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Operator: Good morning, ladies and gentlemen. Welcome to Group 1 Automotive, Inc.'s First Quarter 2026 Financial Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the floor over to Peter C. DeLongchamps, Senior Vice President, Manufacturer Relations and Financial Services. Please go ahead, Mr. DeLongchamps. Peter C. DeLongchamps: Thank you, Jamie, and good morning, everyone. Welcome to today's call. The earnings release we issued this morning and a related slide presentation that include reconciliations related to the adjusted results that we will refer to on this call for comparison purposes have been posted to Group 1 Automotive, Inc.'s website. Before we begin, I would like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the call, statements made by management of Group 1 Automotive, Inc. are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Those risks include, but are not limited to, risks associated with pricing, volume, inventory supply, market conditions, successful integration of acquisitions, and adverse developments in the global economy and resulting impacts on demand for new and used vehicles and related services. Those and other risks are described in the company's filings with the Securities and Exchange Commission. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website. Participating with me on today's call are Daryl Kenningham, our President and Chief Executive Officer, and Daniel McHenry, Senior Vice President and Chief Financial Officer. I would now like to hand the call over to Daryl. Thank you, Daryl. Daryl Kenningham: At Group 1 Automotive, Inc., we pride ourselves on performing effectively in challenging times. We have successfully navigated economic recessions, the COVID pandemic, and the CDK outage in 2024. We focus on what we can control and by remaining a pure-play retailer, we minimize distractions and remain focused on what we feel are our core competencies. We estimate that Q1 2026 weather impacted our results by about $7 million in gross profit, driven largely by our aftersales business. Important to note is that Group 1 Automotive, Inc. typically pays our employees during weather closures, and in some markets, our stores were closed for as long as a week this year. In 2026, we continue to focus on our strengths. Where our performance did not meet our expectations, we acted promptly to address those issues, and I will provide further details on those areas later in my remarks. In the U.S., our new vehicle margins remained robust at over $3,300 per car, exceeding $3,250 for the third consecutive quarter. We saw sequential improvement in used vehicle PRUs and a $95 same-store year-over-year increase in adjusted F&I PRU. Two years ago, we introduced a virtual F&I process in our U.S. stores, giving customers the opportunity to conduct their transactions with an agent. This innovation is now installed in one-third of our U.S. stores, doing 20% of our deals in those stores. We are very pleased with the results of virtual F&I. Our PRU results are strong, transaction times have improved, improving customer convenience and the overall experience. Thus far, customer feedback is very positive. In addition, compensation costs are lower than compared to our in-store transactions. We anticipate continued growth in virtual F&I through the remainder of this year and into 2027. In aftersales, we are committed to setting ourselves apart. This quarter, we increased same-store customer pay gross profits by nearly 6%. We are pleased that in our U.S. business, our customer pay repair order count rose by 2.5%. Our growth in aftersales is driven by marketing initiatives utilizing artificial intelligence, vertically integrated customer data management, decreased technician turnover, completion of our workshop air conditioning project, and the addition of 130 new technicians on a same-store basis. Turning to a progress update on our Group 1 U.S. store rebranding initiative, we successfully completed the rebranding of half of our U.S. stores and anticipate being complete by the end of the year. Our team is actively gathering insights from each converted market, allowing us to refine our approach and apply our learning as we go. In the long term, we believe rebranding will improve the effectiveness of our marketing investments and drive greater customer retention, particularly as we focus on engaging households under the Group 1 Automotive, Inc. brand, especially in cluster markets. Our U.K. operation is demonstrating notable progress across key segments. New vehicle margins remain steady year over year, while same-store volumes increased 2%. Same-store used volumes rose nearly 5%, accompanied by sequential PRU improvements. F&I continued its positive trajectory, up year over year and sequentially on a same-store constant currency basis. Our U.K. parts and service business continues to accelerate, increasing 20% year over year in same-store gross profit, and customer pay increased 18%. We are applying many of the same principles we use in our U.S. business, opening our workshop schedules, expanding our hours, pricing our maintenance offerings on the aftermarket competition, eliminating diagnosis fees, and increasing capacity by hiring