarter ended December 31 benefited from one FDI-purchased (sic) [ FDIC-purchased ] loan paying approximately -- paying off and resulting in approximately $17 million of purchase discount accretion that was recognized in interest income. The FDIC-purchased loans continue to perform and all the loans in that portfolio remain current. New loan interest rates for the March quarter were 6.9% in both the single-family and C&I portfolios, 6.7% in the multifamily portfolio and 7.8% in our auto portfolio. Ending deposit balances were $22.4 billion, up 11.2% year-over-year. Demand, money market and savings accounts represent 97% of total deposits at March 31, increased by 13% year-over-year. We have a diverse mix of funding across a variety of business verticals with consumer and small business representing 52% of total deposits, commercial cash, treasury management and institutional representing 22%, commercial specialty representing 14% Axos Fiduciary Services representing 5%, Axos Securities, 5% and distribution partners representing 1%. Ending noninterest-bearing deposits were approximately $3.4 billion in the quarter ended March 31, an increase of $143 million from the $3.25 billion in the prior quarter. We deliberately reduced higher cost savings and time deposits and temporarily increased Federal Home Loan Bank advances in anticipation of the roughly $2.3 billion of Jenius Bank deposits coming in the June quarter. Client cash sorting deposits ended the quarter around $1.1 billion. In addition to our Axos Securities deposits on our balance sheet, we had approximately $415 million of deposits off balance sheet at partner banks. We remain focused on adding noninterest-bearing deposits from small business, custody clearing, fiduciary services and commercial and cash and treasury management verticals. Our consolidated net interest margin was 4.57% for the quarter ended March 31 compared to 4.94% in the quarter ended December 31. The early payoff of an FDIC purchase loan in that second quarter increased net interest margin by approximately 25 basis points. Excluding the early loan payoffs, the purchased loan yield was 14.2% in the quarter ended December 31 compared to 12.4% in the quarter ended March 31. With the diminishing impact of the FDIC-purchased loans, we expect reported net interest margin to stay roughly flat on an organic basis, excluding the impact of the deposit purchase premium from the acquired deposits, which we estimate to be around 5 basis points. The diversity of our lending channels provide us with flexibility to maintain strong loan and deposit growth while maintaining our net interest margin. Verdant had another strong quarter, contributing approximately $200 million of new loans and operating leases in the March quarter. We continue to identify opportunities to deepen our relationships with existing Verdant vendors and dealers as well as accelerate growth in a few existing verticals that were previously constrained by capital and size limitations when Verdant was under private ownership. The synergy between the Verdant and non-marine floor plan lending teams is starting to gain traction. We believe that our ability to provide a comprehensive retail and wholesale lending solution to top-tier original equipment manufacturers is a strategic advantage that we can leverage to win more deals. Demand in our commercial specialty real estate, fund finance, real estate lender finance and asset-based lending programs remain strong. Pipelines in the jumbo single-family and multifamily areas are rebounding. We are making steady progress growing our loan pipelines in newer lending verticals such as floor plan and retail marine lending. Taking all these factors into consideration, we are confident that we will generate loan growth by the low -- in the low to mid-teens on an annual basis this year. We had a strong increase in noninterest income as a result of several recurring and nonrecurring item. Mortgage banking income was $3.7 million in the quarter ended March 31, up $2.2 million year-over-year due to a favorable servicing rights fair value adjustment. Advisory fee income was $9.4 million, up $1.3 million year-over-year. Banking and service fees in the quarter included a $22 million onetime favorable legal settlement and the addition of rental income from commercial office properties we purchased in January. Verdant contributed approximately $23.7 million in noninterest income in the March quarter compared to $18.9 million in the December quarter. The credit quality of our loan book remains strong and our historic and current charge-offs remain low. Net charge-offs were 31 basis points in the quarter ended March 31 compared to 9 basis points in the year ago quarter. We charged off $14 million of our principal balance in the C&I cash flow loan that was put on nonaccrual over a year ago when we allocated a specific loan loss reserve. The remaining principal balance is approximately $17 million at March 31 on that loan, and we maintain a $10 million specific loan reserve on this balance. Excluding the charge-off related to that loan, total net charge-offs were $5.1 million in the 3 months ended March 31 or 8 basis points of annualized net charge-offs to average loans. Total nonperforming assets were $180.4 million at the end of the quarter, down approximately $5 million from $185 million at the March 31, 2025 quarter. Nonperforming assets declined by approximately $27 million in the multifamily group and commercial mortgages down by $19 million. One syndicated C&I shared national credit became delinquent this quarter, accounting for a $33 million sequential increase in our nonperforming assets in the C&I loan area. We have taken over as agent in the syndicated loan and are actively working to resolve this nonperforming loan. Total nonperforming assets was 62 basis points at the March 31, 2026 time, down from 71 basis points at June 30, 2025. We remain well reserved for our low levels of credit losses with our allowance for credit losses to nonaccrual loans equal to 192.2% at March 31, 2026. In Axos Clearing, advisory and broker-dealer fees were up sequentially due to higher asset and transaction-based income. Total assets under custody administration were flat at $44 billion. Net new asset growth of approximately $140 million were offset by a decline in the stock market in the first 3 months of 2026. Cash sorting deposit balances were roughly flat quarter-over-quarter despite significant market volatility. We continue to expand the scope and scale of artificial intelligence across the firm to a wide range of businesses and functional units. Having established the governance framework and infrastructure to educate, train and deploy AI tools to all Axos team members, we are now focused on scaling the usage of artificial intelligence across more use cases. We have over 500 team members using Claude Enterprise to improve the speed, quality and productivity of various workflows. Since the beginning of calendar 2026, the number of technical users of artificial intelligence tools has increased by 37%, increasing artificial intelligence's share of committed code to 90%. We are adding specialized agents to test, automate and QC various work products. We continue to evaluate M&A opportunities to augment growth from existing businesses and team lift-outs. The Verdant Equipment Leasing acquisition continues to perform well with good progress across a variety of strategic and operational initiatives. Loan growth remains healthy and profitability continues to improve. We announced the acquisition of approximately $2.3 billion of online saving deposits from Jenius Bank in February of 2026. These deposits are a perfect fit for us, and we're excited to offer additional banking, lending and securities products to the roughly 60,000 individual Jenius Bank digital banking clients. We received regulatory approval last month and expect to complete the deposit conversion and client onboarding next month. Last week, we announced a separate deposit acquisition of approximately $3.2 billion of IRA savings and CDs from Capital One. These are granular retirement savings accounts sourced through digital channels. We submitted our bank merger application for this transaction last week and are actively working with Capital One to determine the exact timing and mechanisms of a conversion and close in the second half of calendar 2026. These 2 opportunistic acquisitions help us with incremental liquidity and funding for future organic and inorganic loan growth opportunities. Our disciplined growth and strong capital allows us to capitalize on organic and inorganic growth. The regulatory environment and dynamics within the banking and fintech landscape have created a wealth of M&A opportunities that we intend to fully review. We continue to invest capital in areas where we see the best risk-adjusted returns and in tools, people and processes that will help us scale. Now I'll turn the call over to Derrick, who will have additional details on our financial results. Derrick Walsh: Thanks, Greg. A quick reminder that in addition to our press release, our 10-Q was filed with the SEC today and is available online through EDGAR or through our website at axosfinancial.com. I will provide some brief comments on a few topics. Please refer to our press release and our SEC filings for additional details. Noninterest expenses were approximately $186 million for the 3 months ended March 31, 2026, up by $1.4 million from the $184.6 million in the 3 months ended December 31, 2025. Salaries and benefit expenses were down $0.6 million on a linked quarter basis and professional services fees were up $1.6 million. FDIC and regulatory fees increased $1.6 million quarter-over-quarter, driven primarily by the fiscal year-to-date loan and deposit growth. Across our noninterest expense categories, we are seeing some of the benefits from operational productivity initiatives, including the increased leverage of our AI tools that we have implemented over the past 12 months. Our income tax rate was 24.6% in the 3 months ended March 31, 2026, compared to the 26.8% in the prior quarter. The primary reason for the sequential decline in our income tax rate was the benefit of RSU vestings and benefits derived from certain tax credits in the current quarter. While we continue to explore tax credit opportunities that could provide future tax rate benefits, our expectation is to maintain an annual tax rate of approximately 26% to 27%, excluding these potential benefits. Provision for credit losses was $41 million in Q3 '26 compared to $25 million in Q2 '26. The primary driver of the quarter-over-quarter increase in the provision for credit losses was a specific reserve of approximately $20 million for C&I loan. We expect to maintain a loan loss reserve of approximately 1.3% to 1.4% of total loans and leases going forward. I'll wrap up with our loan pipeline and growth outlook. Our loan pipeline is robust at approximately $2.6 billion as of April 24, 2026, consisting of $611 million of SFR jumbo mortgage, $82 million of gain on sale agency mortgage, $103 million of multifamily and small balance commercial, $83 million of auto and consumer loans and $1.7 billion across the commercial portfolio. We expect broad-based growth across several lending businesses to drive low to mid-teens organic loan growth in the next year, excluding any potential acquisitions. We will deploy some of the Jenius Bank deposits to reduce the temporary increase in borrowings in the March quarter and plan to use the remaining Jenius Bank deposits in combination with growth in our consumer and commercial banking deposits to fund our strong loan growth. With that, I'll turn the call back over to Johnny. Johnny Lai: Thanks, Derrick. Diego, we're ready to take questions. Operator: [Operator Instructions] Your first question comes from Kyle Peterson with Needham & Company. Kyle Peterson: I want to start off on some of the balance sheet moving pieces. I know there's decent amount of stuff going on with the FHLB stuff and Jenius coming on board. But I guess I noticed the securities balances also went up a decent amount this quarter. So I guess like how much of that is managing some of the liquidity before the Jenius deal closes? Or I guess, do you guys anticipate running at a bit higher securities book in the near term? I just want to think about how we should think about the mix over the next few quarters here. Derrick Walsh: Yes. The -- if you'll notice, cash went down as well. So we have internal policy minimums for the level of cash or liquid assets that we hold. And what we identified in the marketplace back in October, November was kind of a dislocation where if we bought some treasuries in 3-, 5-, 7-year tenures that -- and we're able to hedge them with a SOFR swap, we could actually generate 30 basis points improvement over holding that cash at the Fed Reserve, which is what we would be doing anyway as part of that liquidity requirement. So that was something. It was the widest that spread had gotten in -- other than on the liberation day. And so there are -- that was a pretty rare dislocation in the marketplace. So we took that opportunity and acquired some of those treasuries. We still can actually flip them and borrow against them and we -- and they remain liquid since they're -- or remain rate beneficial from a standpoint since they're swapped. So that's why you see that increase in the securities portfolio and that decrease in the cash. So that was around $750 million that we moved into those securities. Kyle Peterson: Okay. That's helpful. I appreciate all the color there. And then maybe just a follow-up, particularly on capital call, it looks like it had a really nice quarter on the growth front there. So I guess I wanted to see if you guys could give any more color what is either on bigger draws with existing customers? Or how much are you adding new accounts and kind of teams adding the pipeline? Just want to think more about new accounts and clients versus bigger drawdowns and utilization and how sustainable this kind of growth can be at least in the near term? Gregory Garrabrants: Yes. Quite a few new clients. I wouldn't say there's any significantly greater drawdowns, although these -- they tend to take a few quarters, the lines we bring on tend to take a few quarters to reach their -- where they tend to be, but bringing on a lot of new clients mostly. With respect to sustainability, I think that given the diversity of the loan book, it's often the case that different segments will outperform in any one quarter. So I don't expect the cap call side growth will be as big as it was in the next quarter, but I still think it will be pretty decent. Operator: Your next question comes from Gary Tenner with D.A. Davidson. Gary Tenner: Just wanted to ask on the credit front. Just looking at the allowance quarter-over-quarter and the increase there, was that pretty exclusively driven by the C&I nonaccrual add in the quarter? Or what other dynamics were at play in terms of the model on the allowance? Derrick Walsh: The C&I was the biggest aspect of it. There is maybe a little bit tied to obviously the broader economic events or the geopolitical events that obviously flow through the Moody's variables and into the quantitative model, but that C&I addition was the biggest piece of it. Gary Tenner: Okay. I appreciate that. And then just in terms of that credit, in particular, could you provide any additional color on the type of credit and timing of resolution, et cetera? Gregory Garrabrants: Yes. It was a syndicated shared national credit. We were not bank syndicated credit. We were not the agent. It's -- a lot of times with these agents, I think they've made concessions early on that they probably should have been a little bit tougher on. We're now the agent, and we're working with the sponsor, and we'll see where it goes, but we felt it was obviously -- well, it's prudent to put it on nonaccrual and also to take a significant reserve against it. And I think over the next several quarters, we'll know exactly how that's going to turn out. Gary Tenner: Okay. And just related to, Derrick, was there any material impact in terms of reversing interest on that in the quarter? Derrick Walsh: Not significant. Operator: Your next question comes from David Chiaverini with Jefferies. James Dutton: Brooks Dutton on for Dave this afternoon. Can you guys help us quantify the impact that temporary borrowings had on NIM this quarter and whether that pressure should reverse as these borrowings roll off given the pending Jenius acquisition? Derrick Walsh: Sure. So we -- it was maybe a basis point or 2, but for the most part, it was -- we swapped out or allowed a lot of our higher cost deposits to outflow and replace those with deposits. So it really wasn't anything too meaningful from an impact on NIM. Gregory Garrabrants: Yes. On the Jenius side, they've been -- that book has been -- they've priced it at a higher price to some extent that we've priced some of our deposits, but we're probably not going to adjust pricing immediately. So I think that although the Jenius acquisition is super helpful from a volume perspective, we don't really intend to try to optimize a few basis points here or there on NIM just to -- we feel pretty good about where NIM is being flattish going forward other than the -- that 5 bps of amortization of the premium. And I think eventually, we'll kind of be able to normalize that. But I don't want to introduce all those clients to the bank with a rate cut. So we'll probably keep it there. But -- so that's kind of the dynamic. Operator: Your next question comes from Kelly Motta with KBW. Kelly Motta: Maybe it's really nice how these 2 deposit acquisitions help provide avenues to fuel what's been really outstanding growth on your part. I'm wondering with -- as we've seen with the -- the Jenius deposits, I apologize, allowing you to maybe be a little more aggressive with repricing your own deposits. I'm wondering how you're viewing the Capital One deposits, maybe average cost of those? And if similarly, that's going to help you further price down funding or it should be kind of a net add to deposits, just as we think through both the margin and overall size of the balance sheet? Gregory Garrabrants: Yes. No, those are great questions, Kelly. Thank you. I think that we're kind of looking at these as be as absolutely ensuring that we're able to have the funding for the level of loan growth that we're looking forward to having it. I think certainly, it does ensure that we don't have to price up deposits or to increase marketing budgets in order to fund ourselves, which I think is obviously very helpful. But I wouldn't really model in any significant sort of increase in NIM from our ability to say, well, now we're going to try to price down other deposits just based on having that excess. I think we feel pretty good. I know I do, and I think Derrick does, too, feel pretty good about the fact that we've been able to manage this rate cycle really well and that we were able to have almost 100 or better than -- we had NIM expansion on the way up and essentially, for the most part, maintain our net interest margin on the way down. And so that is obviously assisted by this. And we probably would have had to increase marketing expense somewhat otherwise or be a little more aggressive on pricing. So I think it will help on balance, but I would -- I think that our guidance on NIM incorporates those acquisitions and how we're thinking about pricing with respect to them. Kelly Motta: Got it. So as those come on, just as we kind of like think through the balance sheet then in order to fund your growth, could we see a build in liquidity just as you kind of have the dry powder to deploy? And just trying to properly handicap if there's a bigger balance sheet, but a little pressure from the liquidity build there. Derrick Walsh: Yes. I think we've strategically positioned the balance sheet for this quarter and this coming quarter's growth. I mean might there be a little overhang potentially for this fiscal Q4 with relation to the Jenius deposits. But I think that, generally speaking, I think we've lined ourselves up well there, not to have much that's worth kind of modeling out. From the Capital One, it will somewhat depend on the timing of that and of course, on some of our own organic growth and opportunities there. But I would expect that there might be a little bit more of a balance sheet gross up in that kind of later portion of the calendar year 2026 that might roll over into early '27. But again, at that point, with the expectations being greater than $30 billion of assets, and it won't be anything that will be overly significant. Kelly Motta: Got it. That's helpful. Maybe a last question for me is in regards to the Verdant acquisition. You've had some really nice boost in your fee income related to that. As you kind of think ahead, given your really strong pipelines across your businesses, how are you thinking through the operating leases versus on balance sheet? And fair to say some additional fee income growth from that? Or should we see more of that added to the loan portfolio here just as you think through your appetite for that? Derrick Walsh: Yes. It's kind of tough to tell. I think I referenced last quarter that the operating leases are about 1 of every 6 or 1/6 of all the originations roughly. And that could flux up or down depending on just opportunities and the nuances of the accounting around specific leases. So the -- obviously, the objective, both the management team from an incentive standpoint and our business operations back office support are incented to help support and grow that business. And so I think the overall kind of -- it will be in line with our forecasted loan growth and is incorporated into that. So I guess, in summary, I can't give you a specific number or reference as to how that fee income will grow, but the -- it should generally grow. But I think I wouldn't, I guess, model it too significantly from that standpoint, given it's only 1/6 of the origination volume. Operator: [Operator Instructions] Your next question comes from Liam Coohill with Raymond James. Liam Coohill: Liam on for David. On your securities business, it sounds like client acquisition trends remain pretty positive despite the market volatility in the quarter. And we've talked about the opportunity to cross-sell potentially to Jenius customers, but do you maybe see similar opportunity with those Capital One clients? And could you maybe talk about some offerings that could be attractive to them? Gregory Garrabrants: Yes. I think over time, the Capital One clients, they were a little sensitive in some periods to certain kinds of cross-sell. They were not sensitive to securities cross-sell. I do think that there would be opportunities there on the Capital One clients with respect to some of those offerings just because these are retirement accounts. Right now, they're very limited in their product types that they have offered and we'll obviously offer them greater product types. We have no restrictions on our ability to cross-sell securities products to those clients. I think over time, as that develops, they can become more general banking clients as well. So I do think there's those opportunities. Liam Coohill: That's helpful. And Kelly touched on the operating leases a minute ago, but I was also curious to hear about other core noninterest income trends. I mean, could you discuss where you're seeing success and maybe how you expect core fees to move going forward? Derrick Walsh: Sure. I think one of the other things that in there, and Greg referenced it in his quotes or in his prepared remarks was that there was roughly $4 million of rental income from our future headquarters as that building is larger than what we would plan to move in. So that there's a good amount of space there that is -- we -- when we acquired it, that is already leased out. So we have some rental income and then there's corresponding depreciation and other expense that was roughly $2 million to $3 million in the noninterest expense this quarter. But on the staying on the fee income side, that's probably one of the other major items that impacted the fee income this quarter besides, obviously, the Verdant piece and -- the one-time legal settlement. So that's -- otherwise, the growth across that category was driven predominantly by the mortgage banking increase. So there was a positive movement on the valuation of the MSRs at the end of the quarter. And then some of the other fees, advisory, broker-dealer and some of the other just general banking service fees and other income all had more kind of step stone, more increases that weren't overly significant. But I would say, as we grow each of these businesses that we expect those fees to also increase. Liam Coohill: Last one for me. Where do you think there is the most opportunity for M&A today? And where are you seeing valuations that are rational? Is that tending to be more lending teams or larger portfolios? Gregory Garrabrants: We're really looking at some of each. So if you looked at our portfolio, we've got team acquisitions. We've got fintechs that have some kind of element of their business model that they're really good at something, but they need components that we have. We have banks that we're talking with, large and small. So it's -- and there's always the specialty finance side, too, that we continue to look at. And there, it's teams and businesses. So we're very disciplined. We talk to people for a long time. We don't rush into things. We make sure that it's going to fit and that we're able to digest it. But -- so it really -- I think there's a lot of idiosyncrasy and a lot of times, the individual circumstances with respect to people funding, just where different individuals and companies are in their life cycle help fuel different opportunities. And so we're always very active. We talk to a lot of people. We have conversations over long periods of time. We try to build relationships. And then so sometimes it looks like an accident or something happens quickly, but it isn't really that. It's really a pretty deliberate strategy of staying with a lot of different opportunities over time and then building those relationships. And so then when they're ready to transact, we're there for them. Operator: Your next question comes from Edward Hemmelgarn with Shaker Investments. Edward Hemmelgarn: Could you walk me through the balance of loans throughout the quarter. I mean your -- if I'm looking at it correctly, your average balances barely grew from -- if at all, from the ending balance at December 31. Was there something else going on? Derrick Walsh: There were some early prepaid during the quarter. So that's what kind of counteracted some of the, obviously, ending quarter growth. So January, we were down at the end of that quarter from kind of the prior -- from the prior month of December. I think that had the biggest impact from that standpoint. On the -- we did grow on the average balance by $1.15 billion of loans. So I'm not sure if maybe there's something -- maybe you're looking at the assets. The assets did stay relatively flat, and that was as we basically -- we've been sitting on some level of excess cash. And so we did reduce that excess cash. As touched on earlier, some of it went into those investment securities, but it still came down about $800 million on an average balance as we had some surplus in cash previously. Gregory Garrabrants: Yes. And we're converting Jenius this weekend. So that will -- then on Monday, those balances will be at the bank. But yes, no, I think you may be comparing like -- I don't know if you're comparing end of period to average, but... Edward Hemmelgarn: We kind of just surprising because it's the first time I really noticed that there was this much of an adjustment within the quarter. I mean, generally, you have a -- unless something obviously is explaining your average balances grow similar to what the -- or in excess of what your ending balance were the prior quarter? Gregory Garrabrants: Yes. There was a couple -- there was a number of prepays, some of which we -- I don't think we were expecting. I think it was in January. But yes, I think average balance still grew, but that is important, right, because you only earn net interest income on what you're putting out. And if you're growing only at the end of the quarter, then that gets reflected next quarter, but not in the current quarter. So yes, I agree. I think everybody should stop using the quarter end as a mechanism of governing the speed at which they get things done. I agree with you 100%. I'm going to convey that message to everyone in the organization immediately. It will be the first time they've heard it. So... Operator: Your next question comes from Kelly Motta with KBW. Kelly Motta: I just had a real quick one. Just wondering, given the really strong loan growth we're seeing, just wondering how the competition is faring and spreads are holding up. I understand there's quite a bit of difference between businesses, but just trying to get a sense of the direction of loan yields from here. Gregory Garrabrants: Yes. I feel that spreads are stable, I'd say, from where we are. I think that there was -- to the extent that there was compression, I feel like that I'd say that compression has stopped. I do think that in some instances, there has been -- some of the outflows in private credit and things like that have resulted in just a little bit of a different positive competitive dynamic, but it's not enough to say that you're taking back any of that compression that kind of happened over the prior year. But I feel pretty good about where we are now in general. I think we've -- I don't predict that we're going to have further spread compression. There'll be a credit here and there that they're going to be bargaining and fighting about. But I think we've done a pretty good job and have a pretty good mix. And then I think also with respect to some of the like Verdant lending is a little bit higher spreads. I think we've got a pretty good mix that allows us to keep spreads where they are. Operator: And there appears to be no additional questions at this time. So I'll hand the floor back to Johnny Lai for closing remarks. Johnny Lai: Great. Thanks for everyone for joining us, and we'll talk to you next quarter. Operator: This concludes today's call. All parties may disconnect. Have a good day.
Operator: Good afternoon, everyone. Welcome to the JAKKS Pacific First Quarter Earnings Conference Call with management, who will review financial results for the first quarter ended March 31, 2026. JAKKS issued its earnings press release earlier today. The earnings release and presentation slides related to today's call are available on the company's website in the Investors section. On the call this afternoon are Stephen Berman, Chairman and Chief Executive Officer; and John Kimble, Chief Financial Officer. Stephen will first provide an overview of the quarter and full fiscal year, along with highlights of recent performance and current business trends, and then John will provide some financial comments around JAKKS Pacific’s financials and operational results. Mr. Berman will then return with additional comments and some closing remarks prior to opening up the call for questions. [Operator Instructions] Before we begin, the company would like to point out that any comments made about JAKKS Pacific's future performance, events or circumstances, including the estimates of sales, margins, earnings and/or adjusted EBITDA in 2026 as well as any other forward-looking statements concerning 2026 and beyond are subject to safe harbor protection under federal security laws. These statements reflect the company's best judgment based on current market trends and conditions today and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other such risks and uncertainties, you should consult JAKKS' most recent 10-K and 10-Q filings with the SEC as well as the company's other reports subsequently filed with the SEC from time to time. In addition, today's comments by management will refer to non-GAAP financial measures such as adjusted EBITDA and adjusted earnings per share. Unless stated otherwise, the most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measure within the company's earnings press release issued today or previously. As a reminder, this call is being recorded. And with that, I would now like to turn the call over to Stephen Berman. Stephen Berman: Good afternoon, and thank you for joining us today. Our Q1 financial results were roughly in line with our expectations and comparable to our strong Q1 2025 results. And our near-term outlook is better than it was 12 months ago. We continue to see a degree of caution from U.S. accounts. I would characterize many of them as somewhat tentative about the year, many becoming more accustomed to the volatility we've been experiencing. They are, among other things, trying to forecast consumer health. Our industry continues to closely monitor higher oil prices given the implications for resins and transportation costs. As I said before, these are dynamics that come with running a global company. We have dealt with these sort of challenges before, and I'm confident we will successfully navigate our way forward in 2026 and beyond. We continue to invest significantly time, effort and financially on some exciting new initiatives coming together for 2027 and '28 while also executing in the year on our plan and pursuing late incremental opportunities. Globally, our net sales finished at $107 million in Q1, comparable to our first quarter results over the past several years, but down 6% from prior year. Toy and Consumer Product net sales were down 7% with costumes up in one of its smaller quarters. The decline was caused by lower results in North America at $78 million. It was down $15 million or 16%, with both our domestic and FOB business decreasing for the quarter. Roughly 1/4 of that decline was due to a reduction in low-margin closeout sales related to our lower level of U.S. imports last year. Demand for our FOB model remains extremely strong with over 70% of our Q1 North American business shipped FOB. As mentioned above, we see the U.S. retailers remaining somewhat cautious trying to recalibrate cost pressures, pricing resilience and ultimately, consumer behavior. Our international business grew nicely in the quarter, reaching $29 million, a 38% increase versus the prior year. We saw healthy growth in both our domestic business as well as our FOB orders. Latin America declined slightly in the quarter, but grew margin dollars. Although slightly down from last year, we finished the quarter with a very strong gross margin of 33.4%, reflective of our robust product margins from new product introductions and reduced closeout sales in the quarter. SG&A expenses were down 4% in the quarter, offsetting some of the drop in margin dollars, but not enough to avoid a quarterly adjusted EBITDA loss of $371,000 versus a gain of $354,000 recorded at the end of Q1 2025. I will now pass it over to John for some comments, after which I will come back and discuss some product initiatives and areas of focus moving forward. John? John Kimble: Thank you, Stephen, and hi, everybody. The first quarter did not distinguish itself dramatically to the positive or the negative, which is all that one can really ask for in the first quarter in the toy industry. Some of our drop in revenues is attributable to a new dress-up initiative last year not carrying forward in addition to some softness in our private label business. We're happy to see our gross margin percentage holding up at 33.4%, even if it is down 100 basis points from the exuberant 34.4% from this time last year. Deconstructing gross margin prompts the issue of tariffs. For your accounting teaser of the day, U.S. domestic products sold in the quarter would have reflected tariff expense related to when the product entered the country when those sales in the year ago quarter did not have that issue. As to whether Q1 2026 product was imported in Q1 or in previous quarters, there's a level of precision that we don't aspire to. I can tell you we paid $1 million to $2 million in U.S. tariffs in the quarter, where we paid less than $100,000 in the year ago quarter. That gives you a sense for order of magnitude of the numbers here in the quarter and as they relate to prior year. This is also a fine place to mention that we have filed for tariff refunds that we feel are eligible for reclaiming as a result of the relevant Supreme Court decision. We do not intend to go deeper on that topic until we have a much higher degree of confidence that refunds are forthcoming and have figured out any related implications. It would be nice to get some of this money back, but frankly, it's one of the least interesting things to talk about in the business today, so we're moving on. Back to the numbers, $36 million in Q1 gross profit, although down 9% from last year, that is still a very robust number for our business. So we're happy to have that on the scoreboard as we exit the quarter. Our selling expenses were flat from a margin perspective in the quarter, primarily due to favorable timing. On a full year basis, we would expect this area to grow at minimum in tandem with sales, particularly as we restricted spending against some marketing initiatives last year given revenue shortfalls. That projection does not anticipate downside scenarios reflective of higher shipping costs due to higher diesel costs. G&A delevered slightly, but also benefited from some timing elements. We are aiming to hold G&A spending to no more than revenue growth on a full year basis while also making the necessary expenditures to support new 2027 launches. Slightly softer results reduced our trailing 12-month adjusted EBITDA down by 2% to $34.6 million. On an adjusted per share basis, the quarterly loss of $0.17 is lower than the loss of $0.03 per share from this time last year. The diluted share count is based on roughly 11.4 million shares. Turning to the balance sheet. We finished the quarter with $64 million in cash, up a bit from $59 million last year. Inventory was flattish at $53 million, essentially unchanged from last year. As mentioned in our release, the Board approved a Q2 payment of $0.25 per common share payable at the end of Q1. The record date for the dividend is May 29, and the payable date will be June 29. And back to Stephen for some more comments about the year ahead. Stephen Berman: Thank you, John. As first quarter is always the quietest quarter for us, I'd like to update you on what we see as some of our big drivers from a product and revenue perspective on the year. We are certainly thrilled with the positive reaction theatrical release of the Super Mario Galaxy movie has received. The success of the first film took some retailers by surprise. But this time, all accounts are ready and on board, allowing us to secure significant out-of-aisle and promotional space starting in early March. The film has created a lot of excitement in Europe as well with Smyths being a big supporter. The excitement continues with the Mario product line, and we look forward to the streaming announcement and launch later this year. The Sonic-DC crossover product has been expanded to all accounts this spring after being an account exclusive at launch. A new comic book in the series is dropping this quarter to keep the energy around this initiative fresh and on top of mind. As we mentioned last quarter, SEGA is recreating a lot of excitement around Sonic's 35th year anniversary, and we continue to work with them very closely as their anchor toy partner worldwide. One example of a new collaboration we are doing with SEGA is adding the Sonic into our outdoor seasonal business as we reposition that segment into our active and early play segment, which is really a better description of what that team focuses on and the products we market there. The speed and energy central to Sonic's DNA makes them a natural choice for products in this area, and we've been excited to share this range with customers this month during our spring 2027 line reviews. We'll have more details about some of the key items launching in this segment in the months to come. We are seeing nice support for our Disney Princess, Style Collection, ily and Frozen lines with sell-throughs in these segments continue to be very strong. These are evergreen brands and play patterns for young children. We nonetheless are constantly introducing new items to the line and ensure we are earning our place in retail assortments every season. Our 6-inch doll line has been refreshed this spring and is selling extremely well. We've also seen positive reaction to some of our new role play introductions in the Style Collection line. We have strong coverage here at both the below $10 and below $20 retail prices, which are great values and also work especially well given the time of year. We continue to steadily expand our Action Sports portfolio where we see additional opportunities. We are happy to share with you that we recently have added the Almost, Darkstar and Duster brands to our Skateboard portfolio. In our Disguise business, we announced our launch of KPop Demon Hunters during the past quarter. We're happy to be able to deliver authentic costumes for that enthusiastic fan base. The success of the Mario Galaxy film is generating more demand for these costumes. We're also seeing a lot of energy behind Pokémon, which is celebrating its 30-year anniversary this year with significant marketing programs. Our European business for costumes continues to grow steadily. We are shipping several new customers in the U.K. as we have transitioned in as a vendor for some accounts who were previously relying on their in-house sourcing teams. And at last, but not certainly least, since our last call, we have announced our new initiative to capitalize on what we see as a significant opportunity in the world of anime. As we expressed earlier this quarter, JAKKS Pacific is launching a large-scale next-generation Anime, Manga and Digital Creator cultural platform, one of our company's most ambitious strategically significant initiatives. Developed more than 2 years, this multifaceted investment positions JAKKS at the forefront of one of the fastest-growing segments in global entertainment. Anchored by premier anime partners and top-tier collaborators, the platform creates a strong foundation for sustained global growth, enhanced monetization and long-term shareholder value. Through this initiative, JAKKS will design, manufacture and market a broad portfolio of premium collectibles, figures, plush, tech accessories, costumes and role-play products while expanding into high-growth live event and influencer-driven merchandise opportunities. Supporting this effort is a next-generation global distribution infrastructure spanning to direct-to-consumer, specialty and experiential retail and promotional channels designed to accelerate speed to market and deepen consumer reach worldwide. The objective is clear: to lead this category at scale. This platform expands our global footprint, accelerates revenue opportunities and strengthens our connection with highly engaged fans that are shaping future of pop culture. We're not simply entering a category. We are building a durable, repeatable platform designed to deliver sustained multiyear value, building on its legacy of successfully commercializing leading entertainment properties. JAKKS will continue to roll out our partnerships and product lines through 2026 with the initial launch expected in 2027. We are only 1/3 of the way through the year. And although it continues to be very dynamic, we feel confident we are still on track to achieve our goals for this year, inclusive of setting up for an even better and stronger 2027 and beyond. And with that, we will take a couple of questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Thomas Forte of Maxim Group. Thomas Forte: I'll limit myself to 3, and I'll go one at a time. So Stephen, the anime product line sounds amazing. Can you give just high-level comments on what success could look like, including the relative gross margin and contribution margin for that product versus your other efforts? Stephen Berman: Thank you. So firstly, this initiative that we undertook has been well over 2 years working with many of these companies that are in Japan and the way that the companies oversee their IP is very stringent and very strict. So we went to them to various large enterprises, Aniplex, which is Demon Slayer, VIZ Media, Naruto; KODANSHA, which is Attack on Titan, and several others from Cover Corp and Crunchyroll. It's been a long process of making sure that when you create products in this genre, it has a very strong fan base that you got to really focus on and cannot veer from. So we had put together a plan we hired across the board, a very young, passionate group in the Anime, Manga and called Digital Marketers. And we put together a plan of products from collectibles to kid adults, which is very strong to somewhat of some of the other properties to tech accessories, areas that the fan base really likes. In fact, for the VTubers and digital marketers, we created light sticks for them to use at concerts, but all with the authenticity of the actual IP and directed towards the fan. So the launch itself is starting in '27. We will get some of it shipped in '26. it's a very broad launch to various initiatives of retail basis. So think of Miniso, GameStop, independent retailers as well as venue sales. A lot of these concerts, movies and initiatives are done in venues, and there's never been real authentic merchandise at the venue. So we have structured and working with several different partners to do the venue sales as what you would see at concerts like at a Taylor Swift concert or Kendrick Lamar where you have the merchandise that goes straight to the consumer. So all these initiatives are all being really launched together at one time in various segmentations and with various collective initiatives with each of the IP holders, but inclusive, you will see a broad array of product of totality of all the strong Anime, Manga and VTube IP and one segmentation at retail instead of having one licensor do one IP and another one, we've collectively worked with these IP holders to make sure that they were present and they were present and focused together so the consumer knows where to buy them. On the part of margin enhancement, because they're somewhat more focused on kid adult, the price points will be slightly higher and the margin in our area for JAKKS Pacific will be slightly higher. Thomas Forte: Excellent. All right. So then second of 3, I recognize a lot of your product releases are coinciding with movie premieres, but I was wondering for your other SKUs, how should we think about the timing of new product rollouts and if you're holding anything back given the current market challenges? Stephen Berman: First, the market challenges, as we mentioned in our prerecorded is we're used to these challenges. It happens. It's -- JAKKS has been public 30 years. We've been around 31 years. So you have to kind of work through them, work with manufacturers, with the container companies, work with the retailers and work very closely and very entrepreneurial to get through these different times. But with these different times, there's also a very strong opportunity. So as we mentioned in our call, the Super Mario movie itself has done phenomenally well. The product line is expansive. The sell-throughs are great. We will have the forthcoming or upcoming streaming release, whenever, Nintendo and Universal announce it. So that will have its legs and continue with the big tailwinds behind it. Then there's a lot of different initiatives that happen in our, call it, Disguise business. You have the Super Mario movie, Toy Story 5, Descendants 5, PAW Patrol movie, Minions movie and Demon Slayer, which is the anime that we mentioned, which is from Aniplex. So in each of our segments, we have some great excitement. But at the same time, some of our basic evergreen business is what's doing extremely well. In our Disney area, our Disney Darlings, our Disney Style Collection, our Disney Princess has seen sell-through strong and profit dollars up. So that's exciting. Then you go into -- going into the year, we also have various other movies that are coming out that we have a nice product behind, which is Moana live-action, some Minions and other IP that's coming out. But that on top of our Evergreen business is really what's keeping us going and strong. And when we start building throughout the year and going into '27 and '28, our lineup, I couldn't be more proud as CEO, a Co-Founder. It is so strong in the majority of all of our categories from our seasonal business with ABG, which we have Element and Roxy and Quiksilver, which is now just starting to take some real traction getting out to the spring and summer retailers. It's a really exciting time. But at the same time, it's a cautious time because of oil prices and things that are just unknowns. But those unknowns, to us, it's just part and parcel of our business, but we're really excited. I'm really excited to get through the year. This is a quiet first quarter, I even mentioned to John, it's a very quiet period to talk about because there are so many things that are happening through the year. But as the year goes by, we will be going on the road, speaking with retailers, investors. It's really an exciting time at JAKKS. Thomas Forte: Excellent. All right. And then last one. So another high-level question. So there are some people who believe that AI will lead to an explosion in video content, which could materially increase your opportunity set for licensing? I would appreciate your thoughts on that. Stephen Berman: With our IP holders, our licensors, many of them are obviously very strong and very focused in the, call it, what AI could do in the, call it, the production, the -- call it, the quickness to market for digital animation and various initiatives. So I think it's going to be very much pick and choose by each of the, call it, large-scale entertainment companies, whether it's the Walt Disney Company, Netflix, Amazon, we're there to help them out in what they do. And the one thing that we've seen because these things are coming quick to market now because of the time it takes to develop is much less than in the past. The one thing that JAKKS is great at is to go to market and doing things very quickly. And I think that's where we're going to be with working with these companies to get things into the market quicker than a normal company can just based on our scale and what our DNA is. Operator: Our next question comes from the line of Eric Beder of Small Cap Consumer Research. Eric Beder: Congratulations on the solid start to the quarter. When you look at it in terms of the consumer, in terms of normalizing in the U.S., how should we think about kind of how the flows are going to happen here? And when we know kind of what is going to be the new market or what is the market we're going to see post all the disruptions we had last year in the U.S. Stephen Berman: I think at the end of the day, product is king. So if we have the right product and you have the right price points, the consumer will be there, especially in our area of business to where whether it's a holiday, whether it's a birthday, people and parents and grandparents are relative spend on children spend on toys. But in this environment, I think price points are very much a focus during the first 9 months of the year and ensuring that we have the right price points and the majority of our products are in the $10 to $30 range. And then during the fall period, during the holiday period, you need to have that the Wow IP, the Wow item, the Wow product to get that bigger purchase. And I think we have all that accustomed in the majority of our divisions. Remember, primarily, we are an FOB company. So we plan very far ahead differently than a real domestic company. So we have things in line with all of our major retailers worldwide to enhance whether it's exclusivity on products and categories so they could actually enhance their margin dollars and also market those products directly to consumers at the same time, not having price comparisons done by other retailers. So that's a very big enhancement. I don't know if I mentioned earlier, but we had our best EMEA quarter since 2015 and our best ups in France and Spain in over 15 years. So we're talking U.S. and I'm talking worldwide. We see growth international as we're expanding with more IP that goes appropriately in specific territories and countries, both in EMEA, Latin America and now really focused on Asia Pacific for the next few years. So that's great. And in the U.S., you just have to make sure you have the right product for the consumer at the right price point, and we monitor that very, very closely on a week-by-week basis. Eric Beder: You kind of hinted at this. How do you look upon this anime management thing to you in terms of international? Are you getting worldwide rights for most of these players? And how can that help drive international even further? Stephen Berman: So the IP is really selective by each territory and country. So in the anime, and I'm speaking broadly for Anime, Manga and then the VTubers and digital entertainers, each country is vastly different. So for instance, in EMEA, France is #1 for anime. It's known throughout the world as they have such a huge fan base in France. And then it goes in Italy and then goes U.K. and after France, actually, it's Latin America. Mexico is very big. So you have to really pick and choose. You can't just think that each of these IPs are going to work in all these territories. So we look at the fan base. We speak to the content holder, the IP holder, and we work closely with them as they have such decades and decades of information of where their fans are, where they're growing. And we follow what they say is they know their IP better than anyone, and then we take our team and really cultivate it per the market and what's appropriate price point-wise, item-wise and content-wise because some of the items that we make for America may not be appropriate for Europe or for Latin America and vice versa. So we really are focused in each of these areas and segmentations, the right product, the right territory, the right IP. Eric Beder: Great. And when you look at international, it keeps on growing as a percentage of the business. I believe Q1, it was about 30%. Longer term, what should we be thinking of the goal for international versus U.S. penetration? Stephen Berman: Well, the goal is growth, but the growth is -- it won't keep up with that 30%, 40% always going. It's growing for each of the areas. The reason why EMEA has grown significantly, we opened up 5 different distribution centers in various territories to allow us to hit much more and penetrate into the retail market. It's much smaller accounts throughout Europe than it is in America. So you need this distribution platform. Our domestic business has grown internationally because we have to have backup inventory for all these smaller customers. So we are looking for growth. We're looking for growth in market share, also garnishing new IP that's appropriate for the marketplace. So it's a combination. And each of these, call it, countries will have different growth than the others because of certain IPs work great in the U.K. For instance, France is very, very strong in anime, U.K. is strong, but not as strong. So you'll see a much faster growth in anime in France, and you'll see a much stronger growth in our general toy business in U.K. versus France just because of the size and shape. So it's really a really dissective approach by each of the countries, territories and the correct IP. But you'll see that enhance the growth, but not all throughout Europe, except of the IP does not work in Europe. Eric Beder: Okay. And last question. You paid out a dollar dividend last year and cash continues to rise. How do you leverage that? And how do we should look upon that as you being able to take competitive advantage and being able to [indiscernible] capital when you want to? Stephen Berman: So with capital allocation, we bring this up during our Board meeting. In fact, we just had one and it's something that we review. And based on the environment, where cash is king right now in this kind of environment. And we are investing capital more than normal with regards to the anime initiatives, the tooling, all these new initiatives, it's costing us capital, not material, but it does cost us capital. And with that, we're going to be doing much more marketing, more influential marketing to the consumer in some of these areas. And we have some very surprising new initiatives that we'll announce later in the year that will cost capital, but nothing to where it's a huge expenditure, but it's more than we normally spend in tooling, marketing and overhead for these areas and new initiatives. That being said, we will look at what we generate in cash through the year and look at what's appropriate. We are seeing opportunities on the acquisition front. We're getting more inbound calls of companies that are looking to sell. So there's a really nice good opportunity out there. We just want to make sure when we utilize our cash, we utilize it on an accretive basis and not just to use the cash to use it. Operator: This concludes the question-and-answer session. I would now like to turn it back to Stephen Berman for closing remarks. Stephen Berman: Thank you very much. I'm sorry for the brief call and also my voice during the prerecorded, I had a cold. But we're looking forward to speaking shortly and getting on the road and seeing some of the investors throughout the summer and going right into fall. So thank you very much. Operator: Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Greetings, and welcome to the Ingram Micro First Quarter 2026 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to Willa McManmon, Vice President of Investor Relations, for opening remarks. Please go ahead. Willa Mcmanmon: Good afternoon. Before we begin, I would like to remind you that today's presentation may include forward-looking statements within the meaning of applicable securities laws. These statements reflect our current views and expectations regarding future events, including, but not limited to, financial performance, strategic initiatives, market conditions and regulatory developments. Forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. Actual results may differ materially from those expressed or implied in these statements due to a variety of factors, including changes in economic conditions, interest rates, competitive pressures and other risks detailed in our most recent filings and public disclosures. We undertake no obligation to update or revise any forward-looking statements to reflect new information or future events, except as required by law. In addition, today's discussion may include certain non-GAAP financial measures, reconciliations to the most directly comparable GAAP measures can be found in our earnings materials, which are available on our Investor Relations website. With that, I will now turn the call over to Paul Bay, our CEO. Paul Bay: Thank you, Willa, and everyone who joined today's call. We delivered another strong first quarter in which we grew net revenue nearly 14% on top of a strong prior year comparable and delivered non-GAAP earnings per share of $0.75. Gross profit rose by nearly 12% from last year, and operating leverage remained strong, resulting in over 20% growth in non-GAAP net income. All of these results were at or above the high end of our guidance. Advanced Solutions and Cloud led to growth, driven in part by large GPU and AI infrastructure deals we captured in North America and Asia Pacific in the back half of the quarter. We also had another quarter of strong growth in networking and servers. Cloud again grew double digits with particular strength in Infrastructure as a Service and client and endpoint solutions also grew with continued strong sales of PCs. Regionally, Asia Pacific grew at double digits and was our second largest region by net revenue. As I mentioned in prior quarters, India continues to make progress and performed to plan in the first quarter, including healthy top line and margin growth, while Latin America continued to deliver outside margins, both powered by our Xvantage platform. North America's double-digit growth was driven by Cloud and Advanced solutions, which included a large GPU and AI infrastructure sales. The growth across all 4 of our regions underscores our unique global reach where we out the ability to serve more than 90% of the world's population, underpinned by a unified platform strategy at global scale. I am encouraged by our performance this quarter and the momentum we see ahead. Our investment in our Xvantage digital B2B platform has increasingly become a competitive moat. We made this investment ahead of the curve because we anticipated the shift now taking place across the market, where B2B customers increasingly expect the same speed, simplicity and personalization they experience in B2C environment. We began the Xvantage journey by bringing together talent from some of the world's largest leading platform companies and combining that expertise with our deep industry knowledge. We then built a real-time data mesh and deployed more than 400 AI and machine learning models designed across the end-to-end customer journey. We have progressed from building the foundation to automating workflows and reducing friction to now scaling intelligence through capabilities like Intelligent Digital Assistant or IDA to improve conversion, optimize pricing and enable more proactive selling. Over time, we see further opportunity for AI to enhance margin quality, life cycle monetization and operating leverage. Xvantage is not a tool or a marketplace. It is the operating system for B2B. It's a global real-time intelligence layer, powering end-to-end B2B execution as we transform from a traditional IT distributor into a platform company. Xvantage's differentiation begins with this architecture and the proprietary technology underneath it. We are pleased that 4 of our 35-plus patent-pending applications have been granted, recognizing and protecting the innovation already delivering value across our platform today. Our IP strategy is centered on solving the fragmented sales and fulfillment processes that define B2B commerce. Let me recap what these granted patents encompass. First, our vendor-agnostic framework uses our AI-driven architecture to integrate with vendors at scale, regardless of the format or underlying systems. This helps solve one of the most persistent challenges in B2B commerce by enabling real-time integration around inventory, pricing and product data across a highly fragmented ecosystem. Second, our dynamic SKU generation capability simplifies historically complex solution configuration, pricing and transaction workflows. What once took days or weeks can now be completed in minutes or even seconds, improving the speed, accuracy, scalability and customer responsiveness. Third, we were granted a patent for our configured and quote-to-order. Configure to order expands funnel creation through automation of complex configurable solutions that were once manual, generating high quote volume, allowing us to touchlessly convert orders through our automated quote-to-order capabilities. This powerful integration of AI throughout the sales life cycle is helping drive materially stronger quote-to-conversion performance. Last, our e-mail to order patent uses generative AI to convert unstructured customer e-mails and attachments into structured transactions. In the first quarter alone, it processed approximately 230,000 e-mails into orders, up 78% year-over-year, enabling more than $1 billion in sales with significantly lower manual touch. We are now leveraging this patent IP to enable other functionality for automating end-to-end workflow, like e-mail to quote, further improving speed, responsiveness and overall customer experience. Taken together, the technology behind these patents is helping improve customer experience while lowering processing costs and increasing operating leverage across the channel. These innovations extend beyond individual capabilities and reflect how we are digitizing the whole transaction life cycle, from automating vendor catalog injection, configuration and pricing to quoting and order execution through a unified AI-driven platform. With the rapid evolution of the AI market, we believe these investments position us well to navigate change and respond more quickly to capitalize on market dynamics. We are increasingly applying intelligence across core business processes as our AI models continue to learn, improve and scale. As an example, IDA and other AI capabilities delivered more than 153,000 proactive engagements in the quarter, helping customers convert more than $800 million in AI-led net sales during the quarter. Importantly, quote-to-conversion performance continues to accelerate with IDA-driven opportunities, converting at nearly 4x our standard baseline. Xvantage is driving stronger engagement, improving the customer and associate experience and supporting better financial outcomes. And we are already seeing that translate into measurable results. We continue to see strong adoption of our self-service capabilities with more than 2 million self-service orders in the quarter, contributing to over 20% growth in average revenue per customer versus the prior year. We are also realizing meaningful productivity gains with both revenue and margin for go-to-market resource increasing as automation enables associates to redirect time for higher-value activities. We believe this is a strong indicator that the digital adoption, automation and AI-enabled selling are driving greater efficiency and increasing operating leverage across the platform. Geographically, we continue to see proof points across markets. These examples reinforce that Xvantage is not limited to 1 region. It is a global operating model. We have moved from proving the model to scaling the model with further future expansion opportunities. In the first quarter, India and Latin America provided clear evidence that we are moving from adoption to performance. Through Xvantage-enabled capabilities, LATAM delivered the highest gross margin across our regions, up 69 basis points year-over-year. By shifting high-velocity SMB demand to self-service and automated quoting and embedding intelligence, our business in the region is scaling efficiently with improved outcomes. In India, Xvantage is providing more pipeline, increased proactive customer engagement, stronger revenue generation, higher quote-to-order conversion and more predictable performance, utilizing the platform. In India, IDA revenue grew more than 200% quarter-over-quarter. We are innovating across the company in other ways as we invest in our partners and build advanced AI competencies. On the vendor side, I am proud to say that we just achieved a specialization for AI apps with Microsoft. Using Azure AI services, we built AI-powered capabilities that help partners close customer yield through increased automation, including streamlining the statement of work generation and accelerating sales productivity. The specialization recognizes our professional services expertise and designing and developing AI solutions using Microsoft AI app and data platforms, which we can leverage on behalf of our partners to deliver more AI projects at scale. One of our key partners, Hans Mize, President of Data41, said about the designation and I quote, "Ingram Micro feels like an extension of our AI practice. Their specialized and validated expertise helps us guide our customers through the full journey from initial assessment to working proof of value and production deployment." This specialization speaks strongly to how we are extending our advanced services capabilities, including our ability to leverage AI with our partners to deliver technology outcomes to the millions of end businesses they serve each and every day. With this quarter's results and the continued momentum I just spoke about, as I look at the remainder of the year, I am confident that Ingram Micro will continue executing both our short- and long-term strategy by further differentiating as a platform company, regardless of the uncertainties. Our customers are at the center of everything we do, and we are grateful for them. And as always, I'm impressed by the talent and drive of our team who continue to deliver. With Xvantage enabling faster innovation, our path to securing our technology edge and AI delivering measurable outcomes, we are moving from proving the platform model to scaling it. It's an exciting time for technology and Ingram Micro's role in the ecosystem continues to expand as we embrace the opportunities ahead in this unprecedented era. And with that, I'll turn the call over to Mike. Mike? Michael Zilis: Thank you, Paul, and good afternoon, everyone. I want to start by reiterating how pleased we are with our first quarter results, which met or beat the top end of each of our guidance ranges. The strong performance was widespread geographically with each of our core regions seeing double-digit year-over-year top line growth in U.S. dollars, but also with solid global growth in our 3 primary lines of business. Looking at the quarter in more detail. Net sales of $13.96 billion were up 13.7% year-over-year in U.S. dollars and up 10% on an FX-neutral basis. We saw strong double-digit growth in both Cloud and Advanced Solutions. Cloud grew 25% year-over-year on an FX-neutral basis and that growth was actually 34% adjusting for the CloudBlue divestiture that closed in Q3 of last year. Advanced Solutions grew 14% year-over-year on an FX-neutral basis, driven by strength in server and networking. This also included continued large-scale enterprise deals in GPU and AI infrastructure product sets, some of which came in late in the quarter. As we discussed in past quarters, these deals come at a low margin, but are low cost to serve. We don't typically stock for these deals, which provides for a strong return on working capital. Turning to Client and Endpoint Solutions or CES. We saw nearly 8% growth on an FX-neutral basis, with strong demand for notebooks and desktops as the refresh cycle continues and AI PC penetration grows. As a note, this 8% growth is on top of what has been solid double-digit growth for CES in Q1 and all other quarters last year. Geographically, we had FX-neutral growth across all 4 of our regions led by just over 12% growth in both APAC and North America. North America net sales came in at $5.0 billion and APAC was our second largest region with net sales of $4.1 billion for the quarter. Both North America and APAC sales were driven by strength in Cloud, and both regions also benefited from large enterprise GPU and AI infrastructure projects I just mentioned. EMEA net sales of $3.9 billion were up 3.8% on an FX-neutral basis with growth across both Client and Endpoint Solutions and Advanced Solutions. But EMEA generated its strongest growth in cloud-based solutions. And this was achieved while navigating around the challenges of the Middle Eastern conflict that started in the final month of the quarter. Finally, net sales in Latin America were up 10.1% on an FX-neutral basis, driven by growth in Client and Endpoint Solutions, notably notebooks and desktops as well as strength in Advanced Solutions and cloud-based solutions. Before I get into more details on our results, I'd like to touch on memory supply constraints and their impact, which is a key ongoing factor in the IT industry. We are seeing increases in average selling prices or ASPs on certain products ranging from single-digit percentage points, well into double-digit percentage points. Also, while it is understandably more difficult for us to quantify with precision, we see some instances of pull forward of demand to get ahead of pricing. But there are other factors to consider as