technicians. Turning to our U.K. SG&A performance, we incurred $3 million in incremental costs due to government-mandated national insurance and minimum wage increases. Without this headwind, we improved our leverage, but we continue to focus on further efficiency there. In the U.S., SG&A performance did not meet our expectations. Consequently, in early April, we implemented cost reduction measures in our U.S. business, cutting our headcount by nearly 700 full-time employees, and reducing SG&A costs by approximately $14 million through contract and vendor elimination. We expect that these efforts will remove $50 million of annual costs from our U.S. operations that will return our SG&A leverage to a more acceptable level. In both markets, across all areas of our business, we continue to look for ways to leverage technology, including artificial intelligence, to improve our returns. Many of these investments are still in the early stages, but they are beginning to demonstrate real benefits. AI can support customer acquisition and retention, enhance inventory optimization through more informed sourcing decisions, drive efficiencies by digitizing processes to reduce SG&A, and put more consistency in performance across all of our rooftops, a key strategic focus for Group 1 Automotive, Inc. We will continue to drive these efforts and look forward to sharing more details in the future. In the first quarter, we also continued our commitment to disciplined capital allocation, particularly in M&A and share buybacks. We divested two Mercedes-Benz dealerships in California. These stores were high-cost operations with significant real estate and operating constraints. In the U.K., aligned with the Volkswagen Group's ideal network plan, we acquired one Škoda and two Volkswagen dealerships while also disposing of one underperforming Volkswagen and one underperforming Škoda dealership. And in the U.K., we finalized a framework agreement with Chinese OEM Geely and will open three Geely dealerships in Q2 in facilities that we already own. We are in additional discussions with Geely and other Chinese OEMs about further representation. Our primary intention is to develop direct understanding of the retail model of Chinese brands. We also believe there is significant profit and sales opportunity with these brands in leveraging our large corporate fleet business in the U.K. During the quarter, we repurchased 205,190 shares, or approximately 1.7% of our outstanding shares. We are managing the business with discipline and purpose, ensuring we deliver strong, resilient performance that our shareholders expect, even in today's dynamic environment. I will now turn the call over to our CFO, Daniel McHenry. Thank you, Daniel, and good morning, everyone. Daniel McHenry: In Q1 2026, Group 1 Automotive, Inc. reported revenues of $5.4 billion, gross profit of $878 million, adjusted net income of $104 million, and adjusted diluted EPS of $8.66 from continuing operations. Starting with our U.S. operations, first quarter performance remained solid across most businesses, despite continued pressure on volumes and margins. New vehicle unit sales declined both on a reported and same-store basis, reflecting not only ongoing affordability concerns, but a tough comparative period which saw elevated new vehicle sales ahead of tariffs. However, new vehicle GPUs increased sequentially from $3,260 to $3,300. We continue to maintain strong operational discipline through effective cost management and process consistency. In our used vehicle operations, in line with the broader market environment, used vehicle retail units declined both on a reported and same-store basis, which were partially offset by higher selling prices. GPUs declined approximately 3% on a same-store and as-reported basis, reflecting continued pressure on vehicle acquisition costs in a more competitive sourcing environment. We continue to leverage our scale and operational flexibility to strengthen used vehicle acquisition while executing disciplined sourcing and pricing in a dynamic used vehicle market. Our first quarter adjusted F&I GPUs were up nearly 4% on an as-reported and same-store basis versus the prior-year comparable period. Aftersales stood out as a key bright spot, with both parts and service gross margin reaching a new quarterly high. Gross profit continues to benefit from our efforts to optimize our collision footprint, shifting collision space opportunistically to additional traditional service capacity and closing collision centers where returns do not meet our requirements. Same-store customer pay and warranty revenues increased approximately 35%, respectively, with corresponding gross profit growth of approximately 69%. Our technician recruiting and retention efforts continue to pay off, with same-store technicians up 3% year over year. Overall, our U.S. business continues to demonstrate resilience, with strong aftersales performance and disciplined execution helping offset ongoing normalization in vehicle margins. Turning to the U.K., while the U.K. remains a challenging operating environment, performance improved across several key areas. New vehicles performed in line with expectations. Used vehicle same-store revenues were up over 6% on a local currency basis, with