well. First, supply constraints are creating more extended lead times and backlog in said products. While more limited in frequency, we saw a few instances where projects are being indefinitely deferred simply because the product is not available. Second, in some limited cases for end users that have greater price sensitivity, decisions are being made to alter project scope or delay spending. Combined, we estimate the net positive impact of all of these factors on our year-over-year net sales comparison for Q1 to be approximately 2% to 3%. Back to my earlier point regarding pull forward of demand. We have ongoing discussions with many of our vendors affected by supply constraints about potentially using our balance sheet for opportunistic inventory buy-in deals. While we have done some such deals, and we'll continue to evaluate such opportunities going forward, the impact of volumes in our first quarter results have not been material. Now getting into some further specifics on our first quarter results. Gross profit came in at $926 million, up 12% year-over-year, and gross margin came at 6.63% of net sales, down 12 basis points year-over-year. The mix shift towards lower-margin GPU and AI infrastructure projects drove an impact on margins of roughly 35 basis points compared to only about 5 basis points in the first quarter of 2025. Thus, excluding these deals, our Q1 2026 gross margins would have been roughly 7%. This margin performance was a function of growth in our higher-margin Cloud and Advanced Solutions offerings, which surpassed the growth of Client and Endpoint Solutions in this comparison. Q1 operating expenses were $703 million or 5.04% of net sales compared to 5.11% in the same period last year. Looking more specifically at our ongoing selling, general and administrative or SG&A expenses. Our leverage improved year-over-year by 12 basis points. This year-over-year improvement in SG&A leverage was driven by operating efficiencies from cost reductions over the past year, the continued impact of Xvantage in driving leverage and productivity gains, as well as mix factors associated with lower cost to serve categories. And while we continue to invest in Xvantage and in the business, particularly in areas like Cloud and Advanced Solutions, we expect our continued optimization efforts will allow us to keep our SG&A expenses less than 5% of net sales for fiscal 2026. Adjusted income from operations was $262 million, up 14% year-over-year, driven by our strong top line performance and continued operating leverage discipline. Adjusted income from operations margin was 1.88% compared to 1.87% in the first quarter of 2025 as the lower gross margin from mix of sales was offset by the OpEx leverage improvements I just discussed. Non-GAAP net income in the quarter was $175.5 million compared to $144.2 million in Q1 of 2025, an increase of 22%, reflective of not only the strong growth I just noted in adjusted income from operations, but also reflective of reduced interest expense from our paydown of debt and more favorable foreign exchange impacts. First quarter non-GAAP diluted EPS came in at the high end of our guidance range at $0.75, an increase of 23% from our prior year quarter. Moving on to our balance sheet. We ended the first quarter with net working capital of $4.4 billion compared to $4.3 billion to close the same period last year. This increase of only a bit over 2% is far less than the 13.7% increase in net sales year-over-year as our Q1 net working capital days came in at 23 compared to 29 days in the same period in 2025. This improvement in cash cycle reflects disciplined management of our terms with and payments to vendors, our efforts to optimize inventory levels and leveraging the capabilities of the Xvantage platform, which together more than offset a slight increase in collection days. As we mentioned in our earnings call in early March, we finished year-end 2025 with an extraordinarily low level of net working capital and therefore, expected a higher-than-normal seasonal outflow of cash in Q1 of this year. So adjusted free cash flow was an outflow of $962 million, which reflects the factors I just noted, including the natural investment in working capital to fund double-digit net sales growth. While we don't formally guide on free cash flow, we expect free cash flow trends over the next 1 to 2 quarters to be more in line with seasonal norms. I'm also very pleased to note that in early March, we successfully completed a secondary offering of our stock, which further moved the ownership stake of our majority owner into public flow and included us repurchasing $75 million of stock directly from our majority owner. And today, we announced we are further expanding the repurchase program for future use. We also returned $19 million to stockholders through dividends paid during the quarter and today announced an increase in the next quarterly dividend of 2.4% sequentially and 10.5% over the prior year. We ended the quarter with $916 million in cash and cash equivalents and debt of $3.3 billion, bringing our net debt to adjusted EBITDA ratio to 1.7x to close the quarter, which has improved notably from 2.0x in the first quarter of last year and reflective of our continued reduction of debt, including the $200 million of term loan we repaid during Q1. Going forward, we will continue to balance our overall capital allocation to ensure we are making necessary investments in the business and providing return to our stockholders. And to the extent we see opportunities to also continue improving our debt leverage, we will evaluate accordingly. Now shifting to our guidance for Q2 2026. We are guiding net sales of $13.6 billion to $14.0 billion, which represents year-over-year growth of 8% at the midpoint and is notable given the strong Q2 we had last year, in which we saw more than 10% year-over-year growth. From a category perspective, we expect Cloud to continue to lead the way with healthy double-digit year-over-year growth with particular strength in Infrastructure as a Service offerings while we expect Advanced Solutions to also grow higher single digits with ongoing strength in servers, storage and cybersecurity. While we are not necessarily projecting outsized GPU and AI infrastructure projects in our guide, we will continue to participate in these projects. Client and Endpoint Solutions is also still in growth mode with notebook desktop refresh continuing. But overall, we see year-over-year growth for CES at a more moderate lower single-digit pace. Finally, we have assumed the impact of broader memory supply constraints to have a similar impact in Q2 to what I noted earlier for Q1. We expect these growth trends to yield second quarter gross profit of $905 million to $950 million, which represents year-over-year growth in gross profit dollars of 8% to 13% and also represents gross margin growth, both sequentially and year-over-year. We expect non-GAAP diluted EPS to be in the range of $0.68 to $0.78 per diluted share. Included in this guide is a potential negative impact of $0.01 to $0.03 per diluted share on our overall results from the volatile situation in the Middle East, where we have a relatively small but nicely profitable business. Even with this impact incorporated, our guidance calls for growth in non-GAAP diluted EPS between 11% to 28%, reflecting solid profit leverage and a continuing growth environment. Our EPS guidance assumes 232.7 million weighted average shares outstanding and a non-GAAP tax rate of 27% for the quarter. In closing, I'm very pleased with our execution in Q1, and we expect to continue our trend of strong year-over-year net sales growth in Q2. While memory shortages, rising ASPs, the supply-demand dynamics and the geopolitical environment are all fluid, we have a track record of navigating through uncertainty. Our broad geographic reach and breadth and scale of offerings, combined with our long-term partner relationships uniquely position us to perform during such times. We've proven this in the past, and we are even better positioned today with real-time insights and capabilities provided by our Xvantage platform. With that, operator, we can now open up the call to take questions. Operator: [Operator Instructions] Our first question is from Katherine Murphy with Goldman Sachs. Katherine Murphy: You highlighted some headwinds related to projects either being deferred or some more price-sensitive customers altering the scope as it relates to the current cost environment. I was wondering if you could provide some more color on either the types of products or the types of projects that are being most impacted here? And then I have a quick follow-up. Michael Zilis: Yes. Katherine, this is Mike. I can start and Paul will add. I think if we're seeing this probably across a mix of products, but it tends to be more project-based, a little bit more on the Advanced Solutions area, where there's and probably a little bit more geared towards smaller customers where there is a little bit more of that price sensitivity, large enterprise continues to do generally continues to invest. So it's across a spread of different projects. And it's -- and I think as we talked about where we're seeing ranges of price increases, probably the price increases from an ASP perspective has certainly been elevated on the PC space, but we also see that happening across server and storage and some of the components that you use themselves to a lesser degree, when you get into networking and some other categories. So that also gives you a little bit of a flavor where there would be more of that sensitivity. Paul Bay: Yes. Katherine, this is Paul. I'd say we've seen it in pockets. There was one instance in a smaller country in Europe where they needed a specific configuration around PCs and the supply is not there for that specific rollout, it will eventually come. The question is when is it going to come? We thought it was going to happen in Q1, it looks like it may be a quarter or two out. Katherine Murphy: That's very helpful. And knowing that you only guide 1 quarter out, is there anything you can share based on these customer conversations given the demand backdrop about what the back half of the year may look like from a overall enterprise IT demand environment? Paul Bay: Yes. So this is Paul. So again, as you know, we only guide 1 quarter at a time. We're optimistic where we sit today and based off of our guidance that we've given for Q2 to reiterate we -- our expectations are our Client and Endpoint Solutions business will grow at market, Advanced Solutions and Cloud above market and we saw that in Q1. We built that into our guide in Q2. Some of the potential, I would say, tailwinds or opportunities with the AI use cases, and I called out one of those in my prepared remarks, is driving growth and some of the benefits we're getting. If you look at from a customer perspective, we did see some pull forward as Mike had mentioned. It's more about enterprise and mid-market companies. SMB is still responding to the more near term. But what I would say is we haven't seen a significant amount of pull forwards at SMB specifically too, and we're still seeing resiliency in the business as we sit here today. So the back half of the year, we did see, again, continued growth and refresh around PCs and AI PCs. So we feel pretty good about where we are and hope that, that continues to the back half of the year. Operator: Our next question is from Maggie Nolan with William Blair. Matt Dezort: This is Matt on for Maggie at William Blair. I guess given the current environment, I'm wondering if you can provide some more color on what you're seeing change in terms of lead times and order dynamics that you alluded to with clients. And how they're evolving budgets, if at all, are shifting midyear, given the rise in memory prices and inflation? Michael Zilis: I could start on that. I think it's -- this is Mike. So I think the -- I think we sort of answered that a little bit in the last question. I think there's -- if you have a budget going into the year, there's going to be a certain amount of spend. And so as prices go up, we're seeing some reallocation where perhaps it's just a shift in scope to something a little bit less balance shift into maybe a lesser product category and so forth. So that's sort of a demand dynamic. But some of that is also dependent on just how long it takes to get there. Certainly, the situation in the Middle East is exacerbating this with shipping delays, anywhere impacted by that part of the world and branching out. And then on top of that, the allocation of product sets by the OEMs into the higher potential products that are serving the AI demand and some of the things that are driving the constraints in the first place. But -- so it is definitely very dynamic, depending on the category of product, the category of customer, and that gives you maybe a little bit more flavor of what we're seeing. Matt Dezort: Got it. And as a follow-up, in terms of Xvantage, congrats on all the progress there. I know you've alluded to the 3 phases, the OpEx, demand gen, and then we're starting to get into a profitable organic growth. But can you update us on progress in Phase 3 and how that's progressing so far in 2026? And what maybe -- what's the true margin delta for a deal that is sourced and completed in Xvantage versus one of your traditional deals? Paul Bay: Yes. Thanks, Matt, for the question. This is Paul. So as we called out, we continue to talk about you're right, 3 phases and really now it's about applying the intelligence across the business, and I called out a couple of points where we saw significant growth where we're using our intelligence. And have been training our 400-plus models for over a year now. So they're getting better, and they're improving every single day, they continue to learn. And so we point back to IDA, our intelligent digital assistant and the active engagements we had, that was up 50% year-over-year, and what we did, and we talked about it in the prior quarter earnings call. What we're doing is we're fine-tuning those opportunities to be more driven around margin. So when you look at some of the growth we see coming out of cloud and we had a very good cloud quarter. If you look at what we're doing around Advanced Solutions, a lot of that is being fed through the IDA, getting into that third phase of what we're able to offer. And one of the questions we get is how much revenue is going through IDA and I talked about it in our prior quarter, which is mid-single digits for those that are on Xvantage of the countries, the 21 countries that are on Xvantage are going through IDA. We have a lot of headroom to be able to roll out more IDA and our expectations and our commitment, and we're well on our way, is to have that be double digits by the end of the year of the revenue for those Xvantage countries being able to deliver through IDA. So we feel very comfortable where we're at today and the investments that we made and the proof points that we're seeing coming out of the quarter and as we sit here in the current quarter. Operator: Our next question is Erik Woodring with Morgan Stanley. Maya Neuman: This is Maya on for Erik today. I have 2 questions. Maybe just to start, given the degree of pricing increases we're seeing in the market today, is there any risk to your kind of historical cost-plus pricing model? And could we see any like-for-like margin compression just given the degree of inflation throughout the overall device ecosystem, especially on the compute side. And I have a follow-up. Michael Zilis: Yes. I mean just -- this is Mike. I think just as a general dynamic price increases, just like what we've talked about in the past with tariffs and other factors, that's a pass-through for us. So -- but if I get your question, and I think there is certainly a rapid elasticity of demand that exists. But from our perspective, as we continue to distribute the products and the services that we do, we're going to be pricing accordingly off of the prices in the market. So it's really more a question of where does the demand reside, but we're not necessarily going to be conceding margin to try and capture sales. It's about an ROWC equation for us and driving the right returns and profit metrics whenever we do any sale, honestly. Paul Bay: Maya, this is Paul. So let me just add a little color to that. I mean, we've been through these cycles before. We've been through shortages. We've been through macroeconomic headwinds. Based on our -- a couple of thoughts here. Based on our broad vendor and product portfolio, we're able to offer alternatives. So we're helping mitigate price increases that may be constrained. We're working with our vendors to provide bundling solutions, and we're doing that from an automated way, being able to look at. I understand if you have multiple products, maybe you have a PC, if you're buying a microphone, a camera, a display, a headset along with that PC, vendors are willing to provide maybe a better margin profile to bundle together. So we're putting some programs around that also. And with the Xvantage intelligence, as I talk about the model, we can better recommend the substitute configuration, bundled product solutions, alternative vendor suppliers. And then the last thing, I think, which is important also is that we are starting to see some movement to from on-prem solutions to actually cloud. And we're starting to see that, and we expect that to happen going into Q2 too. And so what I'd say is our goal is to help customers solve the business needs regardless of the product availability, and that's what's great about Ingram Micro and our business model. It's global, it's resilient and we can participate in whichever direction the market goes. We're trying to provide tools and resources and alternatives based off of our business, so our solution providers, customers can go out and deliver the expectations and outcomes to their end businesses they serve every day. Maya Neuman: Great. And that partially answers my second question, just on kind of given the persistence of pricing inflation and the strength in Agentic AI. How do you think about that shift from on-prem to the cloud in terms of, like, a long-term risk to Ingram's kind of business model? Paul Bay: I actually think it's a benefit to Ingram's business model. If you look at the investments we've made, actually, our Xvantage platform is built off of the $600-plus million that we built. We are investing ahead of the curve in the early days of the cloud a dozen years ago. And so we really built a platform where you can buy hardware, software and cloud and services all in 1 transaction. So as we see that and you notice by our performance, as Mike called out, minus the CloudBlue divestiture, we're up 34%, and we're guiding towards very strong cloud business in Q2 also. So that solution, which may originally get scoped on-prem, now they're getting predictability, they're getting space, they're able to move that. And I'd also say that our deployments still make up 6 different products and services. So it's not just about 1 solution that you're delivering. It's about bundling and bringing that whole solution together for that business outcome. I actually think it's an opportunity because it's an area that we continue to invest in and we have very strong partnerships with each of the hyperscalers where we can provide that service, whichever direction our customers, and ultimately, those end businesses want to go. Operator: Our next question is from David Paige with RBC Capital. David Paige Papadogonas: I wanted to double-click on the 2Q net sales guide. Maybe if you could just parse out what you're expecting by region. So it looks like there's been momentum sequentially across every region. So I just wanted to think -- how should we think about growth within regions. Michael Zilis: Yes, David, this is Mike. So I think yes, we're pretty happy with the fact that on a U.S. dollar basis, all 4 of our regions grew double digits in Q1. So we said you're right, we did see it fairly widespread. As we look to Q2, I think we would see a little bit of the same sort of trends. I think we're seeing strength just really continue in Asia Pacific for quite some time now and that's coupled with our India business really returning to stability and growth in a more normal way, which is good to see now for a couple of quarters running. So impact probably does stand the chance to lead the way. And we still see a little bit more to the extent we do have any of the GPU or AI infrastructure deals. Those are still tending to be either in the North America or APAC region. So if we do see something more than our guide there, that might create some outsized growth in those markets. And then the only other thing I would say, and we called this out at the tail end of my guidance remarks, our EPS assumption is assuming potentially a little bit of negative impact in the Middle East part of the world. And therefore, that does create a little bit of overhang just more generally on the EMEA region, but we still see growth there as well. David Paige Papadogonas: That's very helpful. And then just 1 other thing. I think you've mentioned for CES low single-digit growth for 2Q. I was wondering if you could parse out network, notebooks and mobile or smartphone. Michael Zilis: Yes. So networks and networking, for instance, would be an Advanced Solutions. So within CES, that low single-digit growth to 2 -- we don't break out the subcomponents, but the 2 biggest sub-pieces of it, just more qualitatively, are PC and desktops and then mobility devices. So we're still seeing runway as Paul said and answered to an earlier question, and it was baked a little bit into our prepared remarks as well on the PC refresh. And AI PCs are growing, but there's still roughly 1/4 of our overall PC base. So we're still seeing growth there in some runway. We see probably a little bit harder compare, which we alluded to even in our guide on the mobility side because we saw quite a bit of mobility sales in the first half actually of last year, but certainly in Q2 of last year. So that compare comes a little bit harder. That would center a little bit more in the Asia Pac region to be clear last year. But that would probably read a little bit of that headwind that normalizes to that lower single-digit kind of growth rate. David Paige Papadogonas: Congrats on the great results. Michael Zilis: Thank you. Operator: Our next question comes from Adam Tindle with Raymond James. Adam Tindle: I wanted to double-click in the Americas region. You've mentioned the AI infrastructure projects that are driving growth. This is obviously a business that has gotten a lot of attention from your primary competitor and investors are particularly interested in this. Maybe a good forum to take a step back and talk about your capabilities around AI infrastructure, Remind us of this business to the extent that you could provide any size on it would be helpful. And any aspiration over time to be more ODM-like, Hyve-like business, or does it make more sense to kind of stay in the supply chain lane? Paul Bay: Yes, I'll start off. Thanks, Adam. This is Paul. So to start off your last point of your question to be ODM-like that is not in our plans today. What we're doing is looking at our partners and where the technology opportunities are. So a lot of it, if you look out from an AI infrastructure standpoint, and GPU chips. So it's GPUs, it's AI infrastructure product which touch server, networking, storage product sets. And many of these large ones are going for proof of concept and/or our specific build for very, very large enterprises. So we're able to help facilitate that. I think over time, I hope that this builds into -- we're just talking about categories and product sets because everything is going to be AI-enabled, but we know it's important on this journey to show how we're participating. So -- and again, to Mike's kind of point that he said before, which is this is a very low cost to serve business and a very good ROWC business for us. And so we're fulfilling a lot of that product today. With that said, we really have a focus around how do we help our general 165,000 solution providers, partners on a global basis. And that's through our Enable AI program. So I talked about it. We have 3 growth tracks around that. How do we prepare and give awareness? How we provide execution and training? That third one is driving outcomes, which I talked about in my prepared remarks this quarter and then also in the prior quarter where we're doing that. And we're encouraged by what we're seeing in terms of how many partners are actually moving through those phases, which means that people are getting more to the deployment side of it. So working on those outcomes, and it's significantly year-over-year, but more importantly, quarter-over-quarter. So that's where we think we can play a key role in. Again, this is about the total solution, the 6 different products or services and what we're doing and our goal is to continue to provide a B2B or B2C experience in a very fragmented B2B business for our intelligent digital experience platform and Xvantage that we continue to focus on and how we extend that out. Michael Zilis: And the only thing I would add is you asked about kind of size and just like we say with other subcomponents, we don't really break it out, but I just give a little bit of color here, I guess, maybe to help. So the bulk of the GPU and AI infrastructure projects or product sales, I should say, fall in Advanced Solutions. There is a bit that straddles into our Client and Endpoint in the form of components, but the bigger share is in Advanced Solutions. And as you can probably tell just from the margin impact we called out, it's been a pretty decent growth factor year-over-year growing faster than the herd average of Advanced Solutions as an example. But it's more about -- we want to continue to be driving that transparency more about where the margin is and where that's driving because it does have more of an impact there, honestly. And most importantly, drive on the fact that, as Paul just reiterated, this is nicely profitable business, even though it's dilutive from a gross margin perspective just because of that low cost to serve and also the really low working capital investment associated with it. Adam Tindle: Got it. Okay. I mean that's probably a good bridge into my follow-up question. Just on overall business and operational trends really. If you were to give me a quarter where Ingram Micro was growing top line 14%, I would say EBIT would grow faster than that. You typically get leverage in these models, but yet on the EBIT line, we're kind of growing in line with revenue. And if I look at it on a sequential basis, revenue is down mid-single digits, EBIT down 25% or so. And I hear Paul, a lot of positives around automation, Xvantage and stuff, and I would think that we would be getting better contribution margin especially given the strong growth. What are maybe the offsets or what am I missing? And how do we kind of get back to a point where we're generating more operating leverage in the model? Michael Zilis: Yes. I think just talking a little bit more about the numbers. I mean I think the mechanics of what you're getting at. EBIT is really a function of where does the margin rate get offset by the operating efficiency. So the operating efficiencies are coming through, as we talked about in my prepared remarks, and I'll just focus on the SG&A number. So you take out a little bit of restructuring as an example, that we call out separately on our -- on the face of our income statement, but we're seeing a double-digit basis point leverage there. So we're offsetting the overall margin factor. And then on top of that, if you -- if it were not for the GPU and AI infrastructure projects, we actually have a year-over-year uptick of nearly 20 basis points in our gross margin as well. So it's really more of that factor and where is that leverage coming through on that growth. Now what you can see is, and you can see this in our guide and even just -- even as you look at our reported results, while it's not EBITDA, when you take into account some of the efficiencies of debt paydowns and other factors, we're seeing healthy growth, more than 1.5 times the rate of growth, in fact, in net income and earnings per share on a non-GAAP basis as a ratio to what our revenue growth is. And our guide is assuming even more of that as we look to Q2 and we continue to see not only a little bit more of the mix factors improving with the outsized growth of Cloud, higher growth in Advanced Solutions and Client and Endpoint, but also the leverage still continuing from an OpEx perspective. Adam Tindle: Okay. And just 1 last quick clarification, Mike. You talked about seasonal on free cash flow, and I'm just trying to put a finer point on that. We understand the dynamics in Q1 starting in about $1 billion hole. Do you think you get to kind of parity or positive free cash flow for the year? Is that what seasonal means? I'm not sure I wanted to understand the parameters on what you were alluding to for free cash flow for the year. Michael Zilis: Yes. We definitely see a little bit more just general seasonality of the cash flow than we historically did over the last 2 to 3 years. I think generally speaking, we're seeing outflows in the early quarters, especially Q1. We always have a little bit of an outflow in Q3 associated with some of the inventory buying for the higher sales level in Q4. And then we're seeing the larger inflow coming at the end of the year as you saw last year. I think last year was exceptional as far as where the balance sheet landed to close the year. So I wouldn't necessarily bank on that. But as I look at the rest of the year, and I would look at those last couple of years just directionally where you see perhaps a more modest outflow, but certainly modest in nature over the next couple of quarters is what we expect. And I would just reiterate what we said coming into this quarter and coming out of the end of last year, while we do expect coming out of last year, having the balance sheet as low as it was and that cash flow that came in Q4 that was an exceptional cash flow for the year, but we do still expect that the ratio of free cash flow to adjusted EBITDA for the 2 years combined will still be north of 30%. So you can kind of bank on that as well as far as what we expect the year goes on here. Operator: Our next question is from Ruplu Bhattacharya with Bank of America. Ruplu Bhattacharya: Mike, Paul, as you look into the rest of fiscal '26, can you talk about the relative growth of Advanced Solutions versus endpoints, specifically in the endpoint solutions, what PC unit growth are you factoring in for the year? And as you look at demand from SMB versus larger enterprises, is it trending as you had expected? Or is there anything weaker or stronger than you had expected? And same question on the Advanced Solutions side, how are you seeing demand for server, storage, networking trending? And I have a follow-up. Paul Bay: So I'll start. I mean, we saw good growth in all those categories you just mentioned in the quarter. And as we guide, we're looking for strength in all those categories too. I'm actually pleased with the continued momentum in the refresh from a PC standpoint. It was in, call it, the mid- to high teens for the quarter. So when we say double-digit growth, it was good, and we think we're going to continue to see that. Again, that's coming off of very significant growth last year. Our desktop notebook was high double digits. So we continue to grow there. And we are seeing continued networking, server, I'd say also cybersecurity, is we're seeing strength in that also. So we see that, and that's what we built in from a Q2 guide. Again, we're not really looking at from a back half of the year and I go back to some of the ways we're helping mitigate and trying to keep the demand aspect of how we can help fulfill and then some of the opportunities of looking at different solutions, looking at different bundles, how we can focus on if it's an impact moving from an on-prem to a cloud solution. Mike, I don't know if you have any other comment? Michael Zilis: Yes, Ruplu, I would just reiterate what I said earlier on that perhaps CES piece where we're guiding to lower single digits. It's still solid growth. We don't really break into the units as you asked, but we're still seeing solid growth when you blend sort of the mix of units and ASP increases on the PC and desktop and still see some of the traction continuing to grow on the AI PCs as we've talked about. But it's really more of that smartphone compare that level that number off a little bit overall. And remember, not so unlike some other aspects of our business, smartphones are very low margin. They're low cost to serve as well and generally move pretty fast, but it is a lower-margin business that we see down overall year-over-year. Networking, server, cybersecurity on the Advanced Solutions end, all decent growth categories and then cloud, as we talked about, still seeing very healthy double-digit growth, especially around Infrastructure as a Service. Ruplu Bhattacharya: Got it. Mike, can I ask you to talk a little bit about OpEx and CapEx? You've had good success with Xvantage. I mean, how do you see spending more -- spending trending on Xvantage going forward? And how should we think about overall CapEx? And then on the OpEx side, is there -- do you have levers to drive OpEx lower? How should we think about that trending? Michael Zilis: Yes. So good question. I don't think much has changed on this front to answer that initially, and Paul can add to this. I think on the Xvantage story, what we see is probably another 4 to 5 quarters where we see a bit more of the outsized spend continuing. So get into -- once we get into the middle of next year, we see more steady state. And again, it's not too different from what we said a couple of quarters ago where we see that, that kind of a time line playing out here. And that's really more deployment now than it is design. There's always going to be design and development happening as we roll out new functionality. But as we said, we have 21 out of 57 countries deployed with the most significant functionality. So there is some tail there, which sort of segues to the second part of your question. We have deployed this in our largest countries. So a majority of our revenue is now trade through Xvantage, but there is still that tail where we can still bring some of the automation and efficiency to that. Some of those additional countries and that deployment is happening over the coming quarters. Operator: Thank you. This concludes our question-and-answer session. I would now like to turn the floor back over to Paul Bay for any closing remarks. Paul Bay: Thank you for joining us today and for your continued support. We are proud of our Q1 performance and results. We are executing across the business to deliver continued growth and innovation. Our patented Xvantage platform is a clear differentiator and our investments ahead of the curve aligned with the rapidly scaling AI market. We are positioned well to change the IT distribution market, and we are energized at what's ahead. We look forward to updating you on progress next quarter. Have a great day. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good afternoon, and thank you for joining Atlassian's earnings conference call for the third quarter of fiscal year 2026. This conference call is being recorded and will be available for replay on the Investor Relations section of the Atlassian website following this call. I will now hand the call over to Martin Lam, Atlassian's Head of Investor Relations. Martin Lam: Welcome to Atlassian's Third Quarter Fiscal Year 2026 Earnings Call. Thank you for joining us today. On the call with me today, we have Atlassian's CEO and Co-Founder, Mike Cannon-Brookes; and Chief Financial Officer, James Chuong. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our third quarter of fiscal year 2026. The shareholder letter is available on the Investor Relations section of our website where you will also find our other earnings-related materials, including the earnings press release and supplemental investor data sheet. As always, our shareholder letter contains management's insight and commentary for the quarter. So during the call today, we'll have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made. And we undertake no obligation to update or revise such statements should they change or seek to be current. Further information on these and other factors that could affect our business performance and financial results is included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors and our most recently filed annual and quarterly reports. During today's call, we will also discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter, earnings release and investor data sheet on the Investor Relations section of our website. We'd like to allow as many of you to participate in Q&A as possible. So out of respect for others on the call, we'll take one question at a time. With that, I'll turn the call over to Mike for opening remarks. Michael Cannon-Brookes: Thank you all for joining us today. As you've already read in our shareholder letter, we delivered some incredible Q3 results. Total revenue grew 32% year-over-year to $1.8 billion. Cloud revenue surpassed $1.1 billion and accelerated to 29% growth year-over-year, and RPO grew again 37% year-over-year to $4 billion. These are likely thanks to our team's excellent execution and clear momentum across our key strategic priorities: enterprise, AI and the system of work. This quarter, some of the world's largest enterprises, including Siemens Energy, Rheinmetall and Wayfair deepened and broadened their commitments to Atlassian. In AI, we continue to add millions of monthly active users to Rovo and our AI Rovo credit usage is growing more than 20% month-over-month. Customers using Rovo are also growing their ARR at roughly 2x the rate of customers who are not using Rovo, contributing to our strong cloud outperformance and expansion in the quarter. And more and more enterprises are embracing our platform-wide vision using Atlassian system of work to see the full picture of their organization. This is because the Teamwork Graph connects knowledge, work, people and code, giving our customers one of the richest enterprise context graphs in the world. Context is a clear differentiator for us. And we're saying this is our competitive momentum built. This is our largest ever quarter for competitive displacements from a major ITSM provider. We're taking it from rivals as customers move away from legacy systems and choose Atlassian for a more modern AI native and much better value service platform. As I've said before, I believe AI is one of the best things that has ever happened to Atlassian. In a world where human will run teams of agents, context is the only anchor to avoid chaos. And we believe the companies that prioritizes context will come truly AI native. With Atlassian, our customers aren't just choosing software that choosing the kind of company that they want to become. This is a time of significant change in our industry, and we're moving forward with strong conviction and discipline. We're focused on executing, delivering customer value and driving, durable profitable growth. With that, I'll pass the call to the operator for Q&A. Operator: [Operator Instructions] Your first question comes from Arjun Bhatia from William Blair. Your first question comes from Keith Weiss from Morgan Stanley. Keith Weiss: And congratulations on a really solid Q3 print. It's great to see all these investments in all innovation really starting to come to fruition within the numbers. As it is important in getting investors more confident in the stock, I think another sort of important part of it, and I think Mike, you do a good job of this, is helping people better understand how the existing software that Atlassian brings to the equation plus AI brings a better result. And then there's one line in the shareholder letter that I thought was really interesting. When you're talking about the Teamwork Graph and how it makes the AI investments not just smarter, I mean, we've been talking a lot about context and how it makes the AI better, but you're also talking about cheaper and more valuable. So one, I was hoping you could dig into that and how the Teamwork Graph and the broader system lowers the cost of these AI investments, particularly as we're hearing more and more pushback on these credit costs were really starting to rise and the token costs starting to get really big? And then maybe a follow-up for James. Again, in the shareholder letter, you mentioned data center outperformance driven by some pull forward of some of the -- some deals from future quarters. Any kind of view you can give us into what that means for FY '27 and what we should be expecting from data center in the year ahead? Michael Cannon-Brookes: Keith, sure. Thanks for the question. Not what I expect from the start, but a great question, very, very savvy as I would expect from you. Look, the Teamwork Graph and the Atlassian platform is certainly delivering amazing results to customers. You can see that, that customers using Rovo are growing their ARR at twice the rate of non-Rovo customers. Their credit usage continues to grow strongly, with strong results of over 20% month-on-month. And they're upgrading the Teamwork Collection to get more of those credits included in the base offering, but also using many more agents, right?. And that agent usage is, I think, what you're referring to, whether that agent usage are Rovo agents or whether they're other platforms' agents that are accessing Atlassian's context with Teamwork Graph, that usage is increasing markedly. And that's the compounding effect of intelligence for customers as models continue to get better. But to really accelerate a business, the intelligence compounding is only one aspect. What you also need is the context. That is your knowledge, your work and projects and goals, understanding of your people, so your org chart, their skills and everything else, as well as knowledge of the code. We have a lot of huge announcements coming up next week at Team '26 around this area, but what you're seeing in the Teamwork Graph is the world's best context graph across all aspects of the business. So whether that's a service team, a marketing team, a technology team or a business team, bringing that context to bear in all of those AI surfaces is what's the most important. Now when we say it makes better, faster and cheaper. Why is that? Well, we have a lot of statistics and proof points that not only do you get higher quality AI answers because of our search, the Teamwork Graph, everything put together in the knowledge that we have about your business, but you also get cheaper answers. Those are cheaper answers because you use far less tokens to get to an answer in the same amount of time and fundamentally using less tokens and reduces your cost of AI or allows you to do far more AI investment, whichever way you look at it. So customers are seeing that. You're seeing that in the usage and then showing up in and financial results. James, do you want to follow on with the second half? James Chuong: Yes, Keith, thanks for the question. So on the data center side, the Q3 revenue beat, as we mentioned, was primarily driven by recognizing greater-than-expected upfront term license revenue within that quarter. Since our announcement of the data center end of life back in September, we've had a couple of quarters now to really better understand some of the signals that we're seeing from our customers in terms of their buying behaviors, especially Q3 being the largest expiry base for us. So let me unpack that a little bit more for us here. So first, I would say that the migration to the cloud is on track and continues as expected. We're pleased with what we're seeing there. We still expect that to contribute mid- to high single digits on cloud growth. And second is that the retention rates on our data center business remain incredibly robust, in fact, actually outperformed expectations in the quarter. And third, for some of our largest customers with more complex migration, they remain committed to transitioning to the cloud. But it's going to be a multiyear journey for them, right? They've got a lot of deep customizations, change management. It's going to take these customers time, right? Often many of these have tens of thousands of users, some with over 100,000 users. So this category of customers, we saw a pull forward of purchasing and expansion activity into Q3 from future periods. And we also had a pricing change in March. That further catalyzed this dynamic. So as a result, that drove greater-than-expected upfront term license revenue recognized in the quarter. In fact, relative to our expectations for Q3, we recognized approximately $50 million more in upfront term license revenue. And that's some of the trends that we've been seeing since our announcement of end of life back in September, but more pronounced in Q3 given the size of the expiry base and the pricing catalysts that I mentioned. And maybe lastly, the cohort of DC customers that are actively planning and transitioning to the cloud, we're seeing these customers moderate their seat expansion. versus historical trends we've seen. Again, I'll mention that retention rate remains incredibly high, but now expecting a more muted level of data center expansion from these customers going forward as they try to move to the cloud. We're still seeing really nice uplift when customers move from DC to cloud. So net-net, what we're seeing is that our largest strategic customers continue to deepen their commitment at lasting, whether that's on DC or cloud, and we're working hard to meet them where they are and help them accelerate that transition so they can unlock all the AI and agent capabilities in the cloud. So hopefully that gives you a little bit of color there, Keith. And maybe I'll just share that with these dynamics sort of playing out across the year on data center, with Q4 yet to play out where revenue rec is being pulled into FY '26 from FY '27, we recognize that there's lumpiness in that pull-forward effect in data center and having the timing of -- and that does impact the timing of reported revenue RPO and CRPO. So internally, of course, we look at a variety of metrics to performance manage our business, including a really healthy ARR. So next week, we're going to be holding that investor forum at our Team '26 Conference and to help guide investors through the revenue recognition timing dynamics on the data center side. We'll look to enhance our disclosures and share historical subscription ARR, which will help normalize some of those timing effects and help everyone better understand the underlying strength of the overall business. So all up, we feel really good about our execution, the runway that we still have ahead of us. So more to share next week at the TEAM event and the investor forum. Operator: Your next question comes from Arjun Bhatia from William Blair. Arjun Bhatia: Sorry about that. But congrats on the strong quarter here. I was curious on just Rovo, how you're thinking about positioning that against some of the third-party agents. It seems like you're having a lot of success in your existing customer base I'm curious, are customers evaluating other agents against Rovo? Or is this sort of an easy add-on given how integrated it is into the rest of the platform with Jira and Confluence and JSM and the rest of the suite? Michael Cannon-Brookes: Thanks, Arjun. I can take that one. Look, there are a lot of places that customers can access Rovo is maybe the simplest way to phrase it. Think of Rovo as the AI part of the Atlassian platform that shows up in all of our surfaces, whether those surfaces are on the Atlassian platform inside of Jira or Confluence, in our chat app from the mobile and the desktop or whether those surfaces are in other agent platforms, right, be that from Google, Salesforce or any of the foundation model vendors. Like we want to make sure that Atlassian's workflows, processes, the Teamwork Graph show up wherever is most relevant for the customer. Now that has required us for a number of years to push past through a huge amount of R&D work, really hard R&D work to make sure that our context graph in the Teamwork Graph is the best out there. It has the most amount of context about the organization. It's the most deeply connected. We do the inference upfront to make sure that you get those better, cheaper and faster results that we talked about, better quality answers at lower cost with that run your agents faster is an amazing offering to customers, and they're realizing that. Whether or not that happens on the Atlassian platform or off the Atlassian platform, what we want to make sure is that the customers see value in the platform overall. There is no doubt that agents existing in native context in our automation framework. If you have a huge amount of business processes running through Jira or the Service Collection, the agents that are natively integrated have the largest access to that platform and they're right in the sidebar. They appear in the Jira UI, that's a huge advantage. At the same time, we've shipped a whole series of features that allow third-party agents from Gamma and Canva to Cursor and Claude Pro in each of our different types of teams. We want to make sure that third-party agents also surface in Atlassian's context, whether that's on a Confluence whiteboard, whether that's on a Jira work item, but they all use the Teamwork Graph at the core. So customers are really seeing that. We certainly get evaluated against other platforms. I'll tell you that customer reaction is amazing. We've done a phenomenal amount of R&D to give you great quality answers. We see that in the increasing usage of our Rovo platform on and off Atlassian, both of which benefit us. And then you can see that in the customer is increasing their they see an expansion rates as well as using our AI technology. So all AI is not built equal. We build fantastic AI, and we get it into the customers' hands. That's what's most important. Operator: Your next question comes from Gregg Moskowitz from Mizuho. Gregg Moskowitz: James, welcome to Atlassian. Mike, you may recall my high level of frustration one quarter ago when after I thought it was a pretty good quarter of acceleration, your shares perceived to go materially lower -- continue to be materially lower. And I don't want to minimize that there's a lot more work to be done. But clearly, this is an impressive result. My question relates to a comment in the shareholder letter that strong seat expansion in Jira was a key driver of the cloud revenue acceleration this quarter. And given that there is so much fear about meaningful seat compression at Atlassian being on the horizon, can you unpack the drivers of the seat growth for us? And secondly, is this a dynamic that you think can be durable? James Chuong: Gregg, thanks for the question on that. Yes, on the cloud side, again, we saw strong performance reaccelerating to 29% year-on-year there. And maybe I'll start with the fact that DC migrations again to the cloud were in line with our expectations and not the realistic contributor to that $50 million beat on the print. It's progressing well, and we still expect that to contribute that mid- to single high-digit growth to cloud, like we mentioned. So the real 2 primary drivers that we talked about on the outperformance is really that cross-sell and seat expansion. . So on the cross-sell side, we saw outperformance in our collections business across Service Collection and in particular, Teamwork Collection. We have got Jira and Confluence, Loom and Rovo. And just keep in mind that right now, Teamwork Collection is really the best vehicle for our customers to buy and unlock AI and all the agent capabilities across the Atlassian platform, right? Customers are upgrading to TWC because of the increased AI credits. We're giving 10x more credits on Rovo versus the stand-alone subscription. And I'm sure Mike can touch a little bit more on some of the progress that we're seeing there. But importantly, we're also -- the other driver here is that we're seeing that growth in TWC while also seeing continued seat expansion in our core Jira stand-alone offering, right? And I think that really speaks to how an AI-driven agentic world, Jira and the Atlassian platform really remain core to enabling customers to manage their workflows and collaboration to fully unlock that value of AI. So whether it's TWC or standalone Jira offerings, we're launching a ton of new value that's really enabling our customers to deploy agents to do the work, to capture that agent activity alongside work history, full permissions and audit trails and admin governance. So a lot of great traction here, as you can see in our Q3 print. Michael Cannon-Brookes: Yes, Gregg, thanks for that and for calling it out. I hope we've been very consistent on our views in that world. We are not seeing any signal of seat compression from customers. If anything, we are seeing the opposite. We are seeing strong expansion numbers, strong cross-sell numbers between collections, strong usage of AI and strong commitment to the Atlassian platform. Many, many competitive wins, a huge amount of consolidation happening into the Teamwork Collection. So we have a lot of green lights in a lot of different places. Similarly, you can see that NRR maintained north of 120% and even ticked up again for, I think, the third or fourth quarter in a row. We have a lot of reasons why that is. Firstly, I would go to high R&D investment in just great quality software, right? That does matter. It always gets ignored in a lot of context, wrong choice of words, in a lot of quarters. But we build amazing applications that deliver great value for our customers. Secondly, the context we have in the Teamwork Graph and the critical business processes continue with AI to blur the boundaries between teams and between roles. That means our platform and our offering between service teams on one side that connect to finance and HR, marketing and in through ops teams to technology teams with business teams and leadership teams. The same context across all of those teams allows us to expand into those nontechnical roles at an increasing rate, right, which shows why we are getting that seat expansion in different collections, in different areas and just the continues in our business. Fundamentally, customers are opting for more and more workflows on the Atlassian platform. Operator: Your next question comes from Brent Thill from Jefferies. Brent Thill: Mike, you called out the largest competitive replacements. I think I don't know if you've seen or just you were mentioning that. What are you seeing? What's driving this now where you're seeing that increasing rate? Michael Cannon-Brookes: Thanks, Brent. Yes, we had a great quarter for competitive displacements, especially in the Service Collection, especially -- look, we continue to be incredibly strong in the mid-market area. As you can see from many years of investment in the enterprise pillars of our business, we are starting to go really, really strongly in the enterprise and strategic segments across service management in particular. That's not just in ITSM, although in ITSM, we are growing really strongly, it is in broader employee service management. We're seeing that -- we get the statistic of the 75% of the Fortune 500 uses Service Collection. 60% of Service Collection customers use us outside of IT on HR and marketing in other areas. This is just a fantastic example and why we're getting those competitive displacements. It was our largest quarter ever for those. And it's because, again, I would go to the quality of the software, the state with which you can get up and running on the Service Collection continues to be a strength. The high level of user experience quality continues to be a strength. The comprehensiveness of our data and the Teamwork Graph and bringing that to their Service Collection fundamentally allows you to operate those services cheaper, quicker, better answers because we have access to a better knowledge graph across your organization. And AI continues to win every which way. We're incredibly AI forward. It's one of the largest areas of usage of agents in automation and automated workflows because it allows the service teams to run more quickly. And we're only just getting started in customer service and had a great quarter in that area as well. And our asset management platform, again, assets moving into the platform as a whole, part of that overall Teamwork Graph. It's just an incredibly strong customer story. And so we're really excited about how we keep taking share in that space. And $1 billion of ARR is a great milestone. We thought it was worth celebrating. That's just a fantastic milestone for that business while continuing to grow incredibly fast. Operator: Your next question comes from Allan Verkhovski from BTIG. Allan M. Verkhovski: Mike, it's great to see the AI momentum here. I'd be curious if you could share what drove the decision to announce the data collection changes you're making? And what are you looking forward to from a product capability perspective on the other side of it? Michael Cannon-Brookes: Yes. Thanks, Allan. Look, Atlassian continues to be incredibly driven by its values and its long-term philosophy. I say that because our data collection, the largest part of that is clarifying exactly how it is that we use customer data what the data is in the different segments, I think we have an absolutely world-class policy there. We are as clear as any vendor out there about what the different categories of data are, where they are used, what the benefit is to the customer for that, and what the customers' option sets and other things are. So think of it as broadly a large clarification of what it is that happens at different points and the value that's delivered to the customer from those. The increasing usage of AI allows us to build ever more powerful features. We are seeing a lot of customers. If you look at the DX business, for example, one of the greatest advantages is being able to see how my engineering organization compares to others in my industry, compares to others of my size, et cetera, and this requires a lot of those changes. Similarly, the usage of different types of SaaS tools is how we build the Teamwork Graph. So it's all about that open company, being very clear with customers what it is, what the advantage is and trades are. And we've had, I would say, a really positive customer relationship, customer response because we put trust and openness at the core of that relationship and explaining to them what they get from that. And those usage patterns of customers are incredibly important to building fantastic software, which is our highest overall. Operator: Your next question comes from Raimo Lenschow from Barclays. Raimo Lenschow: Perfect. In your letter, you talked a lot about momentum in ITSM. Can you talk a little bit about what you're seeing there? What's driving it? And how skilled customers like how meaningful this is for you? Michael Cannon-Brookes: Sure, Raimo. Yes, we are seeing great momentum in the Service Collection, again, as I mentioned earlier, celebrating the milestone of passing $1 billion in ARR. We try in the shareholder letter to put a different focus each quarter. So last quarter, you saw us talking about the Teamwork Collection. When we passed 1 million seats and 1,000 customers, less than 6 months into that offering, so showing some momentum in that area, that continues. This quarter, we've chosen to focus on the Service Collection because of the milestone that it passed, which is a great milestone. The strength we're seeing is across the regions. So we had a great quarter in EMEA, the business, but also in the Service Collection a lot of large wins in Europe, Middle East and Asia region of increasing strategic customers and enterprise-level customers. We are seeing a big strength as we mentioned in non-IT use cases as well in the Service Collection. So that blurring of roles is really, really important to understand in the Atlassian platform and importance to business as having less -- one tool for the IT team, one tool for the employees, one tool for the HR team, our ability to connect the teams in an organization is really powerful as your organization becomes increasingly service driven. And lastly, as I mentioned, we have a huge amount of AI features that are delivering real value from AI ops in the IT area to be able to diagnose and fix problems more quickly, all the way through to how you can use Rovo as a broad platform and our increasing adoption by customers of our MCP servers and our CLR Command Line Interfaces. We'll talk a lot more about this next week, but especially in the Service Collection, you're seeing that enabling customers to get access to the contact craft it's built in their service offerings, which lets them just get, again, a fantastic results, a better value proposition for the customer and the service part of the business execute more quickly and at a lower cost. Operator: Your next question comes from Alex Zukin from Wolfe Research. Arsenije Matovic: This is Arsenije on for Alex. So Mike, what is working best with customers when adopting service and Teamwork Collections that's kind of driving that stronger cross-sell growth contribution in cloud? And then a brief follow-up, James. I think you mentioned it earlier, but when we're thinking about next year and the DC revenue growth decel comment, do you think we could get more color on how DC ARR is trending? Or clarify whether we'll get any DC ARR figure exiting the year to better understand for growth when we kind of lap some of these tougher comparison periods next year? Michael Cannon-Brookes: Thanks, Arsenije. What is working best? Good question. It's all working really well. Look, I think I've covered the Teamwork Graph as a whole and the data we have. The speed of adoption and user experience, again, we have customers that have 500-plus different service desks from a new organization, for example. The ability to get new service desks up and running with all of the data from your organization to create incredibly efficient offerings for your finance team, for your operations and workplace teams, for your HR teams, that is going really, really well. It's because of our investment in user experience overall. We continue to do really strongly in the HRSM space. So in service management around HR and other business functions that continues to be a source of strength for the service question. And our traditional connectivity between the dev team and the IT team between your technology teams and your business teams has always been a source of strength for historically for Jira Service Management, we've seen that continue to deepen and improve with the Service Collection because both of those 2 teams are getting more and more AI driven. And that AI-driven nature of things and our ability to connect different teams across the organization with a single context graph with a single AI offering and take that offering out to all of the other products that a customer uses makes all of those service-driven parts of their business just quicker to operate and faster to run. So I would say we're seeing strength across the board. And lastly, our newest addition to the service suction in customer service management, internally, we're having huge success there, right? Again, we got a statistic that more than 70% AI resolution rates are being hit internally across hundreds of thousands of conversations in our internal adoption of customer service management. So it lets us run our business more efficiently and customers are seeing that, too, as the customer service offering continues to roll out with fantastic set of features. James Chuong: Arsenije, thanks for the question. As it relates to FY '27, right now, it's too early to discuss any guide at this point, we'll, of course, provide that guidance out in August, our Q4 earnings. But as it relates to ARR, as I mentioned a little bit earlier, right, we're seeing that lumpiness in the revenue recognition in the year on the data center side. And next week, we're going to be able to share some of the historical subscription ARR across the overall business to help really smooth out those timing effects that we talked about. And I think that will give folks a better understanding of the underlying strength in the business. But maybe just as a reminder, too, for the data center end of life announcement, right, we began to recognize great upfront term license revenue and that results in greater upfront revenue recognition in the period, but there's a corresponding drawdown in RPO and in particular, CRPO as well. So it's worth sharing then that when you normalize for the impact of ASC 606 here, our RPO would have been north of 40% in the quarter, in Q3. And our CRPO would have been north of 30% year-over-year in Q3, much more in line with some of the recent trends that we're seeing, and again, underscores the strength in the backlog that we're continuing to build. Operator: Your next question comes from Fatima Boolani from Citi. Fatima Boolani: I wanted to ask you about diversifying some of your pricing strategy, collections has been a huge step in the direction of consolidating adjacent capabilities into more intuitive selling motion. But a lot of your peers in other enterprise software complex are sort of investigating or testing the path of usage-based pricing. So I'm curious what you think about that approach and particularly how pertinent it could be for the service collection, for instance, and to the extent you're A/B testing any of this with certain products, I'd love the perspective. And then a quick one for James. There has been a tremendous amount of focus on driving efficiencies in the business and is leveraging AI to help Atlassian become even more efficient. So I was curious about what type of qualitative learnings and quantifiable yields you're seeing as you more sort of move down the path of deploying AI internally? Michael Cannon-Brookes: Fatima, look, I'll take the first one on pricing and James can talk about efficiencies next so the efficiency is an incredibly important part. What does sound pricing broadly look? Our philosophy has always been to meet customers where they're at. Let me start there. Customers, in general, like the way we price our offerings and we wish to continue to be customer-led and meeting them where they are. The largest amount of value delivered today is through the seat-based pricing model. The collections have been a major transformation in how we do that, for sure. And in that, you are getting a broader amount of value that you can see there.. So we talk about that when people move to the Teamwork Collection, which we're seeing great momentum in. We talked about the cross-sell and the expansion earlier. The Teamwork collection gives you an amazing amount of software value across Jira, Confluence and Loom and all of the platform assets, goals and projects, et cetera, gives you access to Rovo, but it gives you an increased Rovo credit allowance. And we see that in the Teamwork Collection customers using more than twice as many Rovo credits per user, right? We want to make sure that we're building amazing features that use those Rovo credits, that the customers see value in using those credits. They also have more than twice as many active agents. So the Teamwork Collection comes with a larger pool credits, which customers are then using increasingly. And that's leading Rovo driving customers to have twice the ARR growth rate of non-Rovo customers, which is all a good set of long-term clients' direction and areas for us. We have a series of consumption or usage-based pricing meters now. I think we're over 10 or 12 meters from assets to customer service, index subjects, extra Rovo credits. Forge has a series of different offerings for extensibility, Bitbucket Pipelines. So I would say that we continue to be customer-led in how we deal with that pricing as long as customers continue to consume our AI offerings and continue to grow, which I believe they will. We have a great track record of doing that, growing that token usage of 20% month-on-month. is an incredible achievement by our team, and it shows value of the offerings that we are delivering. And fundamentally, it's about selling the outcome to the customer, then understanding the value that they're getting from our software. You've seen that in them broadly increasing the length of their commitment to the Atlassian platform and increasing their overall dollar-based commitment. You can see that in our strong RPO growth, as James pointed out, normalizing for the Ascend revenue recognition north of 40%, that is customers voting for the long term for the Atlassian platform with our pricing models continue to adapt to their needs underneath that. So I feel we're really strongly placed for that. James, I'll leave it to you to talk about the second half of the question. James Chuong: Yes, Fatima, as it relates to margin expansion, I think we're just in this unique opportunity right now where we're seeing a lot of demand signals, and we're going to continue to reinvest I think on the AI side, on the enterprise sales side where we see a lot of opportunity. But at the same time, we're going to do that while balancing a very disciplined fiscal approach. You saw that in the shareholder letter where we elevated driving durable, profitable growth as a strategic priority for the company, alongside AI, enterprise and system of work. So again, that margin expansion is going to come twofold through those types of efficiencies as well as continue to drive value for our customers on that top line. Michael Cannon-Brookes: Fatima, if I might just add on that. Look, we're seeing an amazing result of investments in the business, right? James talked about durable profitable growth. That's been a long-term Atlassian aim. We've run an incredibly capital-efficient business for our entire history. And I appreciate you calling out we've had some great quarters about as we look to continue the durable, profitable growth story as one of our strategic priorities. At the same time, we've had a number of wins across the R&D investments that we've had in terms of the engineering at scale. You can see that in our continued strength in our COGS numbers, in the cost of operating our platform which is an incredible achievement because that platform is operating with the larger customers that are also expanding at larger and larger scale than ever before, and we are running the platform at a cheaper and cheaper rate without any reliability hiccups. So that's a huge credit to our engineering team and the work that we've done across every level of the stack to continue to build that durable profitable business, every reason that we should do that in the future.and we're seeing that in the fantastic results that we have. So I just wanted to add on, there's an R&D story, there's a finance story, and we're feel really strong about that in terms of durable profitable future. Operator: Thank you. That's all the questions we have time for today. I will now turn the call over to Mike for some closing remarks. Mike? Michael Cannon-Brookes: Thank you all, everyone, for joining us on the call today. Thanks to the Atlassian team for a fantastic quarter. As always, to all of you, we appreciate the thoughtful questions. I believe one of our long-time friends, Keith Weiss, is retiring after this call. So Keith, thank you very much for all the questions over time in person and virtually. We appreciate your thoughtful questions, especially today. And to everyone else, hopefully, Keith, hopefully you will join us next week in Anaheim for Team '26. We have a series of incredibly exciting announcements as well as an investor forum. So whether we see you online or in-person in Anaheim, we'll see you next week. And otherwise, hope you have a kickass weekend.
Operator: Good afternoon, and thank you for joining us for Rivian's First Quarter 2026 Earnings Call. Today, I'm joined by RJ Scaringe, our CEO and Founder; Claire McDonough, our Chief Financial Officer; and Javier Varela, our Chief Operations Officer. Before we begin, matters discussed on this call, including comments and responses to questions, reflect management's views as of today. We will also be making statements related to our business, operations and financial performance that may be considered forward-looking statements under federal securities law. Such statements involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are described in our SEC filings and the earnings presentation we filed with the SEC today. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of historical non-GAAP to GAAP financial measures is provided in our earnings presentation and press release. Just before the earnings call, we posted our earnings presentation, which includes an overview of our progress over the recent months and replaces our shareholder letter. I encourage you to read it for additional details around some of the items we will cover on today's call. Following our prepared remarks, we will be taking questions from sell-side analysts. In the interest of keeping our call to 1 hour, we would ask these analysts to limit any follow-on questions to one. With that, I'll turn the call over to RJ. Robert Scaringe: Thanks, Chip. Good afternoon, everyone, and thanks for joining us for today's call. Last week, I was thrilled to celebrate the start of saleable R2 production with our team at our plant in Normal, Illinois. It's an exciting milestone in Rivian's history and the culmination of all the hard work and energy from so many people across the company. As I've said before, I believe the R2 will be a game changer for our customers and will be a key driver of our company's long-term growth and profitability. In an American automotive marketplace starved for high-quality EV choice, I believe R2 is an attractively priced option sized for everyday ventures from school pickups to weekend trips that is targeting the very popular 5-passenger SUV and crossover segment. With R2, we are taking our design, performance and technology and bringing it to a significantly broader audience without losing what makes Rivian unmistakably Rivian. We've started R2 deliveries to our employees, and I have to say I absolutely love having R2 as my daily driver. I could not be more excited to get this vehicle into the hands of lots of customers starting this spring. In developing R2, our team relentlessly focused on achieving structural cost reductions while maintaining the desirability of the product. For R2, our bill of materials is expected to be approximately half of our R1 platform. For non-BOM cost of goods sold, we expect to see a reduction of more than 50%, resulting from a focus on design for manufacturing and leverage fixed cost efficiencies through higher production volumes. This is how we expect to profitably deliver R2 at an accessible price point at scale without compromising performance and utility customers love for Rivian. Key design changes for R2 include part eliminations and reductions through the introduction of large die castings, a structural battery pack, a new highly efficient drive unit, the evolution of our next-generation electrical architecture, which removes miles of copper wire and the consolidation of our high-voltage electronics into a single enclosure. We are also seeing significant sourcing leverage relative to R1 across a variety of components. Now as we begin to scale our operations in Normal with R2, we're very excited to partner with the U.S. Department of Energy to grow our manufacturing footprint in Georgia. R2 provides the opportunity to expand the Rivian brand to millions of drivers. As a result, we made the strategic decision to increase the production capacity for the first phase of our Georgia plant by 50%, bringing it to 300,000 units of annual production capacity for our midsized vehicle platform. This change is expected to boost cost efficiency while still providing significant room for future expansion in later phases and support thousands of jobs in Georgia as we grow American manufacturing and work to ensure the U.S. retains its leadership and innovation in technology and transportation. We remain on track for the production of our midsized vehicle platform to begin in Georgia in late 2028. Turning to our technology road map. In March, we were excited to announce a new strategic partnership with Uber to accelerate our shared autonomous vehicle goals. In the not-too-distant future, I believe advanced autonomy capabilities will be a key differentiator for customers and the driver of market share. At the core of our third-generation autonomy hardware is the Rivian Autonomy Processor or RAP1. The development of our RAP1 chip is on track, and we are progressing well on validation and reliability testing. Our integrated approach allows our hardware team to rapidly iterate with our software team, and our autonomy feature development is progressing well, and we continue to expect to begin rolling out point-to-point capabilities by the end of the year. Finally, in the coming weeks, we are excited to launch the Rivian Assistant on R1 and R2 vehicles. The Rivian Assistant is our new AI-powered voice assistant that is built to be a digital copilot with integration into the vehicle ecosystem and other external apps. In closing, this quarter, our team has executed across many fronts, laying a strong foundation for the years ahead. As an American automotive technology company, we're building for a future that we believe will be fully electric, autonomous, and AI defined. With our category-defining brand, the launch of R2, which is our first mass market vehicle, vertically integrated and extensible technology and the direct-to-consumer sales model, I couldn't be more excited about the opportunity ahead for our customers and for our business. With that, I'll pass the call over to Claire to discuss our financial results. Claire McDonough: Thanks, RJ, and good afternoon, everyone. As RJ shared, the start of saleable R2 production and initial employee deliveries are a landmark moment for Rivian. By building R2 in Normal, we are strategically leveraging our existing manufacturing footprint in Illinois to drive greater fixed cost absorption across our entire vehicle portfolio. As discussed previously, R2 production is starting with a single shift operation, and we expect to scale to 2 shifts by the end of 2026 as we ramp towards our North Star target of profitably delivering 4,000 vehicles per week in normal. Delivering a strong 2026 exit rate for R2 production and deliveries is a key focus for our team as we believe it will directly translate into positive automotive gross profit for the business. Turning to the results for the first quarter. As depicted on Slide 11 of the earnings presentation, our consolidated revenue in the first quarter was approximately $1.4 billion, an 11% increase over the same quarter last year. Consolidated gross profit was $119 million, and our gross margin was 9%. Gross profit included $122 million of depreciation and $27 million of stock-based compensation expense. Adjusted EBITDA losses for the first quarter were $472 million, driven by our $119 million of gross profit and increased adjusted operating expenses as we prepare to scale R2 and invest in our autonomy road map. In the first quarter, we produced 10,236 vehicles and delivered 10,365 vehicles, which was the primary driver of our $908 million of automotive revenue. Automotive gross profit loss was $62 million compared to $92 million of gross profit for the same quarter last year, primarily driven by the $100 million decrease in sales of automotive regulatory credits and lower production volumes, which resulted in a $45 million increase in depreciation and stock-based compensation expense combined. While current macro and geopolitical factors are creating added complexity, cost and uncertainty, our team continues to work hard to manage supply chain risk and offset elevated costs. Our Software and Services segment reported another strong quarter as depicted on Slide 13. During the first quarter, the segment generated $473 million of revenue, a 49% year-over-year increase and $181 million of gross profit. $282 million or approximately 60% of Software and Services revenue was attributable to our joint venture with Volkswagen Group. We also experienced strong growth from remarketing and parts and service. During the quarter, we also recognized $506 million gain in other income in our financials related to the Series A capital raise and related deconsolidation of Mind Robotics from our financial statements. We currently own approximately 38% of Mind Robotics on a shares outstanding basis. Looking at our balance sheet, we ended the quarter with approximately $4.8 billion of cash, cash equivalents and short-term investments. With regard to our funding road map, in 2026, we expect to receive a total of $2.55 billion of capital from our strategic partners. Today, we received $1 billion from Volkswagen Group in exchange for equity following successful completion of the winter testing milestone by RV Tech. The testing program spans several months utilizing reference vehicles from the Volkswagen, Audi and Scout brands. Later this quarter, we expect to receive $300 million from Uber in exchange for equity related to the signing of our partnership agreement, subject to certain conditions. And later this year, we expect to receive $1 billion in nonrecourse debt from Volkswagen Group and an additional $250 million from Uber in exchange for equity, subject to the completion of certain milestones and conditions related to robotaxi development. As outlined on Slide 14, this brings total available liquidity and expected capital in 2026 of nearly $8 billion. Additionally, we're very excited to partner with the U.S. Department of Energy to grow our U.S. manufacturing footprint. The up to $4.5 billion DOE loan, which consists of approximately $4 billion of principal and approximately $500 million of capitalized interest provides low-cost financing for our 300,000 unit capacity greenfield expansion in Georgia, bringing Rivian to meaningful scale. We expect the 515,000 total units of capacity between our Illinois and Georgia plants will provide Rivian a path to free cash flow positive once fully ramped. We expect to draw on the loan by early 2027, subject to certain conditions. Two weeks ago, our normal factory sustained damage from a tornado. I'm proud of the way our teams have rallied together to get production back up and running while we repair the damages. Despite the weather impact, our 2026 guidance remains unchanged. We continue to expect full year deliveries of between 62,000 and 67,000 total vehicles across R1, R2 and our commercial vans. We also continue to expect to deliver approximately 9,000 to 11,000 vehicles in Q2 as we expect the ramp of R2 deliveries will be back half weighted. While we continue to believe our gross profit will increase year-over-year, we expect the complexity of a new vehicle launch will negatively impact our automotive gross profit in the second and third quarters before becoming a benefit for our overall operations in the fourth quarter as we ramp production and deliveries. As a reminder, we believe this is a transition year for the Automotive segment's path towards long-term profitability as we scale R2. For 2026, we continue to expect an adjusted EBITDA loss of between $2.1 billion to $1.8 billion. While economic and geopolitical conditions, including supply chain and international conflicts pose risks, we remain steadfast in our plans to invest behind key growth drivers. We continue to progress our autonomy road map and the expansion of our sales and service footprint as we scale with R2. We believe these strategic investments will deliver long-term value to our shareholders. Finally, for 2026, we are maintaining our capital expenditure guidance of $1.95 billion to $2.05 billion. Our CapEx spend primarily relates to finalizing construction and tooling for R2 in Normal, the continued build-out of our sales, service and charging infrastructure and kicking off construction of our greenfield plant in Georgia. In closing, I'd like to congratulate our teams again for the successful start of saleable R2 production and the strong execution in the first quarter. We continue to believe that R2 and our technology road map will be truly transformative for the growth and profitability of our business. I'd like to turn the call back over to the operator to open the line for Q&A. Operator: [Operator Instructions] Our first question comes from Shreyas Patil from Wolfe Research. Shreyas Patil: Maybe first, just picking up on a comment that you made earlier, Claire. If you could help give us some more color on some of the actions you're taking to mitigate the increase in commodity costs and some of the metals prices that we've seen increase recently? And what's been the magnitude of increase, if you could help frame that? Robert Scaringe: Well, thanks, Shreyas, for the question. Yes, we're spending a lot of time, of course, focused on all the changes that are happening from a supply chain point of view. And in terms of raw materials and some of the cost of metals, specifically aluminum, this has been a big focus for us. Fortunately, we've -- our sourcing team has been sort of -- we've grown our sourcing team and evolved our sourcing team over the last handful of years where supply chain continues to be an area where there's a lot of unknowns, there's a lot of variability and a lot of a need for us to be very hands-on and very proactive. And so we've been proactive in both our relationship with existing suppliers, but also in making sure we have, particularly in some of these key commodities, alternative sources of supply. Shreyas Patil: Okay. Great. And then maybe, Claire, just to clarify, I think you've made a comment about how -- when Normal and the Georgia facility are fully ramped, you'd be getting to free cash flow positive. I just want to make sure if I understood that correctly. And if that's the case, that could be quite a while from now. So maybe just help us understand sort of the trajectory of CapEx maybe near term, but then also as we kind of think ahead and you start to kind of put more in the ground at Georgia? Claire McDonough: Sure. Shreyas, the comment that I made on the Rivian's ramp up, its Normal facility plus Georgia facility is what takes Rivian to free cash flow positive in the future. And as we talked a little bit about in our prepared remarks, importantly, we have the $4.5 billion of capital from the Department of Energy loan, which provides up to 80% loan-to-value against the build-out of our future Georgia facility. So while we certainly will see an anticipated increase in our capital expenditures as we approach the start of production in Georgia, we do have significant offsets from a capital road map. And the $4.5 billion is just one component of the full $13.6 billion of total liquidity and expected capital through both the cash that we have on hand on our balance sheet, the added availability of our ABL facility, and then the expected capital from our partners with both Volkswagen and Uber that we expect to receive over the coming years as well. Shreyas Patil: Okay. Great. And maybe just one quick clarification. The DOE loan, has there been any change to that? I think the original amount was $6.6 billion that was available. Just curious if there's any change there. Claire McDonough: Yes. So included within our financial release today, we provided an update on the Department of Energy loans. So we'll now have $4.5 billion of loan capacity that will go towards the build-out of our first phase of capacity expansion in Georgia. We've also increased the capacity of the Georgia site, the initial capacity from 200,000 units to 300,000 units. And so the comment that I made in my prepared remarks is really the importance of the funding road map, especially as we think about the Georgia site specifically taking Rivian to meaningful scale in the future. Operator: Our next question is from Joe Spak from UBS. Joseph Spak: Claire, just to maybe pick up on the DOE loan part and to clarify, like obviously, this first phase is an increase from that 200,000 to 300,000 units. But and again, admittedly just being able to skim the document, it does seem like maybe the total project scope is now capped at 300,000 units versus -- I know before it was supposed to be 200,000 units -- Phase 1, 200,000 units, Phase 2 for 400,000 units. So I want to make sure I understand that. And then if you still see an opportunity over time to grow further in Georgia. Claire McDonough: So the strategic decision that we took was to increase the initial phase of production capacity to the 300,000 units. On our Georgia site, the full initial capacity will be put on the upper pad at the site. So we have the lower pad, which is still going to be entirely untouched greenfield for future expansion. Joseph Spak: Okay. But -- and that might be funded more organically in the future, not necessarily with loan or it's TBD, I guess. But the loan is really only up for the 300,000 units, correct? Claire McDonough: So the loan is for the initial phase. The important piece is we've increased the loan size associated with the initial phase as we've also scaled the production volume as well. Joseph Spak: Okay. And then just I appreciate the comments on input costs and -- but I guess the other thing that I was wondering about was with tariffs, and this is sort of come with a lot of companies thus far. Can you remind us like what you've paid in IEPA roundabout over the past year? And have you filed for any reimbursement? And was anything booked in the quarter related to any potential reimbursements? Claire McDonough: We did not book anything this quarter associated with IEPA tariffs, but we do believe that the recovery of those IEPA tariffs is possible in the future. And I contextualize the sizing to be in the tens of millions of dollars of future benefit. Joseph Spak: Okay. But that -- and is that considered at all in your reiterated outlook or that would be upside? I guess it's not significant. Claire McDonough: I would characterize it as considered within our current outlook. Joseph Spak: Okay. And then just lastly, like I know you talked with Uber, you talked about pulling forward raising R&D in '27. Does any of that work start to seep into '26? And is there a change to the R&D outlook for this year? Or it's really more of a '27 factor? Claire McDonough: You'll see the pace of acceleration increase in terms of the spend towards autonomy in '27, but we'll certainly see acceleration throughout the course of this year as well. If you look at Q1, our cash R&D expense increased about 22% this year for that quarter. You could directionally think about that as being more of a year-over-year type run rate as we look out over the remainder of the year. Operator: Our next question is from Itay Michaeli from TD Cowen. Itay Michaeli: Just first, going back to the Georgia capacity optimization. Curious if it has any impact on your previous long-term financial targets of 25% gross margin. And maybe on that as well, if you can maybe share your initial kind of takeaways on kind of R2 demand generation since you kind of launched the trends. Robert Scaringe: Well, thanks, Itay. Yes. And I think, obviously, the decision to increase the capacity of the first phase in Georgia coincides with -- I should say, it reflects the level of confidence in our products and our business. I think most importantly, we've just started production on R2 out of our existing Normal, Illinois facility, and we've had early media events and early customer events and the level of enthusiasm for the product has just been outstanding. So everything from the packaging of the vehicle to the way that it drives to the integration of technology, the overall response has been overwhelmingly positive. And so that bodes extremely well for the ramp-up happening over the course of this year and into next year, but it also sets up a wonderful foundation for us as we think about further capacity on this platform, both for R2 as well as R3 and variants of those vehicles out of the Georgia facility. Itay Michaeli: Terrific. And then maybe as a follow-up on the Uber announcement. I'm curious whether the robotaxis themselves that will go into the Uber network will have the kind of exact same hardware set as the personal vehicles. And I ask because if you're going to launch in 2028 in complex domains like San Francisco and Miami, would that not also imply a pretty wide ODD for the personal vehicles if they're both operating on the same hardware? Robert Scaringe: Yes. We talked about this during our Autonomy Day late last year. But I think it's important to recognize there's going to be a whole series of steps we make in terms of progressing towards Level 4. And so in that series of steps, the first later this year on our consumer vehicles is launching our point-to-point capability. And so that's the ability for the vehicle to drive entirely on its own to an address. And I just this week had -- we do lots of regular rides internally, and I had a great ride with James and the team. And it's so exciting to see how much it's progressed and our technology has progressed even since our Autonomy Day late last year. And so we're very encouraged by this. But that first step of making point-to-point available to customers is going to be a really important step for our consumer vehicles. As we continue to go into 2027, we'll be allowing in specific areas, eyes off. And so it's hands-off, eyes off, that's a Level 3 capability. And then as we go into 2028, as you said, that's when we'll have our first deployments of a Level 4 capability in a robotaxi. And in the robotaxi variant, there will be some additional sensing on the vehicle. So it will be different than the pure consumer vehicle. But we are planning to have a personal version of Level 4 as well. And we've talked about that quite a bit. We think the market for a vehicle that you own being able to completely drive itself, do things like drop you at the airport, go to the grocery store, get groceries for you, pick up kids from a sports event. These are really high-value creating activities for the Level 4 capability, and we see them on both robotaxi applications and on personally owned applications. Operator: Our next question is from Dan Levy from Barclays. Dan Levy: I wanted to first start with R2 and the path to getting to positive gross margin, which I think you said would be by the end of the year. Maybe you could just walk through the gating factors. Does -- even with the raw mats, do you still have the confidence you have the right BOM to achieve this? And what milestones do we need to see to make sure that the production ramp is still on track? What are the sort of most limiting factors that you still have to address on this ramp? Robert Scaringe: We've talked a lot about the cost structure of a vehicle and a huge component of this is, of course, the bill of materials. And the bill of materials is different than the non-bill of materials COGS is contractual. So these are negotiations that happen across hundreds of suppliers, and very different than when we sourced R1. We went into the R2 sourcing with a lot of momentum and much better supplier leverage. And just the level of confidence in Rivian as a business and the level of excitement around R2 helped us put together a set of suppliers that are both very enthusiastic, but that's demonstrated through attractive commercial terms. And so as it stands, the bill of materials for R2 is about half that of R1. And there's, of course, things we can't predict like raw material changes and DRAM shortages, but the vast majority of the BOM is very stable, and we have a lot of confidence in being able to achieve that -- the target BOM, which supports the very healthy gross margins we've talked about in the past. Now with regards to the plant, I'll invite Javier just to comment on some of the progress that's happening in terms of ramping up over the course of the next several months. Javier Varela: Yes. Thank you, RJ. Indeed, as you explained some minutes ago, we had last week, the celebration of the first saleable builds and delivers to customers this week. So very proud of the situation we are achieving now. The industrial process is ready. The people is ready as well. We have been through the right training and build cycles. And I would say plant is prepared, process are defined, and we are very confident in our capability to deliver. I feel confident as well regarding what is our team in place. We have brought in a group of seasoned leaders that have done launches back in the past, big experience on that area. And we are, on the other hand, managing the supply chain, making sure that the supplier scales with us. We have boots on the ground supporting some key suppliers. And we are doing this with our mindset and supplier relationship of transparency and collaboration. Resilient supply chain, agility and intelligence are key factors for success. Dan Levy: Great. As a follow-up, RJ, I wanted to double-click on the point you gave in the prior question from Itay about getting to L4. You'll have point-to-point at the end of this year, and you'll only have the vehicles with the LiDAR end of this year, beginning of next year. It does seem like there's probably a lot of testing that has to happen between when you get those cars with the LiDAR out to the point where you have a launch. So just help us understand what the testing curve looks like, what you need to do from when you have the cars with the LiDAR to being able to unlock L4 because it does seem like there's a lot of miles that have to be driven on that new vehicle. Robert Scaringe: I think a really important point to make here is just the way the self-driving system is architected. So this is the platform that we launched actually on our Gen 2 R1 vehicles is designed around an end-to-end approach where we're building really what we call a large driving model, but think of it as a neural net or a foundation model for driving. And that model is being fed with all of our Gen 2 R1 vehicles and of course, our launch R2 vehicles and ultimately, as you said, R2 vehicles that include a LiDAR, but very different than previous architectures around self-driving where there were rules-based and more classically controlled. As you add more perception and as you add more compute, the capability of the model only grows. You don't lose the previous knowledge embedded in the model. And so I often sort of compare it to imagine if you learn to drive with that vision and then I hand into your pair of glasses. You wouldn't forget your knowledge as a driver, you just suddenly be able to see and perceive things that you may have missed previously so you become a better driver. And then imagine we could hand you a 10x multiplier to your compute capability effectively makes your brain 10x smarter. Again, you wouldn't forget what you knew before, but suddenly, you start to notice new patterns in more nuanced ways than you had in the past. And so that's very important to recognize is a very fundamental difference in how the model is built today and what we're creating versus the more AV 1.0 stack where they were, as I described, they're very rules-based and very classically controlled. And so because of that, the data accumulation that's happened already on R1 and that will continue with the growth in our car park with R2, all feeds into our overall LDM into this large driving model. And even as we think about introducing new sensors, things like our LiDAR, this is not as if it's first on the vehicle when it's delivered to customers. We have lots of prototypes today that are running with those. If you're in the Bay Area and happen to be anywhere around Palo Alto, you'll probably see lots of Rivians with a lot of additional sensors and that's part of a ground truth fleet that, again, is feeding into this large driving model to accelerate the speed at which that model is learning. Think of it as a brain, the speed at which we're teaching it to drive. And the work that will go into ultimately launching a customer-facing version of point-to-point, which today, I was -- as I said, I was in one of our cars driving around both point-to-point earlier this week, it's really exciting. But we want to have when it launches to customers had to be extremely robust. But all that work is accretive to what ultimately will be going into our Level 4 platform. Operator: Our next question is from Andrew Percoco from Morgan Stanley. Andrew Percoco: Maybe just to start on the commercial side of your business. It looks like Amazon made up almost 50% of your auto revenue in the quarter, so a little bit above historical run rates. Can you just maybe talk to what you're seeing with that relationship and maybe even outside of Amazon, the level of maybe interest you're seeing in the commercial product since you launched that extended range version of the commercial vehicle? Robert Scaringe: Yes. Our relationship with Amazon continues to be something that we're very proud of. We've spent a lot of time on this program from its initial kickoff quite some time ago in 2019 through its initial launch and now ramping, deploying. That's everything from not only building the vehicles, but on the Amazon side, getting their operations and the infrastructure ready to ingest a lot of EVs. And what we're now seeing is a reflection of all that work, all the cumulative work that's happened to date that's allowing the volumes for our van program within Amazon to grow, as you point out, pretty meaningfully. And we expect that increased demand for vans to continue. And that's super rewarding to see. It's fun to see all the vans on the road, but that's going to continue to ramp up with Amazon. Now in terms of other customers and other applications, of course, Amazon is by a significant degree, the largest operator. And so they're the ideal lead customer, if you will, but there are lots of other opportunities we've seen. But in the immediate term, our focus remains on Amazon and ramping to support them. Andrew Percoco: Okay. That makes sense. And then maybe just -- I just want to ask one more question on the DOE revised loan piece here. I understand the movement in Phase 1 and upsizing that. I'm curious why you might not want to use the DOE funding for the eventual Phase 2. Is this something initiated on your end? Or did maybe they approach you in terms of revising that? Just kind of curious the thought process around why not tap that low-cost funding for the eventual Phase 2 whenever that comes about. Claire McDonough: Thanks, Andrew. As I mentioned in my prepared remarks, we're really excited to partner with the Department of Energy on Rivian's $4.5 billion loan, which enables thousands of American jobs and helps us establish the U.S.'s strength in technology and manufacturing leadership. The DOE loan is uniquely a very cost-efficient form of capital as we spent a little bit of time walking through Rivian's broader road map. But specifically, the importance of this $4.5 billion is the funding of Rivian's scaling its operation up to 515,000 units of overall capacity and the opportunity with that installed capacity base to be free cash flow positive in the future. We'll continue to be opportunistic as it pertains to our capital road map beyond the components that I had outlined in the existing $13.6 billion of liquidity and total expected capital that we've outlined today. Operator: Our next question is from George Gianarikas from Canaccord. George Gianarikas: So I know it's early days, but I was wondering if you could please give us any color on R2 order trends and maybe some color on the conversion ratios relative to previous orders. Robert Scaringe: George, as you said, it is early days for deliveries, but the signals I'd be looking at are just the reception around the product and how -- whether it's expert journalists, automotive journalists or lifestyle journalists or customers that are getting to experience the vehicle, the overall excitement around what we've been able to put together in terms of content features, packaging, just the overall value proposition is really resonating. And I'm really pleased with having spent a very large amount of time in the car and it's my daily driver. I couldn't be more pleased with the result. The work that the teams did to make something that's truly remarkable. And we had a few journalists say this might be the best vehicle ever made. That's wonderful for the teams to hear, and it's really encouraging for us as we get ready to ramp the vehicle. George Gianarikas: And maybe just as a follow-up, I just wanted to confirm that the Gen 3 sensor suite was going to be available later this year on the R2? Robert Scaringe: That's correct. Yes. So the Gen 3 autonomy hardware suite, which is both our in-house RAP1 platform. And so this is our in-house inference platform, 800 tops per chip. We have 2 of those chips in the vehicle. So it's extremely powerful. It's a big increase, roughly a 4x increase relative to the NVIDIA-based platform. And then the inclusion of LiDAR, as was referenced before, along with some other enhancements across the rest of the perception stack. Operator: Our next question is from Mark Delaney from Goldman Sachs. Mark Delaney: Starting on Autonomy, I'm hoping you could provide more details on the monetization of Autonomy+ so far and any data points you can share on that? And what that might mean for growth in the Software and Services business more generally, including if you still think you can grow that segment revenue by about 60% this year? Robert Scaringe: We're encouraged by what we're seeing in the -- as you noted at the start of having paid Autonomy+, and it's exceeding our own models on this. So we're -- the take rate is higher than what we expected. And that bodes really well for us as we're going to be growing the feature set quite significantly over the course of this year. And the introduction of point-to-point, we think is a major value driver for customers. To be clear, this is -- as I said, you can put the address for the location you're going to into the car and the car will fully drive you there. And then following that, allowing you to go eyes off in highway conditions and ultimately everywhere, that means you get your time back. And so we're very bullish on the long-term trajectory to monetize our autonomy on the consumer side. And that's for both hands off, eyes on, hands off, eyes off and then ultimately, Level 4 for personal consumption, we see as a really key driver of value in the long term. Now in terms of what that does for our Software and Services growth, that is going to start to be something we'll see, but it's not something that we're going to be breaking out separately. Mark Delaney: And then my other question was on demand for the R1. I'm curious if Rivian has seen any improvement in order rates for R1 maybe in response to the recent increase in gasoline prices and what that might all mean for R1 volumes this year? I think the company had assumed R1 would decline. Is that still your expectation? Robert Scaringe: We're encouraged by the continued enthusiasm for R1. It continues to be one of the market share leaders in the premium category. And in a number of states, it's the best -- not just one of the best-selling premium electric cars, but one of the best-selling premium SUVs, electric or nonelectric. So that's true in a handful of states, we've talked about that in the past. I think it's hard to say ultimately what's going to happen around demand with the impact of gas prices going up. Of course, it's a consideration, and we do see that manifest in what people are trading in. We're seeing more trades of gasoline vehicles or vehicles are less efficient than what we're building. And so we do see that on the rise. But I think a lot of folks are wondering how long fuel prices are going to stay high like this. Operator: Our next question is from Andres Sheppard from Cantor Fitzgerald. Andres Sheppard-Slinger: Congratulations on the quarter and all the great progress. I think a lot of our questions have been asked. But RJ, I want to go back to a topic I know you're very passionate about, which is Autonomy. And so I guess with R2 beginning customer deliveries over the coming weeks and with the Autonomy+ now having started this month. Just curious on kind of your vision and how you are thinking about that Autonomy customer adoption? What type of Autonomy penetration rate do you expect for your customer-owned vehicles? Do you expect customers will prefer the monthly subscription or the onetime purchase? Just any color here on your overall vision and customer penetration adoption that you might be expecting? Robert Scaringe: Yes. Andres, we're extremely bullish on the importance of Autonomy for customers over the next, call it, 5 years, and the rate at which we see customers adopting and selecting Autonomy+. And then ultimately, as the feature set grows and the capability grows, that adoption rate growing with it. But I think that there's an even bigger question just from a society point of view, we've been on a journey of -- when we think about Autonomy where Level 2 is where your eyes are still on the road, but you're still responsible for driving the vehicle. That's like a small appetizer for what you can actually achieve when you get to higher levels of Autonomy where you can take your eyes off the road and truly get your time back and get your time back without the car, dinging you to say, hey, look back at the road or pay attention or put your hands on the wheel. And so as that starts to occur and as people start to experience what it's like to truly have your time back, so take a 40-minute commute and the idea of getting those 40 minutes back in both directions. We think it's going to be a very sticky experience. And it's going to be something that once you experience it, even if it's indirect, let's say, in a friend's car, it's going to become a very important purchase criteria. And the reason I call this out is we really believe over the next 5 years, the rate of progress of what we're going to achieve with Autonomy will look very, very different, and I'm talking here at an industry level versus what we've achieved over the last 5 years, means that the topology of customer expectations and therefore the way that the vehicle purchases are made and the criteria that are being used to make those vehicles is going to look very, very different in 2030, 2031 than it does today, where Autonomy will be a very critical criteria where customers are willing to pay for it because they want their time back. They want to not have to be paying attention. They want to be able to be on their phone, reading a book, taking a nap, truly getting time back while you're in the car. And so as a result, as you've heard a few times throughout this call, this is an enormous focus area for us as a business. We're very much deploying a lot of our R&D dollars towards this category, and we've made long-term investments in the hardware and the vehicles to support that. Andres Sheppard-Slinger: Got it. That's super helpful. I really appreciate all that color. Maybe just as a quick follow-up, one for Claire. So just regarding your delivery guidance for this year, which is unchanged. I know in the past you've given us some cadence for deliveries in Q2. I think you reaffirmed that on the call just now. Can you just remind us what kind of unit mix we should be expecting for the year across R2, R1 and EDVs? I think in the past, you might have mentioned R1 and EDV is relatively flat. So the delta should be the R2. But I guess for the R2, the $45,000 price range, right, that's on track for next year. Just curious if you can maybe remind us how we should think about unit mix for the rest of this year. Claire McDonough: Sure. As you reiterated, as you think about the composition of the 62,000 to 67,000 deliveries, we anticipate R1 combined with the commercial vans to be roughly flat relative to our 2025 delivery results and then the remainder being comprised of the introduction and ramp of R2, which as implied by the 9,000 to 11,000 of Q2 deliveries suggests more of a back half weighted ramp associated with R2, which is implied within our outlook and guidance. Operator: Our next question is from Edison Yu from Deutsche Bank. Xin Yu: I wanted to come back on robotaxi. Are there any sort of KPIs that you're sort of tracking or that you need to hit for some of the milestones with Uber? And I think in the past the industry has kind of turned to disengagements or miles between intervention. Any flavor on that would be great. Robert Scaringe: On the path to deploying in 2028, there are a number of milestones and some of those tied to the investment unlocks with Uber. The first of those is later this year we'll be deploying vehicles in both San Francisco and Miami with a safety driver. So the vehicles will be running, but with the benefit of a safety driver in the vehicle with them. And there's a handful of additional milestones ramping up to ultimately having the vehicles operate fully on their own as part of a service in 2028. But as we get closer and closer to that date, there will be -- there'll be lots of proof points, if you will, of the progress that's being made that will manifest on the road. You'll actually see them not only being tested, but you'll see them as part of some of these deployed fleets. Xin Yu: Understood. And just a kind of a separate question on more Autonomy more broadly. I think there were some reports that you guys were looking to potentially license some tech to other OEMs. Just wondering anything you can say about that? Is that something that we could potentially expect this year? Anything that would be great. Robert Scaringe: I think there's 2 broad categories of technology we think that as I referenced earlier that will be very, very important for growing or maintaining market share in the next several years. And so the first of those is shifting away from a domain-based network architecture where you have a very large number of supplier sourced ECUs that are -- think of them as little islands of code on little small computers where you might have, depending on the car anywhere from 50 to 150 of those little ECUs, those little computers that are in aggregate, providing the software for the vehicle. But that architecture is incredibly hard to do updates on. It's very, very difficult to do cross-platform or cross-domain integrations. It makes the idea of integrating in a deep way AI into the vehicle and the vehicle experience very difficult borderline impossible to do it well. And so our view is every vehicle on the road will need to shift to a much more centralized compute where you have more of a zonal architecture. So essentially, think of it as a large consolidation of all those little computers into a single or a very small number of large computers that runs a common operating system and for which the code base that's running on the vehicle can be very easily updated without coordinating among, let's say, 50 to 150 suppliers. And so that architecture I just described is, of course, what's in the Rivian vehicle today. It's also the basis of our relationship that we've forged with Volkswagen Group to deploy that technology. And the first application of that technology being deployed outside of Rivian as part of our partnership with Volkswagen Group is going to be in the ID1, which is -- it's an EV that will be launched in Europe with a price point of just over $20,000. And I can't wait for people to buy this car. I'm sure lots of people to buy it and take it apart and tear it down. And I'm certain they'll be blown away with the elegance of how we've executed the ECU -- or I should say, the network architecture and the compute stack topology. And so that's one technology category or one area that we think has a lot of opportunity to be deployed in other manufacturers. And of course, the proof point that we're successfully deploying this into a very large established manufacturer within Volkswagen Group across multiple brands, across multiple price points, different form factors, different geographies is the proof point or the existence proof that the technology is scalable and that we're capable of supporting these types of complex deployments. With that said, the other large category of technology that we see opportunities to have licensing deals is in the autonomy realm. And here, it's in a similar way, it's not just hardware and it's not just software, it's the 2 of them together. So it's the combination of our compute platform that we've developed, the RAP1 in-house inference platform I talked about and the associated computing platform we've designed around that, along with our perception platforms of the cameras, radar, LiDAR that exists. And then very importantly, the large driving model, this foundation model, this neural map that we've created that defines what driving or how to drive a vehicle. And that's -- as hopefully, I made it clear before, is a much more flexible architecture to deploy into different vehicle embodiments. And so we're doing that already within Rivian. We'll be deploying that across R1T, R1S, R2, ultimately our commercial vans, robotaxi applications, but we do see this as a very scalable technology that can be deployed in many ways. Operator: Our next question comes from Alex Perry from Bank of America. Alexander Perry: Just one, I guess, a little bit further on the robotaxi strategy. So you have the Uber deal announcement. I guess is the plan to pursue a partnership model for now? Does the deal with Uber have sort of any exclusivity? And how else will you sort of look to tap into this important market? Robert Scaringe: When you think about the robotaxi space as a business, and so putting aside the technology for a moment, and I should say, and putting aside and recognizing that the technology for Level 4 in a robotaxi or in a personally owned vehicle is the same, meaning a personally owned Level 4 vehicle can't drive -- or should not drive worse than a robotaxi Level 4 vehicle. They're both very capable of managing the same levels of complexity and the same types of driving situations. So it's the same tech stack. But when you think of it through the lens of a business model, the benefit of working to deploy this first with Uber is you have very large density of choice. And so if you're deploying entirely on your own, you have to build enough vehicles to have in the fleet or in the car park such that if you're a user, when you say I want to have a vehicle available, it's immediately available or it's available in a matter of minutes. And so the scale of Uber's platform and the success they've had in creating a really healthy marketplace really makes them an ideal partner for us as we think about launching this technology in an R2 to deploy into providing robotaxi services. And as you've heard me say a couple of times, and we've talked about this in the past, that technology is going to also underpin a consumer personally owned variant as well. And I think we have to recognize that there's going to be lots of innovation around business model that start to emerge as we have Level 4. And so if you think of it in a very simple sense, the 2 bookends in terms of business model are pure ownership or the vehicles dedicated entirely to your household. And the other end of the spectrum is purely mobility as a service, where you don't own the vehicle, you're not using the same vehicle every time, but you ask for a vehicle on a purely variable basis and it shows up. There will be things that emerge in the middle and not to be exhaustive here in the types of things, but you can imagine different forms of sharing vehicles amongst families or within neighborhoods or within apartment buildings. But there's going to be a very exciting time of innovation in terms of how we think about consuming mobility or consuming transportation. And with all that said, just recognizing the trillions of miles that are driven today, the vast majority of those are driven in personally owned vehicles. And so robotaxi represents a portion of those, but we think there will be lots of new models that start to make up the topology of those trillions of miles that are driven. Operator: Our final question comes from James Picariello from BNP Paribas. James Picariello: So I want to ask about the Uber partnership. Can you share any color on the milestones that are associated with the 4 tranches of funding, right, regarding the $950 million in additional additive liquidity. And it does appear right that one of the tranches is already expected to hit this year, $250 million? Claire McDonough: Yes. As RJ had just mentioned, there are a handful of milestones and the milestone that we more specifically expect to be in position to unlock the initial $250 million this year will be the operation of some Rivian vehicles in San Francisco and Miami with safety drivers later this year. And then as you think about the subsequent years, you can think about the ongoing trajectory towards full deployment in a couple of cities in 2028 and then 25 cities by 2031, that would fully unlock the remaining $700 million of capital from Uber. James Picariello: Excellent. That's great color. And then just to maybe level-set expectations on automotive gross margins for the second and third quarters. I mean, this quarter was yet again another strong showcasing of the company's momentum toward positive auto gross profit, right? And this is the last quarter before the R2. Like is there anything you could share for these next 2 quarters regarding the temporary order-of-magnitude impact we can expect to auto profitability? Claire McDonough: Sure. As we think about the subsequent quarters of Q2 and Q3, we'll see the introduction and turn on of both, all of the depreciation expense, the new manufacturing team that is established that will be producing the vehicles. But as they're in the process of ramping up the first shift of operation, we'll see some of the complexity associated with lower volumes on the new R2 line. And so as a result of those attributes, we do anticipate seeing an impact to our automotive gross profit over Q2 and Q3 before we start to see the overall benefits of the ramp, not just on the R2's unit economic profile, but also importantly, the fixed cost leverage that we'll see across the R1 program and EDV program overall. So in total, we still anticipate that we'll exit 2026 with a trajectory of positive automotive gross profit with that being both R2 as well as total Rivian Automotive gross profit being positive, which is important for us as we go into '27 and really fully ramp up the R2 capacity in Normal. Operator: This concludes the Q&A section of the call. I would now like to turn the call back to RJ Scaringe for closing remarks. Robert Scaringe: Thanks, everybody, for joining us today. Hopefully, you can tell we're really looking forward to getting R2s into customer hands. We're very pleased and excited with the product that we've developed and proud of the team for all the great work that went into creating such a special vehicle. Along with that, we are very much focused on the development of our Autonomy platform. And with that, we'll be starting to see some of the fruit of that significant effort, as I said, first, with our point-to-point capabilities later this year and then adding more functionality, more capabilities over the course of 2027 and '28. And again, thank you everybody for joining this call. We're excited for all of you to hopefully experience an R2 and see them on the roads here very soon. Operator: This concludes today's call. Thank you for joining us.
Operator: Good day, and thank you for standing by. Welcome to the Monolithic Power Systems, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. We are joined by speakers, Michael Hsing, CEO and Founder of MPS; Rob Dean, Interim CFO; Tony Balow, Vice President of Finance. And now I would like to turn the conference over to Arthur Lee to read a safe harbor statement. Please go ahead. Arthur Lee: Earlier today, MPS released a written commentary on our results of operations for the first quarter ended March 31, 2026. This document can be found on our website. Before we begin, I would like to remind everyone that in the course of today's presentation, we may make forward-looking statements and projections within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. The risks, uncertainties and other factors that could cause actual results to differ from these forward-looking statements are identified in the safe harbor statements contained in the Q1 2026 earnings commentary and in our SEC filings, including our Form 10-K and Forms 10-Q, which can be found on our website. Our statements are made as of today, and we assume no obligation to update this information. Now I would like to turn the call over to Tony. Tony Balow: Thanks, Arthur. Good afternoon, and welcome to our Q1 2026 earnings call. In Q1, MPS achieved record quarterly revenue of $804 million, 7% higher than the fourth quarter of 2025 and 26% higher than the first quarter of 2025. Our quarterly performance was a result of our continued innovation, our consistent execution and the resilience of our diversified market strategy. Let me call out a few highlights from the quarter. Our communications end market grew 33% sequentially on the strength of our power solutions for optical modules and switches. The pipeline for our automotive and enterprise data end markets, including server continue to accelerate as we won multiple new projects across customers and regions. We sampled our first high-speed interface products for DDR5 at major customers and MPS continued to grow our capacity past our original $4 billion plan with a new goal of reaching $6 billion in the near future. We continue to adjust to the fluid geopolitical and macroeconomic environment, but our diversified market strategy remains unchanged. MPS focuses on innovation and solving our customers' most challenging problems. We consistently invest in new technologies that open new end markets and applications and accelerate our transition from chips only to a full-service silicon-based solution provider. And finally, we continue to expand and diversify our global supply chain, allowing us to capture future growth opportunities, maintain supply stability and rapidly adapt to market changes as they occur. Operator, you may now open the webinar for questions. Operator: [Operator Instructions] Our first question comes from Ross Seymore with Deutsche Bank. Ross Seymore: I just want to dig a little bit into the enterprise data side of things. Can you just talk about the different trends you're seeing between kind of the XPU side versus the CPU -- server CPU side? I know you mentioned in your preamble that the backlog and visibility was improving in both. But given the strength of demand we're hearing elsewhere in the server CPU side of things, I wondered how you guys are doing there. Michael R. Hsing: Both are good. Yes, Tony, you can talk to that. Tony Balow: Yes. I'll give a little more color. And Ross, if you recall, even last year in 2025, we had talked about CPU being a tailwind, and we continue to see that here in 2026. But if you look across enterprise data, for us, right, as we've said, it's increasingly hard to differentiate between sort of AI solutions and CPU. But in general, all the growth drivers are intact. We're ramping new customers. We've been ramping existing customers. We continue to see the transition to modules. And like I said, plan server has been a tailwind, and we think it will continue to be so. Ross Seymore: And I guess the second question would be on the storage and computing side of things that seem to be a little bit better than feared in the first quarter. Talk about the tailwinds or headwinds given what's happening from a macro perspective and then potentially the difference between what you guys do on the storage side versus the computing side? Tony Balow: Yes. I'll start on that one, and then I'll let Michael and Rob jump in. But as you know, right, that segment really has sort of 2 separate businesses in it. The storage side obviously has remained strong as it's really been indexed to a lot of the data center business. And we see strength in DDR5. We see strength in HDD and SDD continue out of last year and into Q1. On the notebook side, we're still more cautious on that side. As you know, there's really 2 dynamics there. I'm sure you've heard other companies talk about potential TAM headwinds associated with memory shortages or elasticity from memory prices. But remember, we also selectively play in that part of the market that has lower margins around consumer. And so I think -- and if we look forward to those 2 -- on that business going through the year, I think we're still very optimistic about storage staying strong, probably much more cautious on the notebook side. Michael R. Hsing: But the notebook, we don't really care this quarter or next quarter as long as we develop -- we developed the best solutions of power density and our customers' ease of use. And these design wins that we have, the revenue will ramp. Operator: Our next question comes from William Stein with Truist Securities. William Stein: Great. First, I'd like to ask about manufacturing. You noted in the press release that you passed the $4 billion target, you're now working to $6 billion capacity, maybe you can update us as to the strategy around geographic placement of your capacity? And maybe remind us what's going on from a technology perspective. This used to be a big focus of the various BCD iterations that you produce. But can you bring us up to speed as to what is the latest BCD generation? Michael R. Hsing: I'll answer your last question first. We are still around 60 nanometers and maybe we'll go down to 40, 45 nanometers. And these ones as a power density, as a market trend, the power increases and we increase the power densities. And it's just old stories. We keep doing the same thing in the last 20 years. And we just do better than our competitors. For the $6 billion goal for manufacturing pipeline. We -- clearly, and we have -- we see our near future, we see a lot more activities, a lot potentials and all these design wins is imminent, they will turn into revenues. Tony Balow: And maybe just to add. Well, I think I'm telling you what you know, but on the $4 billion of capacity, we talked about that being very geographically diverse, both inside and outside of China. And remember, our strategy really is to maintain that supply chain diversity. So we'll continue to try to have that balance going forward. Operator: Our next question comes from Joshua Buchalter with TD Cowen. Joshua Buchalter: Congrats on the results. Maybe to start, can you just help us a little bit with the models? Any help you can give us on the guidance by segment as we think about sort of a 12% sequential growth for the June quarter, which segments should be above and below? Michael R. Hsing: Well, I think, let me start with what you guys are more interested in the most, okay? Bernie, last time talked to you guys, that we have a 50% floors, so 50% floor. I'll let Tony talk about -- give you a better news today, okay? And I'm more excited about the other projects that are deeply involved, okay? I mean the building automations and audio project side and as well as robotics. And these ones will pave the way for our next 2 to 3 years out to remain on the same growth trajectory. Tony Balow: Yes. I'll follow up a little bit as kind of marching through. And Josh, I know the first thing people are interested is enterprise data, so I'll start there. And as you recall, we tend to be fairly conservative in how we look at these things, waiting for the backlog to be in place. So late last year, we talked about 30% to 40% growth year-over-year. In the last call, we kind of rose that to a 50% floor. And the strong ordering patterns that we saw start last year has kind of continued through Q1. So at this point in time, I think we're comfortable raising that floor up to around 85% year-over-year growth. And that will certainly be one of the drivers of growth for the year for MPS. If you look -- sorry, Michael. Michael R. Hsing: I'll let Tony deliver better than our last CFO. Tony Balow: Okay. If you look at the others, Josh, I think we've been signaling on communication as we've become increasingly excited about that end market with not only the optical module growth, but due to switches as well. So we certainly would expect those to be drivers. Auto, I think is a very consistent story. We said that would be roughly flat for the first half of the year and ramping in later in the year. And then storage and compute, we talked about a bit already with Ross, right? There's really 2 different dynamics going in there where we're still very optimistic on storage pulled through by data center, more cautious on notebook. Michael R. Hsing: So again, overall, we cannot predict which quarter goes ramp volumes. And that's not our business to do that. And we're winning strategy is same as the last 20 years. As long as we deliver the best product and service our solving our problem for our customers. And I don't see we lose any socket, okay, the major socket at least. And we'll keep winning. And those business -- those design wins will turn into revenues. Joshua Buchalter: Thank you both for all the color there. Unfortunately, when you deliver good news, you still get annoying follow-up questions. But I guess if we think about the incremental upside since last quarter, any help you can give us on how much of that's coming from CPUs, as Ross mentioned earlier, versus more confidence into either content or visibility into share on the AI accelerator side? Congratulations again. Michael R. Hsing: That's a good try, okay? I'm not going to give it to you. Okay. Tony Balow: Yes, Josh, I think we just fall back and we've talked about all the growth drivers and say they're intact. I don't think we want to try to parse out between volume and content because it can be very specific. Michael R. Hsing: In reality, it's very difficult, okay, to separate it, okay. What is called AI, what is called servers. There's a lot of etching and a small segment and these are very small utility box. We see a lot happening. I mean maybe I don't use the right words and you guys use it, I mean these are portable AI devices. And just based on GPUs. These are happening. And that's clearly overlapped with the CPU and GPU powered. Operator: Our next question comes from Rick Schafer with Oppenheimer & Co. Richard Schafer: I'll add my congratulations and just a wow, I guess, on the outlook. Maybe if I could just for a second, talk about enterprise data. I've got a follow-up, Michael, that you'll like better, but I think -- the top 4 CSPs, I think just last night, I mean now we're over $700 billion in CapEx just from them. I mean it seems like you guys are clearly seeing that increased order velocity, my real question is, are you able to capture all of that upside? I mean is there anything hurting your supplier, your ability to capitalize, Michael? Because in years past, you guys have kind of made your bones on always being ready for that upside and kind of never being caught short. So I'm just kind of curious if that's still the case or kind of what you're seeing? Michael R. Hsing: I think it's exactly right I mean although we have a few more players and -- well, let me go back a few quarters ago. In these AI and in GPU powers in a given time will be the performance and also the manufacturing capabilities and reliability will remain as only a few players. And after a year -- a couple of years, it's been very clear that MPS is one of the players. And as I promised over a year ago or so, and we continue to do well in many aspects, especially for the power density side. We are the best in the market segment because we provide a total monolithic power solutions. And we can use a single piece of silicon versus our competitor use multiple pieces of silicons. And that clearly shows our advantage. And yet, we don't want to be the dominant suppliers, well, we just want to be a part of it. And our goal is to diversify growth. Richard Schafer: Got it. And for my follow-up, Michael, I'm just curious on physical AI. Obviously, it's getting a lot more -- a lot more people talking about it and see a lot more focused. And just if you could flesh out maybe a little more of your plans for that segment. What kind of TAM do you -- have you guys identified there? I mean you called out robotics a minute ago on the call. I mean, can that be a meaningful revenue contributor next year? Or when would we start to see robotics start to drive top line? Michael R. Hsing: We see this year and -- but the volume are still low, but it can kind of move the needle slightly. And if we go up the trends and this is still at the very beginning, and it's very difficult to predict. And many companies have launched the first high-volume robotics that we clearly benefited from it. And after that, we can call -- we cannot call the market segment growth. But the future is there. Clearly, when more AI adopt it in robotics, the application will be widened. Tony Balow: And I think what you see is us try to run the typical MPS playbook, which right now we're trying to engage broadly and win all the designs we can. We can't control when the customers ramp, but we can't control winning the sockets, and that's the broad engagement we really see happening in 2026. Michael R. Hsing: That's very good point. Yes. Operator: Our next question comes from Quinn Bolton with Needham & Company. Quinn Bolton: I'll offer my congratulations as well on the results and outlook. Michael, Tony, I guess I wanted to ask on the comms segment. It was up 33% sequentially. And March, it sounds like it's going to be one of the faster-growing segments in the June quarter. When I look at optical modules, I think 800 gig modules are more than doubling in '26. So -- my question is, do you think the comms segment could actually grow as fast, if not faster, than enterprise data this year given those trends? Michael R. Hsing: Yes. Again, I'll follow for Tony's answer the last one. So we're not in the business to predicting what the market trend is, okay? I mean we provide -- this happens in this particular segment. And we saw a lot of activities and a lot of demand for high-power density product and especially modules. And I think, as I mentioned about maybe a few quarters ago. And so this quarter and it just jumps out. And I -- from what we learned, the power density of the module with a very confined area and the data rate keeps increasing. And with the opticals or with other type of format, the power will keep increasing, okay? And in what rate, I cannot predict. But in the small confined areas and the power density is critical, that's our basic technologies that we could apply in that segment and that we execute fast and we capture the market. Tony Balow: Yes. And I think as ordering patterns have continued to be strong and extend, we still have them all the way through the year. So I think it's pretty tough for us to call all the way through the back half right now. But certainly, we'd put that end market above the corporate average. Quinn Bolton: Got it. Okay. And then... Michael R. Hsing: Same way, I'll go back to servers side and I go back to server side, we -- in the last years, we don't know, the server market will pick up or not picking up, okay? As far as we listen to our customers, we get our inventory ready and when they need it, they have those products. And so we just focus on deliver better product, winning more socket. Tony Balow: Yes. I'm a broken record, but I think it's a great example of, again, diversified approach, you land and you sort of look at the other sockets available to the applications and continue to grow your SAM. Quinn Bolton: My follow-up question. Michael, you guys have been sampling your products for 800 or plus/minus 400 volts for a few quarters now. Wondering if you could provide any feedback on how that activity is going? And can you give us any thoughts on -- there's a lot of debate between whether those higher power conversion steps will be more GaN-based or silicon carbide based. If it goes GaN, will you guys have GaN-based solutions ready for that opportunity? Michael R. Hsing: No, we based on silicon carbide and our -- that's our solutions. We do -- in the past, I openly said I don't believe in GaN, okay? Now start to -- I didn't know what I was talking about, I guess, okay? We -- in the last -- start of last year, we developed our GaN, but it's not for 800 volts, it's for lower voltage and lower power and lower power segments. We start to develop these fundamental technologies in GaN. To answer the first part of your question, yes, we're sampling, and again rather sample or call it sampling co-developed that systems with our customers and also our customers' customers. And it's -- we don't talk about those until I guess, you guys ask us. And 800 volts became a household number -- household names on the Wall Street in GaN. And so we start to talk about it. And our product is working. And I think the overall, the environment and in the new 800 volts power bus data centers, they -- a lot of things has to be resolved. And we just have our -- for that application is ready, and also have 800 volts, go to 10,000 volts, okay? That's another segment and has to be developed a lot more efficient power conversions. And these are all part of the pictures. MPS will play in those segments. Operator: [Operator Instructions] Our next question comes from Tore Svanberg with Stifel. Tore Svanberg: Congrats on another record quarter. I had a question, maybe as a follow-up to a previous question on power. So I do realize there's a lot of focus on 800-volt, but before we get there, there's the move to 2,000-watt GPUs. And I know there's a lot of sort of wannabe power management companies out there, Michael. So just hoping you could touch on 2 of the 3 things that really make MPS so unique and differentiated to handle those types of power levels because that is not like a 2028 time frame, right? I mean, that's already next year. So yes, if you could give us some color there, that would be great. Michael R. Hsing: Yes. Okay. That's a good question. I can touch and one of them I already said earlier, MPS is a focused on the monolithics. And we do what is the most cost effective and we do -- and how we do the integrations. And we have the capabilities to integrate or disintegrate, okay? And the integration we can put it in our modules. And that's a huge advantage. And with the multiple other chips, okay, and if we use particularly discrete power components, discrete power fabs and it's very difficult to do for manufacturing the modules. The second thing that I should mention that we invested in a module development, you note, for other segments, actually, and since 2016, we want to move up from providing silicon-only power conversion. And again, we do a plug-and-play solution. That journey we started 2016. And immediately, we know how we test these devices and how we qualify these devices, not -- and if it's a higher volumes and high qualities, it can't be touched by humans. We develop our own test systems and own reliability systems. These are fully automated. And actually, it's all based on MPS eMotion product. And these ones are very unique. And they -- before these systems putting in production, we can't find anything like this on the market. And that's I think -- to me, this is a huge advantage. And the other one is -- the last one that will go back to semiconductors, like we talked about this. We use 60-nanometer and now we move to 40 nanometers. And those increased the power density by -- last time we talked about 3M per millimeters cube and now we go pass that. Tore Svanberg: Great. And as my follow-up, when you mentioned a new product, I always listen to you because I remember you talked about 800 gig optical components being in your market. And before you knew it, you had a huge business there. And you now mentioned you have your first high-speed interface product sampling for DDR5. So just curious, when should we start to see material revenue from that business? And could that also grow into a several hundred million dollar business over the next few years? Michael R. Hsing: That's absolutely right, okay? And frankly, I don't know anything about this high speed and which is hire the best engineers and cut them loose and then they created this, okay? But from a business side, it's our natural way of expanding the service, total service market that increased our SAM. And we have a pretty good position in PMIC in memory, then we introduced timing drivers and timing control, whatever and also temperature sensors. And now the RCD or whatever the things came and I know it's very difficult. This is beyond my understanding. Our engineers and our people they pull it off. And so we have a few people that compare -- other companies like they have 50 people that design groups, and we will be able to pull it off in a few years. These are brilliant guys and they want to make things happen. That's -- and the revenue, usually we don't talk about it. I can talk about the product and we sample those products. Clearly, in that market segment, our customers are very much welcomed that we have another player. Tony Balow: And Tore, I'll just help you with the model a little bit. I wouldn't really have that as being a contributor to 2026 revenue. I think we're really highlighting it as we continue to expand our footprint in that market. Operator: Our next question comes from Gary Mobley with Loop Capital. Gary Mobley: Let me also extend my congratulations. I'm curious about the comms business that definitely a stand out for the quarter in terms of growth, upside, and I presume carrying through the -- into the second quarter and for the balance of the year as you previewed already. So what I'm most curious about is how much content you have in these 800-gig optical modules and I assume maybe of rack switches, maybe if you can put it in the context of by how much you see your content increasing in rack scale solutions for accelerated compute given this beachhead in these 2 new applications? Michael R. Hsing: I think it's more than a beachhead than not. We're pretty well in the -- well beyond the beach now. Tony, you want to? Tony Balow: Yes, I think we're going to stop short of kind of giving a dollar content. But obviously, in the optical modules, right, we have a module in the module doing that. So we obviously look at more of that than a discrete device. If you talk about switches and things of that sort, you have a whole different number of trays, for example, you have switches, you have NIC cards, you have other things like that, which all require power. And so I think the opportunity is, right, is you have a number of different processors in these that sit in these racks that we can provide power for and that we've been expanding that all sit within our Communications segment. But I think we're -- as usual, right, we're not going to talk about specific content layers, especially for specific customers. Gary Mobley: Okay. As my follow-up, I wanted to ask about distribution channel inventory. I know it's been running lean. Is it still lean relative to where you would normally place your distribution inventory and then as well, maybe if you can talk about the sort of inflationary relating pricing trends that you have to pass along? Tony Balow: I'll take that one. With regards to our distribution channel, we don't have a great deal of perfect visibility there. But what we have seen at least in 2025 and carrying into 2026, is that the channel has been very lean. And that implies to us that we're shipping to what demand is at the end market. But beyond that, we're looking good. Michael R. Hsing: For the pricing, cost pricing, yes, some of the cost is higher, okay? And we see a lot of activities, okay? So we will keep -- the goal is that we're keeping our margin profiles. Tony Balow: Yes. I think and just to add to Michael's, I think we don't -- we're not looking at it a broad-based across the board, but there are places where input costs have gotten higher, people are asking for expedited supply chains and things of that sort. And in those cases, yes, you could see us raise prices to stay within our gross margin model. Operator: Thank you. Our next question comes from Joe Quatrochi with Wells Fargo. Joseph Quatrochi: Maybe just a follow-up there on the gross margin. Wondering if you could just share any of the puts and takes on the guide. It seems like obviously very positive revenue acceleration in kind of not a ton of follow through on gross margin kind of still stay in that range. Michael R. Hsing: Yes. Okay. I -- again, I said the margins in the last couple of quarters, so margins on the low end. And although it's in our model, I mean it's on the low end. And we still improve the yields on the modules. And I think that we don't have much of a headwind, we're moving up. But I don't want to give you a false hope that we're going to jump very high. That's not NPS. We don't do that kind of thing. Tony Balow: I'll expand a little bit on what Michael just said. Historically, we've been very consistent with delivering to our gross margin guidance. For the last 4 quarters, we've been flat at 55.5%. which is at the low end of our gross margin model for growth, which ranges 55 -- mid-50s to upper 50s. For Q2, as you know, we did have the confidence to increase incrementally our gross margins, mainly because we've gotten better visibility to our backlog. We saw this happening in the fourth quarter of last year, and it's continued into the first quarter of this year. So that has again given us some confidence. We do, however, do see some strong headwinds potentially in the second half. And so we're not -- we're remaining cautious for the guidance in the second half of the year. Joseph Quatrochi: Right. That's helpful. Maybe just on the robotics socket opportunities. You talked about up for grabs or to win this year. Are those -- do we think about those as being incremental? So I think you talked about $150 of content like for humanoid back at the Analyst Day. Is that the right way to think about it? Or are those expanding opportunities? Michael R. Hsing: It really varies. I mean, humanoid is the most visible. You see some dancing robots and those kind of -- and the -- what we focus on is in robotics. If it's remote and without power cord plug-in robot and those have battery operations. And so our battery management product plays a role in there. And the other one is the AI side, the compute side, for power the GPUs, okay. And these automated control units and also as well as these sensors. And the other segment is the actuators, the motion side. That's overall we sell -- we offer for the robotic companies. And many applications is in actuators and they can be in a medical assist for rehab purposes, we're seeing those kind of things happening. And for the dollar content, as I go back to your dollar content, it's very difficult to say. It's a variety of applications. We sell in chip and to selling modules, okay? And so the dollar content is also different, and it's very difficult to judge. But the trend is this robot will happened and there will be a lot in the world, will be a lot more automated, and it can assist human to do a lot of things, okay? Operator: [Operator Instructions] Our next question comes from Chris Caso with Wolfe Research. Christopher Caso: Yes. I guess the first question would be about the ED segment. And if you could talk about the growth on Merchant Solutions versus ASIC solutions this year? And what you're expecting with regard to content? I know you've got a strong position in both, but do you expect outsized growth in one area or the other? Any color you could provide would be helpful. Michael R. Hsing: We don't divide it into -- these are the learning side, inferencing side and frankly, we don't know how to separate it and they could use the similar product. What we do is -- why we're winning all these segments is because the power density, as I said earlier, okay? And nobody wants to waste power and efficiency is -- power densities directly related to power efficiency. And so they want a smaller size and they want to have a high efficiency. It really doesn't matter to us which segment. Tony Balow: Chris, the only thing I'd add, right is, I think we're comfortable raising the floor from 50% to 85%, not because there's been a fundamental change in the growth drivers for how we're approaching the market. It's really, as you know, are more comfort about what's in backlog, and we've seen that extended ordering pattern. So I think to Michael's point, I don't think we subdivide it to content and volume. But I just want to make sure you know that I don't think anything has changed other than be able to see more orders in the books going forward. Christopher Caso: Got it. As a follow-up, if I could ask about the auto segment, and you talked about that being flattish in the first half with some growth in the second half. Obviously, auto has been a little more variable in terms of its recovery. There was some data out of China, which was a little weaker in the beginning of the year, perhaps you give some color on the visibility you have at auto and why you think that starts to grow again in the second half? Michael R. Hsing: I don't pay attention to these, which ones are strong -- which segment is strong, which continent and it's more stronger or weaker, because these are chasing the market. We're not chasing the market. Whatever happened happens and we have the product ready, we can deliver. But Tony, you can talk about the near term, I don't pay any attention to it. Tony Balow: Yes. I mean I can add a little bit more there. I think, Chris, the shape of the year, as you said, right, our expectation hasn't necessarily changed. And while we've talked about seeing that ramp later in the year is really on our belief on one of some of these designs that we previously won coming to market. We can't control when our customers ramp. But the pipeline in auto has been expanding. And based on our current belief, we would expect to see that ramp later in the year. So again, as always, right, we'll monitor as things go through, but that's our belief at the moment. Michael R. Hsing: Well, the bottom line is we're winning socket and we're expanding our market share. Operator: Our next question comes from Kelsey Chia with Citi. Wei Chia: Congrats on the results. Could you talk about the rationale behind focusing on silicon carbide for 800-volt step down while focused on gallium nitride just for the lower voltage, lower power segments. It seems like some of your peers are also using GaN for higher voltage step down. How would that influence your competitive positioning? Michael R. Hsing: It's a long question. Okay, it's a long answer starting, okay, I didn't -- I said I didn't believe in GaN, okay? And I still don't believe for high power, I mean, we still have to prove that in the market segment. The reason we use the silicon carbide is these devices are proven in the history like 20 years ago, they're making diodes, made the materials a lot more reliable. And there's some fundamental issues, we started this -- try to improve at start of 2016. And as a result, we have a deep know-how and to make -- to use the silicon carbide. And the MPS is unlike other company, we're selling -- we don't sell silicon carbide fabs. These are passive semiconductor pass-through device. And we always integrate into our modules. So that's a kind of a short story for you, okay? Wei Chia: Got it. And I know that the team historically has been able to gain share in tight supply environments. Could you talk more about your supply chain management strategy and also your confidence in meeting customer demand if other suppliers face capacity constraints? Michael R. Hsing: We -- throughout our history, if you look at it, and especially during 2021, and these are after COVID happened. And MPS always listen to our customers. We don't play a passive role, when customers tell you to pull in too late, okay? And we have actively preemptively and to build these inventory, get these inventory ready and our product life cycle is very long. So we don't have any materials, like a large amount and scrapping and we know this one, sooner or later we'll sell. And again, like you asked me where these products ramping, I don't know, plus/minus years, it will. And we don't mind and have a little higher inventory, although in the last recent quarters, we cannot have enough to build up. Tony Balow: Yes, I just think the last thing I'd add, just so it's really clear is nothing about our outlook or anything we said about enterprise data floors because we see any constraints in the supply chain. It's something we've continuously stayed ahead at. So the root of your question, Kelsey, was whether or not the 85% floor was limited by something, that's not an issue right now. Operator: I'm showing no further questions at this time. I would now like to turn it back to Tony Balow for closing remarks. Tony Balow: Thank you, operator, and thank you all for joining us on this conference call today. I look forward to speaking with you on our next call for our second quarter 2026 results. Thanks, and have a great day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Welcome to the Q3 Fiscal Year 2026 ResMed Inc. Earnings Conference Call. My name is Daryl, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Also, please note this conference call is being recorded. Later, we will conduct a question-and-answer session. I will now turn the call over to Sally Schwartz, ResMed Inc.'s Chief Investor Relations Officer. Sally Schwartz: I want to welcome our listeners to ResMed Inc.'s third quarter fiscal year 2026 Earnings Call. We are live webcasting this call and the replay will be available on the Investor Relations section of our corporate website later today. Our earnings press release and presentation are both available online now. During today's call, we will discuss several non-GAAP measures we believe provide useful information for investors. This information is not intended to be considered in isolation or as a substitute for GAAP financial information. We encourage you to review the supporting schedules in today's earnings press release to reconcile these non-GAAP measures with the GAAP reported numbers. In addition, our discussion today will include forward-looking statements including, but not limited to, expectations about our future financial and operating performance. We make these statements based on reasonable assumptions; however, our actual results could differ. Please review our SEC filings for a complete discussion of risk factors that could cause our actual results to differ materially from any forward-looking statements made today. I will now turn the call over to Michael J. Farrell. Michael J. Farrell: Thank you, Sally. Before we get into the details discussing our results for the quarter, I am sure all of you have had an opportunity to see our press release and our announcement that Brett will be retiring, and Aaron Blumer has been appointed our next chief financial officer here at ResMed Inc. On behalf of our ResMed Inc. Board and over 10 thousand ResMedians in 140 countries, I would like to thank Brett, who I have had the privilege to partner with for 26 years, including the last 55 quarters as a CEO and CFO team. Brett has been an integral part of my executive team that has delivered growth, expanded access, and improved hundreds of millions of lives. Over two decades as ResMed Inc.'s CFO, Brett has built a financial foundation that has allowed us to deliver strong growth, robust free cash flow, and best-in-class operating margins. Brett has also helped shape the company's culture, and his legacy is embedded in our impact on the lives of many millions of patients worldwide. Brett leaves ResMed Inc. in a position of strength with a very disciplined and global financial team. I am tremendously grateful to Brett for his service, his leadership, his friendship, and his commitment to ResMed Inc. I would also like to welcome Aaron Blumer to ResMed Inc. Aaron brings more than 17 years of global financial leadership, most recently serving as the CFO of Exact Sciences. He has a strong track record of driving strategic growth, operational excellence, and financial discipline across complex global organizations, including prior financial leadership roles at 3M and at Baxter. Aaron's international perspective will be invaluable here at ResMed Inc. as we continue to execute on our global 2030 strategy to accelerate our business and to deliver long-term value for our shareholders around the world. We look forward to introducing you to Aaron over the coming quarters. Okay. Now turning to the third quarter. We delivered another set of strong results, including 11% growth in headline revenue, or 8% growth on a constant currency basis. We delivered operating leverage leading to margin expansion both year over year as well as sequentially, resulting in 21% growth in non-GAAP earnings per share. A huge thank you to the global ResMed Inc. team for their steadfast dedication in serving patients in more than 140 countries worldwide. ResMed Inc. continues to build the world's leading digital health ecosystem, encompassing sleep health, breathing health, and healthcare technology delivered in the home. I would like to return to the three key themes that I have been highlighting over the past year. One, that ResMed Inc. is an operational excellence machine and an innovation machine. Two, that ResMed Inc.'s robust free cash flow and strong balance sheet position us to both invest in the business and return capital to our shareholders. And three, that ResMed Inc. remains a compelling investment opportunity, especially amidst global macro uncertainty. We just continue to deliver the results. I will address each of these three themes in my prepared remarks here before we go to Q&A. Our gross margin expansion in the quarter was strong: 290 basis points year over year and 50 basis points of gross margin expansion sequentially. These results demonstrate the operational excellence that is a ResMed Inc. hallmark. We have continued to execute on our pipeline of supply chain optimization initiatives. These efforts, along with our experience from past supply chain perturbations including COVID impacts, the major recall of a competitor, and semiconductor chip shortages, position us well to navigate the current geopolitical uncertainty and any other external impacts to our resilient global supply chain. ResMed Inc. also remains an innovation machine. We have continued the global rollout of our portfolio of novel fabric-based masks. These masks are designed to deliver an elevated experience for patients, and they are changing the basis of competition in mask technology. The AirTouch N30i and, more recently, the F30i Comfort as well as the F30i Clear have achieved strong early adoption combined with incredibly positive patient feedback and home care provider feedback. And now we also have real-world data that show that the AirTouch N30i drives 6% higher 90-day compliance than its silicone equivalent. Those of you that truly understand the clinical and business relevance of adherence know that those 600 basis points of extra compliance will mean a lot as this technology expands. Adherence is the single biggest driver of lifetime value for patients, for physicians, for HME providers, and for ResMed Inc. Watch this space as fabric technology expands its impact in our full face category with the F30i product lines, both the F30i Comfort and the F30i Clear. On the device side of our business, we have made further progress with the global rollout of the AirSense 11 platform, including most recently in market in Latin America, and just this month in our fast-growing China market. For our China market, as we have discussed before, we leverage a local digital ecosystem, intentionally separated from our global ecosystems, including integration with platforms such as WeChat that create a personalized patient engagement experience. This is an element of our broader strategy to scale our global ecosystem model encompassing devices, software, and data, yet also customized for ecosystem models that target local market needs. ResMed Inc. also continues to drive awareness in the sleep medicine clinical community. Our continuing medical education, or CME, programs include sleep medicine physician society-approved guidelines, including the benefits of CPAP, APAP, and bilevel therapy as the clinical gold standard, the frontline treatment for any patient diagnosed with sleep apnea. Our sleep apnea educational courses have now been completed more than 80 thousand times by more than 45 thousand unique clinicians. Surveys at the end of these courses show that 78% of these providers intend to change their clinical practices related to improving sleep health and breathing health based on what they learned. We are following up with these clinicians to ensure that their intentions can translate into actions that benefit patients on their screening, diagnosis, and prescription journey. Early feedback suggests more patients being assessed for OSA and higher numbers of OSA diagnoses are occurring. We see this in our VirtualOx numbers as well. We will remain laser focused on continuous improvement of the sleep apnea pathway to ensure patients who need CPAP, APAP, and bilevel therapy can readily access it and be treated for life. On the clinical research front, we continue to invest in and track important studies that provide new evidence in sleep health. Last quarter, I noted a study in JAMA Neurology where researchers found that early treatment of OSA with CPAP may reduce the risk of developing Parkinson's disease. Further, in the field of neurology and brain health, we are tracking an increased volume of clinical literature showing that sleep apnea is linked to higher risks of Alzheimer's disease, as well as the broader field of dementia. Specifically, a large population-based study recently published in the medical journal Thorax analyzed data from more than 2 million adults in the United Kingdom and found that obstructive sleep apnea was associated with an increased risk of all-cause dementia and vascular dementia. Notably, individuals with OSA who were treated with CPAP did not show an elevated risk of dementia compared with matched controls that did not have CPAP treatment. This is huge. Additionally, a meta-analysis published in the journal GeroScience showed that individuals with apnea have a 33% higher risk of developing dementia, and OSA was associated with a 45% increased risk of Alzheimer's disease. The growing body of evidence supports increased focus on screening, diagnosis, and treatment of sleep apnea as part of broader health and aging strategies. This is an area of rising cost and rising relevance for payers, providers, health care systems, patients, as well as their caregivers and loved ones. On the GLP-1 front, I would like to share some new data with you. We looked at patients on PAP who subsequently start GLP-1 therapy to see what happened to their PAP use versus a control group that only has PAP therapy. For this real-world analysis, we analyzed a cohort of n = 1.7 million de-identified patient records and focused on the clinical and business-relevant outcome of mask and accessory resupply. Our findings were that PAP patients who subsequently start GLP-1 therapy show higher PAP adherence rates than patients on PAP alone. Specifically, the two-year resupply rates are 5.1% higher, and the three-year resupply rates are 6.2% higher for patients who are on PAP and then start GLP-1 therapy versus patients on PAP alone. As highlighted by Eli Lilly's own clinical trials in this space, these two therapies are better together. This makes sense. Sleep apnea risk factors always include age, gender, craniofacial anatomy, as well as weight. I would say, therefore, OSA very often persists after even very significant weight loss and still needs to be treated. CPAP, APAP, and bilevel therapy remain the gold standard for treatment of OSA. And the reason is simple: because these therapies are the most efficacious. Period. Building on our ongoing real-world analyses in this space, and the ongoing growth of our own mask and accessories business over the last number of quarters and years, we continue to see that patients on a GLP-1 both initiate CPAP therapy more and stay on CPAP longer. As an update to our ongoing large-scale claims analysis, data that are built from a claims database of over 30 million patients, our specifically analyzed cohort includes n = 2.1 million de-identified patients. Our latest update to this analysis is that we are consistently seeing that patients who have scripts for both PAP and GLP-1 are 11% more likely to start on PAP therapy than patients who have a script for PAP alone. They are also more than 3% more likely to have a resupply event at the one-year time period, and more than 6% more likely to have a resupply event at the three-year time period. These data have remained consistent over the last years, as have our very strong masks and accessories business growth. The data are in sync. We believe GLP-1s are truly a megatrend, and a once-in-a-generation demand-gen opportunity for ResMed Inc. Both GLP-1s and wearables alike are driving more patients to talk with their doctors and ultimately, we believe this will lead to more patients coming into the ResMed Inc. ecosystem. In order to ensure that these patients receive the care they need, we are making meaningful investments both organic in our business and inorganic in capturing and channeling the increased consumer awareness. We want to educate the clinicians to manage the interest and questions that come to them, and we want to create life-changing healthcare technologies that people love. Watch this space for more investments and partnerships from ResMed Inc. in this exciting area of better helping the 1 billion people worldwide impacted by sleep apnea to find their way to screening, diagnosis, and ongoing therapy from ResMed Inc. This theme dovetails with my second message, which is that ResMed Inc.'s strong free cash flow generation and robust balance sheet provide us with significant flexibility to both invest in our business and to return capital to shareholders. We will continue to invest in our digital sleep health concierge capabilities, expanding the ecosystems to help patients quickly move from awareness through testing, all the way to being adherent on our therapy for life. I am excited to announce today that we are expanding our leadership across the broader sleep health market. This week, we signed an M&A deal to acquire Noctrix, a company with an FDA de novo classified medical device that treats restless leg syndrome, known in the medical community by the acronym RLS. RLS is the world's third most prevalent sleep disorder after sleep apnea and insomnia. RLS impacts approximately 7% of adults globally and around 17 million people in the U.S. alone. RLS has meaningful overlap with our core market of obstructive sleep apnea. RLS treatments from Noctrix are noninvasive, clinically proven, and drug free, just like our CPAP, APAP, and bilevel therapies. RLS prescriptions are written predominantly by sleep physicians, and the flagship product from Noctrix, called NIDRA, flows through the same HME/DME delivery channel that we here at ResMed Inc. lead in market share for our other sleep products. We expect to close this transaction on or around June 1, 2026. Brett will talk more about the expected impact to our financials in a few minutes, and we can discuss this strategic tuck-in acquisition in further detail during Q&A. I will just say this: its revenue growth rate is higher than ResMed Inc.'s, and its gross margin is higher than ResMed Inc.'s. We are very excited about this tuck in. The reach of our ResMed Inc. brand among sleep physicians and HME providers, as well as our national and international distribution channel strength, makes us the best owner of this scarce asset. The market and clinical need is incredible. Seven percent of the world's adult population need our help. Okay. With regard to our residential care software business, we continue our disciplined portfolio management approach and work, investing more in high-growth areas of the business and looking to find other solutions for the lower-growth areas of the business. We have made significant progress with our portfolio management work this quarter, and I remain confident that we will accelerate RCS revenue back to sustainable high single-digit growth with double-digit operating profit growth in fiscal year 2027. We will have further updates for you over the coming months and beyond. While investing back into our business is our first priority for capital allocation through R&D and sales and marketing, ResMed Inc. also returns significant capital to shareholders through our combination of dividends and share repurchases. During the third quarter, we returned $262 million to shareholders through this combination of our quarterly dividend and $175 million in share repurchases. As you have seen, we picked up the pace of our share repurchases in the last couple of quarters, and we will continue to deploy meaningful capital here. In concert with our ongoing investments, we delivered strong operating profit growth and robust free cash flow growth in the third quarter. ResMed Inc. remains a compelling investment opportunity amidst global uncertainty. This is my final, third point. During the third quarter, ResMed Inc.'s strong revenue growth, gross margin expansion, and disciplined investment approach generated 18% growth in non-GAAP operating income and $520 million in free cash flow—another quarter of above 100% free cash flow conversion. Whether you look back at the last 12 months, or at a compound annual growth rate across three years, five years, or even ten years, we have consistently been generating high single-digit revenue growth or higher, and earnings growth that steadily outpaced revenue growth. This track record delivered by 10 thousand-plus ResMedians combined with the enormous market opportunity we have in front of us underpins our continued confidence in our five-year outlook for high single-digit revenue growth and earnings growth higher than revenue growth. We have a clear and sustained leadership market position. We are committed to keep delivering for consumers, for patients, for physicians, for providers, for payers, and for our communities that we serve—and of course, for you listening to this call, our shareholders. With that, I will hand the call over to Brett in Sydney to go through a deeper dive into our financials. And then we will open the floor for your questions. Brett? Over to you. Brett A. Sandercock: Right. Thanks, Mick. In my remarks today, I will provide an overview of our results for fiscal year 2026. Unless noted, all comparisons are to the prior-year quarter and in constant currency terms where applicable. We had strong financial performance in Q3. Group revenue for the March quarter was $1.43 billion, an 11% headline increase and 8% in constant currency terms. Revenue growth reflected positive contributions across our device and mask portfolio, and in our software business. Year-over-year movements in foreign currencies positively impacted revenue by approximately $39 million during the March quarter. Looking at our geographic revenue distribution and excluding revenue from our residential care software business, sales in the U.S., Canada, and Latin America increased by 9%. Sales in Europe, Asia, and other regions increased by 7% on a constant currency basis. Globally, on a constant currency basis, device sales increased by 6% while masks and other sales increased by 12%. Breaking it down by regional areas, device sales in the U.S., Canada, and Latin America increased by 6%. Masks and other sales increased by 14%, reflecting continued growth in our mask portfolio and resupply as well as incremental revenue from VertuOx, which we acquired in Q4 fiscal 2025. Excluding the revenue contribution from VertuOx, Americas masks and other sales also grew at a double-digit percentage year over year. In Europe, Asia, and other regions, device sales increased by 6% on a constant currency basis and masks and other sales increased by 10% on a constant currency basis. Residential care software revenue increased by 4% on a constant currency basis in the March quarter, underpinned by robust performance from our MediFox Dan software vertical, partially offset by ongoing challenges in our senior living and long-term care vertical. During the rest of my commentary today, I will be referring to non-GAAP numbers. We have provided a full reconciliation of the non-GAAP to GAAP numbers in our third quarter earnings press release. Gross margin was 62.8% in the March quarter and increased by 290 basis points year over year and by 50 basis points sequentially. The increases were primarily driven by component cost improvements and manufacturing and logistics efficiencies, as well as a small positive impact from product mix and foreign currency movements. Our supply chain team continues to focus on our pipeline and productivity initiatives. Despite some of the current headwinds around fuel costs and emerging component cost pressures, we remain focused on making ongoing long-term gross margin improvements. Looking forward and subject to currency movements, we still expect gross margin to be in the range of 62% to 63% for fiscal year 2026. Moving on to operating expenses. SG&A expenses for the third quarter increased by 14% on a headline basis and by 9% on a constant currency basis. The increase was primarily attributable to additional expenses associated with our VertuOx acquisition and growth in employee-related expenses as well as marketing and technology investments. SG&A expenses as a percentage of revenue increased to 19.5% compared to 19% in the prior-year period. Looking forward and subject to currency movements, we still expect SG&A expenses as a percentage of revenue to be in the range of 19% to 20% for fiscal year 2026. R&D expenses for the quarter increased by 12% on a headline basis and 8% on a constant currency basis. The increase was attributable to increases in employee-related expenses. R&D expenses as a percentage of revenue decreased to 6% compared to 6.5% in the prior-year period. Looking forward and subject to currency movements, we still expect R&D expenses as a percentage of revenue to be in the range of 6% to 7% for fiscal year 2026. During the quarter, we recorded acquisition and portfolio review-related expenses of $6 million reflecting costs associated with the evaluation of strategic transactions including legal and professional fees for due diligence and related consulting work. These expenses have been treated as a non-GAAP adjustment in our Q3 financial results. Operating profit for the quarter increased by 18%, underpinned by revenue growth and gross margin expansion. Our operating margin improved to 36.7% compared to 34.4% in the prior-year period. Our net interest income for the quarter was $12 million, which includes additional net interest income associated with a ten-year Singapore dollar to U.S. dollar net investment hedge that was executed on February 2, 2026. We expect this net investment hedge will generate $9 million in net interest income on a quarterly basis going forward. As a result, we expect net interest income in Q4 fiscal 2026 will be approximately $15 million. During the quarter, we recognized unrealized losses of $10 million associated with the write-down of several investments in our minority investment portfolio. This reduced our Q3 fiscal 2026 earnings per share by $0.07. Our effective tax rate for the March quarter was 20.9%, compared to 20.1% in the prior-year quarter. As we noted in our last quarter call, the increase in our effective tax rate was primarily due to the impact of global minimum tax legislation introduced in certain jurisdictions that became effective from July 1, 2025. We still estimate our effective tax rate for fiscal year 2026 will be in the range of 21% to 23%. Our net income for the March quarter increased by 20%, and non-GAAP diluted earnings per share increased by 21%. Movements in foreign exchange rates had a positive impact on earnings per share of approximately $0.05 in Q3 fiscal 2026. Cash flow from operations for the quarter was $554 million, reflecting strong operating results and disciplined working capital management. Capital expenditure for the quarter was $34 million, and depreciation and amortization for the quarter totaled $59 million. We ended the third quarter with a cash balance of $1.7 billion. At March 31, we had $664 million in gross debt, and $996 million in net cash. We continue to maintain a solid liquidity position, strong balance sheet, and generate robust operating cash flows. As Mick discussed, we have entered into an agreement to acquire Noctrix Health for consideration of $340 million, which we expect to close on June 1, 2026. We will include Noctrix Health in our group results from the closing date. The current annual revenue run rate for Noctrix is approximately $24 million; we will report this revenue within our Americas devices category. For Q4 fiscal 2026, we expect Noctrix Health to reduce non-GAAP EPS by approximately $0.02. Today, our Board of Directors declared a quarterly dividend of $0.60 per share. During the quarter, we repurchased approximately 673 thousand shares under our previously authorized share buyback program for consideration of $175 million. We plan to purchase shares to at least the value of $175 million during 2026. In addition to returning capital to shareholders through a dividend and share buyback program, we will continue to invest in growth through R&D and tuck-in acquisitions. Finally, as you know, this is my last earnings call ahead of my retirement, and I would like to take this opportunity to thank you for your support over many years. For me, it has truly been a great honor and privilege to have worked for our investors over the last two decades. I will continue to be a huge advocate for the great company that ResMed Inc. is. Thank you so much. And with that, I will hand the call back to Daryl. Operator: Thank you. We will now open the call for questions. As a reminder, we will limit you to one question at a time so we can accommodate everyone on the call. If you have another question, you can rejoin the queue. Our first question comes from the line of David L Bailey with Morgan Stanley. Please proceed with your question. David L Bailey: Reduced component cost has been supportive of gross margins over past couple of years. I wonder if you could please talk to some of the changes you are seeing in component costs and freight at the moment and maybe also reference any contracting or supply chain changes you have made post-COVID and the volatility we have seen in more recent years? Michael J. Farrell: Yes, thanks, David. I will go first and maybe hand to Brett to talk about broader gross margin implications. It is a very good question. Obviously, we are seeing some geopolitical uncertainty in the Middle East impacting fuel rates potentially with oil and gas supply. One thing, and the good news for ResMed Inc. in terms of our logistics, is we go across the Pacific Ocean on sea freight through the Panama Canal to the East Coast, and we are not seeing any impacts from that geopolitical uncertainty impacting our core supply chain. But as you said, there are impacts on fuel, and we have done a very good job of going from air freight to the very, very vast majority of our work on sea freight. But there are some component costs we are looking at. I can tell you our pipeline of supply chain improvement opportunities is such that at this moment, we are not changing our guidance, which is that ResMed Inc. plans to have gross margin accretion through 2030 and double-digit basis points improvements each year from here to 2030, even amidst all the changes that are happening. Obviously, these changes happen daily and things continue to move and we will watch everything. But at this point, we still, as you saw, had very good gross margin accretion in the quarter, quarter to quarter and year on year. And we expect as we look to fiscal 2027, 2028, 2029, all the way through 2030, to be able to, through our great pipeline of work, still achieve gross margin accretion. It is more difficult given the geopolitical and external circumstances. With that, Brett, any thoughts? Brett A. Sandercock: You covered it well, Mick. The team has done a pretty good job over the last few years on components and improvements there. It gets tougher, obviously, in this environment, and realistically, we will see some cost inflation on components coming through. But if you think about it, and Mick talked about that productivity pipeline, there are a lot of other things we can do that will offset that. Think about platform standardization benefits, vendor management—which we have done a great job on—some longer-term contracts and improving those enormously, and improving resilience as well. Then think around execution on manufacturing: cycle times, asset utilization, logistics efficiencies, and freight optimization. There are many things that we can do that we think can certainly offset that, and our long-term objective is to increase gross margin over time. Operator: Thank you. Our next question comes from the line of Analyst with Jarden. Please proceed with your question. Analyst: Just a question on Noctrix. Just to confirm, it is growing faster and it has got higher margins—are you talking to gross margin? And any indication as to what that will do to your SG&A and R&D? And how does it get reimbursed, and is there any risk for that reimbursement to change over time? Michael J. Farrell: Yes, great questions. I will go first and ask Brett to jump in if he likes. Noctrix Health has a very novel technology—NIDRA is the product. It is a noninvasive nerve stimulation device that has excellent efficacy in treating restless leg syndrome, particularly moderate to severe restless leg syndrome. The current therapies for RLS are often pharmaceutical options—older drugs that have many side effects—and we think this is a huge opportunity for a noninvasive medical device with sleep doctors writing prescriptions and HMEs setting them up. So it is growing faster than ResMed Inc. and has higher gross margins than ResMed Inc. Obviously, they are in the early development cycle, and we will be investing in R&D. We will be investing in sales and marketing. I will just say this at a high level: this is not just about one product coming into the sleep health portfolio for ResMed Inc. We are the best owner of this asset. We can scale it faster than anyone. Our market access team and our knowledge of CMS, the DMACs, the DMEs, and where we can go to drive reimbursement further are going to be incredible. The startup team from Noctrix Health has done a great job of going payer by payer and getting reimbursement and getting this FDA de novo classified product into the market quickly. Brett told you the run rate that they are hitting on the current quarter; multiply that by four, and we expect to do better than that as they go into this year because they are growing faster than ResMed Inc., as I said earlier. So watch this space. We are going to help them get more market access, more reimbursement, and grow faster than they are. Most importantly, we are going to take care of a whole bunch of patients. Seven percent of the adult population worldwide has RLS, and in the U.S., 17 million people have RLS, and a very good portion of that are potentially addressable by this product. Brett, any further thoughts to the questions further down the P&L of Noctrix Health? Brett A. Sandercock: The only thing I would add is it is a strong growth trajectory, so we will continue to invest in SG&A and R&D. The guidance I gave earlier on EPS impact or dilution is a good estimate as we go forward, but we will update that with a bit more clarity next quarter. Operator: Thank you. Our next question comes from the line of Analyst with Barrenjoey. Please proceed with your question. Analyst: Mick, maybe just a question on combined Europe/Asia revenue growth. Again, another quarter of strong growth. It is now several quarters in a row that you have delivered robust growth rates, particularly in masks. Is this the same measures that you have spoken to in the last few quarters that is driving that growth that looks to be above market? Any color you can give us on particular contracts or countries, lumpiness in sales—just some color as to what is driving that strong growth rate, please? Michael J. Farrell: It is a great question. Our Europe, Asia, and rest-of-world category includes around 140 countries. Looking for highlights, I will say our team in Western Europe has done a good job of partnering with home care provider customers. In markets in Northern Europe where we have been able to achieve and continue on contracts with ongoing annual capabilities and growth, they have done well. In our Asia-Pacific markets, we have seen strong omnichannel approaches in China, Korea, Australia, and New Zealand, where the teams have subscription protocols, direct-to-consumer resupply opportunities, and leverage the HME/home care provider channel to drive resupply as well as re-PAP. We talk about mid single-digit growth in devices and high single-digit growth in masks as the general market. To your point, with robust mask growth, it looks like we are taking share. Why are we taking share and growing the market in masks? Look to the AirTouch N30i—our brand new fabric technology mask. It is the first in the world where you can put fabric on top of silicone at scale and mass production from a world-leading company in sleep apnea. As I said in my prepared remarks, this is changing the basis of competition, and it is not just about the N30i. The most recently released ones we just launched, the F30i Comfort and the F30i Clear in the full-face category—which is a higher-margin area—I think change the basis of competition in how mask therapy happens. Go to your channel checks, talk to patients, talk to providers, talk to respiratory therapists who do the setup every day. The comfort is incredible. On the devices side, we are leveraging macro trends from big pharma and big tech, and ResMed Inc. is doing a better job. We have set up re-PAP programs that are working in the U.S., and even in the tougher markets of Europe, Asia, and rest of world. Hard to cover 140 countries in three or four minutes, but that is the gist. Operator: Thank you. Our next question comes from the line of Analyst with UBS. Please proceed with your question. Analyst: Thanks very much for taking my question. We are increasingly hearing about the change in funding models—particularly Synapse comes up from time to time—and some caution amongst the DME customers of yours that this is going to be a challenge. What are you seeing on that front? Are there any trends that concern you? Michael J. Farrell: It is an interesting question because it gets to the evolution of our U.S. HME business. We had our HME advisory board here in San Diego with top HME customers across the U.S., speaking with our commercial teams in sales, marketing, and clinical about what they want over one, three, five years, and what their patients want: smaller, quieter, more comfortable devices; more cloud-connected devices; smoother pathways; and all the work we are doing with our VirtualOx home sleep apnea testing protocols and our Acrivon—Ectosense and NiteOwl—home sleep testing products to smooth the channel and middle-of-funnel work from prescription to setup. They did bring up questions around Synapse and what they are doing in their experiments. Over the last 15 years, a company called CareCentrix did similar utilization management; ultimately, UnitedHealth bought them. If you are looking at areas of waste and loss in healthcare, you go to the hospital and high-cost areas where there is a lot of waste, not lower-acuity care like ASCs and home care where ResMed Inc. plays. I do not think this is a huge threat. It might be something they work on for a while. Payers will find physicians want to work with an insurance company that takes care of patients in the right way. We have had utilization management approaches in France and Germany, so we can deal with any segment of the market that goes here. Employers, physicians, and others will choose based on Net Promoter Scores. OSA—particularly CPAP—is a very low-cost, low-acuity, high clinical and high economic return therapy. We can show the ROI for integrated payer-providers and for payers alone. We are working closely with payers to make sure this forms part of the ecosystem. It is not a big fear for the HMEs; it is manageable. Operator: Thank you. Our next question comes from the line of Analyst with MST. Please proceed with your question. Analyst: Good morning. On the fabric masks, Mick, when we do channel checks, we keep hearing that the price point is such that a traditional HME cannot make any profit on either setup or resupply. From a commercial perspective, it makes the compliance benefit irrelevant. Is this correct, or are we hearing the wrong thing? Michael J. Farrell: It depends on the payer landscape. There are 50 states and multiple payers per state, so you have a large matrix when you think about payers, what they pay, and where the correct price points are. We want to work with all the different models, and we price for what is right in terms of the extra cost that goes into those fabrics but also the extra value that we see. There is a 6% increase in adherence. For many parts of the country where there is margin at the current price points of an N30i, that 6% increase in adherence provides a for-profit reason to put that mask on—HMEs can run the spreadsheet themselves. The most important thing is that the patient is satisfied, and it is a better mask. If you get the patient over the line and they love it and it is more comfortable, and there is the potential for the HME and the patient to both sustain this, then that is there in many states and many payers. We are driving that forward. It will not be the case in every state and every payer. If your checks cover some below that line, that is not going to be many parts. We hope DMEs will help those patients find a way to cash-pay channels if that is the best mask for them. But we work with HMEs to make sure the economics are in line, and for the vast majority, we can make the economics work within the reimbursed environment. In Europe, Asia, rest of world, and cash markets, it is price elasticity; patients will pay for comfort. In HME-driven markets, our goal is that price points allow profit across the vast majority of customers; it will not be every customer because payers differ by state and payer. Operator: Thank you. Our next question comes from the line of Analyst with KeyBanc Capital Markets. Please proceed with your question. Analyst: I wanted to ask about competitive dynamics in the devices segment, mainly in the U.S. Thinking about one of the competitive launches that took place late in 2025—can you speak to the level of noise you have observed in the U.S. around that launch, and whether you have seen any level of market share shift? Michael J. Farrell: As the market leader, we look at every new entrant and technology. I would say we are productively paranoid. There has been no launch in the last 12 months that made us say, “We did not think of that.” But we do use competition to challenge ourselves—when was the last time we upgraded our AutoSet algorithm? There is new technology called AI. It is more difficult to adopt in the medical space, and we already have one FDA-cleared product in AI that we talked about in SmartCare last quarter. Watch this space from ResMed Inc. We are focused on smaller, quieter, more comfortable, more cloud-connected, and more intelligent therapies. We will bring out more intelligent therapies over time. As you saw in the devices number—very solid in the U.S., 6% growth—we are not seeing an impact. We look at new patient starts, new customer adoption, and all new technologies. There is no new competitive threat that we are worried about, but we are accelerating our own pipeline. Operator: Thank you. Our next question comes from the line of Anthony Charles Petrone with Mizuho Group. Please proceed with your question. Anthony Charles Petrone: Maybe one on primary care engagement—on the CME educational program you have, how often does that turn into a new prescriber? How often are these primary care physicians actually new to the CPAP world—they take an educational program, and then they begin writing prescriptions? What is the conversion rate there? And any updated chatter on the Philips return to the market? Michael J. Farrell: On PCP engagement, we have 80,000 CME programs completed by 45,000 unique clinicians. We track closely. We target PCPs who are already engaged at some level in home sleep apnea testing—maybe one referral per month or more over the last 12 months. We do not do pure evangelism with someone who has never engaged. After education, we look at change in referral volume—does it go from one per month to three to five, from five to seven to nine, etc. That is where we focus. Our VirtualOx data show a double-digit increase in home sleep apnea tests. The VirtualOx team is energized, and we are building partnerships to continue growth in primary care. It is less about brand-new greenfield and more about increasing volume with already-engaged PCPs—teaching signs and symptoms, the right questions, and the gold standard therapy. We are seeing volumes increase; you see it in VirtualOx numbers and in our device numbers growing at 6%, where the market might be a little below that. Regarding Philips, nothing new to add beyond what is broadly known; our focus remains on execution and serving patients. Operator: Thank you. Our next question comes from the line of Davinthra Thillainathan with Goldman Sachs. Please proceed with your question. Davinthra Thillainathan: A question on U.S. devices. Channel checks were suggesting some one-off events that may have held back growth, particularly to do with weather events. Any thoughts there? And with the oral GLP-1 rollout, how can that part of the portfolio grow over the next few quarters? Michael J. Farrell: We did not see a major weather event impact our U.S. devices in the quarter. There was seasonality from Q2 to Q3—with HDHPs and HSAs—Q2 devices growth was closer to 7%–8% and went to 6% in Q3. So some seasonality, but not weather-related. At 6%, we are at the high end of mid single digits—doing pretty well. On GLP-1 pills versus injectables, we are seeing a good flow of patients into primary care and into the diagnostics funnel. The conversion to CPAP setup—the middle of funnel—has more work to do. That is why we bought Somnoware, VirtualOx, and NiteOwl: to help with that flow and to support HMEs with higher volumes and virtual referrals. Our goal each quarter is to push 50–100 basis points higher when we can through demand generation, capture, and conversion. As injectables expand to pills, it will appeal to a broader population, and more patients will come through. This is more of a one-, three-, five-year tailwind than a one- to three-quarter phenomenon. This mile marker was good—we will keep building. Operator: Thank you. Our next question comes from the line of Jonathan Block with Stifel. Please proceed with your question. Jonathan Block: Going to continue down the same road a bit on U.S. devices. We have called out increasing ad spend from Eli Lilly and their Zepbound OSA brand campaigns—dontsleeponosa.com—and the broader population for the pills. When that Zepbound OSA patient walks into their PCP or sleep doc, are they walking out with GLP-1 and CPAP prescriptions? And how would you describe that patient’s behavior—are they getting that CPAP prescription filled, and what is their journey exiting the doctor? Michael J. Farrell: We have thought a lot about this and are analyzing it closely. We did not pay for the demand gen—big pharma did—and that brings in patients we might never have reached. Once at the PCP, especially those we target with high GLP-1 volumes and HST providers, that PCP is writing a CPAP prescription. Clinically and often legally, they should prescribe the lowest-cost, most-efficacious therapy. CMS and most payers have a 90-day adherence requirement—70% usage in any 30-day period within the first 90 days. When this approach was put in place 15–20 years ago, some saw it as a threat; ResMed Inc. saw a 90-day sprint opportunity to help a patient get to the most efficacious and reversible therapy. PCPs and sleep doctors know this. We do not get every patient adherent—our 87% day-90 adherence still means 13% do not get there—but we aim to maximize this once-in-a-generation opportunity. That is what we are educating PCPs and sleep doctors on. We are very focused on maximizing probability of setup and adherence. Importantly, the company making the GLP-1 publicly states that combination therapy is better, and their own clinical data show that. Our data on 2.1 million patients show that those with scripts for both PAP and GLP-1 are more likely to start and stay on therapy with higher resupply events at one and three years. We also analyzed patients who start PAP and then add a GLP-1—n = 1.7 million—and they also show higher adherence and resupply. The next phase is patients who receive both prescriptions at the same time; we are analyzing that now. We like what we are seeing and will keep optimizing. Operator: Thank you. Our next question comes from the line of Brandon Vazquez with William Blair. Please proceed with your question. Brandon Vazquez: You reiterated expectations next year and through 2030 for high single-digit growth and better leverage on the bottom line. From a high level, what are the growth drivers you see? Any new product launches as we go into fiscal 2027? And, Brett, what levers are there on a go-forward basis in 2027—more of the same with efficiencies, or anything else new we should contemplate? Michael J. Farrell: You know I do not release product pipeline ahead of launch, but I can talk about what is already out there: the N30i and its strong takeoff; the F30i Comfort and F30i Clear are doing really well at premium prices; our core masks are doing well; AirSense 11 rollout across Latin America—Brazil, Argentina, beyond—and the recent China launch in a fast-growing consumer-driven market where we are a premium and successful brand. Korea omnichannel, Australia, New Zealand, Singapore—all growing. I also talked about algorithms and how digital upgrades can also come with hardware upgrades—watch this space. Brett? Brett A. Sandercock: We will keep executing on driving top line with really good operating margins, so whatever we deliver on top line will fall through to the bottom line. It is important for us to keep executing on our strategy, and that is what we will continue to do into fiscal 2027. Operator: We are now at the sixty-minute mark, so I will turn the call back over to Michael J. Farrell. Michael J. Farrell: Thank you, Daryl, and thank you to all for joining us for our earnings call today. On behalf of the more than 10 thousand ResMedians in 140 countries, I am pleased to say we were able to deliver another strong quarter of performance and continue to build value for all of our stakeholders. Many of our ResMedians are shareholders, so well done to you as well. And, Brett—55 quarters—thank you for being a great partner and friend, and best wishes on your retirement. Welcome to Aaron Blumer—he is going to be an amazing, high-energy CFO who will take us to the next level and build on the amazing foundation that Brett has set up. Over to you, Sally. Sally Schwartz: Thank you, Mick, and thank you as well, Brett. Thank you to everyone who joined us today. We appreciate your time and interest. If you have any additional questions, please do not hesitate to reach out directly to InvestorRelations@resmed.com. Daryl, you may now close the call. Operator: Ladies and gentlemen, thank you so much for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and enjoy the rest of your day.
Operator: Good day, and thank you for standing by. Welcome to the Q1 2026 Westwood Holdings Group, Inc. earnings call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during this session, you need to press 11 on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jill Meyer, director of fiduciary services. Please go ahead. Jill Meyer: Thank you, and welcome to our first quarter 2026 earnings conference call. The following discussion will include forward-looking statements that are subject to known and unknown risks, uncertainties, and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Additional information concerning the factors that could cause such a difference is included in our press release issued earlier today as well as in our Form 10-Q for the quarter ended 03/31/2026 that will be filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. You are cautioned not to place undue reliance on forward-looking statements. In addition, in accordance with SEC rules concerning non-GAAP financial measures, a reconciliation of our economic earnings and economic earnings per share to the most comparable GAAP measures is included at the end of our press release issued earlier today. On the call today, we have Brian Casey, our Chief Executive Officer, and Terry Forbes, our Chief Financial Officer. I will now turn the call over to Brian Casey. Brian Casey: Good afternoon, and thank you for joining us for Westwood Holdings Group, Inc.'s first quarter 2026 earnings call. I am pleased to share our results and key developments from the quarter as well as our outlook for the remainder of the year. Before going into the details, I would like to highlight a few points from the first quarter. Our AUM grew to $18.3 billion, up from $17.4 billion at year-end 2025. Our ETF suite of products surpassed $315 million in combined AUM. West 2 closed at over $300 million, and West 3 fundraising is now underway. Combined institutional and intermediary gross sales were approximately $529 million. And finally, we completed the sale of Vista Bank, generating a net gain of approximately $2 million. I will start with a brief overview of our assets under management. Firmwide AUM increased from $17.4 billion at 12/31/2025 to $18.3 billion at 03/31/2026. This growth was driven primarily by our energy and real asset strategies, particularly private energy funds and energy-focused ETFs, which more than offset modest declines in U.S. value equity. Private fund AUM was the largest contributor, reflecting new commitments and capital deployment in our energy secondaries and co-investment vehicles. This growth was structural in nature rather than market dependent, which we see as a healthy and durable source of AUM diversification. The first quarter reflected the continuing evolution of our AUM mix. Client allocations are shifting toward income-oriented, real asset, and private market solutions driven by macroeconomic forces like energy security concerns, record global infrastructure investments, and persistent power demand growth from data centers and AI-linked infrastructure. Traditional U.S. value equity strategies remain under pressure, although the pace of decline moderated during the quarter. Turning to the market environment, after reaching new all-time highs in late January, U.S. equities quickly faced a reversal. Military actions by the United States and Israel against Iran drove oil prices significantly higher in March, amplifying persistent market uncertainties. The S&P 500 fell 4.3% for the quarter, while small-cap and mid-cap stocks posted modestly positive returns. The standout story was energy; S&P 500 energy stocks gained more than 38% over the three-month period. Market leadership continued to broaden out from mega-cap technology toward sectors like materials, utilities, consumer staples, and industrials. The Fed held the funds rate steady in the 3.5% to 3.75% range, as fourth quarter annualized GDP growth of 0.7% and lingering inflation kept policymakers on hold. Meanwhile, bond yields edged slightly higher, producing modestly negative returns for the quarter. With that market backdrop, let me turn to our long-term investment performance. Our results across strategy groups reflect the challenging near-term environment for value-oriented equities, along with several areas of genuine long-term strength that we find very encouraging. Within our U.S. value equity strategies, our SMID Cap strategy continues to be a standout, ranking in the top quartile of both its eVestment and Morningstar peer groups over the trailing three years—a consistent and well-earned result. On a ten-year basis, our Large Cap Value strategy has delivered competitive results relative to peers. We recognize that parts of U.S. value strategies remain under pressure, but we are actively focused on delivering improved results and have seen some moderation in outflows. Turning to our multi-asset strategies, our results here are really encouraging. Our Multi-Asset Income Fund ranks in the top decile of its Morningstar peer category over both the trailing three- and five-year periods—a strong and consistent performance. Our Income Opportunity strategy ranks in the top third of Morningstar peers over the trailing three-year period. Taken together, half or more of our multi-asset strategies are delivering top-tier results over meaningful time horizons. Our Salient energy and real asset strategies delivered solid performance amid a favorable environment for the sector. Our MLP SMA strategy is in the top third of its eVestment master limited partnership peer group over the trailing three years and is performing well relative to the Alerian MLP Index on a net-of-fee basis. MDST and WEEI—the Westwood Salient Enhanced Midstream Income ETF and the Westwood Salient Enhanced Energy Income ETF—continue to provide attractive yields to income-focused investors consistent with their stated objectives. Our Tactical Growth mutual fund also delivered positive results while providing capital preservation during the March correction. Looking ahead, we believe market conditions are evolving in a way that increasingly favors our investment philosophy. The broadening of sector leadership out from mega-cap technology stocks toward energy, industrials, utilities, and other value-oriented segments is precisely the environment in which our active, quality-focused approach has historically excelled. Geopolitical uncertainty, inflationary pressures from elevated oil prices, and potentially slower economic growth all create volatility, but they also create opportunity for disciplined investors like us who prioritize companies with strong cash flow, sound balance sheets, and reasonable valuations. Over the long term and across market cycles, we have consistently demonstrated that quality and value are durable sources of outperformance, and we are well positioned to capitalize on that dynamic as the environment continues to evolve. Turning to distribution, our institutional channel reported gross sales of $322 million for the first quarter, with net inflows of $32 million. One major highlight was successfully onboarding our first institutional managed investment solutions client, accounting for over $200 million in gross sales—an important validation of the MIS capability we have been building. Our pipeline remains robust across both value and energy strategy, with many new opportunities added during the quarter. We are also initiating SMID Cap due diligence with two of the largest national consultants, which reflects the attraction of SMID Cap’s quality and competitiveness. We expect to see continued momentum in SMID Cap Value for defined contribution plans, and we anticipate that our private capital platform will attract increasing institutional interest following significant enhancements we have made to our personnel and organizational structure. In our intermediary channel, gross sales reached $207 million, led by energy and real assets, with net outflows of $34 million. MDST gained approval from its first major warehouse, a very important distribution milestone, and it continues to receive approvals for major national platforms. YLDW, our Enhanced Income Opportunity ETF, is approaching the $25 million threshold typically required for platform onboarding. Our Broadmark strategies are gaining traction as investor demand for risk mitigation has increased in the current elevated market volatility environment. Finally, momentum from our West 2 capital raise is underpinning West 3 as it attracts early interest from RIAs, family offices, and independent advisers. Moving to our wealth management business, we entered 2026 with solid momentum as we continue to strengthen our multifamily office platform. Client engagement remained elevated throughout the quarter, reflecting ongoing market uncertainty and continued demand for proactive planning and thoughtful portfolio oversight. Our advisers maintained a disciplined long-term approach to asset allocation, which helped reinforce client confidence during periods of volatility. Client conversations are increasingly focused on holistic planning, particularly around tax positioning, liquidity management, and coordination with trust structures—areas where our integrated model is optimal. From an operational standpoint, we continue to make progress on process standardization and cross-functional alignment across our advisory, client service, and trustee teams. Our efforts are improving scalability while enhancing the overall client experience. Business activity remained steady during the quarter, including several notable large inflows from our multifamily office approach. We continue to prioritize high-quality client relationships with significant long-term potential. Looking ahead, our focus remains on refining internal processes, enhancing reporting and communication, and strengthening collaboration across the platform to support sustainable growth. Beyond core business results, I would like to highlight significant events and milestones achieved during the quarter. Our Enhanced Income Series ETFs achieved an important milestone as MDST, our Enhanced Midstream Income ETF, crossed the $200 million AUM threshold in February—a landmark for a fund that has been in the market for less than two years. Together with WEEI and YLDW, our three Enhanced Income Series ETFs have now surpassed $320 million in combined assets. YLDW, the Westwood Enhanced Income ETF we launched last December, represents an important extension of our income ETF platform, being the first of our multi-asset strategies to be marketed as an ETF. YLDW combines a disciplined multi-asset allocation approach with a strategic covered call overlay, providing investors with a consistent and diversified source of current income plus potential capital appreciation, and is approaching $25 million in assets. MDST continues to maintain an annualized distribution rate of approximately 10%, consistent with its income generation objective, and its recent warehouse approval is a truly meaningful step, expanding our distribution reach. We will continue to look for opportunities to expand our ETF lineup with innovative strategies that address investor demands. Our energy secondaries business reached an important milestone as Westwood Energy Secondaries Fund 2 closed with over $300 million in capital commitments—more than double our initial $150 million target. Since launching our first energy secondaries fund in 2023, we have raised nearly $350 million and deployed over $250 million across two flagship funds and three co-investment vehicles. During the first quarter, we also received commitments for a new co-investment fund focused on an operated upstream platform. We have commenced fundraising for Westwood Energy Secondaries Fund 3 and its related co-investment fund, which we expect to market through early 2027, and it is generating substantial early interest. To support this growing platform, we have added team members to our private capital operations team and implemented a new AI-driven technology tool to streamline key operational processes. We completed the sale of our interest in Vista Bank during the quarter, receiving both cash and stock consideration that enabled us to recognize a gain of approximately $2 million. In March, we celebrated the 25th anniversary of the Westwood Real Estate Income Fund, marking a quarter-century of disciplined investing, durable income generation, and successful active management of publicly traded real estate securities. Since inception in 2001, the fund has navigated real estate and economic cycles while maintaining a philosophy grounded in fundamental analysis, valuation discipline, and rigorous risk management. We are proud of the team that has delivered consistent results for our clients over such a long investment horizon. Finally, on 04/01/2026, Westwood Holdings Group, Inc. celebrated its 43rd year in business—a testament to our commitment to clients, our culture of continuous innovation, and the dedication of our entire team. We are proud to be one of the very few asset management firms with this depth of history, and we remain committed, as always, to the principles that have guided us since our founding. Looking back on 2026, we are encouraged by the strategic progress we have made across our business. Our ETF platform has scaled meaningfully, our private capital strategy is gaining significant institutional and intermediary traction, and our distribution channels continue to build a healthy pipeline. The evolving market environment—characterized by broader sector leadership, elevated energy prices, and a renewed interest in quality and value—is one in which we believe Westwood Holdings Group, Inc. is well positioned to deliver for our clients and shareholders. With 43 years of experience, a diversified and growing product platform, and demonstrated long-term performance in our core strategies, we are confident in our ability to capitalize on the opportunities ahead. Thank you for your continued support and confidence in Westwood Holdings Group, Inc. I will now turn the call over to our CFO, Terry Forbes, for the financial results. Terry Forbes: Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $25 million for the first quarter of 2026, compared to $27.1 million in the fourth quarter and $23.3 million in the prior year's first quarter. First quarter revenues were lower than the fourth quarter due to lower average AUM as well as fourth quarter recognition of performance fees for the prior year. First quarter revenues were higher than last year's first quarter due to the solid growth in our business, reflected in higher average AUM and growth from our ETFs and private energy secondaries funds. Our first quarter income was $800,000, or $0.09 per share, compared with $1.9 million, or $0.21 per share, in the fourth quarter on lower revenues and higher compensation expenses, offset by a gain from the sale of our investment in a private bank and lower income taxes. Non-GAAP economic earnings were $2.8 million, or $0.31 per share, in the current quarter, versus $3.3 million, or $0.36 per share, in the fourth quarter. Our first quarter income of $800,000, or $0.09 per share, compared favorably to last year's first quarter income of $500,000 due to 2026's higher revenues and gains from our investment in a private bank, offset by higher compensation expenses. Economic earnings for the quarter were $2.8 million, or $0.31 per share, compared with $2.5 million, or $0.29 per share, in the first quarter of 2025. Firmwide assets under management and advisement totaled $18.3 billion at quarter end, consisting of assets under management of $17.3 billion and assets under advisement of $900 million. Assets under management consisted of institutional assets of $9 billion, or 52% of the total, wealth management assets of $4.2 billion, or 24% of the total, and mutual fund and ETF assets of $4.1 billion, or 24% of the total. Over the quarter, our assets under management experienced net outflows of $50 million and market appreciation of $800 million, and our assets under advisement experienced market appreciation of $48 million and net outflows of $50 million. Our financial position continues to be solid, with cash and liquid investments at quarter end totaling $34.2 million and a debt-free balance sheet. I am happy to announce that our board of directors approved a regular cash dividend of $0.15 per common share, payable on 07/01/2026, to stockholders of record on 06/01/2026. That brings our prepared comments to a close. We encourage you to review our investor presentation we have posted on our website, reflecting quarterly highlights as well as discussion of our business, product development, and longer-term trends in revenues and earnings. We thank you for your interest in our company, and we will open the line to questions. Operator: We will now open the call for questions. Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while I compile the Q&A roster. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. I am showing no questions at this time. I will now turn it over to Brian Casey for closing remarks. Brian Casey: Great. Well, thank you, and I first want to thank our long-term and our new shareholders for approving our entire slate of directors today and all the other items we had on the agenda. Just in closing, our SMID Cap performance has remained strong, and our pipeline of opportunities has grown over a billion dollars. Our managed investment solutions pipeline is improving every week, and we are optimistic that we will land our next institutional client in the coming months. We continue to build out our private capital, and we are anxious to kick off fundraising for our next fund. Finally, our ETF platform is seeing strong demand with higher trading volumes and growing AUM, and we are excited to see MDIF and MDST go fully live tomorrow across one of the major wires. That should be exciting. Thanks so much for your time. We appreciate it. Visit westwoodgroup.com or call Terry or me if you have questions. Thanks so much. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Q1 2026 Pacira BioSciences, Inc. Earnings Conference Call. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Susan Mesco, Head of Investor Relations. Please go ahead. Susan Mesco: Thank you. Good afternoon, everyone. Welcome to today's conference call to discuss our first quarter 2026 financial results. Joining me are Frank Lee, Chief Executive Officer; Brendan P. Teehan, Chief Commercial Officer; and Shawn M. Cross, Chief Financial Officer. Kristin Williams, Chief Administrative Officer and Secretary; Tony Malloy, Chief Legal Officer; and Jonathan Slonin, Chief Medical Officer are also here for today's question-and-answer session. Before we begin, let me remind you that this call will include forward-looking statements subject to the safe harbor provisions of federal securities laws. Such statements represent our judgment as of today and may involve risks and uncertainties that could cause our actual results, performance, or achievements to differ materially. For information concerning risk factors that could affect the company, please refer to our filings with the SEC or the Pacira BioSciences, Inc. website. Lastly, as a reminder, we will be discussing non-GAAP financial measures on today's call. A description of these metrics, along with our reconciliation to GAAP, can be found in the news release issued this afternoon. With that, I will now turn the call over to Frank Lee. Thank you. Frank Lee: Good afternoon to everyone joining today's call. Just over a year ago, we introduced our Five by 30 strategy. This plan was designed to accelerate performance and position the company for sustainable growth and shareholder value creation. To remind you, Five by 30 was built to deliver measurable progress around five key goals: patients served, product revenue, profitability, pipeline, and partnerships. Collectively, we believe advancing these five goals will drive shareholder value into and well beyond 2030. Let me start by saying that I am pleased with our first quarter results and I would like to recognize our team for their remarkable efforts. Our solid first quarter results reinforce our confidence that Five by 30 is delivering its intended business results. We are on the right strategic path. One year into execution, our progress across all five goals is clear. This is reflected in our commercial performance, financial results, and pipeline advancements. I will start with our flagship product, EXPAREL. Since our founding, EXPAREL has been the cornerstone of Pacira BioSciences, Inc.’s leadership in opioid-sparing innovation for postsurgical pain. Thanks to the dedicated efforts of our team, EXPAREL is demonstrating renewed growth more than a decade after its initial launch. This is a rarity in the pharmaceutical industry and a clear testament to the strength of our commercial, medical, and market access organizations. The accelerating volume growth we delivered in 2025 has continued into 2026. This momentum reflects a combination of fundamental improvements that are strengthening the long-term durability of our franchise, including expanding coverage outside the surgical bundle for Medicare patients following implementation of the NOPAIN Act in 2025; a new product-specific J-code enabling streamlined billing and reimbursement; growing commercial payer coverage outside the surgical bundle, which Brendan will discuss in more detail shortly; increased awareness and adoption of non-opioid stewardship programs, as evidenced by encouraging market research results; and enhanced intellectual property protection providing greater long-term visibility for the franchise. We now have 21 Orange Book-listed patents across two families protecting EXPAREL from generic challengers. This is a dramatic evolution from the single patent previously litigated and supported a favorable volume-limited settlement in 2025. This multiyear EXPAREL patent infringement litigation began in 2021 and extended through 2024. In addition to EXPAREL’s leadership in postsurgical pain control, our ZILRETTA and ioverao positions in early interventional pain management are expanding. For ZILRETTA, the year is off to a strong start, with a 15% year-over-year increase in sales. We believe the growth initiatives we put in place last year are beginning to deliver results. These include our dedicated ZILRETTA sales force, expanded patient access programs, and extended promotional reach through our Johnson & Johnson MedTech collaboration. From a lifecycle management perspective, we are pleased to report enrollment has concluded for a Phase 3 registrational study in shoulder OA. Top-line results are on track for later this year. The unmet need for shoulder OA is significant. There are approximately 1 million injections for shoulder OA administered annually in the U.S. despite the absence of FDA-approved products. If this Phase 3 trial meets its objectives, ZILRETTA could become the first product with a labeled indication for shoulder OA. ioverao also had a strong start to 2026, with first quarter sales increasing 21% over 2025, as we are starting to see the benefits from last year's rollout of a product-specific reimbursement code and a dedicated sales force staffed with experienced medical device account managers. From a lifecycle management perspective, our registrational study in spasticity is on track, with top-line results expected by year-end. Here, the unmet need remains high with 6.3 million patients with spasticity seeking treatment each year in the U.S. Together, we believe our strong commercial performance and advancing lifecycle management will support durable top-line growth. Importantly, this momentum further strengthens our leadership in postsurgical pain control and early-intervention OA pain management. In tandem with the momentum across our commercial portfolio, through our Five by 30 strategy, we are now advancing an innovative clinical-stage pipeline. Here, we are prioritizing mechanistically de-risked assets with the potential to drive shareholder value well beyond 2030. In addition to clinical data readouts for our commercial products, our clinical-stage assets are entering a catalyst-rich period. Key upcoming milestones include PCRX201, our locally administered gene therapy for knee OA, which remains on track for top-line data later this year. With approximately 15 million people in the U.S. affected by knee OA and limited durable treatment options, the unmet need remains high. I will talk in greater detail about PCRX201 shortly. PCRX2002, our novel hydrogel formulation of the non-opioid analgesic ropivacaine for postsurgical pain, was designed to deliver rapid-onset and long-acting analgesia from a single application at the time of surgery. We expect to begin Phase 2 development later this year. This asset has the potential to complement EXPAREL as an easy-to-use, longer-acting therapy with patent protection extending to 2042. Additionally, our gene therapy platform continues to generate promising preclinical candidates to advance our Five by 30 pipeline goal. These include PCRX1003 for degenerative disc disease, PCRX1002 for dry eye disease, and PCRX1001 for can90A, which we believe has significant out-licensing potential. Let me briefly highlight PCRX201, our lead HCAG program, which represents a potential paradigm shift in the treatment of knee OA. Building on the encouraging durability we observed in our Phase 1 study, our two-part Phase 2 ASCEND study is on track. Part A is fully enrolled with 49 patients, and as previously mentioned, we will have top-line results from this 52-week study later this year. Like most Phase 2 studies, ASCEND is not powered for efficacy. The primary objective is safety, but we will also be looking for efficacy trends. Key secondary endpoints include changes in pain and function from baseline, as measured by numerical rating scale, WOMAC, and CUSS scores. In parallel, we are advancing a commercially viable manufacturing process for PCRX201. This work is critical to enabling the initiation of Part B around midyear. We expect Part B to enroll roughly 90 additional patients across three arms: two different doses of PCRX201 and an active steroid comparator. While it is premature to quantify the commercial opportunity, we believe PCRX201 has three key attributes that underscore its market potential. First is durability. We believe that demonstrating a treatment effect lasting one year would represent a transformational advance in knee OA. This would be significantly longer than currently available OA treatments, which generally provide durability of approximately three to six months. Second is cost of goods. PCRX201 is locally delivered. This differs from systemic approaches requiring much higher dosing to achieve the desired effect. Lower dose levels, coupled with efficient manufacturing, support a favorable and commercially viable cost-of-goods profile. This is an important consideration for any therapy intended for chronic high-prevalence conditions like osteoarthritis. Third is health economic value. If the durability we are targeting is borne out clinically, we believe PCRX201 could offer attractive value to the health care system. As a reminder, PCRX201 is an IL-1 receptor antagonist. IL-1 is a well-validated, de-risked target for reducing inflammation. There are currently two FDA-approved drugs that block the IL-1 pathway in other inflammatory joint conditions. Neither one is practical for early OA intervention because their short half-life would require very high systemic doses or daily knee injections. PCRX201 is complementary to ZILRETTA and ioverao and could expand our leadership in early-intervention OA pain management. Briefly turning to partnerships, which remain a key pillar of our Five by 30 strategy, we are taking a disciplined, targeted approach to business development. We are prioritizing strategically aligned assets that are financially accretive and leverage our commercial infrastructure. In parallel, we are utilizing strategic partnerships to access new sources of revenue by expanding our commercial reach into untapped U.S. and international markets. Our strategic collaboration with market leaders Johnson & Johnson MedTech and LG Chem are both excellent examples of our strategy in motion. These partnerships advance our goal of five partnerships by 2030 and efficiently expand our commercial coverage and geographic reach. In summary, we are pleased with our first quarter results and the momentum behind our Five by 30 strategy. With clear progress across every Five by 30 goal, we remain confident we will deliver stable growth and value creation into and well beyond 2030. With that, I would like to turn the call over to Brendan to share more details on our first quarter commercial performance. Brendan? Brendan P. Teehan: Thank you, Frank, and good afternoon to all joining us today. I am pleased to report that the upward momentum we observed in the second half of 2025 has continued into 2026. Our commercial execution is on point, demand trends are strong across the complete portfolio, and we are delivering top-line growth consistent with what we previewed in February. I will start with our flagship product, EXPAREL, where we are outperforming last year's first quarter volume growth and continuing to expand patient and provider access. We continue to see excellent momentum in hospital outpatient and ASC settings, where an increasing number of EXPAREL-assisted procedures are taking place and where our customers are seeing favorable reimbursement. Our focus, beyond sharing excellent clinical outcomes, is demonstrating the enhanced economic value of EXPAREL. To support this, we recently presented data from real-world studies highlighting EXPAREL's compelling value proposition, along with several health economics and outcomes studies at key congresses that include the Orthopedic Research Society, the American Academy of Orthopaedic Surgeons, and the Academy of Managed Care Pharmacy. These real-world data demonstrate both the clinical and economic value EXPAREL delivers. We look forward to reporting additional data readouts as the year progresses. Our initiatives include the comprehensive real-world IGORD registry, which now has more than 3,500 OA patients enrolled and is providing valuable information for EXPAREL, ZILRETTA, ioverao, as well as other treatments. These data are helping guide best practices for knee OA patients across their treatment journey. Importantly, commercial payers continue to recognize the EXPAREL value proposition and implement NOPAIN-like policies that reimburse outside the surgical bundle. We have now surpassed 110 million covered lives with reimbursement outside of the bundle for EXPAREL. With a growing critical mass of coverage, we expect accelerating change in the market throughout the remainder of the year. In short, we are extremely encouraged by the progress made in the first quarter. Building on the momentum from 2025, demand is being driven by a powerful combination of expanding reimbursement, growing protocol adoption, and compelling real-world evidence, all supporting each other and growing our business. With a strong finish to 2025 and a solid start to 2026, EXPAREL continues to gain share as institutions commit to best-practice opioid-sparing care. We remain confident in our ability to deliver durable, sustainable growth for EXPAREL as access widens and best practices evolve. Turning to ZILRETTA and ioverao, both products are off to a strong start to 2026, as valuable commercial investments we made last year begin to bear fruit. As you know, last year we rolled out a dedicated Pacira BioSciences, Inc. sales force for ZILRETTA to ensure a focused promotional impact. In addition, we essentially tripled our U.S. commercial reach for ZILRETTA through a strategic collaboration with Johnson & Johnson MedTech. For ioverao, we are benefiting similarly from a dedicated sales force onboarded last year. Looking ahead, we believe both ZILRETTA and ioverao have significant upside potential to become more meaningful sources of revenue. In summary, we are pleased with the strong start to 2026 across our three commercial products, and we believe we are well positioned to deliver a successful year of sustainable top-line growth. With that, I will turn the call over to Shawn for his financial review. Shawn M. Cross: Thank you, Brendan. I will start with an update on sales and margin trends. First quarter EXPAREL net sales increased to $143.3 million versus $136.5 million in 2025. Volume growth of approximately 7% was partially offset by a shift in vial mix and discounting from our third GPO going live last year. In addition, first quarter sales were also impacted by winter storms disrupting shipping and triggering returns. As we move forward in 2026, we expect the delta between volume and revenue growth for the second quarter to be similar to 2025 and then narrow as we anniversary our third GPO agreement midyear. For ZILRETTA, first quarter sales improved by 15% to $26.8 million versus the $23.3 million we reported in 2025. As Brendan mentioned, this was largely attributable to the growth initiatives implemented last year, including our dedicated ZILRETTA sales force. For ioverao, sales increased 21% to $6.2 million compared to $5.1 million in 2025. Again, as Brendan mentioned earlier, this was largely attributable to the growth initiatives implemented last year, including our dedicated ioverao sales force. Turning to gross margins, on a consolidated basis, our first quarter non-GAAP gross margin was 80% versus 81% for last year. Gross margins continue to benefit from the improved costs and efficiencies of our enhanced larger-scale EXPAREL manufacturing process and continuous improvement initiatives at both of our manufacturing facilities. Non-GAAP R&D expense for the first quarter increased to $25.4 million from $23.1 million reported last year. This increase relates to our advancing Phase 2 study of PCRX201 as well as our label expansion studies, all of which have anticipated top-line readouts later this year. In addition, we are supporting three promising HCAG-based preclinical programs. Non-GAAP SG&A expense came in at $83.9 million for the first quarter versus $76.2 million last year. You may recall that last year's SG&A expense was positively impacted by a favorable outcome to litigation and subsequent recovery of $5.2 million in legal fees. Taking this into account, we are largely in line with last year. As we discussed last quarter, we are now leveraging our existing commercial infrastructure, which is well equipped to support top-line growth. All this resulted in another quarter of significant adjusted EBITDA of approximately $40.2 million for the first quarter. As for the balance sheet, we continue to be in a position of strength and ended the quarter with $[inaudible] in cash and investments. With a strong balance sheet and a business that is producing significant operating cash flow, we believe we are well equipped to advance our Five by 30 growth strategy and create shareholder value. With respect to capital deployment, we will continue to maintain a disciplined and strategic approach focusing on three key areas. First, driving top-line growth by leveraging our existing commercial infrastructure. Second, advancing an innovative pipeline and becoming a leader in musculoskeletal pain and adjacencies. We are prioritizing accretive in-market assets to leverage our established commercial footprint and de-risked clinical-stage programs. Third, opportunistically returning capital to shareholders. During the first quarter, we executed another $50 million in share repurchases. As a result, we retired approximately 2.2 million shares of common stock. Since last year's start of the plan, we have decreased our share count by a total of approximately 9 million shares and reduced our outstanding common shares to 39.3 million. As of March 31, we had $100 million remaining under our share buyback authorization, which runs through the end of this year. Going forward, we remain committed to maintaining favorable operating margins while advancing our Five by 30 strategy. This brings us to our full-year financial guidance for 2026, which we are reiterating today as follows: total revenues of $745 million to $770 million; for EXPAREL, net product sales of $600 million to $620 million. With respect to quarterly trends, we anticipate the remainder of 2026 will largely follow historical patterns. For ZILRETTA and ioverao, our guidance assumes 2026 will be largely in line with 2025. While we are encouraged by both products' start to the year, we will wait to gain more visibility before updating our assumptions. The final component of our 2026 revenue guidance relates to $7 million in expected revenue from our licensing agreement for the veterinary market. Non-GAAP gross margins of 77% to 79%. With respect to quarterly cadence, we expect the next two quarters to continue to benefit from the sale of lower-cost EXPAREL inventory; for the fourth quarter, we expect margins to be slightly below our full-year guidance range due to the sale of higher-cost inventory as well as shutdown-related costs and other expenses. Non-GAAP R&D expense of $105 million to $115 million. As we prepare to initiate Part B of our Phase 2 ASCEND study of PCRX201 and certain EXPAREL and ZILRETTA product development efforts, we expect an uptick in R&D expense during the second quarter followed by a slight decline in quarterly spend in the back half of the year. Non-GAAP SG&A expense of $320 million to $340 million. With respect to the timing of SG&A spending, we expect the first half of the year to be higher than the second half as a result of proxy-related activities. Stock-based compensation of $54 million to $62 million. Lastly, for those modeling adjusted EBITDA, we expect our 2026 depreciation expense to be approximately $30 million. With that, I will turn the call back over to Frank. Frank Lee: Thank you, Shawn. In closing, 2026 is off to a strong start. Pacira BioSciences, Inc. is operating with momentum, clarity, and discipline. Our Five by 30 strategy is driving strong execution and reinforcing our leadership in postsurgical pain and early-intervention OA pain management. We look forward to building on this momentum and positioning the company for sustainable growth and value creation through and beyond 2030. Thank you again for joining us today and for your continued support and confidence in our mission. We will now open the call for questions. Operator? Operator: To withdraw your question, please press 11 again. Our first question will come from the line of Douglas Tsao of H.C. Wainwright. Your line is open, Douglas. Douglas Tsao: Hi, good afternoon. Thanks for taking the questions. I have two questions. Maybe, Shawn, just as a starting point, if you could help us walk through a little bit about the cadence for R&D spend through the rest of the year. Just to confirm, it sounds like we are going to have a step up in 2Q followed by then sort of a step down in the third quarter, just as we see 201 ramp up. Should we think then more spend in 2027? Thank you. Frank Lee: Hey, Doug. Frank here. Thanks for the question. Let me turn it over to Shawn, and he can walk us through that a little bit here. Shawn M. Cross: Thanks, Frank, and thanks for the question, Doug. Happy to provide a bit more detail on the R&D cadence this year. As mentioned in our remarks a few minutes ago, we are preparing for initiation of Part B of the ASCEND study for PCRX201, which we are excited about, and certain EXPAREL product development efforts. From the $25.4 million in Q1 that we spent, we do expect an uptick in Q2. To provide a little more detail, we expect it to be in the low $30 million range, and then we will come back down closer to the Q1 levels in Q3 and Q4. That is how we see it playing out, and we will obviously provide more updates as we get through the year. Douglas Tsao: Okay. Great. That is very helpful with that specificity. And then just at a macro level, one thing that I have been curious about is the expiration of the Obamacare subsidies, and we have started to see some decline in terms of enrollments. I think if we look at results for some of the medtech companies in the first quarter and even some of the hospital names, it has not shown anything dramatic. But I am just curious what you are hearing from the hospital channel in terms of how they are thinking about the rest of the year playing out? Thank you. Frank Lee: Thanks, Doug. We stay close to this. Let me turn this one over to Brendan to give his perspective. Brendan P. Teehan: Doug, thanks so much for the question. Obviously, we are always looking at the broader macro environment, and I am sure people are taking a look at what those changes will mean to them individually. We will keep a close eye on those procedures where EXPAREL is favored, and we will continue to provide updates as we see it play out. I think it is just too early to say. Douglas Tsao: Okay. Great. Thank you very much, and I will jump out for now. Operator: Our next question will be coming from the line of Dennis Ding of Jefferies. Your line is open, Dennis. Analyst: Hi. This is Cynthia on for Dennis. Thanks for taking our question. Earlier this week, we saw data from a cell-free regenerative therapy for knee OA with a headline efficacy of 93% of patients demonstrating clinically meaningful improvements in mobility and pain reduction. There is not a lot of information on that trial, so I am curious how you are framing that data and how 201 will differentiate from that product. And then any additional color on what promising efficacy trends would look like for PCRX201's readout would be helpful as well. Thank you. Frank Lee: Thanks for the question. I did not get the name of the company you mentioned. What was that? Analyst: I think Creative Medical Technology. Frank Lee: Okay. There are a lot of different cell and regenerative therapy companies out there, with various studies of differing rigor. Let me turn it over to Jonathan to see if he has any perspective on that. Jonathan Slonin: Thanks, Frank. Not commenting on any specific company, we are confident that the HCAG platform is the right modality for sustained relief of knee osteoarthritis. We have made tremendous progress in scaling up and are finalizing our commercial-scale manufacturing for Part B, as we have articulated before. Our anticipated enrollment is right on time. To answer your second question, we are expecting the top-line data from Part A to read out at the end of the year. Just to remind you, the primary endpoint is safety, and we will be looking at the totality of the data to understand how PCRX201 performs in a randomized controlled trial with an active comparator. We will also be looking at the secondary endpoints around efficacy, including pain and function measures. We will review those data and assess where we are, but the trends we are looking for are trends consistent with durability and efficacy from our Phase 1 trial. Analyst: Okay. Thank you. Operator: Thank you. And our next question will be coming from Truist Securities. Your line is open. Analyst: Hey. This is Jeevan on for Les. Thanks for taking our questions. How would you characterize elective procedure trends exiting March? Any lasting impact from the winter storms? And then, separately, how should we think about potential upside from ex-U.S. partnerships across the portfolio? Thank you. Frank Lee: Thanks for the question. I will ask Brendan to comment on what we are seeing now. He mentioned it a little earlier. Then I will comment on ex-U.S. partnerships. Brendan? Brendan P. Teehan: Jeevan, thank you for the question. If we look at the moving annual total for procedures where EXPAREL would assist, that is largely flat year-over-year, despite EXPAREL being up over 7%. If we look specifically at the first quarter, market procedures are up in the mid-single digits, I would say 4% to 5%, as opposed to EXPAREL, if that gives you some sense. We will look to see how that progresses here in the second quarter. Frank Lee: On ex-U.S. partnerships, this is an important part of our Five by 30 strategy in terms of signing five partnerships both in the U.S. and ex-U.S. As you know, ex-U.S. we have signed a partnership with LG Chem. They are a leading company in Asia-Pacific, and we have plans to sign similar partnerships in other major geographies. It is premature to provide guidance on these partnerships and top-line impact, but I would say it is not insignificant. These will be important partnerships that will drive revenue not only through 2030, but well beyond 2030. The first partnership’s intention is to file in the not-too-distant future, and we will be updating you on guidance around that starting in 2027. Operator: Our next question will be coming from the line of Serge Belanger of Needham. Your line is open. Serge Belanger: Hi. Good afternoon. Thanks for taking the questions. The first one is a follow-up to the previous question around the impact of winter storms. I think you were expecting a potential softer 1Q because of those storms. It looks like all three of your products had some pretty solid year-over-year growth. Did you see any impact, or were you able to recapture it over the remainder of the quarter? And then my second question regarding NOPAIN: if I remember correctly, the NOPAIN Act has a three-year term ending in 2027. Is there any legislation in development to extend or modify that term? Thanks. Frank Lee: Thanks for your questions, Serge. Regarding the winter storms, we can provide a bit more color. I will turn to Brendan for that, and then I will speak to NOPAIN. Brendan P. Teehan: Thank you, Serge. The winter storms did have an impact. They affected both the ability to ship and, as you would expect in those geographies, the surgeries did not happen, which led to rescheduling not necessarily within the quarter. There is some carryover as patients look to be rescheduled for those procedures. Despite that, we are very pleased with the performance of EXPAREL volume vis-à-vis the total available market. We believe we are past that and are looking forward to the second quarter. Frank Lee: And Serge, with regard to your question about NOPAIN, initially it is scheduled to expire in 2027. We have been staying very close to CMS and other stakeholders. We are very encouraged by not only the uptake of NOPAIN, but also the expansion of coverage to commercial lives. As Brendan mentioned earlier, we now have a total of 110 million covered lives outside the bundle, and growing. As you know, NOPAIN primarily covers Medicare lives. We are encouraged by the discussions we have had and the uptake we are seeing. We will confirm a lot of what we are seeing through claims analysis. NOPAIN is doing what it is intended to do, and commercial payers are also coming on board, which is highly encouraging. Operator: Thank you. And our next question will be coming from the line of Hardik Parikh of JPMorgan. Your line is open. Hardik Parikh: Hey, everybody. Thanks for taking my question. I just want to ask about SG&A. I think I heard you say you expect SG&A to be lower in the second half. Can you talk to the magnitude of the step down you are expecting in the second half? And then, SG&A seems to have been elevated the past five quarters relative to 2024. I am trying to get a sense of what the normalized run rate is going forward. Frank Lee: Thanks for that, Hardik. Let me turn it to Shawn. Shawn M. Cross: Thanks for the question. We reported $83.9 million in SG&A this quarter. Without providing super specific detail, you can look at the information we filed in our proxy this week that provides some magnitude of what we anticipate spending during the proxy season that would be above the typical course of events. We anticipate coming back down in Q3 and Q4 to perhaps a little bit below where we spent in this quarter. That is generally directionally correct for the second-half step down and normalized run rate. Operator: I would now like to turn the conference back to Susan for closing remarks. Susan Mesco: Thank you, operator, and thanks to all on the call for your questions and time today. We are excited about the opportunities ahead and remain focused on executing our Five by 30 growth strategy with discipline and purpose. As we look to the remainder of 2026, we are confident in our ability to build on our momentum and position Pacira BioSciences, Inc. for long-term success. Thank you again for your continued support. Good night. Operator: This concludes today's program. Thank you for participating. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Riot Platforms, Inc. First Quarter 2026 Earnings Conference Call. Please note that all participants have been placed in a listen-only mode until the question-and-answer session begins following the company's presentation of its prepared remarks. Please also be advised that today's call is being recorded. I would now like to hand the conference over to Joshua Kane, Head of Investor Relations at Riot Platforms, Inc. Please go ahead. Thank you, operator. Joshua Kane: Good afternoon, and welcome to Riot Platforms, Inc. First Quarter 2026 Earnings Conference Call. My name is Josh Kane, Head of Investor Relations. Joining me on today's call from Riot Platforms, Inc. are Jason Les, Chief Executive Officer, and Jason Chung, Chief Financial Officer. On the Riot Platforms, Inc. Investor Relations website, you can find our first quarter 2026 earnings press release and accompanying earnings presentation, which are intended to supplement today's prepared remarks and include a discussion of certain non-GAAP items. Non-GAAP financial measures should not be considered as a substitute for or superior to measures prepared in accordance with GAAP and are included as additional clarifying items to aid investors in further understanding the company's first quarter 2026 performance. During today's call, we will be making forward-looking statements regarding potential future events. These statements are based on management's current expectations and assumptions and are subject to risks and uncertainties. Actual results could materially differ due to factors discussed in today's earnings press release, comments and responses made during today's call, and in the Risk Factors section of our Forms 10-K and 10-Q, including for the three months ended 03/31/2026, which will be filed later today, as well as other filings with the Securities and Exchange Commission. With that, I will turn the call over to Jason Les. Jason Les: Thank you, Josh, and good afternoon, everyone. 2026 was a definitive inflection point in Riot Platforms, Inc. transition into one of the most significant and capable data center operators in the industry. Looking at our key milestones for the quarter: First, AMD officially exercised a 25 megawatt expansion option, bringing their total contracted footprint at our Rockdale facility to 50 megawatts, validating our ability to execute at institutional scale. Initial data center capacity for this expansion will be delivered beginning in November. Second, on the initial 25 megawatt AMD lease, we delivered the first 5 megawatts of critical IT capacity right on schedule in January, with the remaining 20 megawatts on track for delivery this May. Third, we continue to make significant progress at our Corsicana facility. We have initiated development of our first core-and-shell building using our enhanced 168 megawatt standard design, which efficiently consolidates our previous two-building design and will be connected by expanded administrative capacity. Concurrently, we are securing long-lead items to ensure timely delivery of full built-to-suit capacity after the core-and-shell is complete. Finally, we achieved this infrastructure growth while maintaining strong capital discipline, proactively funding our data center initiatives entirely through operating cash flow and disciplined Bitcoin sales, allowing us to execute on these key growth initiatives without issuing a single share of equity. Let us dive into the AMD expansion. When we announced the initial AMD lease in January, we signed a 10-year agreement to deliver 25 megawatts of critical IT capacity at our Rockdale facility with extension options that created a partnership pathway of up to 25 years. That original lease included a 75 megawatt expansion option and a right of first refusal on an additional 100 megawatts. More recently, our partnership with AMD has expanded as they worked with our team to exercise an additional 25 megawatts of their expansion option capacity. AMD now has 50 megawatts of critical IT capacity under contract with Riot Platforms, Inc. at the Rockdale facility. This expansion reflects AMD's ongoing confidence in our ability to deliver and is a clear indicator that we are delivering exactly as promised—on time and on budget. To summarize the economics of our expanded AMD lease today, we are delivering an additional 25 megawatts of critical IT capacity, bringing the total lease to 50 megawatts. Total revenue of $636 million during the primary 10-year period, $51 million in average annual NOI over the course of the contract, which, when combined with the reduced CapEx spend, will drive an even more attractive development yield relative to the initial AMD lease. The total CapEx required for the expansion is approximately $3.3 million per megawatt, totaling $83.2 million, a significant reduction from the initial 25 megawatt CapEx of $3.6 million per megawatt, driven by a leaner build-out scope following building preparation in the initial phase. Slide 8 presents a clear visual of how this expansion is taking shape at our Rockdale facility. On the top half of the slide, you can see the physical layout of Buildings F and G. We are finalizing the initial 25 megawatts of capacity for AMD, highlighted in yellow. We are already delivering 5 megawatts for AMD, with the remaining 20 megawatts firmly on schedule for full delivery next month in May 2026. AMD's 25 megawatt expansion will be developed directly adjacent to the initial footprint in Building G and will be constructed in two phases. Phase three, highlighted in blue, will deliver 10 megawatts in November 2026, while phase four, highlighted in orange, represents the remaining 15 megawatts for delivery in May 2027. As a result of this phased delivery, we anticipate exiting 2026 with an annualized operating lease revenue run rate of $37.8 million, scaling to a run rate of $55.6 million as we exit 2027 and AMD's full 50 megawatt footprint comes online. Importantly, this provides a highly visible, high-margin baseline that has the potential to scale up even further if AMD exercises its remaining expansion options. You can see the physical footprint of those additional options mapped out in green on the site plan. AMD retains an additional 50 megawatt expansion option and now holds an additional 100 megawatt option, which replaces their prior right of first refusal. Together, this provides a highly visible, de-risked pathway to potentially scale our partnership with AMD to up to 200 megawatts of critical IT capacity at Rockdale. Now I want to provide an update on the development activity underway at our Corsicana campus. As a reminder, at the end of last year, we announced our plan to initiate core-and-shell development at Corsicana. I am pleased to report development is actively underway and tracking on schedule. This marks the transition of Corsicana from a site with approved power into an active data center development site. Since that announcement, our team has refined our standard basis of design based on market engagement and feedback. The result is a meaningful enhancement to both the density and the flexibility of what we can deliver. Our updated standard is a 168 megawatt critical IT building engineered to support densities beyond 1,000 watts per square foot. The design is configurable as a two-story standard or a single-story high-density format with oversized galleries to accept 100% liquid cooling and the densest next-generation equipment without retrofit. We are using prefabricated skids and vendor-agnostic equipment specifications to further compress our schedule and de-risk procurement. This is a design built for repeatability, speed to market, and the requirements of the most sophisticated AI and HPC tenants in the market today. Reflecting this enhancement, we have consolidated the two buildings we previously announced into a single larger building with 168 megawatts of critical IT capacity, up from the 112 megawatts we originally planned across two buildings. The core-and-shell CapEx is unchanged from our prior guidance, which means we are now delivering 50% more critical IT capacity for the same capital spend. This meaningfully improves our capital efficiency at the core-and-shell level. Development is underway today, and we have a clear line of sight to 168 megawatts of completed core-and-shell in 2027. Applying the updated design across the full Corsicana site, our total planned campus capacity now stands at 756 megawatts of critical IT capacity—an increase over our prior plan on the same approved power, the same land, and the same development timeline. Put simply, we are extracting more capacity and more value from the infrastructure we have already secured, and we are doing so on a timeline that matches the urgency of today's market. Now I would like to turn it over to Jason Chung to outline our financing strategy and review the quarterly financial results. Jason Chung: Thank you, Jason. Turning to how we are funding this growth on Slide 11, there are four primary principles that guide our approach to finance. First, we carefully manage our current liquidity. This involves the strategic management of cash and Bitcoin holdings to finance initial equity requirements for data center development. Second, we seek to broaden capital availability. By leveraging the credit profiles of our tenants and our highly visible long-term contracted cash flows, we are establishing new institutional financing and capital sources for Riot Platforms, Inc. Third, we look to systematically lower our cost of capital. As our asset base matures, we are able to translate these strong credit characteristics and funding profiles into accretive, low-cost capital. Fourth, we maintain prudent ongoing balance sheet management. This requires active debt management throughout market cycles in order to cleanly recycle capital, preserve our liquidity profile, and support long-term growth. Slide 12 illustrates how these principles work in practice. Our funding strategy utilizes a sequential capital cycle to fund our data center development. In phase one, initial development funding, we use our balance sheet to advance development, as seen with the initial 25 megawatt AMD deployment, the just-announced additional 25 megawatt AMD option, and the core-and-shell development at Corsicana. During the quarter, we funded this CapEx through a disciplined sale of a portion of our Bitcoin holdings, the most capital-efficient source of funding currently available to us. Importantly, we did not issue any common equity during the quarter. Instead, we leveraged our Bitcoin treasury and our operating cash flows to fund this development. In phase two, tenant-backed project financing, we are actively engaging with multiple institutional lenders on project-level nonrecourse financing structures for the AMD lease. The quality of the AMD lease as a long-term, high-margin lease with an investment-grade leader in the AI ecosystem makes this the type of asset that project finance markets are designed to finance efficiently. We continue to target attractive loan-to-cost ratios in the range of 80% in these structures. Once we close funding, we will be in a position to recover a substantial portion of the equity we deployed into this first set of projects. Phase three is the capital recycling phase, where equity recovered from either a true-up during the construction period, as in our AMD discussions, or from refinancing proceeds on completed, stabilized assets flows directly back into the next wave of data center development. The cycle is to lease, finance, build, and recycle. As we compound through this cycle, we retain ownership of high-quality, cash-flowing assets while continuously redeploying capital to finance additional growth. Let us move on to the first quarter financial update on Slide 14. For the first quarter of 2026, Riot Platforms, Inc. reported total revenue of $167 million. Notably, with the delivery of our first 5 megawatts to AMD this quarter, Riot Platforms, Inc. is now an active data center operator, and for the first time, our top line includes contracted lease revenue from an investment-grade tenant. We recorded a GAAP net loss of $500 million, or $1.44 per diluted share, and an adjusted EBITDA loss of $311 million. This loss was driven by non-cash mark-to-market accounting adjustments on our Bitcoin holdings of $326.7 million and non-cash depreciation and amortization expense of $97.7 million, which do not reflect the underlying strong fundamental economics of our operations. Diving into these operations, our Bitcoin mining segment performance remained robust. Riot Platforms, Inc. produced 1,473 Bitcoin in the first quarter and ended the quarter with a deployed hash rate of 42.5 exahash. We generated $21 million in power curtailment credits, driving our net cost of power down to $0.03 per kilowatt-hour, thereby lowering our direct cost to mine Bitcoin to $44,629 per Bitcoin, a 26% reduction compared to 2025. In our newly added data center segment, we successfully exited the quarter with 5 megawatts of critical IT capacity fully online and generated $33.2 million in total revenue, consisting of $900,000 in operating lease revenue and $32.2 million in tenant fit-out services revenue. Finally, we ended the quarter holding 15,679 Bitcoin on our balance sheet, valued at approximately $1.1 billion, which we will continue to leverage in order to finance the ongoing development of our data center business. Turning to Slide 15, I am proud to present the inaugural financial results of our data center segment. In the first quarter, this segment generated $33.2 million in total revenue. As we introduce this new reporting line, it is important to understand the composition of this revenue and how it will evolve as our footprint scales. The majority of our first quarter revenue—$32.2 million—was driven by tenant fit-out services. This represents the procurement and installation of customer-specific equipment, which is reimbursed by tenants on a cost-plus basis. While this revenue naturally carries a lower margin, it requires no capital risk from Riot Platforms, Inc. and accelerates our tenants' ultimate speed to market. The fundamental value of this segment, however, is reflected in the operating lease income. We recognized roughly $900,000 in recurring lease revenue, driven by the initial 5 megawatt delivery to AMD in January, which generated a 91% gross margin this quarter. As AMD scales its operations, we expect associated operations and maintenance costs to increase, which will normalize this margin towards our previously stated run-rate target of 80% plus. As we look ahead, you will see a natural evolution in this revenue mix. While tenant fit-out revenue is elevated today during the development phase, as the remaining megawatts for AMD come fully online, our high-margin operating lease revenue will scale dramatically. This will layer highly predictable, infrastructure-grade cash flows into our consolidated P&L, driving significant margin expansion over time. Turning to Slide 16, our Engineering segment—comprised of ESS Metron and E4A Solutions—serves as a key pillar of our execution strategy. The financial metrics for Engineering remain exceptionally strong. Engineering backlog stood at $193.4 million during the quarter, with approximately 90% of backlog continuing to be driven by data center sector demand. Most importantly, the apparent decline in backlog for this quarter was entirely driven by our decision to strategically hold back manufacturing capacity for deployment towards our own data center business. Since acquiring ESS Metron in December 2021, Riot Platforms, Inc. has realized approximately $24 million in cumulative CapEx savings across our development footprint, and these savings will continue to compound as we further scale up. While this compounding cost advantage is accretive, the true strategic value of our Engineering business is control over procurement. Low- and medium-voltage switchgear, transformers, and power distribution centers are among the most severely constrained components in the data center supply chain. For developers relying on third-party manufacturers, lead times are lengthening, and these lead times have become a binding constraint on delivery schedules across the industry. Because Riot Platforms, Inc. owns a dedicated switchgear and power distribution manufacturer, we can sequence, prioritize, and de-risk the schedule-critical equipment required to bring a data center online. This vertical integration was a key factor supporting our ability to deliver phase one of the AMD lease on an accelerated timeline. Looking ahead, we will continue to invest in this strategically important business. In 2026, we expect to increase ESS Metron's total engineering capacity by approximately 25%, and we will be strategically allocating that incremental capacity to support Riot Platforms, Inc. data center growth. Further, because we manufacture these components in-house, we design them in parallel with our data center engineering team, allowing us to move faster and reducing redesign risk. Just as importantly, the same teams that manufacture this equipment also provide maintenance in the field, which will drive long-term operational efficiencies as our data centers are energized and stabilized. Taken together, our Engineering business is a core engine of our competitive moat in a market where time to power is the single most valuable commodity. Now I would like to turn it back over to Jason Les. Jason Les: Thank you, Jason. I want to frame one of our key competitive advantages in the broader data center development market: secured power. Today, access to power is a key bottleneck in data center development globally. This makes our large portfolio of 2 gigawatts of fully approved power a strong competitive advantage, giving us one of the most significant development pipelines in our industry. However, we are not stopping here. We recognize that market demand for power is strong, and we are aggressively pursuing growth in our power portfolio across four distinct avenues. First, through greenfield and brownfield development—securing and developing new land assets that offer immediate or near-term approved power capacity. Second, through behind-the-meter self-generation, allowing us to strategically colocate our own power production directly with our critical load. Third, through inorganic M&A—actively targeting and acquiring portfolios or organizations that already possess established access to power. And fourth, through strategic partnerships—forming joint ventures to expand our geographic footprint, rapidly grow our pipeline, and explore next-generation technologies. To put the scale and rigor of this effort into perspective, our corporate development team has already evaluated over 100 distinct opportunities across these four avenues. We have the team, the capital, and the strategy to continuously source the highest-quality power assets required to fuel our development pipeline. However, let me be clear. While we are aggressively pursuing these opportunities, we maintain rigorous capital discipline. We will only execute on transactions that are highly accretive, financially responsible, and strictly aligned with our target return thresholds. Now I want to walk through the path we have taken to get to where we are today and provide investors with a clear picture of some of the obstacles Riot Platforms, Inc. has navigated in order to best position our power portfolio for maximum value creation. At the start of 2025, we engaged Altman Solon to conduct a formal feasibility study on both Corsicana and Rockdale. The conclusion was unambiguous: we had two of the most attractive data center sites in the country. But the same study also identified two specific constraints that, left unresolved, would have prevented us from leasing that power to high-quality tenants at meaningful scale. The first was land at Corsicana, where our original footprint was insufficient to accommodate the full 1 gigawatt campus development we wanted to deliver. The second was our ground lease at Rockdale. Until we solved both of these constraints, we were not in a position to meaningfully advance design, development, or leasing at either site. Solving these constraints required patient, disciplined execution, and that is what we did. Over the course of 2025, we successfully navigated a series of obstacles to acquire land adjacent to our original Corsicana site, unlocking the ability to develop the full 1 gigawatt of approved power on Riot Platforms, Inc.-owned land in a connected campus layout. At Rockdale, we converted our interest from a long-term ground lease into a fee simple acquisition of the 200 acres underlying the site. With those two transactions closed, we owned the land, took control over our own destiny at both sites, and removed the most significant barriers between our power portfolio and high-quality contracted leases. Critically, we did not wait for one workstream to finish before beginning the next. In parallel with the land work, we systematically built out the organization starting in 2025 with veteran product design and engineering talent. With the Corsicana land situation on track, we completed the initial basis of design for our standard data center product and initial campus design for the full Corsicana buildout. Through 2025, we took those designs to market for direct technical and commercial feedback from prospective tenants, initiated core-and-shell development at Corsicana, and brought on senior commercial leadership to drive leasing execution. That disciplined, sequenced groundwork is exactly what allowed us to move decisively when the opportunity arrived. In January, we signed our first data center lease with AMD and delivered the initial phase of capacity within the same month. Since that initial lease, we have expanded the AMD relationship to 50 megawatts, enhanced our standard design to increase density and flexibility, and are now actively engaged in commercial discussions at both of our sites. Every step on this timeline was necessary in order to maximize our value creation opportunity. Every one of them has been completed on an accelerated schedule. The result is that we now have an active commercial pipeline underpinned by secured land, a proven design, committed capital, and a tenant relationship that is already generating revenue today. This is an excellent position to be in, and we are confident in our ability to continue to execute from here. Now I want to zoom in on part of that timeline and elaborate on the team we have built to execute on this opportunity. Over the past year, building out a world-class data center organization has been one of our highest priorities, because we knew from the start that the quality of our team would be every bit as important as the quality of our assets. What you see on this slide is the depth and breadth of the capabilities we have assembled across four pillars: commercial sales, critical operations, project execution, and design and construction. Each of these functions is led by experienced, credentialed leadership with direct track records of delivering mission-critical infrastructure at hyperscale-grade platforms. On the commercial side, our sales organization is led by Ria Williams, our Senior Vice President of AI and Hyperscale Sales. Ria joined us following previous sales roles at Oracle, Compass Datacenters, and Digital Realty, and she brings both the relationships and the credibility necessary to engage hyperscalers and other top-tier tenants at the highest level. Ria reports directly to me. That reporting structure is deliberate. Our leasing strategy is the single most important driver of long-term shareholder value at Riot Platforms, Inc., and having sales report directly to the CEO ensures that I am directly engaged in every major commercial discussion. I am also very pleased to announce today a significant addition to our leadership team. Adam is a proven infrastructure executive with more than 15 years of experience leading hyperscale and AI data center development at multi-gigawatt scale. He comes to us most recently from TA Digital Group, where he served as Senior Vice President of Design and Construction, and prior to that, he held leadership positions at both Google and Meta. Adam is exactly the caliber of leader we need at this stage of our development, and we are thrilled to have him at the helm of our design, construction, and procurement teams as we scale Corsicana, Rockdale, and our broader data center platform. Rounding out the organization, our critical operations leadership brings deep experience running mission-critical environments to hyperscale SLA standards. Our project execution team combines in-house high-voltage and procurement expertise with integrated program management across our development pipeline. Every one of these functions is supported by Riot Platforms, Inc. broader enterprise platform, including our vertically integrated engineering capabilities at ESS Metron and E4A Solutions. The result is a data center organization that is experienced, credentialed, and deep. This is the team that is already delivering for AMD at Rockdale, building Corsicana, and advancing the leasing discussions underway today. We have the right people in the right seats to execute on the opportunity in front of us, and our confidence in this team is reflected in the pace of progress you are seeing across our business. I want to close by putting this quarter into perspective. Riot Platforms, Inc. has four things that, in combination, are extraordinarily difficult to replicate. We have the assets—2 gigawatts of utility power, including 1.7 gigawatts of fully approved, energized capacity at two of the most attractive data center development sites in the United States. We have the balance sheet—a 15,679 Bitcoin treasury worth roughly $1.1 billion at quarter end, significant cash on hand, operating cash flow from efficient, low-cost mining operations, and strong capital markets relationships that give us the ability to fund our growth on value-accretive terms. We have the team—our in-house data center organization includes veteran leadership across product design, construction, engineering, sales, and operations, and they are delivering on the AMD lease, developing our data center product, building Corsicana, and advancing our next wave of leasing discussions. And we have a repeatable approach—our power-first strategy: lease to creditworthy tenants, finance efficiently, build with discipline, recycle capital. Our priorities for the balance of 2026 are clear. First, deliver contracted megawatts to AMD on schedule and on budget. Second, execute on additional leases at both Rockdale and Corsicana, with active discussions underway across hyperscale and other high-quality tenants. Third, advance core-and-shell development to support delivery of Tier III built-to-suit data center capacity. Fourth, secure attractive, low-cost financing that reflects the quality of our tenants and sites. Fifth, continue to selectively grow our power pipeline through greenfield and brownfield development, self-generation, partnerships, and targeted acquisitions. The opportunity in front of us is significant. Data center demand continues to grow rapidly, driven by the commercialization of AI and the accelerating need for high-density compute. Power, execution talent, supply chain access, and capital discipline remain the binding constraints, and timelines for new capacity continue to extend. Riot Platforms, Inc. sits on the right side of these trends, with energized, fully approved power in exactly the right markets and with a built-out operating model that is delivering. The AMD expansion is a direct reflection of that position, and it is, we believe, just the beginning. As we continue to convert megawatts into contracted data center leases with creditworthy tenants, we expect the market to increasingly recognize the quality, scale, and cash flow visibility of our platform and to re-rate Riot Platforms, Inc. valuation accordingly. On behalf of our entire management team, I want to thank our shareholders, partners, and employees for their continued support as we execute on this opportunity. We will now open the call for questions. Operator? Operator: Thank you. As a reminder, to ask a question, please press [inaudible]. To withdraw your question, please press 1-1 again. Due to time constraints, we ask that you please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. Our first question will come from the line of Paul Golding with Macquarie. Paul Golding: Thanks so much, and congrats on all the progress this quarter. I just wanted to ask a couple of questions. First, on the 25 megawatt expansion with AMD, I was hoping you could talk through some of the puts and takes. It looks like the total contract value across the 25 megawatts is up versus the initial lease, while, as you noted, the CapEx per megawatt is down due to a leaner build-out. Could you give some color on those puts and takes on how you were able to realize a better TCV versus a leaner build-out and better CapEx profile? And then I have a follow-up. Thank you so much. Jason Les: Sure. Thanks, Paul. This expansion falls under the original lease that we executed with AMD earlier this year, so it is the same rental rate and terms. I think the only reason you may be seeing the difference is that there is an escalator clause in our agreement, and this new tranche runs over the course of those escalators occurring. Otherwise, it is substantially similar terms and rate. The only economic difference is the lower build-out cost that you mentioned. We are able to achieve that lower build-out cost because we are leveraging the full building preparation that was already done in the original phase. When we did the first 25 megawatts, we prepared that full building, which had some additional expense. Now, as we execute the next 25 megawatt expansion completing that building out, we do not have to do that work again, so we have lower cost by leveraging the initial work and substantially the same lease terms. As you see on our slide, you combine all of these factors together, and you are getting a lower build cost, a slightly higher contract value, and altogether, an even improved yield from our original deal. Paul Golding: Great. Thanks, Jason. Maybe a two-part follow-up. It does look like there may be a bit of a longer build-out period for that 25 megawatt expansion. Can you talk to that, and also the ROFR piece that was converted to an option as a follow-up to that? I know there is another 50 megawatts in that original option, as well as the 100 megawatt ROFR, but just to understand how that converted, as well as some of the timing considerations with the expansion? Thanks so much. Jason Les: Yes. This is a pretty fast timeline to deliver capacity. We are announcing this deal here in April, and then we are delivering in October/November, so it is a quick timeline. To give you some color, with the first 25 megawatts for AMD, we were making progress on that schedule before the lease was signed. We were taking some calculated, manageable risks to be prepared and to get that first lease off the ground. With this expansion, you are seeing the whole process from the beginning, and this schedule is broadly in line with the build schedule in the first phase—the difference being we were not able to announce that until farther along in the process. As far as the expansion option and the ROFR go, from the beginning we viewed our initial deal with AMD as the beginning of a larger partnership. The best way we at Riot Platforms, Inc. can achieve that is by being a consistent and reliable partner for AMD, positioning ourselves as their supplier of choice. By continuing to do what we are doing, we believe we are positioned to continue to grow that relationship, and the fact that AMD exercised part of its options a few months after the initial deal demonstrates that. More specifically on the ROFR, we converted the ROFR to an option to simplify the pathway of expansion with AMD. We want to advance this relationship, and having an option instead of a ROFR gives them what they wanted and works better for us. With the pace of interest at Rockdale and in addition to Corsicana, it was better for us to have a defined mechanism for what AMD is looking for, instead of having to call that ROFR on terms or on a design different than AMD’s needs. We simplify our discussions with other potential tenants while also simplifying the pathway for expanding the relationship with AMD. That is how we thought about changing this ROFR to an option. Paul Golding: Got it. All very clear. Thank you so much. Congrats again. Operator: One moment for our next question. And that will come from the line of John Todaro with Needham. Your line is open. John Todaro: Hey, thanks for taking my question, and congrats on the capacity with AMD. Could we get an update on current lease discussions beyond AMD at Rockdale and Corsicana—how you would characterize progression since last quarter, and if there have been any sticking points or gating factors? And then I have a follow-up. Jason Les: Thank you for the question. Over the past few quarters, we have laid out the roadmap we have been on to execute a commercial process. We completed the foundational work to fill gaps, as we discussed on the timeline, and to bring a strong offering to the counterparties we want to lease to. As a result, we have been able to act on the substantial interest I mentioned on our last earnings call, and those discussions have advanced considerably since then. We are in a great spot; there are no gating items or issues. We are moving forward, we have interest for capacity across both Corsicana and Rockdale, and we are pursuing those opportunities in parallel. On leasing, our philosophy has always been to focus on high-quality tenants that can drive the financing terms that maximize value. The type and depth of engagement we are getting validates the methodical approach we have taken. Our ability to succeed in this commercial process is enhanced when we go through onboarding with a hyperscaler and can check the box affirmatively on the vast majority of the hundreds of requirements they have. That is the result of preparation. Leasing this type of capacity to top-tier tenants is an enormous lift and can have an unpredictable timeline. We have seen peers have multiple deals start and stop before one got to the finish line. While it is unpredictable, I am more confident than ever in our ability to succeed based on the progress we have made and the engagement we are getting. I cannot tell you when our next lease will be signed, but I believe you will continue to see us make progress over the roadmap we have laid out, ultimately culminating in a full lease-up of our capacity. John Todaro: That is great, thanks. As a follow-up on demand signals: do you think we have seen fewer leases in the public markets so far than some investors expected in 2026? Is there anything beyond your conversations where there are changes in demand signals over the last several weeks or months? Jason Les: We see the broader theme of data center demand outpacing supply continuing for the foreseeable future. The commercialization of AI is rapidly advancing, and everyone is going to continue to be short on compute. All of the hyperscalers’ earnings calls yesterday showed growing CapEx, and they are short on compute and capacity—identified as a key thing keeping some CEOs up at night. That theme remains intact. Each buyer is in a different phase of their own buying cycle, and at different times different companies are in a more urgent state than others. In this rapidly changing environment driven by AI, this cycle is running quicker than it has historically. You are not always going to see the same level of urgency across the field, and that field can change from one quarter to the next. The important thing is that we at Riot Platforms, Inc. have built a structure where we can come fully prepared and rapidly respond and engage as customer interest comes forward. Whether it is reliance on our standard design or specific requirements that our design can easily accommodate, our preparation is paying off, and we are in the right market at the right time. John Todaro: That is very helpful. Thanks for taking my questions, and congrats again. Operator: Thank you. One moment for our next question. And that will come from the line of Mike Grondahl with Northland. Your line is open. Mike Grondahl: Hey, thanks. Can you talk about some of the initial data center revenue this quarter—how that related to the initial 25 megawatts you are delivering, and how to think about margins this quarter and going forward? Jason Chung: Mike, thanks for the question. To get a clear picture of our initial data center financials, it is important to break down the total segment revenues of $33.2 million for the quarter because there are two distinct revenue streams at play. First, the vast majority of that top line—$32.2 million—relates directly to tenant fit-out services, which we execute on a cost-plus basis. This generated $1.4 million in gross profit, at about a 5% margin. The remaining and more interesting data point is the core operating lease revenue, which was $900,000 for the quarter. This reflects a little over two months of revenue from the initial 5 megawatt delivery to AMD, which occurred in late January. Regarding margins, the margin on that core operating lease component for this quarter was 91%. However, that 91% is a function of being in the early stages of AMD's ramp at Rockdale, meaning relatively lighter operating costs during those initial two-plus months. As AMD scales into their full capacity and site operations mature, we expect O&M costs to scale in line with that ramp-up and drive NOI margins towards the targeted 80% plus range we have put out publicly before. Mike Grondahl: Got it. And then maybe one more as we close out Q3 and head into Q4: can you talk a little bit about the financing structure you envision for AMD and initial conversations you have had with lenders? Jason Chung: Absolutely. Initial feedback has been very positive on the AMD financing, based on the strong cash flow profile of the lease, the attractive development yield, and the overall strength of having AMD as an investment-grade tenant. I cannot comment on specific spreads at this point, but we believe the overall structure of the deal—and the relative lack of supply of AMD debt in the market today—supports spreads that will be highly competitive with what we are seeing across the broader financing markets. Mike Grondahl: Got it. Thank you, guys. Operator: Thank you. One moment for our next question. And that will come from the line of Stephen Glagola with KBW. Your line is open. Stephen Glagola: Hey, thanks for the questions. Two parts for me. With the recent changes in leadership on the data center side, has that had any impact on lease discussions you are having with hyperscalers or potential tenants in general? And second, sitting here today, do you feel you have the team in place to simultaneously advance leasing efforts at both Rockdale and Corsicana? Thank you. Jason Les: Thanks for the question, Stephen. One of my ongoing responsibilities as CEO is to ensure that we have the right leadership structure and the right team in place to execute on our strategy. To do that, we are constantly looking at how we are organized and where additional talent can enhance our ability to succeed. Bringing in leaders like Adam Black to lead design and construction is a perfect example of that philosophy in action. You can imagine this is not something that happened overnight; it was some time in the making and was the right move to enhance our leadership structure. These changes have had absolutely no impact on development or commercial discussions. Our continued rapid delivery for AMD—and their decision to exercise part of their option—is a perfect example of that. As we continue to make progress, that will become even more clear. For the second part of your question, do we feel that we have the right team in place right now? I believe we have an extremely strong team to execute at both Rockdale and Corsicana concurrently—and the reason I say that is because we are doing that right now. From design, construction, commercial sales, critical operations, and project execution perspectives, we have an incredibly strong leadership team assembled, working hand-in-hand to advance our strategy. You can expect some incremental hiring for support roles across departments in the future as our business scales, but the core leadership structure has been built, and that is the team executing today. Stephen Glagola: Thank you. Operator: One moment for our next question. And that will come from the line of Brett Knoblauch with Cantor Fitzgerald. Your line is open. Brett Knoblauch: Hi, thanks for taking my question. Maybe a quick double on Corsicana. It seems like there is a lot of momentum there, and last quarter you talked about customer conversations for taking down the entire site. Is that still the case? Do you have a preference for single-tenant or multi-tenant? And as a follow-up, on the procurement process for the core-and-shell—where are you on that, as well as the procurement process for what would come after the core-and-shell? Jason Les: Thanks, Brett. On whether the majority of the conversations are still around the entire site—yes, that remains the case, and that is probably our preference. I want to emphasize that we still have the ability to accommodate multi-tenant if that is the way things go. At a potential 756 megawatts of leasable capacity, Corsicana is a huge deal. We have not seen any deals signed by peers at that scale. That is a fantastic asset for us, but it also means it is a big bite to chew for tenants committing to a multiyear deployment schedule at a huge scale. So while the majority of interest is for the full site—as I said on our prior call—there are multiple potential outcomes this can take. There is still a substantial amount of interest, and we are very excited about that. On procurement, we previously secured and have already begun receiving the necessary substation equipment, so we are in a terrific position on the long-lead equipment for core-and-shell. At this point on core-and-shell development, it is largely an exercise in mobilizing labor. I am happy to share that we have secured a general contractor for this phase of development, and they are executing. In fact, this is the same general contractor executing for us with AMD on a very accelerated timeline, and we feel great about this partnership. Beyond core-and-shell—talking about the Tier III eventual buildout of the site—we have been securing long-lead equipment for that, such as backup generators and chillers. As Jason mentioned in the prepared remarks, ESS Metron is scaling up and holding/allocating capacity for Riot Platforms, Inc. use. All of this procurement reflects our confidence in how our strategy is progressing. We are ensuring that we have an attractive offering and an attractive timeline. You can read into why we are making these moves—we feel good about the progress we are making with procurement, and development remains on schedule. Brett Knoblauch: Awesome. Thanks so much, and congrats on the quarter. Operator: Thank you. One moment for our next question. And that will come from the line of Brian Dobson with Clear Street. Brian Dobson: Hey, thanks so much. One more follow-up on financing in general. Bitcoin sales have been a big part of your upfront financing. Do you expect that to continue? And would you elaborate on your view of long-term debt financing and how that fits into your broader strategy moving forward? Jason Les: Let me turn that question to Jason Chung. Jason Chung: Sure. Hey, Brian. That is correct—right now, our Bitcoin treasury and operating cash flows remain the most capital-efficient, non-dilutive sources of funding available to us. As a reminder, we executed our Q1 development entirely without issuing any common equity. Looking ahead to our broader financing philosophy, as our leasing pipeline scales, we recognize that establishing deep, diversified access to capital is critical. We are in active discussions with capital markets participants and evaluating a wide spectrum of debt options, ranging from asset-specific project financing to broader corporate debt markets. To be clear, we are not looking to push all of our future growth through a single financing channel. We fully expect our long-term capital structure to utilize a mix of different instruments, and the specific path we take for any given project will depend on the dynamics of that particular underlying lease, the credit profile of the tenant, prevailing market conditions at the time, and Riot Platforms, Inc. own needs. Regardless of whether a specific project is funded through project finance, capital markets, or otherwise, the mechanics will remain the same in that the debt will be supported by long-duration, highly visible cash flows from investment-grade tenants, in line with our leasing strategy. By maintaining a strong balance sheet today, we are preserving the optionality to tap into the right market with the right instrument at the right cost of capital for every future lease. Brian Dobson: Yeah, thanks very much for the color. Operator: Thank you. One moment for our next question. And that will come from the line of Nick Giles with B. Riley Securities. Your line is open. Nick Giles: Thank you, operator, and good afternoon, everyone. I wanted to ask about the potential cadence of AMD's remaining 150 megawatt expansion option. Is there a date where the options expire? I see the illustrative chart on Slide 22 shows the second 100 megawatt tranche is contingent on power availability—what exactly does that mean? Thanks. Jason Les: The cadence of expansion with the AMD lease will be driven by them. As I said earlier, we will continue to be good partners, deliver capacity, and ensure we are the first call they make when they are looking to expand capacity. As far as the mechanics of the options, the new 100 megawatt option is conditional on first utilizing all of the first option, which now has 50 megawatts remaining. There is some confidentiality to the agreement, so I do not want to elaborate further. One comment: the original lease and expansion clearly go into the two buildings already there—Buildings F and G. For the next 100 megawatts, that would require a new building or capacity being developed. I would say stay tuned as we work on those plans and that development pipeline comes together. Nick Giles: Got it. For my follow-up, regarding your pipeline and the four different growth options, which do you favor most? And out of the 100-plus opportunities referenced in your prepared remarks, were those mostly greenfield and brownfield, behind-the-meter, M&A, or JVs? Jason Les: In this environment where power is so constrained, I do not think you can have a single preference. We laid out that slide because we are pulling on every lever possible to build our pipeline. As we advance commercial discussions at Rockdale and Corsicana, this pipeline becomes even more important—we have built the base of our business with these large core assets, and now we are thinking about how we continue the strategy from there. Our philosophy is that it will require creativity and being open-minded to all of those options. They all have merit, with pros and cons, and you can expect to see a bit of everything as we progress in building our pipeline. Nick Giles: Got it. Thanks for the color, and best of luck. Operator: That is all the time we have today for our question-and-answer session. I would now like to turn the call back over to Mr. Jason Les for any closing remarks. Jason Les: I want to thank everyone for tuning in to our call today—our investors, shareholders, analysts, and partners. We are incredibly excited about the progress we have made and the position we are in today. We have more confidence than ever right now, and we are very excited to continue sharing progress as we make it. We will see you on our next earnings call, if not before. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Internet Bancorp Earnings Conference Call for the First Quarter 2026. [Operator Instructions] Please note this event is being recorded. It is now my pleasure to turn the call over to Julia Ferrara from ICR. You may begin your conference. Julia Ferrara: Thank you, operator. Hello, everyone, and thank you for joining us to discuss First Internet Bancorp's first quarter 2026 financial results. The company issued its earnings press release earlier this afternoon, and it is available on the company's website at www.firstinternetbancorp.com. In addition, the company has included a slide presentation that you can refer to during the call. You can also access these slides on the website. Joining us from the management team today are Chairman and CEO, David Becker; President and COO, Nicole Lorch; and Executive Vice President and CFO, Ken Lovik. David and Nicole will provide an overview, and Ken will discuss the financial results, and then we'll open up the call for your questions. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial conditions of First Internet Bancorp that involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. At this time, I'd like to turn the call over to David. David Becker: Thank you, Julia. Good afternoon, and thank you for joining us on the call today. We delivered strong first quarter results that demonstrated the resilience and strength of our diversified business model. We generated solid revenue growth, expanded our net interest margin and continued making meaningful progress on credit quality, all the while navigating an uncertain macroeconomic environment. Let me start with some of the highlights for the quarter. Total revenue reached $43.1 million in the first quarter, up 21% year-over-year, driven by a 26% increase in net interest income. Our fully taxable equivalent net interest margin expanded to 2.45%, a 54 basis point improvement from a year ago and 15 basis points sequentially. This margin expansion reflects the benefits of our proactive balance sheet management strategy and the power of our deposit franchise, combined with our scalable nationwide lending platforms. Pre-provision net revenue grew 51% year-over-year to $18.1 million, underscoring our ability to generate strong operating leverage while maintaining disciplined expense management. This performance gives us confidence in our ability to drive sustainable profitability as we continue to work through our credit normalization process. On credit, our overall loan book remains solid and continues to perform in line with industry trends. In addition, we're seeing tangible evidence that the decisive actions we've taken over the past several quarters are yielding favorable results on the 2 problem portfolios, SBA and Franchise. Our provision for credit losses for the quarter came in better than expected, and we're observing improving trends in our portfolio with delinquencies and nonperforming loans headed in the right direction. The credit trends we're seeing, particularly in our SBA portfolio reflect the impact of enhanced underwriting standards, more vigorous portfolio monitoring and responsive problem loan resolution. On the growth front, our commercial lending pipelines remain robust across multiple verticals. Total loans increased to $3.8 billion with particularly strong production in single tenant, lease financing and construction lending as well as in one of our emerging verticals, wealth advisory lending. While we maintain appropriately conservative underwriting standards, we're seeing great opportunities to deploy capital into high-quality commercial relationships at attractive yields. Turning to the other side of our balance sheet. Total deposits reached $5 billion, up from $4.8 billion in the prior quarter. We continue to benefit from the strength and flexibility of our Banking-as-a-Service initiatives. Importantly, we're seeing continued growth in lower-cost fintech deposits, which has also allowed us to let higher cost CDs and broker deposits mature without replacement. Our fintech deposit platform also provides us with significant balance sheet management flexibility. During the quarter, average fintech deposits totaled $2.4 billion, an increase of over 186% from the first quarter of 2025. At quarter end, we have moved approximately $1.5 billion of these deposits off balance sheet, optimizing our asset size while maintaining these valuable customer relationships and the associated fee income streams. This capability is a unique competitive advantage that enhances both our profitability and our capital efficiency. In our SBA business, while seasonality and tightened underwriting resulted in softer loan production for the quarter, we're pleased with the strong foundation we're building and how the business is positioned for long-term profitable growth. To further align our strategy in SBA, we've strengthened the business by promoting Gary Carter to the position of National Sales Manager. Gary rejoined us a year ago as our Senior SBA Credit Officer, bringing deep industry expertise, including his role at Live Oak Bank that will help us continue building this business on a sound foundation. Our capital and liquidity position remains solid as we were able to closely manage the size of the average balance sheet while continuing to grow revenue. Regulatory capital ratios remain well above minimum requirements with a total capital ratio of 12.5% and a Common Equity Tier 1 ratio of 8.97% as well as substantial liquidity coverage. Moving to our strategic investments in technology and artificial intelligence. We continue to invest thoughtfully in digital capabilities that enhance the customer experience, improve operational efficiency and position us for long-term growth. These technology investments aren't just about maintaining our competitive position, they're also about creating sustainable advantages in how we serve customers, manage risk and drive operational excellence. Looking ahead, we're navigating an uncertain macro environment from a position of increasing strength. Our diversified business model is generating strong revenue growth. Our deposit franchise provides funding advantages and strategic flexibility. We've proven our ability to make difficult decisions and execute effectively. The credit challenges we've experienced are manageable in the context of our overall business. We've taken decisive action, strengthening underwriting standards, enhancing risk management and addressing problem loans proactively. We see the benefits in improving trends and expect continued progress throughout 2026. We are not standing still. We're investing in AI and technology to enhance efficiency and customer experience, strengthening our commercial banking capabilities, expanding fintech partnerships and repositioning our SBA business on a stronger foundation. We're confident in our strategy, our team and our ability to deliver value for shareholders. I'll now turn it over to Nicole for operational highlights, including commercial lending, SBA, Banking-as-a-Service and credit. Nicole Lorch: Thank you, David. Starting with commercial real estate, we saw solid first quarter activity with particularly strong production in construction and single-tenant lease financing. These businesses continue to perform well with strong credit quality and attractive risk-adjusted returns on new originations. We were also pleased to see higher balances in a couple of our emerging verticals, wealth advisory lending and equipment finance. The pipeline remains healthy with disciplined underwriting and good yields on new commitments. Turning to SBA. As David mentioned in his comments, the deliberate shift we communicated in our last call that prioritizes credit quality over volume, combined with a seasonally lighter first quarter resulted in lower originations for the quarter. This translated into lower loan sale volume and lower gain on sale revenue compared to the linked quarter. Regarding gain on sale revenue, while premiums have been strong so far this year, we still expect to retain more production on our balance sheet in future periods as the pricing on certain higher-quality deals will not fetch quite the same premiums in the secondary market. We generally look at a 12-month earn-back period when making decisions on whether to sell or hold loans. While this will impact gain on sale revenue for the year, it will be highly additive to net interest income and net interest margin in future periods. Nonetheless, barring any macroeconomic deterioration, we remain optimistic about the previously shared production and gain on sale targets for the full year. Importantly, while we're being selective about growth in this portfolio, we remain committed to small business lending as a core business. This is an attractive lending vertical with good long-term economics, and we have the platform, expertise and relationships to compete effectively once we've fully worked through this current credit cycle. As to credit performance, we've made substantial progress over the past several quarters through proactive and prudent actions. We've significantly enhanced our underwriting standards, added experienced talent to our credit and portfolio management teams and implemented more robust monitoring and early warning systems. We've also been proactive in working with our borrowers to prevent the formation of nonperforming loans, and we're seeing results. As of March 31, delinquencies in the SBA portfolio have improved 118 basis points quarter-over-quarter and 126 basis points year-over-year. As we look ahead, our focus in SBA is on durability and consistency rather than near-term volume. Loans originated under our revised standards are showing more stable early behavior. While these newer vintages are still early in their life cycle, we're encouraged by what we're seeing in terms of borrower performance, responsiveness and overall portfolio dynamics. The operational changes we've made across underwriting, execution and portfolio oversight are now fully embedded in the business. This enables us to remain selective today while preserving the ability to scale responsibly as conditions normalize. Our objective is an SBA portfolio with attractive long-term economics and reduced volatility across cycles, and we are building with that goal in mind. In Franchise Finance, we continue to make progress working through problem loans. Our special assets team was busy during the quarter coming to resolution on several credits. While net charge-off activity remained elevated during the quarter, it more than offset nonperforming loan formation as nonaccrual Franchise Finance loans dropped to their lowest level in 4 quarters. Looking at our Banking-as-a-Service operations, we continue to see strong momentum with our fintech partners. These relationships provide valuable deposit funding, generate attractive fee income and position us at the forefront of innovation in digital banking. We processed over $82 billion in payments volume during the quarter, an increase of over 260% year-over-year through a carefully curated partner network, a reflection of our efforts to strengthen and deepen existing relationships while cultivating new partnerships. We are constantly evaluating new partnership opportunities while ensuring we maintain the highest standards of compliance and risk management. Across the bank, we continue to invest strategically in AI and automation to drive efficiency and enhance customer service. Our strong data foundation built through previous investments in our data warehouse and integrated data sources now supports our infrastructure upgrades for AI agent processing. While scoping our own proprietary agents, we've already deployed third-party AI capabilities with measurable impact, such as fraud detection agents that screen outbound transfers before processing. Additionally, our virtual customer service agent resolves approximately 45% of inquiries, significantly reducing the burden on human agents and improving response times. The effects of this are validated by the favorable results from the Net Promoter Score framework and customer listening program we implemented in the first quarter with our consumer and small business banking team. Out of the gate, our scores are well above industry average. We have built relationships through transparency and delivering on our promises, and that loyalty delivers strong returns. The diversity of our business model is another key strength. We have multiple engines driving growth and profitability. Our commercial lending is performing well. Our consumer lending remains stable. Our fintech partnerships continue to grow, and we're seeing improving trends in SBA. We're executing on all of this with appropriately conservative underwriting standards that position us for sustainable profitable growth. I will now turn it over to Ken for additional insight into our first quarter performance and update to our 2026 outlook. Kenneth Lovik: Thanks, Nicole. We are pleased to report solid first quarter results with net income of $2.5 million or $0.29 per diluted share. Total revenue for the quarter was $43.1 million, a 21% increase over the prior year period and when combined with well-managed expenses, pre-provision net revenue totaled $18.1 million, up 51% year-over-year. These results reflect our diversified business model, strong operational execution and sustained business momentum across our core segments. Net interest income for the first quarter was $31.6 million or $32.8 million on a fully taxable equivalent basis, up about 26% and 25%, respectively, year-over-year. Net interest margin improved to 2.36% or 2.45% on a fully taxable equivalent basis, up 14 and 15 basis points, respectively, from the prior quarter and both up 54 basis points year-over-year. The yield on average interest-earning assets for the quarter rose to 5.67% compared to 5.57% in the prior year period as higher rates on new loan originations more than offset the impact of Federal Reserve rate cuts in late 2025. We also saw a meaningful decline in funding costs during the same period with the cost of interest-bearing deposits falling 56 basis points to 3.45%. The ability to maintain and increase yields on interest-earning assets in conjunction with declining cost of interest-bearing deposits demonstrates delivery on our years-long effort to reposition the balance sheet and optimize our mix of earning assets. Noninterest income for the quarter totaled $11.5 million, up almost 11% year-over-year as fee revenue from our fintech partnerships continued to grow, supplemented by higher net loan servicing revenue following the servicing retained sale of single-tenant lease financing loans in 2025. David and Nicole both touched on our positive momentum in the Banking-as-a-Service space, which is evidenced by the growth in fee revenue with quarterly revenue increasing over 200% compared to the first quarter of 2025 and increasing over 220% on a trailing 12-month basis. Noninterest expense for the quarter totaled $25 million, up only 6% year-over-year despite continued investment in technology and AI to enhance both front and back-office operations and costs related to working out problem loans. Turning to credit. The provision for credit losses was $16.3 million in the first quarter, which was a little better than our initial expectations. The provision for the quarter included net charge-offs of $15.8 million and additional specific reserves in our Franchise Finance portfolio. Relative to our original forecast, the lighter provision was due to a combination of lower loan balances and unfunded commitments as well as updates to the assumptions in the CECL model. Our allowance for credit losses at quarter end was $56.5 million or 1.5% of total loans, up slightly from year-end. Nonperforming loans increased to $61.6 million or 1.63% of total loans. However, a portion of the increase consists of fully guaranteed SBA 7(a) balances where the government guarantee substantially mitigates our loss exposure. Excluding fully guaranteed balances, nonperforming loans to total loans drops to 1.22%. Another component of the increase in nonperforming loans was accruing loans 90 days or more past due. However, the largest portion of this increase, about $6 million, relates to one relationship that we expect to pay off in full in the second quarter. I will also note that our SBA team was successful in bringing some past due borrowers current shortly after quarter end, reducing delinquencies even further. At quarter end, the ratio of the allowance for credit losses to nonperforming loans was 92%. Adjusting nonperforming loans to remove the fully guaranteed SBA balances, the allowance coverage ratio improves to 122%. While we are pleased with the improvement in nonperforming loans and delinquencies, our updated allowance for credit losses model reflects our expectation that the provision for credit losses will remain elevated in the second quarter, but then improve gradually in the second half of the year. Total loans as of March 31, 2026, were $3.8 billion, an increase of $29.1 million or 1% compared to the linked quarter and a decrease of $479 million or 11% compared to March 31, 2025. David and Nicole both covered some of the lending highlights from the quarter where we experienced growth. Overall, origination activity was fairly strong across our commercial and consumer areas. We did, however, experience some early payoff and maturity activity in the Franchise Finance, Public Finance and Recreational Vehicles portfolios and in particular, saw early payoffs of some large balance relationships in the investor commercial real estate portfolio, which impacted total loan growth during the quarter. Total deposits as of March 31, 2026, were $5 billion, representing an increase of $142 million or 3% compared to December 31, 2025, and an increase of $36 million or 1% compared to March 31, 2025. David talked about the continued strong growth in fintech deposits, which has allowed us to further improve the mix of deposits and drive funding costs lower. Average CD and broker deposit balances, our highest cost of deposit funding were down over $180 million from the prior quarter. The weighted average cost of maturing CDs in the first quarter was 4.19%, while the average cost of fintech deposits was 3.19% and the cost of new CDs was 3.62%. As the cost of maturing CDs in the second quarter is 4.11% and in the third quarter is 4.06%, we have the ability to drive funding costs lower throughout the year and hence, drive net interest income and net interest margin higher even in a flat rate environment. Looking at our full year 2026 outlook, we're broadly maintaining the guidance we provided in January. However, we want to acknowledge the heightened macroeconomic uncertainty we're navigating, including volatile energy prices and other potential geopolitical developments. While we're confident in our business momentum and strategic positioning, we're taking a measured approach given the current uncertain environment. With regard to loan growth, while our commercial pipelines remain robust and our consumer business continues to produce solid results, we recognize our full year target could prove ambitious given higher-than-expected loan payoffs and the evolving macro headwinds, which could lead to further tightening of underwriting standards. We're closely monitoring the current environment, and we'll provide updates as the year progresses. In summary, we feel confident in the underlying momentum of our business and our ability to navigate the current macro environment while positioning the business for accelerating profitability in the second half of the year and into 2027. With that, I'll turn it back to the operator for questions. Operator: We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Nathan Race with Piper Sandler. Nathan Race: I was wondering if you could just help us kind of unpack the charge-offs a bit more for this quarter. And just generally, what kind of visibility you have into charge-offs over the balance of this year? I know you guys have spent a lot of time scrubbing the SBA portfolio. But just curious within that context, how we should think about the $50 million to $53 million provisioning forecast that was laid out last quarter for this year. Kenneth Lovik: Yes. I think as we think about it, it's -- I think it's still very similar to what we had talked about last quarter where we expect the bulk of it in the second half of the year. In terms of charge-offs for this quarter, we had $15 million to $16 million of charge-offs. I think where SBA -- I think our SBA came in line with what we were forecasting. Our Franchise number was a little bit higher because we took action on some other credits probably sooner rather than later. But I think we still continue to feel like first quarter is probably going to be the worst of the quarters in the second quarter. You can look at -- even though we made progress on reducing nonaccrual unguaranteed SBA balances and Franchise balances, we still have elevated nonperforming loans that we need to work through. But our special assets team is working through those. And I think we'll probably see some resolution on many of those here in the second quarter. And I think by the time we get to the third and fourth quarters, I think our feeling is that we'll be through a lot of the kind of some of the older vintages where there's probably still some potential problems. And by the time we get to the end of the year, the credit costs are going to be at a far more moderate level. Nathan Race: Okay. Got it. That's really helpful. Maybe changing gears to the margin. With the Fed on hold, I think that's a bit of a headwind in terms of deposit repricing. But David, you mentioned a lot of the success you're having bringing on some lower-cost deposits from some fintech relationships. So just curious how you're kind of thinking about the margin trajectory over the next few quarters, assuming the Fed remains on pause and just trying to drive that with the NII growth expectations for this year that were laid out last quarter of, I believe, $155 million to $160 million. David Becker: We're sitting here, Nate, Ken and I are pointing fingers back and forth on it. Yes, the net interest margin, the biggest issue that we have out here even without -- and we did not put in our forecast at the beginning of the year, any rate decreases. We have not come back and modified it with any rate increases yet. But we -- from the get-go, we weren't anticipating any rate fall off this year. But because of the CDs that are maturing and running off, as Ken said earlier, they're north of 4%. New CDs that we're adding and rolling are in the 3.6% range. So there's a gap there, but even better yet on the fintech deposits are coming in at about 3.19%, almost 100 basis points improvement. So that will continue throughout the course of the year. We have another $800 million rolling between now and year-end. So we could be up in that $290 million range by the end of the year. Kenneth Lovik: Yes. I think, Nate, in terms of what we -- I mean, kind of similar to what we talked about last quarter, I think our forecasting still holds that we'll probably -- I mean, feel like a 10 to 15 basis point improvement through the -- 10 to 15 basis point improvement per quarter through the end of the year is a very, very achievable target on our end. Nathan Race: Okay. And then David, I believe you said to get you to the $290 million by the fourth quarter, if I heard you correctly? David Becker: Yes. Operator: Your next question comes from the line of Brett Rabatin with StoneX Group. Brett Rabatin: I wanted to just continue to talk about guidance, and you just mentioned the $290 million guidance. I think for the outlook in January, you mentioned $275 million to $280 million by the fourth quarter. It sounds like the only tweak that you've made, if I'm hearing this right, really is you're a bit more conservative on that 15% to 17% loan growth target, just given some uncertainties. But I was a little surprised you didn't tweak down maybe the expense guide a little bit from the $111 million to $112 million and then also, it seemed like the fee income guide could have increased. Any thoughts on fee income and expense guidance and just the variables that might impact that? Kenneth Lovik: Yes. I think on the expense side, Brett, I think we're -- the guidance we had out there before, I think we're good keeping it there just for conservatism. I do think if, for example, in the macro headwinds, if you will, impact originations or maybe the SBA originations are lighter in the first half of the year or whatever, we have some offsets on the expense side, certainly in incentive compensation tied to loan origination. So there are definitely some offsets there on the expense side that would take that number lower. And then on the fee side, too, there's levers there, too. I mean, as we -- Nicole said in her comments that we expect to retain more balances going forward in SBA, given some of the higher quality deals we're doing. But as we put in our deck, look, premiums are holding in there on gain on sale. So there could be -- if the premium levels hold up near the high end of the range, I mean, there's the opportunity to sell more into the secondary market and drive higher fee income. So there's a number of different levers there that could offset perhaps any shortfall in the loan growth. Brett Rabatin: Okay. So there's leverage to both those line segments. Kenneth Lovik: Yes. Absolutely. Brett Rabatin: And then I know you guys have been working really hard on the Franchise and SBA. When I think about the macro of higher oil prices, I guess the only piece of your portfolio that I start to think about would be the RV portfolio. And I know quite a few of that or a lot of that is not RVs per se. It's horse trailers and things that people use for work. But have you guys seen any migration in the RV book as you've been looking at that portfolio just to watch it as oil prices/gas has been higher? Nicole Lorch: A great question, Brett. I'll take that one. We actually just had a credit committee meeting this morning, and we're talking around the table with all of our lending lines about the impact of fuel prices. I think diesel fuel is up over $1 per gallon and certainly regular gasoline is as well. Our consumers have not been affected. We are not seeing any increase in delinquencies or any problem loans in the consumer book as a result of fuel prices. The horse trailers in particular, have always performed well even with headwinds. Other lines of business that could be -- and in fact, originations are very solid. So even in this first quarter and the conflict has been going on for a little over a month now. So we're not seeing any depreciable decline in new originations with people spooked by the prices. So that's a positive sign. In other lines of business, equipment finance, we do some lending for fleet vehicles. We're not seeing any issues there that are related to fuel prices. We've also done some outbound contacting of our top SBA customers who are most likely based on their industry to be affected by fuel pricing. So that's not just transportation, but it's anything that would have a fuel component to it. And there -- we're hearing no issues related to fuel pricing at this point. Some have had to pass along price increases to their customers. But overall, we're not seeing any weakness in the portfolio as a result. Certainly, we all hope that the conflict gets resolved sooner than later. Brett Rabatin: Yes. That's -- I think everyone knows that. And then if I could just ask one last one just around -- you guys highlighted the $82 billion of payments processed. When I think about some of the stuff that you've been doing in fintech, I guess I look at the fee income and just think that there should be some momentum in fees aside from whatever happens to the SBA bucket. Do we start to see bigger fees related to all these things you're doing in fintech? Or is that just going to be a process over time? It just seems like you're gaining some momentum on the fintech side, but it hasn't yet showed up really in a meaningful way on the fee side. Nicole Lorch: Well, we are seeing some momentum there. And I think what's important is that we have negative net revenue churn, which means we are seeing really good retention from our existing programs, and we have been able to increase our fee structure in a way that helps us to support them and support the growth of the program. We're not bringing on new programs at a rate that we cannot sustain. So we always have a backlog of customers that we've been talking to. We're in due diligence with half a dozen programs, but we're trying to make sure that we're bringing them on in a really responsible way. And we have some solid partners that are meaningful. So I think on a year-over-year basis, we've doubled the fees that we're seeing in our fintech partnership line of business. But it does show up in different ways across our income statement. For instance, the balances that we've been able to push off balance sheet, those are not showing up in the interest income or interest expense, but those are showing up in noninterest income. You're also seeing the fees in the noninterest income. And then we do have a couple of lending programs and those are going to show up then in interest income. Does that help? Brett Rabatin: That is helpful. Do those things show up in the other line? Or what line items did those show up in? Kenneth Lovik: Yes. Brett, they really -- they show up in the other line item. Well, they show up in the other line item. They also show up in the services and fees, service charges and fees line item. But just to put some numbers around that. I mean, in the fourth quarter, we had about just, call it, a little bit over $1 million for the quarter in fee income. This -- in the first quarter of '26, we had a little over $1.5 million of fee income. So to Nicole's point, with some of the momentum that we're getting with some of our existing partners, higher volumes, higher payments volumes, higher deposits, more deposits pushed off balance sheet. I mean if you run rate that, you're talking about a 50% growth year-over-year and you're starting to talk about real dollars. Brett Rabatin: Okay. And Ken, just to be clear, that $1.5 million, that encompasses all of your fintech operations? Kenneth Lovik: Yes. That's just fees, right? That doesn't include any interest income from any of our lending partners. That's just pure fee income. Yes. Operator: Your next question comes from the line of Emily Lee with KBW. Emily Noelle Lee: This is Emily stepping in for Tim Switzer. Yes. So you mentioned you're in due diligence with about half a dozen programs right now on the fintech side. Can you speak more on just those partners in the pipeline and maybe the projected timing of those launches or an idea of kind of potential earnings impact surrounding those? Nicole Lorch: Well, we are not known for being easy in the fintech space. In fact, I think we've gotten a reputation for being one of the tougher due diligence programs out there. So we certainly kick the tires and give them a good opportunity to understand what our expectations are because, in fact, we are the regulators of these programs because they are, in fact, our customers in many cases. So right now, I know we have a couple of lending programs that we are taking a look at. We also have a couple of deposit programs that are out there. We have one that is moving much closer to approval. And so I think that would be a second quarter onboarding event. But some of them will go more slowly, especially when there is a consumer lending program involved, for instance, that's going to be probably the longest due diligence process. Something that might be a business payments program can be a bit faster. It just depends on the nature of the program and when that starts to show up. Also depends on whether or not the program is existing with another financial institution as a sponsor bank. A conversion is a different beast and usually can be quicker to have an impact on the financial statements as opposed to a brand new program that needs to ramp up itself. So it all depends is the very official answer to that, but we have some that we do expect to be bringing on in the next quarter and then the third quarter as well. Emily Noelle Lee: Understood. And then also just on the NIM. You mentioned 10 to 15 basis points of improvement per quarter through the end of the year as a very achievable target. That's if the Fed doesn't cut, but what would be the impact of 125 bps cut? Kenneth Lovik: If they cut -- and this is -- keep in mind, we run this on a static balance sheet. So this doesn't impact -- this doesn't take into account growth. But on a static balance sheet, you're talking about probably $2.2 million to $2.3 million annually of net interest income. Operator: Your next question comes from the line of George Sutton with Craig-Hallum. Logan W Lillehaug: This is Logan on for George. First one for you, Ken. I was wondering if you could just kind of talk about the loan-to-deposit ratio. I've got it kind of stepping down again this quarter, and you've talked about how it's kind of a historically low point for you guys. I wonder if you could just sort of address sort of the path for that from here, especially as we think about potentially lower loan growth this year and just sort of how you plan to manage that? Kenneth Lovik: Well, I think over the course of the year, we expect the loan-to-deposit ratio to increase. We ended the year with pretty healthy cash balances. And it's kind of hard to look at any particular quarter end cash balances because sometimes they're inflated due to payments activity at the end of the month. But we do have, in our minds, excess cash that we can just take out of the cash and deploy. So we probably see that ratio if we're at 75%, 76% this quarter, probably gradually stepping up and probably being somewhere closer to 85% to 90% in the fourth quarter. And I think that's -- we like that because you're obviously -- you're deploying cash into higher interest-earning assets, loans, but on keeping the balance sheet relatively -- keeping balance sheet growth to a minimum. David Becker: We had a couple of very large commercial loans, literally one paid at the last day of the quarter that was over $50 million and knocked it down. So that kind of messed up the ratios pretty quickly. But as we are in that commercial market now, we can have some pretty big swings. And as Ken said, we have swings on the deposit side at quarter end because of bill payment services and we also have people trying to close deals or clear them up by quarter end. So that number didn't intentionally go down. It was just a matter of math and the way things happen in that last week of the quarter. Logan W Lillehaug: Okay. Got it. And then maybe just a high-level one for you, David. I mean the last few quarters, you kind of mentioned that returning to that 1% return on asset level. And obviously, there's a lot of moving dynamics this year. But maybe just talk about sort of the steps that you need to take to sort of get back there and call it, the medium term? David Becker: Yes. We get back to our -- what we think our numbers are for the fourth quarter, that will set us up to be back into the 1% return for 2027. And we just continue the improvements. We've got a great base taking that number forward through our calculations, we'll be right back at 1% by the end of 2027. Operator: Your next question comes from the line of John Rodis with Brean Capital. John Rodis: Ken, the -- what drove the tax benefit this quarter? And how should we think about the tax rate going forward? Kenneth Lovik: The -- again, it's -- when net income is low like it has been, we do get a significant benefit from our tax-exempt businesses, particularly our Public Finance portfolio. So we have to get to a certain level of pretax income before you start applying rates to it. I mean I think if we're in the range of I don't know, call it, maybe $3 million of pretax or less, probably that tax rate is going to be nonexistent to a credit. And then kind of once you get into maybe north of $5 million to $8 million or so, you're probably a low mid-single-digit tax rate. And then if we get into, say, a $10 million to $12 million of pretax income, you're probably looking closer to a 7% to 9% tax rate, effective tax rate that is. It's just when income -- when pretax income is low, we just -- we get such a benefit from the not only the tax-exempt business in public finance, but we also get benefits from some LIHTC investments. And obviously, from last year, we have an NOL that we can carry forward when we make money. So as long as when pretax income is low, we're going to have a pretty -- we're going to have a decent tax credit. John Rodis: Okay. It's a moving target then. Kenneth Lovik: It is. Operator: Your final question comes from the line of Nathan Race with Piper Sandler. Nathan Race: Just on the SBA revenue going forward, I appreciate Nicole's comments earlier around holding some production for a longer seasoning period, I think, was what she was alluding to. So I'm just trying to think about kind of the cadence of SBA revenue. I think in the past, it's been more back half loaded. But I know you guys have made a number of changes to your platform and credit infrastructure over the last handful of quarters. So I was just hoping you could kind of speak to the cadence of kind of SBA revenue within that context. Kenneth Lovik: Yes. I think historically, if we go back in time a couple of years, it's probably like first quarter, you had -- it was seasonally light, although oftentimes, you may reap the benefit of a strong fourth quarter in terms of loan sales. But in terms of originations, first quarter historically has been light and it ramps up in the second, ramps in the third and then usually maybe comes back a little bit in the fourth quarter. I think the way that we're looking at it this year and the experience we saw in the first -- certainly in the first quarter with, again, kind of changing our approach on underwriting and having our team get around that, combined with just the typical seasonality is that probably the way that we're looking at originations this year is that there's just -- there's going to be a ramp-up throughout the year. And second quarter will be a little bit higher than first and third quarter and fourth quarter will be -- I don't want to use the word significantly higher, but we do have those third and fourth quarters ramping up in terms of origination volume, much higher than we have second and first quarter. Nicole Lorch: And our pipeline is building. It's up about 1/3 from where it was at year-end. So that would suggest that we're going to be in a good position to hit that. Nathan Race: Okay. So it sounds like the base case is SBA revenue grows from here and the guidance from last quarter on total fee income, which I believe was $33 million to $35 million, it's going to be higher than that, correct? Kenneth Lovik: Well, I think right now, we think -- keep in mind, that's total fee income. I think last quarter, we said in terms of just pure gain on sale somewhere in the $19 million to $20 million range, just that line item within the fee income. I think as we talked about, I think we still feel good about that total amount. Maybe it just shifts a little bit more towards third and fourth quarter than say, I mean, we had a pretty good first quarter without a doubt. The second -- the third and the fourth quarters are definitely stronger than the second quarter. Operator: I will now turn the call back over to David Becker for closing remarks. David Becker: We thank you for joining us today and for all the thoughtful questions we had. We're pleased with the strong momentum that we built during the first quarter. We remain confident in our ability to execute on the priorities we've outlined for the year. We are very mindful as we have said many times about the macroeconomic uncertainty, but we think we're executing from a position of strength and we're well positioned for improving profitability throughout this year and beyond. So we appreciate your continued support. Look forward to keeping you updated on our progress next quarter. Thank you very much. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good morning, everyone, and welcome to the MYR Group First Quarter 2026 Earnings Results Conference Call. [Operator Instructions] Today's conference is being recorded. I will now turn the call over to Jennifer Harper, Vice President of Investor Relations and Treasurer, for introductory remarks. Jennifer Harper: Thank you, and good morning, everyone. I would like to welcome you to the MYR Group conference call to discuss the company's first quarter results for 2026, which were reported yesterday. Joining us on today's call are Rick Swartz, President and Chief Executive Officer; Kelly Huntington, Senior Vice President and Chief Financial Officer; Brian Stern, Senior Vice President and Chief Operating Officer of MYR Group's Transmission and Distribution segment; and Don Egan, Senior Vice President and Chief Operating Officer of MYR Group's Commercial and Industrial segment. A copy of yesterday's press release announcing our first quarter results can be found on the MYR Group website at myrgroup.com under the Investors tab. A webcast replay of today's call will be available on the website for 7 days following the call. Please note, today's discussion may contain forward-looking statements. Any such statements are based upon information available to MYR Group's management as of this date, and MYR Group assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. For more information, please refer to the risk factors discussed in the company's most recently filed annual report on Form 10-K. Certain non-GAAP financial measures will also be presented. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is set forth in yesterday's press release. With that, let me turn the call over to Rick Swartz. Richard Swartz: Thanks, Jennifer. Good morning, everyone. Welcome to our first quarter 2026 conference call to discuss financial and operational results. I will begin by providing a summary of the first quarter results and then turn the call over to Kelly Huntington, our Chief Financial Officer, for a detailed financial review. Following Kelly's overview, Brian Stern and Don Egan, Chief Operating Officers for our T&D and C&I segments, will provide a summary of our segment's performance and discuss some of MYR Group's opportunities going forward. I will then conclude today's call with some closing remarks and open the call up for your questions. We delivered strong financial results in the first quarter, supported by ongoing work with long-term customers and the selective pursuit of new opportunities while continuing to expand customer relationships. Quarterly results reflect strong bidding activity and continued infrastructure investment to support electrification needs across our business segments. We continue to monitor project opportunities and remain focused on disciplined project execution. Safe, reliable delivery and strong customer relationships remain central to our operations. Our teams are focused on understanding our customers' requirements, maintaining clear communication and producing consistent results. I'm proud of our teams for their continued dedication to quality, safety and collaboration. Now Kelly will provide details on our first quarter 2026 financial results. Kelly Huntington: Thank you, Rick, and good morning, everyone. Our first quarter 2026 revenues were $1 billion, which represents an increase of $167 million or 20% compared to the same period last year. Our first quarter T&D revenues were $541 million, an increase of 17% compared to the same period last year. T&D segment revenues increased primarily due to higher revenue on unit price and T&E contracts, partially offset by a decrease in revenue on fixed price contracts. Work performed under master service agreements increased to approximately 70% of our T&D revenues. C&I revenues were $459 million, a record high for our C&I segment and an increase of 24% compared to the same period last year. C&I segment revenues increased primarily due to higher revenue on fixed price contracts. Our gross margin was 13.4% for the first quarter of 2026 compared to 11.6% for the same period last year. The increase in gross margin was primarily due to a larger portion of our projects progressing at higher contractual margins, some of which are nearing completion. Gross margin was also positively impacted by better-than-anticipated productivity, favorable change orders and a favorable job closeout. These margin increases were partially offset by an increase in costs associated with inefficiencies on certain projects. T&D operating income margin was 9.7% for the first quarter of 2026 compared to 7.8% for the same period last year. The increase was primarily due to better-than-anticipated productivity and a favorable job closeout, partially offset by an increase in costs associated with inefficiencies on a project. C&I operating income margin was 8.1% for the first quarter of 2026 compared to 4.7% for the same period last year. The increase was primarily due to a larger portion of our projects progressing at higher contractual margins, some of which are nearing completion. C&I operating income margin was also positively impacted by better-than-anticipated productivity and favorable change orders, partially offset by an increase in costs associated with inefficiencies on certain projects. First quarter 2026 SG&A expenses were $69 million, an increase of approximately $7 million compared to the same period last year. The increase was primarily due to higher employee incentive compensation costs and employee-related expenses to support future growth. Our first quarter effective tax rate was 26.9% compared to 28.9% for the same period last year. The decrease was primarily due to a favorable impact from stock compensation excess tax benefits, partially offset by higher U.S. taxes on Canadian income and other permanent difference items. First quarter 2026 net income was a record $47 million compared to net income of $23 million for the same period last year. Net income per diluted share of $2.99 increased 106% compared to $1.45 for the same period last year. First quarter 2026 EBITDA was a record $82 million compared to $50 million for the same period last year. Total backlog as of March 31, 2026, was a record $2.84 billion, 8% higher than a year ago. Total backlog as of March 31, 2026, consisted of $981 million for our T&D segment and $1.86 billion for our C&I segment. First quarter 2026 operating cash flow was $85 million compared to operating cash flow of $83 million for the same period last year. The increase in cash provided by operating activities was primarily due to higher net income, partially offset by the timing of billings and payments associated with project starts and completions. First quarter 2026 free cash flow was $69 million compared to free cash flow of $70 million for the same period last year. This slight decrease was due to higher capital expenditures, partially offset by an increase in operating cash flow. Moving to liquidity and our balance sheet. We had approximately $258 million of working capital, $9 million of funded debt, $460 million in borrowing availability under our credit facility and $163 million in cash and cash equivalents as of March 31, 2026. We improved our already strong funded debt-to-EBITDA leverage ratio to 0.04x as of March 31, 2026. We believe that our credit facility, strong balance sheet and future cash flow from operations will enable us to meet our working capital needs, support the organic growth of our business, pursue acquisitions and opportunistically repurchase shares. I'll now turn the call over to Brian Stern, who will provide an overview of our Transmission and Distribution segment. Brian Stern: Thanks, Kelly, and good morning, everyone. The T&D segment delivered strong first quarter results, supported by a mix of small to midsized projects across our markets. Execution remains consistent with a focus on safety, quality and reliability. Bidding activity remained steady with increases in revenue and margins from the prior quarter and compared to our first quarter of last year. We continue to deepen relationships with long-standing customers while also pursuing opportunities with both new and existing customers, supported by a positive industry outlook. This quarter, Sturgeon was awarded an MSA in Arizona, spanning transmission, distribution and substations along with EPC program opportunities in the Northwest. Great Southwestern Construction secured the construction of 2 greenfield substations in Texas. High Country Line Construction was selected for substation work in Arizona, along with the 345 kV transmission line project in South Carolina. L.E. Myers was selected for a 345 kV transmission job and several overhead distribution rebuild projects across Illinois and Iowa. Harlan Electric was awarded overhead transmission work in Pennsylvania. This activity is supported by a strong industry outlook. According to the S&P Global Horizons Top Trends 2026 report, grid infrastructure has become a central focus in 2026 as electrification and digital demand continue to strain existing systems and underinvestment in transmission and distribution modernization presents a potential bottleneck for reliability and capacity growth. This dynamic reinforces the ongoing importance of our T&D project activity across our markets. We expect work to remain steady across the U.S. and Canada, spanning a range of sizes and complexities. Our ability to support this demand is driven by a continued focus on safety and ongoing investment in our workforce. We are proud of our accomplishments in the first quarter and look forward to advancing this momentum in the months ahead. I'll now turn the call over to Don Egan, who will provide an overview of our Commercial and Industrial segment. Don Egan: Thanks, Brian, and good morning, everyone. Our C&I segment achieved strong first quarter results supported by the health of our core markets. Bidding activity remained consistent and backlog expanded further, reflecting both market demand and the depth of our customer relationships. By working closely with customers to understand their needs, plan projects effectively and execute safely and efficiently, we continue to create opportunities for long-term collaboration across projects of various sizes. These strong ongoing customer relationships remain central to our strategy, reinforcing our position as a trusted partner in the industry. Data center projects and water, wastewater projects are driving the strongest growth in today's construction market. According to FMI's 2026 North American Engineering and Construction Outlook, data center construction starts are up nearly 100% year-over-year. While nonbuilding infrastructure such as power, water and wastewater also continues to grow, supported by committed funding and long-term investment needs. These projects require specialized expertise in grid modernization and complex installations creating multiyear backlogs and sustained demand. The result is a clear divergence within the construction market. Mission-critical electrical and infrastructure work is showing sustained resilient growth, while more traditional commercial building segments remain volatile. Our teams across all subsidiaries continue to execute and pursue a diverse range of projects. We were awarded multiple data center projects in New Jersey, Arizona, California and Colorado, clean energy work in California and multiple water treatment plants in Colorado. These awards reflect the strong and growing demand for data centers and related electrical infrastructure projects across our key markets. We continue to earn significant project awards, reflecting our ongoing ability to deliver value across markets and sectors. In closing, we continue to see steady performance across our core markets, supported by our long-standing customer relationships that drive opportunities. Our employees remain central to this execution with a consistent focus on quality and safety across every project. Thank you, everyone, for your time today. I will now hand the call back to Rick for his closing remarks. Richard Swartz: Thank you for those updates, Kelly, Brian and Don. Our first quarter 2026 performance reflects the effectiveness of our business strategies and the value of our long-term customer relationships across both segments. We believe we are well positioned for continued growth as investments in electrical infrastructure increases, supported by safe execution, disciplined bidding and close collaboration with our customers in a dynamic energy environment. Our record of integrity, teamwork and dependable project delivery enables us to pursue new opportunities and deepen long-term customer relationships. I appreciate our employees for their contributions and our shareholders for their ongoing support. As we move through the rest of 2026, we look forward to building on the progress and continuing to strengthen our customer relationships across the business. Operator, we are now ready to open the call up for comments and questions. Operator: [Operator Instructions] Our first question comes from Sangita Jain of KeyBanc Capital Markets. Sangita Jain: First, can I ask about C&I margins, which were very, very strong in 1Q. If you could help us kind of understand what led to the strength and what we should expect going forward? Richard Swartz: Yes. I said our backlog margins were similar to what they were in the past, but we had less risk in our contracts. And again, we've been focusing on carrying less risk in our contracts along with project execution and making sure that we continue to do as much prefab as we can. We do it in a controlled environment where we're taking that labor risk out of the field. So we continue to double down on that. And then we also had some projects that were nearing completion that had some potential upsides. With that being said, our margin profiles coming into this year, we were at 5% to 7.5%, and we're looking to increase that going forward for the rest of the year. We're looking kind of at that 6% to 9% margin profile and operating kind of in that mid-ish range on the C&I side. Sangita Jain: That's helpful. And then can we talk overall guidance for the year because you also beat on -- well, I shouldn't say beat, but your revenue performance was also very strong in 1Q, and I think you said 10% in each segment for the year? And how should we think about T&D margins, which also came in towards the high end of your range? Richard Swartz: Yes. I think previously, our margin profile on T&D was at 7% to 10.5%. And as we look at what's in our backlog and the quality of our backlog work, really upping that margin profile to that 8% to 11% with the goal of operating in that mid part of that range. So again, an increase on that one going forward for the rest of the year. Now quarter-to-quarter in either one of those, it can be a little lumpy depending on which projects are starting and finishing. But we see that kind of as our goal overall. Along with that, I think if you look at our revenue growth, we came into the year saying we have that 10-ish percent growth. I think when we look at it across both segments as a whole, kind of that 12-ish percent growth this year is where I would forecast that out, knowing it can be lumpy quarter-to-quarter depending on how subcontractors come into our mix or materials delivered. So it can be a little lumpy between segments, but I'd look at that overall 12% growth on revenue. Operator: Our next question comes from the line of Manish Somaiya of Cantor Fitzgerald. Manish Somaiya: Congrats team on a fantastic quarter. Rick, I wanted to just go back to the C&I business. I think you mentioned that the fixed price contracts are now about 86% of the mix. If you could just help us understand where that mix has been over the past year, over the past couple of years? And perhaps that's what's kind of driving some of the upside in C&I based on solid execution? Richard Swartz: It's solid execution on that. I mean, as I said, a little less risk in our contracts, so more favorable terms and conditions, managing our projects very well. So that's really where it is. I'd say that mix has been similar over the past. So fixed cost is really a big component of how we do C&I work. I think we're pretty good at executing it as a whole and our customers trust us and continue to release that work. But again, with contracts that have a little less risk in them contractually than what historically they've had. Manish Somaiya: Okay. Helpful. And then, Kelly, if you could just talk about cash flow from operations, free cash flow. Clearly, Q1 was exceptionally strong. How should we think about it for the rest of the year? Kelly Huntington: Sure. Yes, we delivered another strong quarter from a cash flow perspective, and we were able to maintain our DSO in that kind of mid-50s range, which is significantly below our historical average. I think if we look out, we could see DSO rise to the low 60s, and that will really depend on the timing of new awards and the weighting between projects with more favorable billing structures versus more MSA-like work. As I noted in my comments on the call, MSA work in T&D represented 70% of our revenues, which was an uptick from what we've seen for the last few quarters. And we like that work. It's recurring, it's predictable, but we never get into an overbuild position. So that can represent a little bit of a headwind from a DSO perspective. The other thing I would say about cash flows is I would just point out CapEx. We've been talking for a couple of quarters now, how we expect that to be trending more to about 3% of revenue on a full year basis. And that is above our historical average, really driven by the opportunities that we see on the T&D side of the business that is the more capital-intensive side of the business. And with first quarter being light from a CapEx perspective, which was really just due to timing, that does mean we'll see an increase as we look rest of the year. Operator: Our next question comes from the line of Julien Dumoulin-Smith of Jefferies. Brian Russo: It's Brian Russo on for Julien. I was wondering if you could just elaborate a little bit more on what's driving the structural margins higher now in both segments? Is it just your confidence in your labor productivity and maybe better contract terms? Or is it more so a function of the electrician labor constraints that we read and see nearly every day in the end markets that you serve. Is that driving better bidding power for you and the E&Cs. Richard Swartz: Yes. I would say that tight market right now on labor isn't really turning into margins today and what we're seeing. It still remains fairly competitive, and we feel that will potentially change in the future, and we continue to be selective on the larger projects we're taking on because I've said in the past, we don't want to be the first in on those projects, plenty of opportunities, great conversations going on with our clients. I think it really has more to do about what I talked about a little earlier in the call with better contract management, better terms and conditions and then better execution on our project side as far as the way we're laying out our projects, doing pre-fab, kitting our material, really being more efficient out there. So that's really where we've seen those margin increases. But again, hopefully, in the future, we can see more margins come in because of the tightness of the market with the labor. Brian Russo: Okay. And should we assume kind of gradual improvement in the segment margins as we move through the year, assuming lower margin projects are burned off and replaced in the backlog with the higher margin type profile? Is that the way to progression? Richard Swartz: I think from quarter-to-quarter, it can be lumpy. We've given the new margin profiles that 6% to 9% operating margin for C&I and that 8% to 11% for T&D. And again, we plan on operating on a yearly basis, kind of in that mid-ish range of those. With that being said, it can always be lumpy quarter-to-quarter depending on weather, depending on project timing, which ones are finishing up, which ones are starting. So again, on a yearly basis, I'd look at that. But from a quarterly basis, it's always going to be lumpy. Brian Russo: Got it. And then just on the T&D side, can you just talk about some of the recently signed MSA awards and kind of the cadence of layering that into the backlog, the Xcel $500 million 5-year MSA and then I think it was a Kentucky new MSA highlighted last quarter. Neither of those are in backlog yet. Is that accurate? Richard Swartz: The Kentucky one wouldn't be in complete backlog yet. I mean we're not burning it. So the whole amount is not in there. Again, we only count on the MSA side, 90 days of that work in our backlog. So the Xcel one is starting to have some activity, but a little bit slower start as we said it would. And we see that progressing and going forward and that spend really start continuing to ramp up this year slowly and into next year and take off from there. But good activity on those projects and great opportunities going forward. Brian Russo: Okay. And then just lastly, I think your 10-K referred to any large transmission or T&D project awards granted this year would not start construction or generate revenue until 2027 at the earliest. I mean is that kind of insinuating that you're still in discussions on some high-voltage transmission projects? And that -- is that what you were referring to? Or were you being more broad? Richard Swartz: Yes, we are. Yes, that's -- we anticipate with our conversations going on that some of those large projects will start rolling in our backlog this year. So we see that still happening, ongoing great conversations with our clients, and we see that continuing into next year also. But we do feel we'll have some large projects come into our backlog in the future quarters. Operator: Our next question comes from the line of Ati Modak from Goldman Sachs. Ati Modak: I guess some of your peers in the market are increasingly stepping into C&I data center exposure. I'm curious how you're thinking about your exposure on a relative basis. You've guided to a very strong year and obviously, the fundamentals look pretty strong. But does it create a little bit more competition or risk to project awards or pricing concerns? Any thoughts on that? Richard Swartz: Not overly concerned. We've got long-term client relationships with a lot of the data center providers. We've been doing it since we're not just trying to get in the market now. We've been doing data centers since data centers first started. So again, we continue to expand that market, very good conversations with our clients. But along with that, we've always said we want to balance business. So we don't want 100% of our resources just doing data centers. But again, we haven't seen margin pressure from these new entrants. There's a lot of work going on. And again, it's how do we keep our relationships with our clients going forward and keeping those relationships strong. Ati Modak: Great. And then I guess you mentioned some of the transmission line awards along the larger projects. You mentioned 345 kV line awards. So I'm curious what the outlook for [ 500 kV ] and more specifically 765 kV lines looks like as you think about the rest of the decade. Like in terms of your conversations, how are you positioning for that? Richard Swartz: I feel we're well positioned for that. We've done -- there hasn't been much 765 kV done in the country, but we performed that work in the past, having great conversations with our clients. It's a matter of project timing. I think the 765 kV for the most part, won't get started the project at the earliest, probably mid next year, rolling out. But again, very good conversations with our client. We've got long-term alliances with some of those clients that are building that work. And as I said, ongoing conversations. So hopefully, more to come in this year, next year. I think there's great activity in that market, though. Operator: Out next call comes from Brian Brophy of Stifel. Brian Brophy: Congrats on the nice quarter. Just a big picture question for me, Rick. How would you compare the environment you're seeing here today, maybe over the next couple of years to the demand environment we saw back during the CREZ project in 2013 and 2014? And what do you think the market [ implications ] of that? Richard Swartz: Yes. I don't -- I really can't say what the market -- what the margin impact or implications are on that. What I can say is when you go back to the CREZ days and you look at that during that '13, '14, '15 time frame, it had an increased margin against not just on our work, but across all our peers at that point. But that was in one area. I mean that was [ 2,500 miles ] being built out in Texas. And now you have the build-out going across the United States over the next 10 years or so, over the next decade. So I think it's just going to be amplified from what we saw there. Potentially, we're not seeing that yet today. But again, our conversations with clients aren't just about projects that are going to start in the next year or 2. We're having conversations with clients about projects going to start in '30, '31, '32 and beyond. And they're concerned about 2 things where are they going to -- how do they get the material lined up to have their project built on time and where -- how do they get their labor secured. So very good conversations with our clients. Operator: Our next question comes from the line of Justin Hauke of Baird. Justin Hauke: Great. First of all, thank you for giving those updated margin targets. That's interesting. I just wanted to clarify on those, the 6% to 9% for C&I and the 8% to 11% now for T&D, those are like kind of multiyear targets at this point, right? That's not -- you're not talking about just for this year because of some of the pull-through, but that's kind of the operating environment as it stands today, right? Richard Swartz: Yes. We see that, as I said, on a yearly basis this year, we feel those are our margin profiles we can operate within. I think when you look beyond, I don't see the market getting any softer. So we haven't got done anything beyond that, but that's where I see it for this year. And again, I think there's great opportunities going in future years. Justin Hauke: Yes. Okay. That's what I figured. And then I guess the second thing, I heard you talk a little bit more about the prefab capacity that you guys have as something that's been controlling the risk terms on your jobs. I feel like you mentioned that more than you have in the past. And Kelly, maybe it's a question on the CapEx as well. You've got a lot of net cash here, $152 million. Is that one of the areas where you're seeing or where you expect to kind of deploy some of that capital to the extent that there aren't acquisitions that you do and kind of expanding some of that prefab capacity? Kelly Huntington: Sure. I can start on that, and then Rick or John might give you a little bit more color. But absolutely, that is an area where we continue to invest. I mean we've been doing prefab for a long time, but I think our teams are continuing to push the limits on how we can perform more work in a controlled environment in a way that really helps us to be effective at the job site, especially in congested areas and can help support our more consistent execution. I would still say that the vast majority of our capital expenditures go to the T&D side of the business, but it is part of our growth in CapEx overall. Richard Swartz: Yes. And then you talked a little bit about our strong balance sheet and what we're doing with that. I think we'll continue to invest in the prefab, but that's not going to take that all up. So I think we continue to look for acquisitions. And I'll say right now, there's some great activity in the market with some, I would say, some high-quality companies that are out there. So we talked about kind of the 12-ish percent growth on revenue overall, and that's on the organic side. If we capture the right, I guess, acquisition and it came into our portfolio, that would be above that. So again, we're looking to potentially do acquisitions with that money or do stock buybacks either way. Kelly Huntington: Yes. And I would just kind of reiterate Rick's point in a very strong financial position with almost no debt at the end of the quarter and [ $160 million plus ] in cash on the balance sheet. So in a good position to support that strong organic growth that we're seeing as well as pursue the right acquisitions. Operator: At this time, I'm showing no further questions in the queue, and I would now like to turn the call back over to Rick Swartz for additional closing remarks. Richard Swartz: To conclude, on behalf of Kelly, Brian, Don and myself, I sincerely thank you for joining us on the call today. I do not have anything further, and we look forward to working with you in the future and speaking with you again on our next conference call. Until then, stay safe. Operator: Thank you very much. This concludes today's conference call. We thank you for your participation, and you may now disconnect.
Operator: Good day, and welcome to UFP Industries Q1 2026 Earnings Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Stanley Elliott, Director of Investor Relations. Please go ahead. Stanley Elliott: Good morning, everyone. Thank you for joining us to discuss UFP Industries' first quarter 2026 results. Joining me on our call are Will Schwartz, our President and Chief Executive Officer; and Mike Cole, our Chief Financial Officer. Following our prepared remarks, we will open the call for questions. Before I turn the call over, let me remind you that yesterday's press release and presentation include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations. These risks and uncertainties include, but are not limited to, the factors identified in this release and our most recent annual report on Form 10-K and in our other filings with the Securities and Exchange Commission. Today's presentation will also include certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release and our website, ufpi.com. I will now turn the call over to Will. William Schwartz: Good morning, everyone, and thank you for joining today's call to discuss our financial results for the first quarter of fiscal year 2026. We'll start by sharing our thoughts on the quarter, what we are seeing in the marketplace and provide some thoughts on how we see the business performing for the balance of the year before opening the call for questions. Many of these same dynamics that we saw through much of 2025 continued into our first quarter. After seeing some stabilization through much of the quarter, macro headwinds and competitive pressures increased volatility as the quarter progressed. We were also adversely affected this quarter by a longer-than-normal winter season, and so the normal seasonal uplift during the month of March failed to materialize. In addition to the impact of softer demand, our results were impacted by higher medical costs than the previous year. This abnormal activity throughout March contributed to roughly 60% of the year-over-year decline in profitability in the quarter. Business conditions have since leveled out, but given the ongoing geopolitical uncertainty and broadening inflation, particularly around higher transportation costs, we are approaching the remainder of the year with a slightly more cautious outlook. Our Q1 results are reflective of the current operating environment. Net sales of $1.46 billion were down 8% from Q1 of 2025, representing a 7% decrease in units and a 1% decrease in price. Our adjusted EBITDA margin for the quarter was 7.6% and earnings per share for the quarter was $0.89. Despite the temporarily challenged environment, we will continue to be focused on refining and growing our core business. We will focus on controlling costs, and we plan to use this period of uncertainty to be more opportunistic and leverage our strong financial position. With approximately $2 billion in liquidity, we intend to pursue meaningful M&A, while returning our free cash flow to shareholders through opportunistic share repurchase and dividends. As we've said before, we continue to target above-market growth with an emphasis on returns, and we continue to make strategic investments that contribute to the long-term success of our business. In the immediate term, new product sales remain consistent at 7.5% of sales on a trailing 12-month basis. We also have a sharp eye towards strengthening our core business for the long term, deploying capital for greenfield investments and M&A, introducing innovative products and structurally lowering our cost base. On the cost side, we are actively mitigating higher costs and remain on track to deliver the remaining $25 million of our $60 million cost-out program by year-end with the potential to capture incremental savings beyond our initial targets. While Mike will share additional color on the results, we were also pleased to announce two post-quarter end acquisitions that align with our disciplined strategy to deploy capital toward high-quality strategic fits. Before I get into the details, I'd like to start by welcoming the employees of Moisture Shield and Berry Palets into the UFP family. These companies were a strategic financial fit, but equally important, they aligned well with our future. In our Deckorators business unit, we announced the acquisition of moisture Shield decking operations from Oldcastle APG. The acquisition adds a wood/plastic composite plant in Springdale, Arkansas, which meaningfully expands our capacity, adds redundancy to our operation and enhances our ability to bring unique products to market. Additionally, this acquisition eliminates the need to spend capital on a new greenfield as demand for our product has outpaced capacity. We anticipate that this acquisition gives us the needed footprint to double our wood/plastic composite decking manufacturing capacity by 2027. Additionally, the acquisition also brings the rights to Moisture Shield's cool deck technology, a proprietary heat mitigating technology, which reduces heat transfer by up to 35%. We believe this would fit alongside our Deckorators decking line, including integration into our Surestone technology boards. In our Packaging segment, we also welcome to the UFP family Berry Pallets, a new pallet manufacturer in the Upper Midwest that expands our geographic reach and strengthens the density of our pallet network. These opportunities to increase the scale and synergy of our business only create value if we integrate it well, and that's exactly why earlier this month, we announced Patrick Benton will transition from his role as President of UFP Industries Construction segment to the newly created Executive Vice President of Operations Integration position. Patrick has spent his career running some of our most profitable plants and business units, and he knows firsthand what it takes to drive efficiency, reduce cost and accelerate the path to strong returns. In his new role, Patrick will apply that operational discipline across our growing portfolio of acquisitions, ensuring we move faster from close to contribution and that every business we bring into the UFP family performs to its full potential. Now moving on to segment highlights, beginning with retail. Our largest business unit, ProWood, continues to make progress on lowering our cost positions and improving our manufacturing process. Some of this progress was overshadowed by the levels of inflation we saw in the quarter as well as the later-than-usual winter conditions. ProWood is an industry-leading brand, and we continue to add more value across our portfolio. A great example of this is our TrueFrame Joists product launched last month at JLC. As a reminder, this is the business unit's first proprietary product designed specifically for use in deck substructures. The value we add on the front end eases several common pain points for contractors, saving time and money. We have expanded production into four manufacturing plants and increased our sales efforts to capitalize on the demand pull. While still relatively small, this is a compelling product line extension in our core pressure treating and decking products. Similarly, we are pleased with the repositioning of our Edge business and prospects for profitable growth. Our new Arris trim made with Surestone technology will begin shipping to customers late this quarter. Early demand indicators look quite favorable as contractors are gravitating to the same product features that has made our Surestone decking offering so compelling. Turning to Deckorators. We continue to see strong momentum from last year carry over into our first quarter. Our Surestone decking sales increased 27% and our traditional wood/plastic composite decking increased by 4%, both from the same quarter a year ago. We believe both metrics remain ahead of the broader industry. We were pleased with the results of our efforts last year to enhance Deckorators brand and intend to maintain that effort in 2026. In addition to our elevated sales volumes, our measures of consumer interest have more than doubled over the past year. These metrics include where to find a contractor, where to buy decorators and sample requests, both at big box retailers and through our website. The outperforming demand stated earlier, combined with a measurable customer feedback gives us confidence in our stated plan to double market share over the next five years. We remain excited about the progress we are making within both our Surestone and wood/plastic manufacturing facilities to increase capacity and meet growing consumer demand. Our first truck left Buffalo in mid-April, and we continue to ramp up production at both our Surestone production locations. We look forward to being fully operational in Q2, which will help us continue to work through the sales backlog that we were not able to realize in the first quarter. Coupled with the recent MoistureShield acquisition, we are well positioned to capture growth entering 2026 and beyond. Despite near-term macro uncertainty, our confidence in the business remains strong, and we continue to expect $100 million of incremental Deckorators growth this year. Our Packaging segment continues to make progress despite an uneven macro backdrop. We are positioning the business for longer-term success by introducing new value-add products to our customers, investing in automation and investing in new and lower-cost manufacturing. Quoting activity has remained strong, but customer takeaway remained mixed, which is reflective of the uncertainty across many end markets. The combination of higher commodity prices and a competitive market remain an overhang on profitability. That said, we are encouraged that our margins continue to stabilize sequentially and supports our view that we are closer to the bottom of the cycle. We continue to believe that our national footprint gives us geographic expansion opportunities and our design and engineering capabilities separate us from many of our smaller, more regional competitors who lack the manufacturing scale and financial position to compete with national customers. With the improvements we made to the business, we can deliver above-market growth in a recovery. Moving on to construction. The macro story in our Construction segment has been fairly consistent for the past several quarters, but we continue to actively reposition our portfolio. A challenging new residential construction environment continues to weigh on results, overshadowing improvements across our other businesses. Residential builders remain cautious, managing home inventories carefully ahead of the spring selling season, while consumer confidence and affordability headwinds persist. We continue to make investments in automation and other initiatives to improve our cost position and throughput. One of these initiatives is the Frame Forward Systems brand that we launched in February at the International Builders Show. Frame Forward Systems positions our site-built business unit to move our wood framing business beyond commodity component sale to capture increased margin through a system selling approach and to drive greater customer loyalty. While early, Frame Forward Systems has been very well received by the construction trade as we continue to raise the bar on off-site manufacturing to address the on-site challenges in the construction industry. Similarly, in our factory-built business, this business unit continues to actively add more value to our customers through partnerships, expansion of distribution capabilities and by facilitating cross-selling with other parts of our business. Our concrete forming business continues to expand our products and services offerings to capture more of our customers' wallets while helping them address labor challenges on the job site. Finally, our Commercial business continues to build on new products, new customer relationships and the benefits from prior restructuring actions to deliver improved results. Across our Construction segment, we are actively finding ways to solve our customers' problems by helping address labor, quality, production cost and reduce build time to help our customers win in the marketplace. Looking ahead, we remain committed to our long-term targets and believe the steps we are taking today will position us to achieve these results in the future. As a reminder, we are driving towards the following goals: a 12.5% EBITDA margin, 7% to 10% unit sales growth, some of which will come from M&A and new products; ROIC in excess of 15%, which is well ahead of our cost of capital. And lastly, to achieve all of this while maintaining a conservative capital structure. While the market dynamic has changed since our last call in February, it has not dampened our enthusiasm for our business longer term. As we've said before, we have confidence in our model and our focus remains on the most attractive opportunities that enhance our core business. We're taking action to reduce costs, rightsize capacity and exit underperforming or non-core businesses, while positioning the company to deliver above-market growth and margin expansion as market conditions normalize. With that, I'll turn it over to Mike Cole. Michael Cole: Thank you, Will. Net sales for the March quarter were $1.5 billion, down 8% from $1.6 billion last year. The change reflected a 7% decline in units and a 1% decline in pricing. Units declined due to continued weakness in residential construction activity, adverse weather, the exiting of select low-margin commodity sales and softer demand for new pallets. Pricing was impacted by a 6% decline in lumber and continued price pressure in our site-built business. Adjusted EBITDA was $111 million, down $31 million year-over-year, and adjusted EBITDA margin was 7.6% compared with 8.9% in the prior year period. The decline was driven primarily by Site Built, where gross profit decreased by nearly $19 million, along with higher health care and transportation costs across the portfolio, which increased approximately $7 million and $3 million, respectively. Despite these headwinds, our trailing 12-month return on invested capital remained above our weighted average cost of capital at nearly 11%, demonstrating continued value creation through the current phase of the cycle. Turning to our segments. I'll begin with the Retail. Retail sales were $531 million, down 12% year-over-year, driven by a 13% decline in units, partially offset by 1% higher pricing. ProWood units declined 15%, reflecting soft demand driven by adverse weather, weaker consumer sentiment and the absence of storm-related demand. We also exited certain low-margin commodity sales starting in Q2 of 2025. Deckorators delivered 2% unit growth as decking continued to outperform the market. Overall, decking sales increased 16%, led by 27% growth in Surestone, which was supported by capacity added at our Alabama plant. And wood/plastic composite decking increased 4%. We continue to target above-market growth in our Deckorators business unit. In April, we added wood/plastic composite manufacturing capacity in Arkansas through an acquisition. Our new Surestone plant in Buffalo just started shipping, and we continue to expand distribution across professional and retail channels, all of which is expected to support additional share gains in 2026 and beyond. Edge volume declined 20% as we closed our [ Bonner ] facilities and narrowed the portfolio to products we expect to meet profitability targets by the end of 2026, representing the significant actions needed to restructure the business unit. Retail adjusted EBITDA was down $1 million year-over-year. Gross profit and SG&A were both essentially flat, reflecting improved mix and continued cost control, while we continue to invest in the Deckorators brand. We remain focused on improving ProWood distribution and increasing throughput and margins in Deckorators. With these initiatives and the EDGE restructuring substantially complete, the Retail segment is well positioned for improved results in 2026. Packaging sales were $394 million, down 4% year-over-year, reflecting a 2% decline in units and a 2% decline in pricing. Structural packaging volumes were flat. PalletOne units declined 7% and protective packaging units increased 5% as new greenfield locations continue to ramp up. Across the segment, we continue to gain share with key customers because of our ability to provide value-added solutions and a comprehensive product portfolio on a national scale. Packaging adjusted EBITDA was $28 million, down $7 million year-over-year. The decline reflected lower volumes and higher input costs in PalletOne, along with unabsorbed overhead as protective packaging greenfield operations continue to focus on achieving targeted volumes. We partially offset this gross profit impact with a $2 million reduction in SG&A, primarily from incentives tied to profitability. Construction sales were $465 million, down 10% year-over-year with a 5% decline in price and a 5% decline in units. The change was driven primarily by a 14% unit decline in site-built as housing demand remains pressured by affordability and weaker consumer sentiment and larger builders are focused on lowering inventory. We are, however, seeing improving trends among multifamily customers. Factory-built units declined 7% as we exited certain low-margin commodity sales. While volume was lower, mix improved and supported higher profitability. And commercial and concrete forming each achieved mid-teens unit growth. Construction adjusted EBITDA was $26 million, down $12 million year-over-year, driven by market weakness and competitive pricing pressure in Site Built. The other three business units improved profitability through growth and more favorable mix, partially offsetting the decline. As we manage through this cycle, we're balancing cost discipline with continued investment on our long-term strategy. We remain focused on aligning our cost structure with current demand while continuing to fund growth initiatives, product innovation, brand awareness and technology-enabled productivity improvements. Consolidated SG&A declined over $3 million year-over-year due to lower incentive compensation tied to profitability. For 2026, our key cost structure targets are $25 million in cost savings from capacity consolidations, reducing cost of goods sold and keeping us on track to achieve the $60 million cost-out goal we announced last year. Core SG&A of approximately $570 million, including Deckorators advertising and excluding the following incentive-related items. Bonus expense of 17% to 18% of pre-bonus operating profit, sales incentives of about 3% of gross profit and $21 million of vesting expense for prior year stock-based incentives, an effective tax rate of 25% to 26% and total depreciation, amortization and other noncash expenses of approximately $200 million. Turning to capital resources and capital allocation. The company continues to maintain a strong balance sheet. At the end of March, the company had $714 million in surplus cash and no borrowings under its credit agreements for a total liquidity of approximately $2 billion. Our surplus cash was approximately $200 million lower than at year-end, driven by a typical seasonal working capital build that we expect to convert to cash by early Q4. We believe our diversified business portfolio generates meaningful and consistent free cash flow to support organic growth and M&A. Last year, we converted 80% of adjusted EBITDA into free cash flow. Our highest capital allocation priority is to invest in opportunities, organic and inorganic that grow our core businesses and increase margins and returns over time. Our focus areas are expanding geographically in core higher-margin businesses where we have sustainable competitive advantages, expanding capacity for new and value-added products and driving operational excellence through automation, consolidation and enhanced productivity. Consistent with this framework, in April, we completed one acquisition and announced a second that we expect to close in May. On April 6, we purchased the net operating assets of MoistureShield, Inc. And on April 28, we announced our plan to acquire the net operating assets of Berry Pallets. These transactions are aligned with our capital allocation strategy to strengthen our core portfolio, expand capacity in the geographies we serve and improve margins. We also intend to return capital by growing our dividend in line with long-term free cash flow and repurchasing shares primarily to offset dilution from stock-based compensation. We will evaluate additional repurchases opportunistically when we believe our shares are trading below intrinsic value, and we'll preserve our balance sheet strength to fund growth. With these points in mind, the Board approved a quarterly dividend of $0.36 per share, a 3% increase from a year ago. We have a $300 million share repurchase authorization in place through July 2026. Year-to-date, we've repurchased 30 million shares at an average price under $90 per share. We currently expect $250 million to $275 million of CapEx, about $50 million lower than our February target due to the MoistureShield transaction. And we continue to build our M&A pipeline around targets that fit strategically, offer higher margin and return potential and present opportunities to meaningfully scale our core businesses. As we pursue these opportunities, we'll remain disciplined on valuation. I'll conclude with our outlook. We expect the current market environment to persist through 2026. Based on current headwinds and visibility, we believe demand for the balance of the year is trending toward the lower end of our prior guidance, which assumes flat to slightly down unit volumes across our segments based on mix. With respect to input costs, we expect continued pressure from energy and transportation. While pricing actions are underway to offset these items, the benefit is expected to take time to flow through the income statement this year. Positively, we believe market share gains, capital investments and operating improvements should help offset headwinds in markets tied to new residential construction. For example, we continue to target $100 million of growth in Deckorators, decking and railing sales. With that, we'll open the line for questions. Operator: [Operator Instructions] Our first question will come from the line of Kurt Yinger with D.A. Davidson. Kurt Yinger: I just wanted to start off on ProWood. I know that you lost some lower-margin business last year, but it also sounds like kind of that slow progression into spring impacted the March period. I guess with the commentary that April has maybe leveled out a little bit, would you expect to see some better volume trends there? William Schwartz: Yes. I think that's fair to say, Kurt. If you look at it, there's the factors and points that we referenced in some of the commentary, whether it's kind of carryover of really a very slow storm season from last year. A lot of that tail drags into 2026 into the first quarter. We didn't have that, obviously. You combine that with unusual weather patterns and then the change in business mix, some of those volumes we talked about. So yes, we -- I think if you take some of that noise out, it really matches up well to some of the guidance we've talked about for single-digit down, and I think that carries forward. Kurt Yinger: That's helpful. And then on the Deckorators side, obviously, still a very good quarter in terms of decking sales growth. Can you just talk about how that matches up maybe internally versus your plan? And then as we think about the need to hit accelerating growth to get to that $100 million target with Buffalo online, does that really help ramp things up in Q2, or is it maybe more of a back half kind of phenomenon in terms of when a lot of that starts to flow through? William Schwartz: Kurt, it's a combination of both. I think you're -- what you're reading into Q1 is exactly aligns with the amount of production that we have. So with those CapEx improvements coming online, [indiscernible] fully operational. But as described, we shipped our first truck mid-April out of Buffalo. So that's a quick ramp-up. But really, as you get to Q3, Q4, we'll be able to capitalize on a lot of backlog of orders. So our first quarter sales matched up to what we had to sell. So we were very happy. It's right on track in those CapEx advance. It's right where we expect it to be at this point. Kurt Yinger: Okay, okay. Great. And then just last one on the transportation and energy side. Without maybe putting too fine a point on it, could you just help us kind of frame maybe what type of headwind do you expect that to be relative to what you're kind of budgeting at the start of the year? And then also talk a little bit about kind of the process of passing that additional cost on. Is it something that a portion of your contracts with customers might be embedded with just a time lag or something that's more negotiated? Just help us understand that dynamic a little bit. William Schwartz: Yes. The -- that's a hard one. The month of March is where we really felt the impact. And certainly, when the conflict started, we didn't know how prolonged that would be at the point that we realized we were a month in that looks like this is going to have a longer-lasting effect, we started those conversations with customers. And fortunately, for us, because of the relationships we have, they understand. We're not the only ones in that game with the cost out of our control. And so those are starting to go into place or already in place in most cases and will continue as -- in the different markets that we serve. But yes, as it looks right now, it looks like that's going to continue to be a bit of a headwind, but we've got it covered in the form of covering those costs and continue to work through it with customers. Kurt Yinger: Is it fair to say then that we kind of see that headwind in Q2 and then the back half, you feel like you're pretty well set in offsetting it, barring another kind of material inflation shock, or is it maybe going to be really the latter part of the year where you think? William Schwartz: Yes. I think as you described it, I think it's a very fair assessment of it. Most of those are already in place at this point, those offsets, but we continue to work through things through the quarter. But by the back half of the year for certain, I wouldn't expect to be taking hit as a result of those increased fuel costs. Operator: One moment for our next question, and that will come from the line of Jeff Stevenson with Loop Capital. Jeffrey Stevenson: First, I was wondering if you could provide some more color on how the MoistureShield assets fit into your long-term Deckorator strategy and then the opportunity to leverage your Deckorators products at existing MoistureShield distribution partnerships that you previously were not working with? William Schwartz: Yes. You hit the nail on the head. There's a combination. That was certainly an opportunity that we were happy to be able to take advantage of. We needed additional capacity. We've been challenged there. We needed a secondary plant. And so we had budgeted. It was reflected in the CapEx expectation for another plant. That eliminated that need. So we got immediately a product that's really, really good, a manufacturing plant that satisfies that additional capacity need. But I'll tell you the cool deck technology and being able to apply that across the Deckorators portfolio of products also is extremely exciting. And then lastly, coming with it, as you described, some other distributor partners that we think are extremely valuable and potentially, we can expand on that. So it was a win all the way around. Jeffrey Stevenson: That's great to hear. And then at a high level, how should we think about the margin cadence over the next several quarters in your retail business, given the full load-in of your low-end summer decking products across the 1,500 retail stores and then the new Deckorators capacity coming online here in mid-April. Just any more color there would be helpful. William Schwartz: Yes. And let's go back to last quarter, we kind of re-pivoted on that 1,500 stores. It's a little different. So store count, where products flow in from distribution centers, et cetera, and that's why we really explained the $100 million of additional Deckorator sales that we expected to get. You'll see that continue to build throughout the year. So describing back to the last question, we've only been limited by the production that we've had. So as that additional capacity comes on, Jeff, you'll see those sales build and revenues grow. So super excited about that. Operator: And that will come from the line of William Carter with Stifel. W. Andrew Carter: What I wanted to ask is on the kind of inflation, the energy pass-through. I think just to make sure, you are saying that when it's a headwind, it's transitory like in March. Could you give us a sense of how big that transitory headwind particularly was in the first quarter? How long you live with the lag? And then if it's just we see diesel stop or whatever, then the lag goes the other way. Any other incremental color to get some clarity around that incremental headwind this year? William Schwartz: Yes, absolutely. I think Mike is chomping at the bit to get a word in. So I'm going to let him kind of jump in here. Michael Cole: Yes, it was about a $3 million headwind in March, [ Andrew, ] and it did increase in April. But the good news is that in April, as Will had indicated, that's when we started taking actions with our customers and now through freight surcharges and price increases on the products, depending on which approach the customers prefer, we're now beginning to pass that through. And so working through that process, like Will said, and I expect that's going to be completed here in pretty short order in Q2. W. Andrew Carter: And I 100% apologize if you all answered this to Jeff's question because I actually cut out, but it's kind of something that we were chomping at the bit to ask about. The MoistureShield locations, basically, if you look at the kind of the dealer locations for MoistureShield and kind of Deckorators where you are today, it's highly incremental in terms of incremental distribution points. So I guess the first thing is, obviously, MoistureShield is going to go more 2-step. Is it an easy conversation to pick that up for Deckorators or Surestone? Obviously, you'd also be the factory constrained that you -- kind of your kind of playbook for launching MoistureShield. And I guess, long term, what's the brand strategy here? Is it keep MoistureShield, is it kind of -- and make it more of the brand, or just anything to help out there? William Schwartz: Yes. Good question. And I'm going to start with the last question first or the last point. So the intent is to run the MoistureShield brand for the remainder of the year and in 2027, we'll start to transition moving that under the Deckorators umbrella and starting to introduce some of those products into the mix as well as the cool deck technology, applying that towards the whole portfolio of products where we deem fit. Yes, we're excited, and we're working through that with those customers and partners that were part of MoistureShield that weren't part of the Deckorators customer mix, and we're working through that right now and -- but very, very excited about the opportunities that presents to us. Operator: One moment for our next question, that will come from the line of Reuben Garner with Benchmark. Reuben Garner: Let's see, this may be too early days, but any plans from a branding perspective? Will the MoistureShield assets ultimately become Deckorators wood/plastic composite, or is there a need or a reason to keep the separate branding longer term? William Schwartz: Yes. So Reuben, I think you probably cut out in the queue for asking the question. And yes, so we will transition that MoistureShield brand under the Deckorators umbrella at some point in 2027. So we'll carry it through the year, and then we'll start that transition process. Reuben Garner: Got it. Sorry, I missed that. And then the -- a lot of moving parts the last couple of years with both demand and the supply you've been adding and now MoistureShield. Can you give us an idea of what total wood/plastic composite business you have today, what total Surestone business you have today? And then like what the capacity is today, and where it's ultimately headed in each of those so we can kind of level set it on a go-forward basis? Michael Cole: Yes. So I'll work off with the 2025 numbers, Reuben. I think we finished the year in total decking and railing sales of about $245 million. I think of that $245 million, there was $165 million of decking. And of the $165 million in decking, about $90 million was mineral based with Surestone and about $75 million was wood/plastic composite. And the balance there, I think it's $80 million was railing. Now to your point about capacity, prior to this year, we had about $100 million, I think, in capacity of mineral-based or Surestone. We had about $100 million in wood/plastic composite. We've now doubled as a result of the -- or have the ability to double as a result of the MoistureShield acquisition, wood/plastic composites. So that's going to go from $100 million to $200 million. And as a result of [ Soma ] and Buffalo, we go from $100 million of capacity to adding another $250 million. So we'll be at $350 million of capacity for Surestone. And some of that will be -- most of it will lion's share be for decking, but we don't want to forget about the churn product that we're launching this year as well. Reuben Garner: Perfect. Very helpful. And then a question about -- you mentioned -- I think you used the term price mechanisms and maybe there being a lag for offsetting some of the inflationary pressures that you've seen. What exactly are those mechanisms? Are you using surcharges for fuel and transportation and they're delayed for some reason? Just walk me through that comment. William Schwartz: Yes, it's a combination. And so you're exactly right. Fuel surcharges in certain situations, others want repricing, building that into the price. So each of those scenarios is different. So when we speak mechanisms, we have a lot of business that we quote each time. And so you obviously take that into account the new updated costs, and what's reflected in the market. So it's just a combination of all of those and each of the segments we serve have different pricing time lines. So site built is very different than retail, an example. Operator: And that will come from the line of Ketan Mamtora with BMO Capital Markets. Ketan Mamtora: So sticking with the flavor of the day, which is Deckorators. So just help me understand a little bit on Q1. Obviously, Surestone and wood/plastic composite both grew quite nicely in Q1. Yet overall Deckorators sort of bucket was up 2%. So what are the other offsetting sort of factors there? Michael Cole: Yes. Railing was off 6%. I think we called that out in the release. So that was an offset. And then the other product categories that are sitting inside the Deckorators business unit are decorative aluminum fencing, deck accessories, generally post caps, [ basters ] and then vinyl lattice is also in the category. So those are areas that were softer. And obviously, the decking sales themselves are obviously very strong. Ketan Mamtora: I see. Okay. No, that's helpful. So as I think about sort of decorators and now with MoistureShield coming into the fold, Mike, is the right way to sort of think about as $100 million incremental sales you all talked about previously. And now we've got MoistureShield for probably 8 months of the year or something like that. So is that the way we should be thinking about Deckorators growth in '26? Michael Cole: Yes, that's exactly right. The $100 million that we originally talked about with the capacity coming online that goes a long way towards helping us achieve that and now the incremental increase from the MoistureShield transaction. Ketan Mamtora: Got it. Okay. That's helpful. And then just switching to the construction side. In Site Build, are you seeing sort of continued price competition among players, or is that sort of largely leveling out at this point given that we've been at it for a while now? William Schwartz: Yes. That's the hardest part of the business for us today. Obviously, that business is very tough. And when you talk about even some of the cost inputs that we recognized in the first quarter, it's hardest to pass along. So that's reflected in margins, too, when you talk fuel increases, lumber costs going up during the quarter. And so it continues to be a very pressured market for us on the margin side. Ketan Mamtora: Understood. But has the competitive dynamics changed at all since the start of this year? Obviously, at the start of this year, there was expectation that things will -- that housing activity will get better. And then with sort of the geopolitical events, it sort of feels like things have become a little softer since then, has there been any change? William Schwartz: Yes. I think your assessment is exactly right. From the start of the year until today, it has certainly not gotten better in the geopolitical tensions, interest rate increases, consumer sentiment, all those factors in play, it's a tough environment. Michael Cole: Although we did expect a tougher front half of the year. We had tougher year-over-year comparisons. Obviously, housing was pretty tough coming into the beginning of the year. We had anticipated it being tougher. But yes, exactly the recent events have made it even more so. Ketan Mamtora: Okay. That's fair. And then just final one for me. On capital allocation, are you -- sort of how are you thinking about M&A opportunities? And it seems like that pipeline is growing and you are seeing more opportunities versus kind of the other tool that you have on share repurchases. How are you stacking those two at this point, and if you were to rank order? William Schwartz: Yes, we are definitely more focused on growing. That's where we start. We talk about that a lot, but never losing sight of return. And I would tell you the pipeline is the best we've had in 5-plus years. I think a lot of that is intent and action. We've done a lot more prospecting. I personally have done more prospecting, allocated more time towards it for strategic opportunities that fit where we want to take the corporation. And so when you think about the liquidity, we want to put that to work, but it's got to be the right opportunities. Operator: I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Will Schwartz for any closing remarks. William Schwartz: Thank you for joining us this morning. While the operating environment remains challenging and visibility limited, we're confident in the strategy we have in place and the actions underway to strengthen our business. We're staying disciplined. We're focused on what we can control, investing thoughtfully in our core businesses and managing costs while remaining patient in how we deploy capital. I want to thank our employees for their continued execution and commitment and our customers and shareholders for their trust and support. Thank you, and have a great day. Operator: This concludes today's program. Thank you for participating. You may now disconnect.
Operator: Greetings, and welcome to the Lincoln Electric 2026 First Quarter Financial Results Conference Call. [Operator Instructions] And this call is being recorded. It is my pleasure to introduce your host, Amanda Butler, Vice President of Investor Relations and Communications. Thank you. You may begin. Amanda Butler: Thank you, Kathleen, and good morning, everyone. Welcome to Lincoln Electric's First Quarter 2026 Conference Call. We released our financial results earlier today, and you can find our release and this call slide presentation at lincolnelectric.com in the Investor Relations section. Joining me on the call today is Steve Hedlund, Chairman and Chief Executive Officer; and Gabe Bruno, our Chief Financial Officer. Following our prepared remarks, we're happy to take your questions. But before we start our discussion, please note that certain statements made during this call may be forward-looking, and the actual results may differ materially from our expectations due to a number of risk factors and uncertainties, which are provided both in our press release and in our SEC filings on Forms 10-K and 10-Q. And in addition, we do discuss financial measures that do not conform to U.S. GAAP. A reconciliation of non-GAAP measures to the most comparable GAAP measure is found in the financial tables in our earnings release, which again is available in the Investor Relations section of our website at lincolnelectric.com. And with that, I'll turn the call over to Steve Hedlund. Steve? Steven Hedlund: Thank you, Amanda. Good morning, everyone. Turning to Slide 3. We achieved solid results, led by record quarterly sales and adjusted EPS performance while also navigating heightened operating complexity from geopolitics and evolving trade negotiations. Teamwork exemplified our success this quarter. We remained agile in addressing short-term dynamics while staying customer-focused, investing in long-term growth and reimagining how work gets done. The global launch of our new RISE strategy was successful, and we celebrated a string of early wins, which include the U.S. launch of our elite customer program as part of our enterprise-wide Spotlight initiative, which raises the bar for customer service in our industry. It enables us to provide superior on-time delivery, hassle-free support and value-added services to help customers grow their business with us. In addition, we commissioned a new automated manufacturing line in one of our Harris facilities that triples the line's productivity while significantly improving quality. This investment also showcases the breadth of automated manufacturing solutions we engineer beyond traditional welding robots. Finally, we launched a new center-led process innovation function in welding consumables to accelerate our speed to market. I am pleased by the speed of progress, and we will work hard to maintain this pace. Turning back to quarterly performance. We are encouraged by improving sales and order momentum in the Americas region through April. This aligns well with 3 consecutive months of expanding manufacturing PMI data. In the quarter, we held our adjusted operating income margin steady with prior year. While we targeted a slight margin improvement, our 10% higher price did not fully offset inflation in the quarter. To ensure we achieve our neutral price/cost target this year, we have already announced new price actions across our welding segments, which go into effect in early May. Cash flows, while seasonally lower, were further affected by a temporary increase in inventory levels we put in place to maintain high fill rates and service levels while we pursue our Spotlight initiative and migrate select products to next-generation versions. We continue to invest in long-term growth through CapEx and R&D and return cash to shareholders through both dividends and share repurchases. ROIC performance remained at top quartile levels at 21.5%. Turning to Slide 4 to spend a few minutes on demand trends. The Americas region continued to outperform other geographies and consumables remained the most resilient product category. This was driven by factory activity and infrastructure investments in energy and data centers, which helped offset slower auto production. These same end market drivers, along with an increase in capital spending from off-highway customers, supported modest automation growth in the Americas in the quarter as well. Globally, our automation portfolio achieved $210 million in sales versus $215 million in the prior year with compression from international markets where we have a challenging prior year comparison. We have been encouraged by the continued acceleration in both equipment and automation order rates and backlog levels in the Americas through April. This should support modest volume growth in the Americas Welding segment starting in the second quarter with further improvement in the back half of the year if conditions are sustained. Internationally, we also saw a broad improvement in sales from European customers with organic sales pivoting to growth across Northern, Eastern and Central Europe and in Turkey. In addition, India and Australia improved. The headwind in our international business was largely from challenging prior year comparisons in regional automation and energy projects and to a lesser extent, the Middle East conflict. On a consolidated basis, the Middle East represents a relatively small portion of sales, and we estimate an approximate $8 million sales impact from the conflict as several customers suspended activity. In April, EMEA order rates continued to improve, and we are monitoring for consistency as activity may reflect prebuying ahead of higher inflation and regional commodity supply concerns. In the Middle East, we are engaged with regional customers servicing active requests and our global team of welding experts are ready to support their repair and expansion needs as called upon, whether for rapid large-scale metal 3D printing of replacement and spare parts to core welding and automation solutions. Pivoting to end market performance, we continue to see three of our five end markets achieving flat to higher organic sales growth in the quarter. Most notable is the high 30% growth rate in general fabrication, which represented accelerated factory and fabrication activity in the Americas as well as in data center and HVAC projects. Heavy industries grew in the quarter, led by growth in off-highway globally. Both construction and ag equipment grew across a broad mix of solutions, including automation. Energy was steady but was bifurcated between a high teens percent growth rate in Americas, which was offset internationally. We remain bullish on energy and expect Americas to continue to outperform international with a strong pipeline of pending LNG projects and energy infrastructure projects needed to support data center investments. With our strong broad presence across oil and gas and power generation applications, including gas turbine, battery, nuclear and renewables, our energy team is encouraged by the opportunities ahead. Our two challenged end markets, nonresidential structural steel and transportation are both project-oriented and capital intensive, which can result in choppy results quarter-to-quarter. Nonresidential was largely impacted by international weakness, while transportation was broader and largely driven by lower capital spending versus prior year and a slight decline in production rates. To conclude before passing the call to Gabe, while we are operating in a more complex environment, we are well positioned to adapt and react effectively to short-term dynamics. We are financially disciplined, maintained a solid balance sheet profile and continued to generate strong cash flows and manage the business for long-term profitable growth. This is evident in our balanced capital allocation strategy as well as our track record of compounding earnings and increasing shareholder returns through the cycle to deliver superior long-term value. This is an exciting time at Lincoln Electric with the launch of our new RISE strategy, and the entire team is energized to achieve our mission of being the essential link to help customers build better and execute on our 2030 goals. And now I will pass the call to Gabe Bruno to cover first quarter financials in more detail. Gabriel Bruno: Thank you, Steve. Moving to Slide 5. Our first quarter sales increased approximately 12% to $1.121 billion from approximately 10% higher price, 2% favorable foreign exchange translation and a 1.6% benefit from the Alloy Steel acquisition. This was partially offset by 2.6% lower volumes. Gross profit increased approximately 9% to $399 million, reflecting higher sales. Our gross profit margin declined 80 basis points to 35.6% due to lower volumes, timing of price/cost recovery and an approximate $1 million LIFO charge. Price/cost was unfavorable 90 basis points in the quarter. We continue to target a neutral price/cost posture and have implemented new pricing actions in our welding segment, which will go into effect in early May. Our SG&A expense increased by 7% or $14 million to $211 million. The increase was driven by foreign exchange translation, higher discretionary spending, which was largely commercially driven and from higher employee costs. SG&A as a percent of sales improved 80 basis points to 18.8% on higher sales levels. On April 1, we implemented our seasonal merit increase, which raises employee costs by approximately $6 million per quarter on a year-over-year basis. We expect our quarterly SG&A run rate to be at $250 million for the balance of the year. For analysts reviewing our segment EBIT schedule, our corporate expense of approximately $1.4 million reflects our decision to allocate additional center-led enterprise investments to our reportable segments. Looking ahead, we expect corporate expense to be approximately $1 million to $2 million per quarter for the balance of the year. Reported operating income increased 13% on higher sales. Excluding special items, adjusted operating income increased 11.5% to $189 million, and we held our adjusted operating income margin steady year-over-year at 16.9% with a 17% incremental margin. Our steady margin performance reflected favorable SG&A leverage, which offset the impact of lower volumes and an unfavorable price/cost position. First quarter diluted earnings per share performance increased 18% to $2.47. On an adjusted basis, earnings per share increased 16% to $2.50. We recognized a $0.04 benefit from foreign exchange translation and $0.05 from share repurchases. Moving to our reportable segments on Slide 6. Americas Welding sales increased approximately 8% in the quarter, driven by nearly 8% higher price and 1% favorable foreign exchange translation. Volume declines narrowed to 40 basis points as orders accelerated through the quarter across all three product areas on improving demand trends from most end markets. We expect volumes to inflect to modest growth in the second quarter. First quarter Americas price marked peak levels in the segment as we started to anniversary last year's actions in the second quarter. The team has recently announced new pricing actions to mitigate rising raw material and logistics costs. We expect Americas Welding to achieve a full quarter benefit of these new actions starting in the third quarter at 150 basis points per quarter run rate. We will continue to monitor evolving operating conditions and will respond as necessary. Americas Welding segment's first quarter adjusted EBIT increased approximately 3% to $128 million on higher sales. The adjusted EBIT margin declined 100 basis points to 17.2%, primarily due to timing of price/cost recovery and higher corporate expense allocated to the segment. We expect Americas Welding margin to perform in the mid-18% to mid-19% EBIT margin range for the remainder of the year. Moving to Slide 7. The International Welding segment sales increased approximately 4%, primarily from favorable foreign exchange translation and strong sales in our Alloy Steel acquisition, which will anniversary in early August. This increase was partially offset by 10% lower volumes primarily from automation and to a lesser extent, a temporary decline in customer activity due to the Middle East conflict. Adjusted EBIT decreased 1.5% to $23 million. Margin declined 50 basis points to 9.7% as the benefit from Alloy Steel was offset by lower volumes and higher corporate expense allocated to the segment. We now expect International Welding's margins performance to improve sequentially but remain in the 11% range until conditions improve in the Middle East. Moving to The Harris Products Group on Slide 8. First quarter sales increased 42%, led by 41% higher price. The outsized price impact reflects actions taken to mitigate record high metal costs, most notably in silver and copper. The segment effectively managed costs and achieved their neutral price/cost target in the quarter. While metal prices remain elevated, we expect Harris' price to moderate from first quarter record levels based on current metal price trends and prior year comparisons. Harris volume compression narrowed, benefiting from the growth in the retail channel as well as an improvement in HVAC production activity, which we anticipate will inflect positive by midyear. Looking ahead to the second quarter, we expect segment volumes to compress due to a challenging comparison from last year's retail channel load-in of a new customer. Volumes are then expected to pivot to growth in the back half of the year. Adjusted EBIT increased approximately 68% to $41 million and margin improved 330 basis points to 21.2%. The profitability improvement reflects SG&A leverage from higher sales dollars and favorable mix. We expect the Harris segment will operate in the 19% to 20% margin range at current metal prices. Moving to Slide 9. We generated $102 million in cash flows from operations in the quarter, which was lower due to higher uses of working capital. We strategically increased inventory levels on a short-term basis to ensure high customer service levels while we transition select products to newer models and ensure we capitalize on early strengthening of demand, especially in the Americas. We expect to reduce inventory levels in the second half of the year. The increase in inventories resulted in an 80 basis point increase in our average operating working capital to sales ratio to 18.6%. Moving to Slide 10. We continue to execute on our capital allocation strategy by investing $39 million in CapEx and returned $101 million to shareholders from a combination of our higher dividend payout and from share repurchases. We maintained a solid adjusted return on invested capital ratio of 21.5%. Moving to Slide 11 to discuss our operating assumptions for 2026. We have increased our net sales growth assumption to incorporate recently announced price actions taken to offset rising input costs. We now expect net sales growth to be in the high single-digit percent range as compared to our initial assumption of mid-single-digit percent growth. Our organic sales mix is now expected to be 3/4 price at a mid-single-digit percent rate and 1 quarter volume. Given how early we are in the year and the potential trade-off of strong order rates in Americas offsetting lower sales from the Middle East conflict, we have not changed our original volume growth assumption of a low single-digit percent growth rate. We estimate the sales impact from the Middle East conflict to be $8 million to $10 million per quarter while the conflict persists, which is split evenly between the Americas and International Welding segments. We also continue to anticipate a 70 basis point M&A benefit from the Alloy Steel acquisition, which again anniversaries in early August. We are maintaining our other full year assumptions on operating income margin improvement, a mid-20% incremental margin, interest expense, tax rate, CapEx and cash conversion. And now I would like to turn the call over for questions. Operator: [Operator Instructions] And your first question comes from the line of Bryan Blair of Oppenheimer. Bryan Blair: It would be great to hear a little more on how your team is thinking about cycle positioning here and the prospects for overall demand acceleration and broadening product growth over the coming quarters. Consumables growth has been encouraging since Q2 of last year, obviously, very robust in Q1. Trends have been a bit choppier on the equipment side, but it sounds like you do expect near-term improvement. Just any additional color on that front would be helpful. Steven Hedlund: Bryan, this is Steve. I would say we're cautiously optimistic, right? We're seeing good order rates in the Americas business. We've got continued strength in the PMI data conversations with customers are encouraging, but we don't want to get ahead of ourselves, right? We want to see a little bit more consistency month-to-month. In Europe, there's a lot of choppiness. We're concerned that some of the volume growth we saw there might have been pull forward around pricing and other regulatory issues in terms of carbon taxes and the like. Don't really have any more clarity than anybody else about what's going to happen in the Middle East and keeping our fingers crossed there. So cautiously optimistic, I guess, is our overall position. Gabriel Bruno: Yes. Bryan, just to add. As we mentioned, in the Americas Welding segment and we look at real volumes, consumables and automation were up. And as Steve mentioned as well as I, the progression in the quarter on orders were strengthening through March as well as into April and it also positions for growth on the equipment side. So Steve mentioned that a keyword for us is being just cautiously optimistic about what we're seeing in the business. Bryan Blair: Okay. That all makes sense. And specific to automation, sorry if I missed any related detail here. Is the expectation that the strategy turns to growth in Q2? Is it mid-single-digit range is still a reasonable outlook for 2026? And have you seen any improvement in the scope of quoting outside of the large projects that you cited last quarter? Gabriel Bruno: Yes. So Bryan, we do expect to turn to modest growth on the automation side as we exit Q2 with an expectation that second half, we see broad volume improvement across the automation business. Our order intake continues to be strong, backlog levels strong. And the mix, while a lot of project activity, which creates some choppiness, as you saw, particularly on the international side in this first quarter, but we do expect to posture the growth in second half. Operator: Your next question comes from the line of Angel Castillo of Morgan Stanley. Oliver Z Jiang: This is Oliver on for Angel this morning. Just a question on your gen fab end markets. I know you guys were up high 30s this quarter. Can you help us unpack that in terms of how much of that was driven by price versus volume? And then just on the back half of the year, we're seeing some of your customers talk about order numbers that are higher than that even. So just how does that translate in terms of volume growth for you guys in the back half of the year? Gabriel Bruno: Yes. So just high level, our volumes, particularly on consumables in the Americas Welding segment were up low double digits. So we're pleased with the mix. We do have a significant component of the overall increase tied to automation projects in this first quarter. But overall, we're seeing a broad-based strength across general industries. So we're optimistic -- cautiously optimistic that, as you know, almost 1/3 of our business is tied to general industries. And so as we see now 3 months in a row on PMI improving and the flash numbers in April also point to positive, we're tracking that closely because it's a key part of our business. Oliver Z Jiang: Got it. That's super helpful. And then maybe just one on automation. Was that a drag on Americas margin this quarter? And then looking forward, how does the margin look in terms of what you signed into your backlog? I know you guys are targeting mid-teens there. So any color there would be helpful. Gabriel Bruno: Yes. For the first quarter, we did have some pressure on automation margins. As you know, that's dilutive to our overall business. It wasn't as a key driver to the overall margin performance in the Americas Welding segment because, as I mentioned, it was driven by price/costs. We're trailing a bit there as well as the increase in corporate allocations into the segment, which is about 40 basis points. But we expect improvement in volumes to also track with a high single-digit type of margin for the automation business. Operator: And your next question comes from the line of Mig Dobre of Baird. Mircea Dobre: I just have a couple of points of clarification here. Gabe, I appreciate all the commentary, trying to take notes, but I guess I'm not a fast enough note taker here. In terms of pricing, do you expect to be back to neutral from a price/cost standpoint in Q2? Or is that delayed until later in the year? And as far as the embedded price in the guide, does that reflect the actions that you talked about in the welding business that occurred in May? Is that embedded in that or not? And how about Harris? Like -- because obviously, I mean, what we saw in Q1 at Harris is just outsized. And I know things are moderating, but at what pace should we expect that to happen? Steven Hedlund: Yes. So Mig, let me handle the first part of that, and then I'll let Gabe comment more specifically. Obviously, our goal is to be price/cost neutral at the margin level and that we've got a long history of achieving that objective. What you saw was an inflection in input costs for us in the latter part of Q1. And then there's a little bit of a delay for us to be able to announce the pricing to our customers, communicate all that and have it go effective. So I would expect that we're going to recover most of that in Q2 as the pricing goes into effect beginning of May. And then I think our guide for the year on total price reflects that assumption of the pricing we've already announced. Gabriel Bruno: Yes. So Mig, as Steve mentioned, I would expect price/cost neutral as we enter the third quarter. So the timing of the price increases will have an impact positively in the second quarter, but we have the full impact in the third quarter. In terms of our price assumptions, if you think about the increase between 300 and 400 basis points, the way I think about it is about 1/4 of that on a full year basis is tied to the new price actions and the balance really tied to the Harris, what we've seen throughout Harris. We don't get the full year impact, obviously, with the new price actions being taken. So if you just think about that 150 basis points that I mentioned that begins in the third quarter, think about half of that, and that's really about 1/4 of the overall pricing change assumption. Mircea Dobre: Great. That's very helpful. And then my follow-up, going back to international, I'm trying to make sense of the volume decline that you have in there. I understand the Middle East impact, something around 230 basis points. But what about the rest of it? Because at least optically to me, when I'm looking at the prior year, the comparison was not that difficult. I know you talked about tough comps, but volumes were down about 6% last year as well. So can you unpack what's going on here and what regions are doing what -- outside of the Middle East? Gabriel Bruno: Yes. So just real simply, the largest driver was the timing of projects within our automation business. We did see pockets of strength in certain markets within Europe and you have the impact of Middle East, but that was the key driver. On the Asia side, we've seen favorable trends in the likes of India, Australia and that. But biggest driver overall was the timing of projects and the tough comps on the automation side. We were down in automation internationally. We're slightly up on the Americas side. Operator: And we have our last question from Nathan Jones of Stifel. Andres Loret de Mola: This is Andres on for Nathan. Just moving on to the margin side. Can you maybe talk about some of the cost management actions Lincoln is taking to drive improved margins near term? Steven Hedlund: Yes. We have a series of initiatives we're driving under this RISE strategy in terms of enterprise-led initiatives. We're focusing a lot on sourcing and trying to get more leverage out of our global spend. We're looking at trying to improve supply chain planning, so we can become more efficient in how we run the factories and servicing our customers with less inventory going forward. We're looking at SG&A productivity initiatives. And the combination of all those things are reflected in our assumptions around incremental margins over the course of the RISE strategy period. Gabriel Bruno: And just to remind you, when we talk about our expectations in the operating margins as well as incrementals for 2026, as you know, we're talking about mid-20s. When you think about our 2030 targets, we're talking about high 20s. So we're looking to make a step change and a lot of the investments we're making currently have longer-term implications while we're continuing to improve the short-term margin outlook. Andres Loret de Mola: Got you. That's helpful. And just specifically to Harris, I guess, can you walk us through what were the primary margin drivers in Harris? Was it mainly mix related? Maybe just a little bit more color there. Gabriel Bruno: Well, mix was certainly favorable. We did have some strengthening across on the retail side as well as what we've seen on HVAC, which was better than expected. And then we also have the pricing impact where we've achieved our price/cost neutral posture and with the leverage on SG&A. You probably have about low to mid-20s type of incremental margin on that. So mix is a big part of it and then our pricing and strategy as well. Operator: And we have more questions. The next question comes from Walt Liptak of Seaport Research Partners. Walter Liptak: I wanted to ask about the lower international margins. I wanted to hopefully talk about that a little bit. I think you -- Gabe talked about 11% international margin throughout the year. And I think previously, it was at 11% to 12%. And I wonder if you could help us understand, is this more price/cost? Or is it the Middle East kind of volume overhang? Help us understand what's going on with the international profitability. Gabriel Bruno: Yes. Well, certainly, the volume impact in the first quarter, while the 9.9% down had an impact. And we do expect to see more stability in the overall business profile as we enter the second quarter. Timing of projects, as I mentioned on the automation has an impact depending on how the conflict progresses in the Middle East, we'll continue to see an impact there. But the mix is good from an Alloy Steel acquisition standpoint that will anniversary, as I mentioned, in August, and we expect that to also have a favorable impact. So the impact on volumes had an impact coming into the second quarter, which we expect that to stabilize. Walter Liptak: Okay. Great. And then kind of going back to the earlier questions about some of the general fab markets and just the way that things trended. Was this quarter kind of in line with what you guys were thinking going into it? Or did you see more of a pickup as the quarter went on and into April? Gabriel Bruno: Yes. I mentioned the level of -- in Americas Welding consumable volumes being up low double digits. So that was stronger than we would have expected as we spoke in February. So we saw strengthening in real volume activity in general industries. We continue to see that momentum into April. So that's what gives us the cautious optimism on the early parts of recovery, particularly in the Americas Welding side. Steven Hedlund: Yes. Walt, I would say the improvement in gen fab, particularly in the Americas, consumables may be a little bit ahead of what we were anticipating and standard equipment may be a little bit behind what we were anticipating. The consumables is a great barometer of factory activity. And with continued strength in the factory activity and hopefully improving confidence, we should see the standard equipment follow in fairly short order. Operator: And your next question comes from the line of Steve Barger of KeyBanc. Christian Zyla: This is Christian Zyla on for Steve Barger. One clarifying question. Just with your earlier comments on the 2Q volume expectations, are you expecting overall margins in 2Q to be somewhat similar to 1Q and then a pretty meaningful step-up to get to your full guide of slight improvement? Can you just help us walk through the cadence for the full year? Gabriel Bruno: Yes. No, I expect the second quarter to show a step improvement compared to what we've realized in the first quarter and see that progressively stable as we get full realization of price/cost neutral in the third quarter. Christian Zyla: Got it. And then to follow up on that, is that driven primarily by volume or mix in the back half? Just kind of help us parse that out. Gabriel Bruno: Yes. So for sure, volumes, we do see progressively improving. As we talked prior to the increase in our pricing assumptions for the year, we did point to the mix of price volume to progress into volumes in the back half of the year as we've anniversaried the price actions from -- that we had taken in 2025. So we have pivoted to volume in the back half of the year. The only comment we made to reinforce mix is that the strengthening of Americas, depending on what progresses within the Middle East conflict could be an offset, which we estimate that impact to be about $8 million to $10 million per quarter. Steven Hedlund: Yes, Christian. So our expectation is still for continued volume improvement in the second half of the year. We haven't seen anything yet to have us come off of that, but we're cautiously monitoring demand trends to stay on top of that. So hence, our cautious optimism. Christian Zyla: Understood. One final one for me is just on the cash flow for the year. I think I understood the comment of the increased working capital or inventory levels. Do you expect that to repeat as we go for the full year? Or should we expect a similar '26 versus '25 free cash flow, which then would imply about $140 million, [ $150 million ] per quarter? Gabriel Bruno: Yes. No, we expect to -- we're still anchored on 100% cash conversion. So we expect that while we're investing short term for some product transitions that would turn around in the back half of the year. Operator: And we have one last follow-up question from Mig Dobre of Baird. Mircea Dobre: Still back on international for me. If we're kind of leaving out the Middle East conflict and the drag that you've outlined from that, so excluding this, do you expect to see volume growth in the rest of that business at any point in time in '26? And as far as inflation goes, what is the impact on that flow-through in pricing in international welding? Steven Hedlund: Yes. Mig, I would say we're expecting volume growth in the Asia Pacific region of the business. The Western Europe, in particular, and the broader European region, excluding the Middle East, a little more cautious. We were pleased to see a little bit of an uptick this quarter versus the prior quarters, but we're concerned that, that might be pull forward related to pricing actions and also some of the government regulations around the carbon border adjustment mechanism coming into play. And so it's just a little too early to call any bottoming and improvement in Europe at this point in time. But we continue to see growth in Asia Pac and believe that we're investing appropriately to take advantage of that growth. Gabriel Bruno: And our posture there in the international market is to be price/cost neutral. So we'll take some action to achieve that objective, and that's what drives the improvement as we see from Q1 into that 11% type EBIT margin profile that we expect from the business. Operator: And this concludes our question-and-answer session. I would like to turn the call back over to Gabe Bruno for the closing remarks. Gabriel Bruno: I would like to thank everyone for joining us on the call today and for your continued interest in Lincoln Electric. We look forward to discussing the progression of our RISE strategy in the future. Thank you very much. Operator: Ladies and gentlemen, that concludes today's call. Thank you, everyone, for joining. You may now disconnect.
Lena Petersen: Good morning, and welcome to Stagwell's First Quarter 2026 Earnings Webcast. I'm Lena Petersen, Stagwell's Chief Brand and Communications Officer, filling in for Director of Investor Relations, Ben Allanson today. With me are Mark Penn, Stagwell's Chairman and Chief Executive Officer; and Ryan Greene, Stagwell's Chief Financial Officer. Mark will provide a business update before Ryan shares a financial review. After the prepared remarks, we will open the floor for Q&A. [Operator Instructions] Before we begin, I'd like to remind you that the following remarks include forward-looking statements and non-GAAP financial data. Forward-looking statements about the company, including those related to earnings guidance, are subject to uncertainties and risk factors addressed in our earnings release, slide presentation and the company's SEC filings. Please refer to our website, stagwellglobal.com/investors for an investor presentation and additional resources. This morning's press release and slide deck provide definitions, explanations and reconciliations of non-GAAP financial data. And with that, I'd like to turn the call over to our Chairman and CEO, Mark Penn. Mark Penn: Thank you, Lena. This is a pivotal moment in the Stagwell story as we continue to achieve our vision of extending in services from global full service to platform self-service AI applications. We're hitting major milestones on both ends of that vision while keeping costs under control and increasing our earnings per share. Together, these developments should produce an incredible 2026. First, our net new business is hitting records, and we are now regularly achieving large-scale wins. The first quarter was a record, and our wins are about $80 million ahead of wins last year at this time. We're closing in on 4 new major assignments under final negotiations and we just signed our first 5-year nearly $60 million government contract this week. Second, our new enterprise tech products and sales organization are on track towards hitting the first sales goal of $25 million with $12 million booked, and we are just getting our sales operation in place. Demand for the new products is strong with a growing pipeline. Our Digital Transformation segment continues to lead the way in growth. Third, this quarter is in line with expectations, as indicated on the last call, and we are building towards a record-breaking second half of the year with the combination of new business and the kickoff of an advocacy super cycle. We reiterate guidance and express even further confidence given this quarter's organic net revenue growth is actually the strongest in Q1 in at least 4 years. We expect growth to accelerate to double digits by Q3 and Q4. Revenue grew 8% to $704 million and net revenue grew 4% to $585 million. We saw growth across all 5 of our segments in the first quarter, led by a 9% jump in Digital Transformation. Digging into the Digital Transformation results, the 2-year organic net revenue stack for the segment tells a particularly impressive story with growth of more than 22% in Q1. This continues an improving trend in this metric that we have seen for the last 8 quarters. Given the strong start to the year, we expect the Digital Transformation segment to accelerate to mid-teens growth in the second half. AI and our understanding of how to apply it is a huge tailwind for us. Past weakness in Communications has reversed and the segment grew more than 6%, principally on the backs of new corporate assignments as the political season was not yet underway, but will be in full swing in the last 2 quarters. All advocacy work is now within the single Communications segment, and the companies are diversifying their work for more nonprofits, universities and localized retail marketing. By region, the U.S. led the way this quarter with over 8% organic revenue growth with over 3% organic net revenue growth and double-digit growth in adjusted EBITDA. International efforts outside the U.K. were muted by a strengthening dollar and slowdowns in the Middle East tourism and technology, which we expect to be temporary. Adjusted EBITDA grew 9% year-over-year to $90 million, representing a margin of 15.3%, an improvement of 75 basis points versus last year. This reflects prudent cost controls across the business. Our first quarter labor ratio declined to 63.9%, even as we invested in our go-to-market engine. We are reinvesting these efficiencies in growth to take advantage of the AI opportunities. In the first quarter, we bought back approximately 7.3 million shares. Our shares outstanding at the end of the quarter was down to about 246 million shares, down by about 19 million shares since last April and down about 50 million shares since August 2021. As a result, EPS for the quarter was $0.17, 31% higher than a year ago. Continued improvements in cash management means cash flow from operations improved by $34 million versus the first quarter of last year. This puts us on target to hit $250 million to $300 million in free cash flow with almost no deferred acquisition payments. Acquisitions have been dialed back as we are investing heavily in buybacks and in new technology, as I previously outlined last month. As I also predicted on the last call, we saw a surge in wins to start the year with record-breaking first quarter net new business coming in at $141 million, putting our last 12 months at $486 million. Our winning streak is continuing into this quarter as well with several important wins to be announced shortly. As I mentioned earlier, our government contract effort is also picking up steam and having success. This is adding hundreds of millions of dollars to our pipeline, and we have multiple large pitches coming up. When it makes sense, we are partnering with established players like Deloitte and Palantir on massive contracts. We continue to focus on driving organic growth through larger assignments, previously the domain of our 3 major competitors and reducing the high churn rate among our smaller customers. We have taken 2 major steps to execute that strategy, and we expect it to pay off in 2026 and in raising 2027 estimates. First, we have doubled the size of the new business team, announcing significant new hires, including Nicole Souza as Chief Growth Officer for North America, who brings with her 25 years of experience, most recently at Publicis. Second, to reduce client churn, we've instituted a client accountability program so that every client, no matter what its size has a person responsible for it. We're receiving frequent reports fed into an AI engine that monitors and reports on client needs and trends. We have seen our top 100 clients grow by 15% in size, and we've decreased client churn across the business by more than 10% versus 1Q 2025 as we roll out these programs. As to our emerging Enterprise Services and Software business, we are innovating with the products and driving early sales. In addition to the over $100 million of Marketing Cloud revenue, we are building an additional stream of software and service revenue housed in the Digital Transformation segment based on 3 key products: The Machine, an agentic marketing operating system, which brings together a company's entire marketing stack; SATs, the Stagwell Agentic Targeting system that brings together a secure mix of client and our proprietary data with the power of Palantir's targeting; and Stagwell Search+, a new set of tools for managing search in the world of AI answers. We announced the addition of Michael Twidell to lead our Enterprise AI Solutions team and organize our sales and go-to-market efforts. He is quickly building a team. We are building the most cutting-edge comprehensive agentic marketing system available today. We believe every company will need an agentic marketing operations operating system, or MOOS, as I like to call it, to unite their ever-burgeoning volume of enterprise applications and data. Since officially launching the machine, we have 3 active engagements that are part of the initial $12 million booked, including Con Edison, a well-known electric utility, a division at Microsoft and a soon-to-be announced global spirits brand. We also currently have 9 active opportunities with 2 deep into scoping, the rest spanning industries from public sector to financial services. SATs will be sold both with the machine and individually. It's also in testing with multiple client engagements, including a Fortune 500 client and a global lifestyle accessories brand. Working together with Palantir, we are adding key features that take users from audience identification through to media placement and assessment on an agentic basis. Stagwell Search+, our tool to help brands optimize in AI search and beyond was described by senior Google leaders as "genuinely differentiating," and we are now working regionally with Google industry heads to support client adoption. We're partnering with key leaders, including The Trade Desk, AppLovin and Adobe. Last week, we announced a joint initiative with Adobe called the Creative Intelligence System, which creates agentic personas to surface insights specifically for marketers in the financial sector who use Adobe as their system of record. This is a major pivot to the sales of AI application services and software, and we are now on the verge of bringing it all together, going to market with significant sales and installations this year and the ability to hockey stick it in 2027. Stagwell is on the verge of expanded growth that will carry through '26 into '27 and '28. Leg 1 of that growth is from the political super cycle, which will ramp starting in midyear and then with the presidential race starting the day after the midterms. Expenditures and political efforts have expanded fourfold since 2008, and we believe it can double again. Leg 2 is the unique combination of services and software we are now offering, which is at the sweet spot of what clients need to adopt AI and shift new models of marketing. And leg 3 is our expanded wins of new clients at scale, displacing long-term holdco relationships. We are coming into the CPG and health care spaces with superior talent offerings against hollowed out creative shops, and we are moving to disrupt their long-standing government contract relationships. While aged legacy companies are seeing shrinkage, we continue to grow year after year and have an unlimited growth runway ahead of us. We will continue to diversify the business into new high-touch areas as the business of marketing changes and into AI-based services and software that is a must-have for marketing today. We're growing our top and bottom lines. We're expanding our margins. We're delivering strong free cash flow. We continue to be significantly undervalued no matter how you look at the metrics for a healthy growing company like us at the forefront of its field. How many companies with this profile do you know are trading at 6x free cash flow. That's why we will continue to be aggressive with our buyback. We have hundreds of millions of dollars in our buyback runway. We will use it. With that, I'd like to hand it over to Ryan, who will walk you through some of the financials in more detail. Ryan Greene: Thank you. Good morning, and thank you for joining us. Today, I will share additional information about our first quarter's financial performance and how we are tracking towards our full year goals. Before beginning, I want to reiterate what we discussed on the fourth quarter call. Our first quarter is where we lay the foundation for growth throughout the year. And we go through a cycle of departing clients leaving January 1 and new clients coming on typically from April to June. Results in the quarter were firmly in line with our expectations across all metrics. We expect to deliver accelerating sequential growth in the second quarter and throughout the year. Starting with the top line. Revenue increased 8% year-over-year to $704 million, and net revenue increased 3.6% to $585 million. All 5 segments delivered revenue and net revenue growth during the quarter. Growth was led by Digital Transformation segment with net revenue rising 9% year-over-year to $96.5 million, driven by increasing demand for integrated technology solutions paired with services that deliver measurable ROI in a changing market. The Marketing Cloud grew 5.3% to $26.5 million, driven by demand for our AI-enabled communication technology platforms and research offerings that help clients track sentiment in real time, gain faster insight and more actionable insights into customer behaviors. Some of the other divisions are now selling Marketing Cloud products and retaining the revenue there. One product in the Middle East was pushed to Q2 due to regional conflicts, while BERA, our brand modeling product, grew 28% year-over-year and the Harris Quest family of products grew 19%. The new enterprise software products are not accounted for in the Marketing Cloud, but are in the Digital Transformation segment. Media and Commerce continued its rebound, delivering 2.3% net revenue growth to $149.5 million. Performance was driven by improving new business momentum and expanding relationships as clients increasingly lean into the segment's integrated media, creative and loyalty capabilities. Continued investment in media technology and AI-enabled platforms, combined with disciplined cost management supports stronger operating leverage across the segment. Marketing Services maintained its momentum despite elevated prior year comparables, growing 1.1% to $217.6 million. Performance was led by our creative and research agencies and our centralized production group nearly doubled net revenue as we continue to bring more production in-house. And finally, Communications grew 6.4% year-over-year to $96.8 million, largely driven by new corporate assignments as our communication firms deliver their product lines to undertake more localized marketing for retailers and other outlets. We expect election-related revenues to ramp up in the second quarter and to continue to grow each quarter thereafter. As we grew to our top line, we continue to take steps to manage our costs. Payroll as a percent of net revenue declined by 110 basis points year-over-year to 63.9%, while G&A as a percent of net revenue declined by approximately 50 basis points to 19.6%. In the first quarter, we expanded the rollout of tech deployment through our businesses in anticipation of actions, actioning the balance of the cost savings we announced last year. The total action savings since April last year amount to $54 million, firmly on track to achieve the $80 million to $100 million that we previously outlined with these savings flowing through the P&L during 2026 and fully reflected in 2027. These improvements were partially offset by purposeful actions to strengthen our go-to-market expertise through expanding our new business team, which we aim to double in 2026 and Marketing Cloud sales force. Additionally, we increased our investment in our AI and technology capabilities. This includes OpEx investments into our tech products, including the machine and our Palantir partnership as well as bringing in further experts to strengthen our technical expertise in AI and data. Adjusted EBITDA in the first quarter was $89.7 million, representing a margin of 15.3%. This reflects year-over-year growth of 9% and margin expansion of 75 basis points. This improvement in adjusted EBITDA, together with the impact of share repurchases I will discuss shortly, drove adjusted EPS of $0.17, a 31% increase versus the first quarter last year. Cash management continues to be a core focus for Stagwell, and we delivered further progress early in the year. Cash flow from operations improved by $34 million versus first quarter last year, driven primarily by stronger working capital execution. That improvement translated into an $18 million year-over-year increase in free cash flow within the quarter, keeping us firmly on track to achieve our full year free cash flow conversion target of 50% to 60% of adjusted EBITDA. These improvements in cash flow reduced our revolver balance at quarter end to $350 million, a $25 million or approximately 7% reduction versus the first quarter of 2025. Lower net debt and year-over-year growth in adjusted EBITDA drove a 0.17 turn improvement in our net leverage, bringing leverage down to 3.11x. Our continued progress on leverage and cash has been reflected in recent ratings actions with Moody's reaffirming our B1 rating and revising our outlook to positive in late March. We remain on track to exit 2026 with net leverage in the mid-2s, reflecting the combination of our growing adjusted EBITDA, disciplined cost allocation and improving free cash flow generation. Turning to capital allocation. We repurchased approximately 7.3 million shares during the quarter at an average price of $6.16 representing approximately $45 million of deployment. We continue to invest in our technology platforms, including the machine, our partnership with Palantir and the Marketing Cloud offerings. Capital expenditures and capitalized software totaled $33 million in the first quarter, and we continue to expect full year investment levels to be consistent with 2025. As Mark noted, the momentum behind these products supports this level of investment, and we expect them to begin driving growth across the segment in the second half of the year. Deferred acquisition consideration totaled approximately $50 million at quarter end, down roughly $43 million versus prior year period. As previously noted, we expect deferred acquisition consideration to be negligible by year-end. First quarter results, coupled with excellent new business trends that Mark highlighted, give us confidence in our full year guidance of total net revenue growth of 8% to 12%, adjusted EBITDA of $475 million to $525 million and free cash flow conversion of 50% to 60% and adjusted earnings per share of $0.98 to $1.12. Thank you, and I will turn it back over to Lena for questions. Lena Petersen: [Operator Instructions] Let's start with a question from Steve at Wells Fargo. Digital Transformation continues to track well. Can you talk about the underlying trends here in terms of new customers, expansion with existing customers and also speak to what kinds of projects we're working on in a world with far more AI adoption in marketing services? Ryan Greene: I think we're finding that there is tremendous demand out there. Now we've come from the stage of what's AI; "Oh my God, what's legal say about AI"; to "I better have AI." And I think that we're seeing with the machine, like lots of pitches, same thing with the SaaS product. You see that we're getting big name customers. We're going first, obviously, to existing customers and offering this. But we just went to the Adobe Summit, and we got over 600 leads, right, and that kind of tremendous interest in the product. So I think the answer to your question is really, people want to put AI into their marketing. We've got a full suite of agentic tools here. We're going to existing customers first, but we're really out -- we've just organized our sales force. We just went to Adobe Summit, picked up 600 leads. And I think that's how this thing is going really about as well as I could expect. And we've gotten 50% of our first year quota really in the first couple of months. Lena Petersen: Great. So Steve has one more question, which is, I think last year, you cycled off of a client loss that dragged Media segment down. As we look into 2026, what's your outlook for media? And how should we expect it to trend throughout the year? Mark Penn: Yes. I mean we're still in the Media burning off from the Q1 H&R Block client that was there. So that kind of is fully out. And so that means our -- we don't have somebody else with a big Q1. So we think that the media stuff comes later in the year. I think right now, we run really strong. If you look, particularly GALE has been out there winning really significant contract after contracts. I think that, that's going to be probably the biggest area of kind of Media growth that we -- that I see coming down the pike. We, of course, have given now -- we have a new head of the entire division, and he's been reorganizing the media. We're adding the technology. So our media is going to be more holiday pattern. Our political is going to be more holiday -- more or less holiday season pattern as well. And I think I see us growing across the year. And I think you're going to particularly see that pattern, both in the whole company and with media. Lena Petersen: Okay. We've got a question from Mark at Benchmark. Your guidance implies an acceleration in the second half of the year. Could you discuss how much the second half acceleration is dependent on AI product scaling versus advocacy tailwinds and existing client expansion? Mark Penn: I think it's not dependent as much on AI scaling as it is on -- number one, we know that a number of large-scale creative contracts are closing. We know that our pipeline for general digital transformation work is really about as strong as we've ever seen that pipeline. And it is also -- and the third element is the political season, which really, again, promises to be another record political season. I think people -- I've never heard of people talking about midterms 6 months out like they were tomorrow. So I think those 3 elements when we started out, say, what gives us increased confidence? Well, we just won the biggest government contract. We know that we're closing on 3 or 4 other assignments now that are in final contracting and signing stage, which are mixed across Creative and Media. We know the political super cycle is coming, and we already have the clients in the bank. Lena Petersen: So a question came in asking for you to elaborate on the comments about advocacy agencies and specifically seeing how they're seeing more work from corporate rather than political clients? Mark Penn: Yes. I think that in the long term here, I ran originally where you recall an advocacy, and we were always diversifying by the end of it, Microsoft was my biggest client. And so I think we're seeing those -- all of those companies now taking more public affairs, more particularly suited to local work around retail establishments in communities. We're seeing those kinds of assignments. We're seeing more nonprofits, universities, hospitals, those kinds of clients that really work well as they begin to really diversify. Remember, we've taken the whole Communications segment now and put it together into a single unit under a single manager. Lena Petersen: Excellent. So turning to new business. Laura at Needham was asking, could you dig a little deeper into the record net new business quarter? Can you talk about the areas where Stagwell is seeing strength? Or what verticals are driving the improvement in pipeline? And is the mix of your new clients changing? What are the margins on new clients versus historical client base? Mark Penn: Okay. So I think the -- in terms of new clients, I think digital transformation and creative are the 2 spots where we are seeing really strong flood of new business. I think that we're also -- as you can see, we're getting out there with the new products. But in terms of what I call the regular pitch flow, when I look at that and I look at the wins and the wins are significantly ahead of what we've ever seen, and so I think that's kind of where the new ones. I think in terms of margin for the new clients, I think those margins are at or better than the previous. I think that as we scale up to bigger clients, we are not finding that we have -- that the margin is going to be reduced on those clients. It's really quite the opposite. We have a lot of smaller, lower-margin clients that are sort of cycling out of the system. And just in terms of the fact that our longevity with larger clients is 5x our longevity with smaller clients, just what you spend on marketing and remarketing and getting those smaller clients, just taking that overhead out gives them a higher margin. Lena Petersen: So we have a number of questions coming in about the improvements in churn we're seeing in the business. Could you discuss what improvements in churn might look like through the rest of the year? And what impact we might -- that might have on our top line? Mark Penn: Yes. Look, our goal is to cut the churn by about 25% right? We've seen -- we've seen a change already as we've told kind of everybody to focus on it. We're putting in place the system, what I call the accountability system where every single client, no matter how small, we'll have someone responsible for it, has to report on it. Look, many of these are small projects. We don't count small projects, by the way, under $500,000 in net new business. But -- so we'll separate out the small projects from the clients that should grow, and we're really focused. But our goal, if we're successful, we could get 2 or 3 points of organic growth out of that system. I think we are trying a dual-track approach, double where we've been successful, obviously, in the net new business, put a real focus on trying to mitigate what's been taking us down, which is small client churn. And those 2 together, I think, are key factors here in improving organic growth over the next -- over this year and permanently. Lena Petersen: Okay. A question for Ryan. Could you talk about the key drivers of the 30% plus improvement in adjusted EPS this quarter? Ryan Greene: Yes, sure. So it's really a function of 2 things. We have seen significant growth in our adjusted EBITDA, which has increased our numerator, but we also have been aggressive with our share buyback, purchasing 7.3 million shares in the quarter for about $45 million. And so we lowered the denominator with us realizing the stock has been undervalued. We've got aggressive, and we're seeing the reflect of that in our adjusted EPS growing 31%. Lena Petersen: Great. I think we have time for one more question from Jeff at B. Riley. He's asking a question about the macro. What are you hearing from your client base regarding if and how they might alter their marketing plans as a result of the Middle East conflict, oil prices or headwinds and the macroeconomic impact that could materialize if the conflict is prolonged? And what assumptions are you making about potential macro impact included in your guidance for 2026? Mark Penn: Well, look, I think the only direct impact on us is Mid East tourism is not exactly the flourishing at the moment. We expect, though, when this is over, it will bounce back quickly and that a lot of these clients will then -- they will be like post pandemic, but that is -- but really only about 3% of our business is out there, but it is -- but that is some impact on us. We are not right now, as you can see, as the stock market continues, we don't see clients making contingency plans about this. We don't see clients pulling back about this. We don't see clients altering their plans right now. I think for those in America right now, remember, gasoline prices or oil prices were above $100 a barrel for 3.5 years of the Obama administration, parts of the Biden administration. This is not what we're -- this is not like a pandemic, massive pullback. We're just not seeing that right now. And we're -- remember, people are going to pretty much lock their holiday plans in the next 2 or 3 months. So there's not a lot of time here for change. We're seeing, in fact, tremendous investment in AI, tremendous focus on the fact that every company needs to redo its connection with AI. And we don't see any pullback from that whatsoever. And that and the political sphere, which is going to be, I think, again, a very strong season, no matter what happens in the Mid East, I think those 2 basic trends, which are the most important for us as a company are really strong and intact for this year. Lena Petersen: Okay. Our final question is a question from Jason. And what have you learned about the opportunities in the government sector over the past year? And how do you think the opportunity for Stagwell has changed as you've been engaged in these contract discussions? Mark Penn: Well, I set that out as an initiative that I knew would take time. I think that we've moved a long way in the initiative. As I say, you should see in the next 2 weeks, a formal announcement of the contract I alluded to, which is a real breakthrough. We've picked up 2 or 3 other smaller government-related contracts and assignments. But now we're really ready with the team, the accounting, the structure in order to bid on the largest contracts like the post office and the Navy to bring in good partners to, because these are massive contracts and to really to compete. And for the first time, I think, for some of these agencies to have a brand-new competitor. And so far, I can say from the ones that we've won or just about to win, that has played out pretty well for us. Lena Petersen: On that note, that was our last question. Thank you to everyone for joining us. We'll see you next quarter.
Operator: Ladies and gentlemen, welcome to the DexCom, Inc. First Quarter 2026 Earnings Release Conference Call. My name is Abby, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star one on your touch-tone phone. As a reminder, the conference is being recorded. I will now turn the call over to Sean Christensen, senior vice president of finance and investor relations. Mr. Christensen, you may begin. Sean Christensen: Thank you, operator, and welcome to DexCom, Inc.'s first quarter 2026 earnings call. Our agenda begins with Jacob Steven Leach, DexCom, Inc.'s President and CEO, who will summarize our recent highlights and ongoing strategic initiatives, followed by a financial review and outlook from Jereme M. Sylvain, our chief financial officer. Following our prepared remarks, we will open the call up for your questions. At that time, we ask analysts to limit themselves to one question each so we can provide an opportunity to everyone participating today. Please note that there are also slides available related to our first quarter 2026 performance on the DexCom, Inc. Investor Relations website on the Events and Presentations page. With that, let us review our safe harbor statement. Some of the statements we will make on today's call may constitute forward-looking statements. These statements reflect management's intentions, beliefs, and expectations about future events, strategies, competition, products, operating plans, and performance. All forward-looking statements included on this call are made as of the date hereof, based on information currently available to DexCom, Inc., are subject to various risks and uncertainties, and actual results could differ materially from those anticipated in the forward-looking statements. The factors that could cause actual results to differ materially from those expressed or implied by any of these forward-looking statements are detailed in DexCom, Inc.'s annual report on Form 10-K, most recent quarterly report on Form 10-Q, and other filings with the Securities and Exchange Commission. Except as required by law, we assume no obligation to update any such forward-looking statements after the date of this call or to conform these forward-looking statements to actual results. Additionally, during the call, we will discuss certain financial measures that have not been prepared in accordance with GAAP. Unless otherwise noted, all references to financial measures on this call are presented on a non-GAAP basis. This non-GAAP information should not be considered in isolation, or as a substitute for results or superior to results prepared in accordance with GAAP. Please refer to the tables in our earnings release and the slides accompanying our first quarter 2026 earnings call for a reconciliation of these measures to their most directly comparable GAAP financial measure. Now I will turn it over to Jake. Jacob Steven Leach: Thank you, Sean, and thank you everyone for joining us. Today, we reported first quarter revenue growth of 15% compared to 2025 and organic revenue growth of 12%. This reflected strong demand for DexCom, Inc. CGM globally, as we benefited from broader access, new product launches, and continued active base growth. We also continued to drive operational improvement over the course of the quarter, which included an outstanding launch of G7 15-day, improvements in field performance across all of our products, a good response to our MyDexcom account and enhanced web-based service and support, and continued progress on new product initiatives. This helped us deliver solid margin performance, cash flow generation, and earnings for Q1. In the U.S., we are generating good momentum across the spectrum of diabetes care. This was especially pronounced across the categories of type 2 diabetes where our expanded reach and product momentum led to strong first-quarter share gains, with the biggest increase coming from people with type 2 diabetes who are not on insulin. This performance reflects growing clinical awareness of the greater than 6 million non-insulin lives currently covered for DexCom, Inc. CGM across the three largest PBMs. Our team has done a great job driving this awareness in the field, and this message will become even stronger as type 2 coverage continues to build. Along those lines, I am excited to announce another recent reimbursement win for the commercial type 2 non-insulin population. As of this summer, Prime Therapeutics will begin covering DexCom, Inc. CGM for all people with diabetes. This puts us on track to have commercial coverage for more than 7 million type 2 non-insulin lives by the end of this year. It is also another clear demonstration that payers are recognizing the value of DexCom, Inc. CGM in driving health and economic outcomes for this population. While this is a great start, we will not be happy until we have coverage for all people with diabetes. And the largest single driver towards that goal would be CMS coverage for the type 2 non-insulin population, as around half of those with type 2 diabetes not using insulin sit within the Medicare population. As we have said before, we continue to view this decision as only a matter of time. In recent months, we have seen upgraded recommendations in the ADA Standards of Care recommending CGM use for all people with diabetes, and the level of real-world evidence for CGM-driven health outcomes continues to grow. As one example, at ATTD, we recently provided a full readout of our 12-month type 2 non-insulin registry data. In this real-world study, DexCom, Inc. CGM delivered a statistically significant A1c reduction over a one-year period across a broad population of people with type 2 diabetes with strong utilization. These are the types of outcomes that we are consistently demonstrating across this group, which gives us high confidence that the coverage will continue to grow. And to further strengthen our case, we are currently completing our randomized control trial for people with type 2 diabetes who are not on insulin. Similar to how our DIaMonD and MOBILE RCTs reshaped clinical perspectives for those using insulin, we expect this trial can become the defining study for the non-insulin population. This readout will also form the cornerstone of our evidence base for any global payer that is waiting to see RCT-level data. We look forward to sharing a full readout of this study with you at the ADA's 2026 Scientific Sessions in a few weeks. As I mentioned earlier, during the first quarter, we also expanded the launch of our DexCom, Inc. G7 15-day system across all channels in the U.S. This broad rollout has been very well received, and most importantly, the feedback from customers and physicians has been excellent. The positive response goes well beyond the longer wear time. One of the most consistent points of feedback is around the new sensor algorithm which delivers our highest level of accuracy to date. Combined, we believe these updates can attract new customers into our ecosystem. And we are now working to build broader awareness of DexCom, Inc. G7 15-day in the market. We are also excited for more of our existing base to shift to this product so they can experience this longer wear time and improved performance firsthand. Of course, we are not stopping there. We are always working to improve the performance across our product portfolio. As one example, we recently began May manufacturing with our new patch technology that received FDA clearance earlier this year. We expect this upgraded adhesive to strengthen sensor survivability across our product portfolio and improve wear experience for our customers. We expect this new technology to reach the market in the coming weeks. We also have several software updates planned, including a complete redesign of Stello. In the coming weeks, we will introduce this new experience to all customers, which will offer a more consumer-friendly feel, more AI-driven personalized insights, and additional food logging capabilities including detailed macronutrient information. For our G Series products, we are currently expanding access within our pilot KOLs for our DexCom, Inc. Smart Basal feature. This personalized dosing module has the potential to reinvent basal insulin management by driving more accurate insulin titration, accelerating the time needed to reach optimal dose, and delivering improved outcomes for customers and physicians. Each of these updates were built specifically around customer feedback. We will always keep the customer at the center of future product innovation, which we believe can help us build an ecosystem that is more personalized and engaging for all customers. Our international markets provide a great example of what product personalization can do for our business. By offering a portfolio of products that can be tailored to each market and reimbursement system, we have been able to consistently secure broader access and drive growth within these regions. Our first quarter results were another great demonstration of this story. Once again, we delivered some of our strongest growth in markets where we have established broader access in recent quarters. Even in some of our largest markets, recent reimbursement wins have helped us reach a new cohort of customers and drive greater share. We will continue to build on this international growth strategy, including through the launch of new products. In 2026, this will include the international launch of Stello, as well as a new CGM system that is designed to further extend our market reach. We look forward to going into greater detail on these product launches, software updates, and more at our upcoming May Investor Day. You may recall that earlier this year, I laid out my three priorities for DexCom, Inc.'s next phase of growth: number one, be the premier glucose sensing solution for all; number two, set the standard for customer experience; and three, expand international market share. At our Investor Day, I am looking forward to exploring each of these topics in further detail as we share our vision for DexCom, Inc.'s next chapter. For those joining in person, we are also planning to visit our Mesa manufacturing facility to provide a glimpse into our original high-scale CGM manufacturing location and the level of precision that this work requires. We look forward to showcasing the quality and automation that we have built, and that we feel positions us well to lead the CGM category into the future. We hope to see you there. With that, I will turn it over to Jereme. Jereme M. Sylvain: Thank you, Jake. As a reminder, unless otherwise noted, the financial measures presented today will be discussed on a non-GAAP basis. Reconciliations to GAAP can be found in today's earnings release as well as the slide deck on our IR website. For the first quarter of 2026, we reported worldwide revenue of $1.19 billion compared to $1.04 billion for 2025, representing growth of 15% on a reported basis and 12% on an organic basis. As a reminder, our definition of organic revenue excludes the impact of foreign exchange, in addition to non-CGM revenue acquired or divested in the trailing 12 months. U.S. revenue totaled $832 million for the first quarter, compared to $751 million in 2025, representing an increase of 11%. As Jake mentioned, in the U.S., we saw momentum build across the spectrum of diabetes care in the first quarter. This reflected both growing awareness of the broader type 2 coverage and the launch of our G7 15-day product, which has generated a lot of excitement in the market. We have been very encouraged by the initial 15-day uptake and the market feedback, and look forward to seeing the active base continue to transition as we progress over the course of the year. International revenue grew 26%, totaling $360 million in the first quarter. International organic revenue growth was 17% for the first quarter. Our international growth was widespread across our core markets this quarter, with some of the largest increases coming from geographies where we recently expanded access, such as France and Canada. Our first quarter gross profit was $757.4 million, or 63.5% of revenue, compared to 57.5% of revenue in 2025. We are excited by our progress on gross margin performance, which was up significantly on a year-over-year basis and flat compared to the fourth quarter despite our typical Q1 seasonality. This performance reflected strong execution across our operations and supply chain as we delivered continued manufacturing efficiencies, more normalized freight costs as we have improved our global inventory levels, and initial benefit from the switchover to G7 15-day. Operating expenses were $493 million for Q1 2026 compared to $453.1 million in 2025. Operating income was $264.4 million, or 22.2% of revenue in 2026, compared to $143.1 million, or 13.8% of revenue in the same quarter of 2025. We are really proud of the team and the discipline demonstrated over the course of the quarter, both on operations but also all of the support teams that worked tirelessly for our customers. This is a demonstration of the ability to deliver for our customers, our employees, and our shareholders. Adjusted EBITDA was $364.5 million, or 36% of revenue for the first quarter, compared to $230.4 million, or 22.2% of revenue for 2025. Net income for the first quarter was $216.3 million, or $0.56 per share, representing 75% growth over 2025. We remain in a great financial position, closing the quarter with approximately $2.4 billion of cash and cash equivalents. This was up over $400 million compared to year-end 2025, which reflected our significant free cash flow performance in the first quarter. This cash balance, along with our growing free cash flow profile, continues to provide us with a lot of flexibility as we assess ongoing capital allocation opportunities. Turning to guidance, we are reaffirming our prior revenue guidance of $5.16 billion to $5.20 billion, representing growth of 11% to 13% for the year. For margins, we are reiterating our previous full-year non-GAAP gross profit margin guidance of 63% to 64%, and increasing our non-GAAP operating profit margin guidance and adjusted EBITDA margin guidance to 23% to 23.5% and 31% to 31.5%, respectively. While our Q1 gross margin performance leaves us tracking well relative to our current guidance, we left gross margin guidance unchanged to account for the current geopolitical environment, including uncertainties with fuel prices and shipping routes. Regardless, our strong cost control over the quarter positioned us to raise our full-year non-GAAP operating profit and adjusted EBITDA margin guidance. With that, we will now open the call for questions. Sean Christensen: Thank you, Jereme. We will now open the call for questions. As a reminder, we ask our audience to limit themselves to only one question at a time and then reenter the queue if necessary. Operator, please provide the Q&A instructions. Operator: Thank you. We will now begin the question-and-answer session. If you have a question, please press 1 on your touch-tone phone. If you wish to be removed from the queue, press 1 a second time. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press 1. Our first question comes from the line of David Roman with Goldman Sachs. Your line is open. David Harrison Roman: Thank you. Good afternoon. I appreciate your taking the question here. I guess when we look at the totality of the U.S. market now with two major players having reported, it does look like the market is in a period of slower growth. And as your competitor noted, that may be due to no major coverage expansion or new indications. So could you maybe just give us your perspective on how you are seeing the U.S. market unfold here? What is assumed in your guidance? And any details you can provide, whether it is new patient starts or other metrics, to corroborate the health of both the U.S. market and your business would be helpful as we think about the balance of the year? Jacob Steven Leach: Yes, thanks, David, for the question. If you take a step back and look at the U.S. market, there is still pretty significant opportunity. If we think about it, about 30% penetration into the covered lives is where we are as a category. That means that only one in three people that have coverage for CGM are using it, so the other two thirds is out there today, and that is before we talk about any expanded coverage. So I think as we look at new patients, we are always striving for a record number of new patients every quarter, and this quarter came in in the U.S. very close to a record, and we set a global record number of patients across the entire globe. We feel like there is a lot of strength in the category, and if we just focus on the U.S., there is still a long runway to go. We mentioned a new PBM now covering CGM by the end of the year that is going to add another million lives to that non-insulin using population, and when you think about that, that provides a lot of opportunity. Frankly, our team is getting much better at targeting this new coverage, as we saw some of the share gains that we had in this group, and so I think we still see a solid rate of growth going forward for the U.S. Operator: Our next question comes from the line of Travis Steed with Bank of America. Your line is open. Travis Lee Steed: I will start maybe asking on 15-day, kind of a two-part on 15-day. When you think about the better algorithm and the better customer experiences, is that something where maybe that product helps new starts as it launches? And then also maybe talk about the margin impact. I know you left gross margin guide unchanged, so how much inflation are you baking in? I am curious how to think about the margin impact of 15-day rollout versus the inflationary impact on margins. Jacob Steven Leach: Sure. I will take the part around the product and the starts, and then Jereme will fill in with the margin perspective. I absolutely believe that the 15-day product is helping drive the momentum that we are seeing. We did see performance improvements across our entire portfolio when it comes to the reliability of our product, but when you think about the 15-day in particular, it has that new algorithm and the extended wear, and that is something that patients very much value. The convenience of the longer wear, and then the algorithm, the performance and reliability of that product, is really driving new starts as well as conversions over to it. We are making good progress towards converting the base over to that product. We estimate nearly 50% will be converted by the end of the year over to this new 15-day product. Jereme, you want to fill in on margin? Jereme M. Sylvain: Yes. You are exactly right, Travis. We kept gross margin guidance on hold because of the impact of oil on both fuels and resins, and obviously resins play a large part in our product as well. There is probably about 50 to 100 basis points of potential risk associated with fuels and resins over the course of the year. Absent that, we would be raising the gross margin guidance. You can see in the first quarter we had really solid performance. Typically, we step back from Q4 into Q1, and with some of the work that we have done over the course of the year, that was flat coming into Q1, which should give you a lot of confidence that the work we have been putting in place to help improve throughput, quality, and yields is really starting to play out. So think about it that way: about 50 to 100 basis points. If oil prices come back down to normal, we will certainly revisit it and revise at that point, but right now, we have a placeholder for that. The underlying performance of the business is outperforming expectations as we got into the year. Operator: Our next question comes from the line of Larry Biegelsen with Wells Fargo. Your line is open. Gursimran Kaur: Hi, good afternoon. Thanks for taking the questions. This is Simran on for Larry. I just wanted to ask on type 2 non-insulin. We heard the RCT presentation is slated for ADA. Could we see a publication before ADA, and do you plan to share any color on the trial results at the Investor Day? And maybe just a broader question on type 2 non-insulin: any color on how we should think about this unlocking or re-catalyzing the next leg of growth in the U.S. CGM market, maybe even stepping back to that strong double-digit growth that you have talked about in the past? Jacob Steven Leach: Thanks for the question. Speaking of the randomized control trial for the non-insulin using population, we are planning to do the full readout at ADA, and we are anticipating results there are going to be similar to what we have seen when we look at our registry data and all of the other data that we generated in this population—really significant improvements in the glucose outcomes for these folks that, frankly, are not usually measuring glucose in any way. Many of them are not taking fingersticks. When you provide them with real-time feedback from our CGM, they are making the changes, the behavior modifications, and learning about how to better manage their diabetes, and therefore getting the A1c reduction, which is what that study is powered for. We do not plan on publishing before the readout. It will be in a major publication, but the readout at ADA will be the first time we do the readout. As we think about the unlocking of coverage, we have both continued unlocking of commercial coverage and then, obviously, this large population of non-insulin treated folks that sit in Medicare. It has the potential to really provide durable growth for a long time in the U.S. when you think about that opportunity. We are going to continue to advance access for these folks. As we think about the field and how we are building out our products and serving this population, we are going to continue to build products that help us grow the active user base. We think about new patients, but it is also retention and utilization in these populations. The more we do with the product and the service and the experience, the more that active base is going to grow. Operator: Our next question comes from the line of Robbie Marcus with JPMorgan. Your line is open. Robert Justin Marcus: Great. Thanks for taking the questions. You said it was close to a record new patient start, and I think that has been the language the past four quarters. So we are now a full year without a record new patient start. If I remember on the fourth-quarter call, you said the top end of the sales guide assumed a record and the bottom end assumed no new record patient starts. So a two-part question. One, do you feel like the lower end is maybe more appropriate if we do not see a record? And two, do you think you can maintain the current sales growth if you do not put up a new record in the future? Jereme M. Sylvain: Sure. Thanks, Robbie. Let me be clear. Globally, we did have a record new patient quarter this quarter. So globally, it was a record. In the U.S., it was close to a record. We are seeing momentum building behind 15-day, and sequentially it was an improvement from Q4. We also took share both in the U.S. and OUS. As you talk about the full year, the low end would be not records globally, the high end would be records globally. We are tracking well, given the first quarter is a record, and that gives you some context. For the year, our goal is to continue to unlock coverage. We talked about Prime Therapeutics in the U.S. commercial space. Outside the U.S., we also have plans to unlock coverage over the course of the year. Our expectation is to continue to unlock that coverage and help drive the growth algorithm. We have a lot of catalysts over the course of the year: momentum building with G7 15-day, Stello launching with a new app experience, bringing Stello outside the U.S., and looking at 15-day opportunities outside the U.S. Given what we have seen in the U.S. with the performance of 15-day, we are excited to bring that outside the U.S. We also expect progress on CMS coverage unlock timing. It starts with a record globally in the quarter, and we delivered that. Operator: Our next question comes from the line of Matt Taylor with Jefferies. Your line is open. Matthew Charles Taylor: Hi, thanks for taking the question. I wanted to double click on the CMS coverage. Your competitor said they are not going to call the month, basically implying it could happen soon. I know you do not know exactly when it is going to happen, but what are your thoughts on whether that could come before the usual process of going through the RCT and submitting your application? What is the range of outcomes for when that could happen, you think? Jacob Steven Leach: Thanks for the question, Matt. At this point in time, the RCT may not be required for that CMS coverage. In my conversations with the folks at CMS, it is very clear that they understand the benefit of CGM for this category. It is hard to estimate exactly when this coverage is going to come, but as we have said before, it is really just a matter of time. When that coverage does come, it provides a great opportunity for durable growth and continued patient impact. This product provides significant benefits for all people with diabetes, and as I said in my prepared remarks, we are not going to be happy until everybody with diabetes has coverage for this product. We are looking for that globally. Again, it is hard to call exactly, but we do know that the benefits are clear, and we look forward to the decision. Operator: Our next question comes from the line of Jeff Johnson with Baird. Your line is open. Jeffrey Johnson: Thank you. Good afternoon, guys. Jereme, you talked about some of the coverage unlocks outside the U.S. Are you inching closer? Is there progress or any even body language or gut feel on moving towards some basal coverage in some of the other bigger markets where we do not have it outside the U.S. at this point? Any update there? And was there anything one-time—timing, tender—anything that helped that 17% OUS constant currency organic growth rate, anything we should think about as a tough comp for next year in 1Q or anything like that? Thanks. Jereme M. Sylvain: Thanks, Jeff. Outside the U.S., there is a mounting body of evidence that continues to grow. We have had MOBILE and other studies come out, and the dialogue with a lot of the international bodies has continued to progress in a good way. We are continuing to look to unlock basal coverage. We are in lots of different conversations about how to do so, whether it is payers or tenders. There is a lot moving by country, and I would expect to have wins in pockets over the course of the year. We will give updates as they come. In markets where basal already exists, our type 2 evidence will help keep moving there. As Jake mentioned, around the world, we are not going to stop until everybody has access. In terms of any one-timers, no, there really was not. The way tenders work, folks use this product repeatedly. You do not use it once and then move away. Tenders typically allocate product for some time because people use the product year-round. We have been competing in tenders for some time and winning quite a few. Our product portfolio approach has gotten into tenders that may have been exclusive with a competitor and are now dual formulary, and that has happened in many cases we have seen. It is our opportunity to get into these markets with a product portfolio that makes sense and take share, and you are seeing that taking place. Operator: Our next question comes from the line of Marie Thibault with BTIG. Your line is open. Marie Yoko Thibault: Thanks for taking the questions this evening. I wanted to drill down a little bit more on your comments about the share gains in the type 2 population this quarter. I wanted to understand how sustainable some of that momentum feels to you out in the field, what you have seen since the quarter ended, and how much of it you think is linked to the 15-day launch versus sustainable momentum from your salesforce and execution? Jereme M. Sylvain: Yes. There are a few things we have seen playing out, which I think are all good things around share taking and the outlook longer term. First and foremost, we pay a lot of attention to customer satisfaction, and our NPS scores have jumped up with 15-day. We saw that playing out in the first quarter. That is sustainable. The customer experience is moving in the right direction, and that is an exciting moment for us. Certainly, the launch of 15-day helped. We had opportunities to extend wear length, and we have taken advantage of those, and the new algorithm has wowed customers. When you have a product like that in the market, plus coverage wins over time with low copays, it is providing an opportunity to get in front of physicians, demonstrate the value of the product, and make sure physicians know we have the lowest copays and the most coverage across the board. We are not going to stop until we win in these categories. Given we have the best coverage, I do not think there is any reason we would not look to do so. Our opportunity is to continue to take share and continue to take share until we are market leaders in every category. We are already market leaders in some categories, and we have some room to go in categories that historically did not have coverage. Having the 15-day product, having the customer satisfaction scores moving, and having the best coverage all bode well to taking share for some time to come. Jacob Steven Leach: What I would add is, when you think about the long run and as we are developing this product portfolio for different categories of patients, a feature like our Smart Basal is really designed to change the experience around going onto basal insulin. We are still seeing the largest category of new patients in the type 2 insulin-using population, both the IIT and the basal. With basal penetration still around 20% to 25% as a category, there is still a lot of opportunity for us to grow and take share there. That system is really designed to make the experience that both users and physicians are looking for, driving outcomes and ease of use. Operator: Our next question comes from the line of Matthew O'Brien with Piper Sandler. Your line is open. Matthew Oliver O'Brien: Good afternoon. This is Anna on for Matt. Thanks for taking the questions. There is always a focus on new patient starts, but I also wanted to ask on the retention side what trends you are seeing today in the domestic market and how that contributed to the results in the quarter. How do you expect this metric to evolve from here? Jacob Steven Leach: Hey, Anna. When we think about retention, it has been fairly consistent within a band. We look at both retention and utilization because both really help drive the active base. We have targeted improving our experience and really setting the standard both with the product and the service behind it. As Jereme mentioned, our NPS scores have been going up quite a bit, and I do think that bodes well for the future when we think about retention and utilization. It has been fairly consistent for a period of time now, but one of our goals is to improve it so that we can continue to improve active base growth. Operator: Our next question comes from the line of Joanne Wuensch with Citi. Your line is open. Joanne Karen Wuensch: Good evening, and thank you for taking the question. I am curious how we should think about the next couple of quarters, and if you can comment on thoughts for revenue growth rate throughout the remainder of the year and, in particular for the second quarter, if there is anything else we should be aware of as we think of our models. Thank you. Jereme M. Sylvain: While we do not necessarily guide to quarterly cadence, I can give you some things to think about over the course of the year. When we guided the year at 11% to 13% organic growth, we said it would be relatively split across U.S. and OUS, and that really has not changed. U.S. comps are a little more difficult in the first part of the year and a little easier in the back half, and vice versa internationally, where comps are a little easier in the first half and more difficult in the back half. We are still anchoring around the same commentary around the split across the two. Most folks are thinking about the cadence relatively well. Operator: Our next question comes from the line of Jayson Bedford with Raymond James. Your line is open. Jayson Tyler Bedford: Good afternoon. Thanks for taking the question. I apologize if I missed it. The Smart Basal launch, I think it was early access in 1Q. When do you expand this launch? Thanks. Jacob Steven Leach: Thanks, Jayson. We are still in a pilot launch. The idea is making sure the system as designed fits into workflow because it is designed to be a very broad-use product across many clinical environments—large diabetes clinics and small primary care offices. The work we are doing now in a number of pilot sites is ensuring that flows well. We actually learned a couple of things and made some updates to the system. We are not revalidating the algorithm; we know the patient experience is excellent. It is more about how it fits into clinical workflow. When we broaden the launch, we want it to be extremely easy and successful for users and physicians. We do plan to expand throughout the year, and once we finalize the workflow, we will launch it in a very big way. Operator: Our next question comes from the line of Jonathan Block with Stifel. Your line is open. Jonathan Block: Great. Thanks, guys, and good afternoon. Maybe I could go back to the prior question and push a little bit on the 11% to 13% organic revenue growth being essentially evenly split between U.S. and international. If you look at 1Q—17% international—and you said there was nothing abnormal in terms of tenders. T2 NIT seems more of a 2027 event than 2026. There seems to be sensitivity from investors around that U.S. number. Why do you have the conviction it is split and not, say, 10% plus U.S. this year poised to maybe accelerate next year with T2 NIT, instead of equally weighted specific to 2026? Jereme M. Sylvain: The question is fair. We exited last year with a relatively split U.S. and OUS business. Looking at comps year over year, you can see where there were wins and opportunities. We saw a ramp in the international business into the back half of last year and, as we comp some easier first half, looking at Q1 in isolation can be challenging. As you zoom out to our performance over last year and into this year, we still feel very excited about the opportunities in both the U.S. and international businesses. If we come back at the end of the year and it is slightly different, we will keep you posted. We still see a lot of opportunity in the U.S., especially with coverage wins like Prime Therapeutics, and outside the U.S. with tenders we expect to win. We still think it is balanced. If the numbers are slightly off by half a percent or so by the end of the year, we will discuss it. Nothing has changed versus what we saw at the start of the year—we continue to believe both businesses can operate quite strongly over the course of the year. Operator: Our next question comes from the line of Issey Kirby with Redburn. Your line is open. Issie Kirby: Hi, guys. Thanks so much for taking my question. I wanted to ask about Stello and how that is tracking. What prompted the redesign? With the international launch, how broad do you expect to go? Is this a product that you could push into markets where you are not currently present? Thank you. Jacob Steven Leach: Thanks, Issie. We see Stello as a fantastic opportunity to reach more patients, and it is tracking well to our estimates. As we have been out there for over a year, we have learned quite a bit. One of the main things we are hearing from users is they want more context around real-time glucose data. Over time, we started adding features to the current version of Stello, particularly focused around capture of nutrition—meal logging—using AI to analyze those meals. Taking a step back, we looked at the current version and saw an opportunity to redesign the experience to better match what customers are looking for, both aesthetically and functionally. The new Stello app we are launching very shortly is a complete redesign of the user interface. It has a more technology-forward aesthetic and provides insights that add context to glucose excursions, glucose variability, and nutrition. We are finding that nutrition is really important in helping users connect the dots to make sense of their glucose data and make healthy lifestyle changes. This new version puts those insights front and center and has an overhauled insight engine. We wanted to make insights much more personalized and take advantage of integrated data from activity trackers—Oura Ring, sleep scores, and more—bringing more personalized context and analysis. We are excited for people who maybe tried Stello but wanted more, and for enhancing the experience for current and future customers. For international launches, we are looking at countries in both EMEA and APAC. We will start with a smaller number and then expand, and we believe it is an opportunity for many markets to have an entry point with a product that meets user needs. Operator: Our next question comes from the line of Mike Kratky with Leerink Partners. Your line is open. Analyst: Hey, guys. Good afternoon. This is Brett on for Mike. Thanks for taking the question. Back to type 2 NIT—going into the Analyst Day, we will see the data at ADA. You say it is a matter of time for CMS. For your long-range plan and thinking long term, would you expect to have the assumption that CMS coverage is coming within that number, or would you need to actually have that coverage in hand before that is included within your long-range plan? Jereme M. Sylvain: For long-range plans, I would expect us to include our assumptions around that. I do not want to preempt Investor Day, but it is an opportunity for us to talk about it—our thoughts on timing and how we think about it. It does not change that we will push hard to get the coverage as soon as possible because there are a lot of folks who need this product. You can expect us to talk about our assumptions and viewpoint into the future at Investor Day, and if timing differs from assumptions, we will address that then. Operator: Our next question comes from the line of Richard Newitter with Truist Securities. Your line is open. Richard Newitter: Hi. Thanks for taking the questions. One clarification and then a follow-up. Did you say you have an incremental 50 to 100 basis point headwind that you are now contemplating in 2Q to 4Q that is getting absorbed in your reiterated gross margin guidance? Did I hear that correctly? Jereme M. Sylvain: It is 50 to 100 basis points. Richard Newitter: Got it—50 to 100 basis points incremental to what you had heading into the year? Okay. And then on the Prime Therapeutics win—congratulations. How long does it take for these things to work into having an impact? Does that mean you are banking on contribution from that incremental coverage to get to 11% to 13% in the U.S., or was that largely left as upside? Jereme M. Sylvain: On coverage timing, on national formularies like Prime, the second it is turned on, if you have a script and go to the pharmacy, you are covered. It is generally immediate on those national formularies. You should see it this summer when it is turned on for everyone covered there. That will help. New patients are helpful for the long-range engine, but they are not the only driver—retention, utilization, price, and mix also play into the guide. This is helpful and gives us bullishness around penetration and adoption, but it was not a major contributor to the original guide. We assumed nominal wins over the year and coverage largely as is. As we get more unlocks, that helps over the course of the year. One dynamic our salesforce consistently sees is that as coverage expands, physicians become more comfortable writing scripts broadly. As coverage for the type 2 population rises, it really unlocks the ability for physicians to go deeper. We would expect a similar phenomenon with CMS coverage—a rising tide. Operator: Our next question comes from the line of Chris Pasquale with Nephron. Your line is open. Chris Pasquale: Thanks. Jereme, on the gross margin strength, leverage in the middle of the income statement was excellent this quarter as well. You tweaked up the high end of your operating margin and EBITDA ranges a little bit, but those seem conservative given where you are starting and the normal cadence we see throughout the year. Did some spending get pushed out of 1Q that is going to come back later? Might this year look a little bit different? I am looking in particular at R&D being flat in dollar terms as an outlier. Any color there would be great. Jereme M. Sylvain: I appreciate you bringing it up; there has been a lot of work by the team to get here. We did much of that work in the back half of last year. One reason we felt good about raising guidance—though we typically do not raise after one quarter—is you saw operating expense performance in Q4 and now in Q1. We raised the midpoint of operating margin guidance by 75 basis points, which is a pretty big raise with just one quarter behind us. We do expect R&D spend to continue to increase. We did good work managing expenses and leaning into things like AI to be more efficient, but we are not pulling back on R&D. Being flat year over year is not expected to continue. We will continue to invest in Ireland as that manufacturing facility ramps through the year. You really start to ramp a facility right before you turn it on; we turn it on in the fourth quarter, so you can imagine Q2 and Q3 ramping a bit going into that. It was not pushed back—this has always been part of the plan. We had 300 basis points of leverage in operating expense spend last year; that is playing through a bit this year. Our underlying business is continuing to get leverage despite the investments in Ireland, and that is one of the reasons we raised guidance. Operator: Our next question comes from the line of Joshua Jennings with TD Cowen. Your line is open. Colin Clark: Hi, guys. Good afternoon. This is Colin on for Josh. Thank you for taking my question. People seem to be treating CMS as a binary event. Is it possible there is language around stipulating that patients are on orals or other diabetes medications, and would that change your expectations for the adoption trajectory over the next couple of years? Thank you. Jereme M. Sylvain: It is a good question. CMS has always had requirements to ensure qualification for coverage. When it was intensive insulin, you had to prove multiple shots per day and submit glucose logs. When it moved to basal, you had to demonstrate one shot a day. I would not be surprised if CMS includes something—script evidence, orals like metformin, etc.—to document diagnosis and therapy. Most folks diagnosed with diabetes are prescribed medication. Whether it is all folks or all folks with some form of medication, this is a massive expansion and opportunity to serve this population. I would not expect any such requirement to materially limit our ability to impact the population or change our growth opportunity. Operator: Our next question comes from the line of Daniel Markowitz with Evercore ISI. Your line is open. Analyst: Hey, good afternoon, and thanks for taking my question. It is great to hear the callout on share gains in type 2 non-insulin. It sounds like the 15-day is helping a bit. Is there anything you are doing to the organization or the salesforce in order to prepare for this market unlock—maybe more focus on PCPs versus endos? Also, how should we think about the operating impact related to increasing contribution from the type 2 non-insulin market going forward? Thank you. Jacob Steven Leach: We are continually evolving the product portfolio and service, and the way our field team is calling, to make sure we are serving all the people that have coverage for this product. For those that do not have coverage, we have our Stello over-the-counter product available. We have advanced our service—updates to technical support, web forms, and digital tools—and that is one of the reasons we believe our user satisfaction scores are improving. It is a big deal for the type 2 non-insulin population. The 15-day product is helping drive share gain, but it is also the experience they are having with DexCom, Inc., making sure we meet their needs. On the salesforce, we are using advanced tools to analyze data and target—find these patients, find their prescribers. The number one thing we need to do is continue to educate around the coverage that exists because, as Jereme mentioned, when only about 25% of this population is covered today, it can be complicated, particularly for primary care physicians who are not prescribing CGM every day. We are finding the physicians seeing these patients, making sure they are aware of coverage, and helping them know how to write the prescription for CGM. As we expand, we will continue to look for efficiencies and productivity across the salesforce. Primary care is the main location where these folks are seen, and that is why we expanded our salesforce in 2024 to call on this broader group of physicians. Operator: Our next question comes from the line of Bill Plovanic with Canaccord Genuity. Your line is open. William John Plovanic: Great. Thanks for taking my question. Really impressive free cash flow in the first quarter, especially considering the first quarter is typically not so good for free cash flow. With that cash balance and commentary in the press release on prioritizing exploring new opportunities, help us understand what that means. You have more than enough to pay back the convert if you so choose. Another building? $1.2 billion? Are you looking to buy something? What is the use of cash? Thanks. Jereme M. Sylvain: Thanks for the question. We worked hard on free cash flow. In terms of uses of cash, you are right: we paid down our convert last quarter, and that was one reason to isolate cash. We did $500 million of share buybacks in the back half of last year. Having extra on the balance sheet provides multiple opportunities: tuck-in M&A that makes sense—geographic expansion or capabilities we do not have—and having capital for potential capital markets activity. We have not been shy about share buybacks. We will talk more in a couple of weeks at Investor Day; we will have a section on capital allocation and dig into it more there. It is important folks understand we are able to generate quite a bit of cash in this business, and it is something we will be focused on for the foreseeable future. Operator: Our next question comes from the line of Shagun Singh with RBC Capital Markets. Your line is open. Shagun Singh Chadha: Thank you so much for taking the question. Could you talk about the right growth rate in your view for your U.S. and OUS business excluding Stello? How should we think about those underlying growth rates? Also, as we think about the NCD and the type 2 non–insulin-treated market opening up, any comments you can make on lifetime patient value and how that impacts financials going forward? Jereme M. Sylvain: Let me anchor on what we said this year, and for beyond this year I will defer to Investor Day. This year, we talked about 11% to 13% growth, split across U.S. and OUS, and about one point of contribution from Stello. That gets you down to the core clinical markets. Stello will not be a meaningful contributor outside the U.S. this year in total dollar value, so assume de minimis OUS contribution from Stello in 2026. It is most important to get Stello outside the U.S. so it can roll up over time. On lifetime value of a customer, retention and utilization are why we pay so much attention to those metrics. Value varies based on utilization by use case—type 1, type 2 intensive, basal—and we have those bands on our website. As we move into use cases with 70% to 80% utilization, the value is a little less than higher-utilization categories, but still a massive unmet need. The economics per purchase are generally around the same. Our goal is to keep a close eye on cost to acquire—there is a team dedicated to that—meet the unmet need, and keep patients on our product. We balance operating expenditures with that value over time. We will get into longer out-years at Investor Day. Operator: Our final question comes from the line of Anthony Petrone with Mizuho. Your line is open. Anthony Petrone: Thanks. Just one on the RCT. Looking at historical data—the MOBILE study, Libre studies, registry data, meta-analyses—you can see A1c reductions from as low as 50 basis points up to 2.5%. This is a less intense population, so I am assuming starting A1c levels are a little bit lower. How do you level set expectations on what we should be looking for for a statistically meaningful A1c reduction out of the RCT? Thanks. Jacob Steven Leach: I appreciate the question. It is important for care and reimbursement. Our registry data is a good example. This population comes in with a spectrum of A1c—some are quite high because they have not progressed to insulin and are on other glucose-lowering medications. A big part of managing diabetes is behavior and also medication adherence. Those are two things CGM targets, and that is why we see improvements. Looking at our registry data is a reasonable estimate for what we expect. The main thing we are expecting is a statistically significant improvement that meets the threshold for reimbursement. We are confident that CGM will drive that type of outcome in these patients, and we look forward to sharing the full readout at ADA next month. Operator: That concludes our question-and-answer session. I will now turn the call back over to Mr. Jake Leach for closing remarks. Jacob Steven Leach: Thank you, operator. As we close out the call, I want to take a moment to say thank you. First, to our employees: the results that we shared today are a direct reflection of your execution, your resilience, and your commitment to doing the hard work the right way. I am incredibly proud of what you have delivered and how you show up for our customers every day. I also want to thank the customer advisory council. We met multiple times this past quarter, and your candid input and your partnership are playing a critical role in shaping our strategy and improving the experiences that we deliver. The progress we are making is stronger because of your voice. We look forward to seeing many of you at our Investor Day in a few weeks. Thanks, everybody. Operator: Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Q1 2026 Grand Canyon Education, Inc. earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sarah Collins, General Counsel. Please go ahead. Sarah Collins: Joining me on today's call is our chairman and CEO, Brian E. Mueller, and our CFO, Daniel E. Bachus. Please note that many of our comments today will contain forward-looking statements that involve risks and uncertainties. Various factors could cause our actual results to be materially different from any future results, expressed or implied by such statements. These factors are discussed in our SEC filings, including our Annual Report on Form 10-Ks, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K. We undertake no obligation to provide updates with regard to the forward-looking statements made during this call, and we recommend that all investors review these reports thoroughly before taking a financial position in Grand Canyon Education, Inc. With that, I will turn the call over to Brian. Brian E. Mueller: Good afternoon, and thank you for joining Grand Canyon Education, Inc.’s first quarter 2026 conference call. Grand Canyon Education, Inc. had another strong quarter, producing online enrollment growth of 8.8% and hybrid growth, excluding the closed sites and those that are in teach-out, of 20.3%. Grand Canyon Education, Grand Canyon University, and now 19 additional partners have produced remarkably consistent positive results over the last 17-plus years in spite of significant change in the macro environments of education and the workplace. Most significantly, GCU has gone from the brink of [inaudible] to now being the largest private university in America. In addition to over 110 thousand students studying online, GCU now has 25 thousand students in an on-campus environment and has more students living in university-owned housing on its campus than any university in the country. Recently, Grand Canyon Education, Inc. and its partners have built 47 hybrid campuses throughout the country to address severe shortages in the health care fields. More recently, Grand Canyon Education, Inc. has assisted GCU in building a workforce development center to produce professionals in the rapidly growing construction and manufacturing fields where there are also severe shortages. The growth and success that has taken place is because Grand Canyon Education, Inc. and its partners have built a model that is extremely flexible, is able to respond with great speed, and has used advanced technologies to produce tremendous scale. The current dissatisfaction with higher education is because faculty governance models are very inflexible, move very slowly, and cannot scale to meet demands. Excellence in higher education is going to be defined in very different terms going forward. There is a lot of talk about how AI will produce winners and losers by industry type. The real discussion should be about winners and losers within industries. Higher education as an industry will continue to exist. Institutions that are flexible, fast, and that can scale will be able to use AI to flourish to even greater levels in the next ten years. Higher education will be more important than ever if we can educate the generation of workers to use AI in three important ways. One, to use AI to produce products to increase levels of human productivity. Two, to quickly allow workers whose jobs have been eliminated to re-career. And three, to educate a generation of workers for jobs that do not exist today but will exist in the future. It is important that universities do not just teach AI, but are able to model it in the way they run their business. Grand Canyon Education, Inc. and GCU have dozens of AI products and products in development across 10 colleges, over 375 academic programs, emphases, and certificates, and across every operational area. Students are learning with increasing levels of excellence and efficiency. Scores currently produced by GCU students in exit and licensure exams in the areas of health care, education, accounting, etc., are reaching all-time highs while scaling to huge numbers. This is especially important for GCU since it has rapidly expanded into academic areas requiring licensure. Programmatic areas like nursing, education, social work, counseling, etc., will benefit from AI implementation, but employment in those areas will always require formal higher education, the completion of degrees, and licensure. Project work produced by business, engineering, and technology students is at increasing levels of sophistication. GCU's innovation center is producing new student businesses that are thriving. To succeed in the future, universities must produce these real-world opportunities for students, and they must graduate in less time, for less money, and for lower debt levels. Our AI products are making curriculum more targeted, faculty more effective and efficient, and allowing operators to produce greater levels of student support. I believe AI will make our current advantages even greater, which makes me even more confident we will continue to meet or exceed our long-term objectives. With that, I would like to review the first quarter results. First, the online campus at Grand Canyon University. New starts were up in the high single digits in 2026, which was slightly above our expectations, and total enrollment growth was 8.8%, which significantly exceeds GCU's long-term objectives. In the past, I have highlighted four reasons for the growth. They include continuing to roll out 20-plus new programs on an annual basis, working with over 5.5 thousand employers directly to address workforce shortages, strong retention levels, and holding the line on tuition to maintain GCU's competitive pricing position. Working with over 5.5 thousand employers directly to address workforce shortages puts us in a very strong position with regard to online enrollment growth. We are now getting approximately 30% of our new starts by directly working with employers. The lead generation environment is definitely being impacted by the increasing numbers of people using artificial intelligence rather than an organization's website to gather information that they will use to make important purchases and life decisions. Our ability to respond to those changes is greater than before because of our unique ability to generate a high percentage of our students without using the typical lead generation strategies. The students we are generating by working directly with employers tend to be very purpose-driven and have high retention and graduation rates. Our marketing team continues to roll out AI strategies to showcase the strong brands and outcomes of our partners. We believe in the long term, this will be very positive for us. Second, the GCU ground campus for traditional students. Total traditional campus enrollments were down slightly year over year in 2026 as expected. Spring total enrollments have historically been less than fall enrollments, as spring new enrollments are a small percentage of overall traditional campus new enrollments, as they are mostly made up of transfer students that defer a semester, and total enrollment is impacted by the growing number of students that are graduating in less than four years. We believe GCU will continue to experience annual new student growth on the ground campus each fall despite its increasing number of graduates because of its significant advantages, including the very low price point, very low average debt levels, the percent of students completing in less than four years, the relevancy of GCU's academic programs to a fast-changing and modern economy, and having the twentieth-ranked campus in the country. As we discussed on last quarter's earnings call, we have made some changes to our marketing and recruitment strategy for GCU's traditional campus which accelerated some spend into 2025 and 2026. Those changes to date are producing positive results, as registrations for fall 2026 remain ahead of last year. Even with the macro trends I discussed earlier, and the tougher year-over-year comps, we believe we can grow new enrollments significantly year over year, which should get residential students back to growth. Two weeks ago, GCU made a major announcement. As part of its 25 thousand-student traditional campus, GCU has one of the fastest-growing honors colleges in the country. Mike Ingram, one of Arizona's most prolific land developers, has made a long-term commitment to the future of the college, and it has been named the Sheila and Mike Ingram Honors College. GCU expects to have over 3 thousand students in the fall with average weighted incoming GPAs of over 4.1. This is one of the highest in the country. The students are coming from all 50 states and are studying across all 10 of GCU's colleges. Students are getting internships and eventually jobs at many of America's top companies, health care organizations, school districts, counseling centers, engineering firms, etc. GCU plans to more than double the student population, making it one of the largest and most impactful honors colleges in the country. Mr. Ingram is leading an effort to build a very prestigious Honors College Council which will be comprised of highly successful professionals from the worlds of business, entertainment, politics, education, health care, and sports. A 55 thousand-square-foot building is under construction to open in the fall that will be a state-of-the-art facility containing lecture halls, collaboration spaces, maker spaces, and gathering areas for many of America's best students. We believe the university's academic brand will continue to accelerate upwards as the Honors College grows, which is another reason we remain optimistic about the future growth of GCU's traditional campus. Third, Grand Canyon Education, Inc.'s hybrid campus had an increase in enrollment year over year of 18.3% in the first quarter. Excluding the closed sites and those that are in teach-out, enrollment increased 20.3% year over year. Hybrid campus new starts in the first quarter, excluding those in teach-outs, were up 20% over the prior year, which exceeded our expectations. There are two main reasons for this continued growth. One, almost all of our active ABSN partners have responded to the younger students interested in ABSN programs by admitting advanced standing students or are in the process of making that change. Students with partially completed degrees have not accumulated a great deal of debt. They are very interested in nursing careers but did not have an efficient way to earn the prerequisite science coursework. GCU created the science courses and some other gen ed courses so that they could be delivered online in eight weeks. Students can access these courses from anywhere in the world. There are start opportunities almost every week. These courses have been made very affordable, are taught by experienced faculty, class sizes are low, and there is a tremendous amount of academic support, including the artificial intelligence project, which provides students 24/7 access to tutoring. Since implementing these courses, we have already enrolled 23.104 thousand students. We have a waterfall report which allows us to know how students are progressing through prereq courses and when they will be eligible to start at one of our ABSN sites. Graduation rates of students who successfully enter the ABSN programs are in the mid-80s, and the first-time pass rate on the NCLEX exam is approximately 90%. Nearly all our partners have responded positively to the change needed to serve the advanced standing students. Our goal is to still have 80 locations with our partners, with 40 of the locations being GCU locations. We opened five new sites in the year ended 12/31/2025, closed two sites in which we stopped recruiting new students in 2024, and merged two sites that were located in the same market, bringing the total number of these sites to 47 as of 12/31/2025. Three of the five new sites were GCU's, bringing their ABSN location total to 11. We plan to open one to two additional sites in 2026, while we mutually agreed with one partner to stop the recruiting of new students and begin teach-out at three of its sites during 2026. A couple of sites that were planned to open in 2026 are more likely to open in early 2027, as we have previously discussed. We are being more selective on new site openings with a focus on the scalability of the market. We are also expanding our programmatic offerings with our hybrid partners by adding a graduate nursing program with seven specializations with Northeastern University, which started this past fall; a hybrid occupational therapy bridge-to-master's program to the already successful St. Kate's occupational therapy assistant hybrid program, which will begin in 2026; and an online health science degree with Utica University, and GCU launched a BS in occupational therapy assistant program and a speech-language pathology program in 2025 at its Phoenix West Valley location. GCU also plans to add a Bachelor of Science in Medical Lab Sciences program in 2026. Adding additional programs at our hybrid locations is an important component to our business plan. We anticipate this momentum will continue, although with the lower number of new site openings and more of our locations getting to capacity, hybrid enrollment growth will slow a bit; the profitability of this pillar will continue to improve. Fourth, the Center for Workforce Development at Grand Canyon University. GCU now has four programs in the Center for Workforce Development, including the electricians pre-apprenticeship program, the CNC machinist pathway program, the manufacturing specialist intensive pathway, and a construction general pathway, and we will be rolling out a fifth program, the manufacturing general pathway, in 2026. Programs were all built in partnership with companies that are experiencing labor shortages in that area and are excited about hiring GCU's graduates. These programs are either one-semester or two-semester programs. A total of 116 students successfully completed the electrician pre-apprenticeship program in fall 2025, with five in the Austin, Texas hybrid location. Fifteen students completed the manufacturing CNC machinist pathway program in the 2025 cohort, and 29 students completed the manufacturing specialist intensive program. These students attend school for 20 hours a week and then work in the facility as a paid employee for 20 hours. At the end of the semester, they receive a manufacturing certificate and become eligible for employment in Arizona's fast-growing manufacturing industry. Students in GCU's growing engineering college are getting experience in this manufacturing facility, which is adding to their engineering education. I started out talking about the relevant programs and creative delivery models that Grand Canyon Education, Inc. has implemented with 20 partner institutions. In the seven-plus years since Grand Canyon Education, Inc. became a service provider, it has helped its partners accomplish the following. In that time, Grand Canyon Education, Inc. has helped Grand Canyon University graduate 221.436 thousand students: 59.659 thousand in education, including 27.601 thousand first-time teachers, at a time when teacher shortages have created a national crisis; 57.412 thousand in nursing and health care professions, including 3.723 thousand prelicensure nurses, at a time when there is a huge shortage of nurses; 46.520 thousand in the College of Humanities and Social Sciences, including thousands in counseling and social work, where there are also huge shortages. The College of Business has become one of the largest business schools in America and has produced 38.823 thousand graduates. The College of Science, Engineering, and Technology has grown by 225% and provided 9.739 thousand graduates. The doctoral college, Honors College, and College of Theology also continue to grow. In addition, Grand Canyon Education, Inc. has helped its other partners graduate over 15 thousand prelicensure nurses and occupational therapist assistants. The numbers that I have cited have all happened in the past seven years, since the GCU–Grand Canyon Education, Inc. transaction and since Grand Canyon Education, Inc. has become an education services provider. This is a great example of a futuristic educational model that is flexible, moves fast, and is capable of great scale. All of this has occurred while Grand Canyon Education, Inc. paid 627 million in federal and state taxes, while state universities and community colleges pull money out of the tax system. Grand Canyon Education, Inc. has helped produce over 235 thousand graduates while pouring millions of dollars into the system. Service revenues were 308.8 million for 2026, an increase of 19.5 million, or 6.7%, as compared to 289.3 million for 2025. The increase year over year in service revenue is primarily due to an increase in university partner enrollment [inaudible], including an increase in GCU online enrollments of 8.8%, university partner enrollments at the off-campus classroom and laboratory sites of 18.3%, and one additional day of ground traditional revenue at GCU of 1 million in the quarter as a result of the shift of one day of revenue from the second quarter to the first quarter as compared to last year's spring start date.