volumes up nearly 5%. Same-store GPUs declined 2% on a local currency basis, leading to an increase in same-store used vehicle gross profit. Performance reflects improved demand and throughput, despite continued margin pressure in a competitive used vehicle market. Aftersales delivered year-over-year growth in both revenue and gross profit on an as-reported and same-store basis, while F&I delivered year-over-year growth in revenue and gross profit on a same-store basis. The aftersales business remains an important stabilizer within the U.K. operations, and along with F&I, it is a key area of focus as we work to enhance profitability by bringing best practices from the U.S. Same-store technicians are up 3%, adding significant capacity to our shops. Same-store customer pay and warranty revenues were up over 612% year over year on a local currency basis. Same-store F&I PRU reached 1,128, with an as-reported and same-store PRU both increasing over 8% year over year. We are continuously taking decisive actions in both the U.S. and U.K. to control costs, strengthen operational efficiency, and position the business for improved returns as market conditions stabilize. Turning to our balance sheet and liquidity, our strong balance sheet, cash flow generation, and leverage position will continue to support a flexible capital allocation approach. As of March 31, our liquidity of $714.3 million was comprised of accessible cash of $191 million and £523 million available to borrow on our acquisition line. Our rent-adjusted leverage ratio, as defined by our U.S. syndicated credit facility, was 3.09 times at March 31. Cash flow generation year to date yielded $147 million of adjusted operating cash flow and $95 million of free cash flow after backing out $53 million of CapEx. This capital was deployed in the same period through a combination of acquisitions, share repurchases, and dividends, including the acquisition of $135 million of revenues through March 31, $72 million spent repurchasing 205,000 shares at an average price of $353.08, and $7 million in dividends to our shareholders. We currently have $306.3 million remaining on our board-authorized common share repurchase program. For additional detail regarding our financial condition, please refer to the schedules of additional information attached to the news release, as well as the investor presentation posted on our website. I will now turn the call over to the operator to begin the question and answer session. Operator: We will now open the call for questions. To ask a question, you may press star and then one on your telephone keypads. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, you may press star and two. We ask that you please limit yourselves to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Alex Perry from Bank of America. Please go ahead with your question. Analyst: I was wondering if you can walk us through the cost savings plan in more detail. It looks like $50 million in annualized savings with benefits beginning in the second quarter. Maybe help us parse out what the expected second quarter benefit is and what we should expect in the back half as well. And just provide a bit more color on the overall plan. Thank you. Daniel McHenry: Alex, hi. It is Daniel here. I would say coming out of January and February, we could see some weakness in the market and our SG&A leverage at that point was much lower than we would have expected. Going into March, we developed a cost-cutting program: 700 heads to come out of the business. They have all been completed by April. Total cost effect of that headcount reduction is approximately $35 million. In addition to that, we have taken cutting exercises around contracts, as Daryl talked about earlier, and that is close to $15 million in terms of cost. So on an annualized basis, or a quarterly basis, we would expect that to be about $12.5 million a quarter. Now, what would that have done for us in quarter one if we had taken that cost out on January 1? U.S. SG&A was circa 70.5%. We would have expected that to have been about 68.5%. So it is about 200 basis points out of cost in the U.S. Additionally, we continue to take cost out in the U.K., but we do have that additional national insurance in quarter one that we did not have last year. Analyst: Really helpful. Thanks for all the color there. And then my second question is about the used business. What is the path to getting used profitability back up to historical levels? I know you mentioned some of the sourcing cost on the used side, but maybe talk through the path there and if we should expect any near-term improvements on the used GPUs. Thanks. Daryl Kenningham: This is Daryl. We saw some nice sequential improvement in used PRU. Sourcing is the big challenge right now, because the SAAR was depressed in the first quarter, so there were fewer trades. We ended the quarter with 26 days. We do not rely very heavily on auctions—11% of our sourcing comes from auctions—so we work hard on organic sourcing. But the problem there is it is heavily late-model vehicles. Our mix of cheaper, higher-margin used cars in our inventory is very light compared to what it has been historically, and everybody is scrambling for those. Everybody really wants those because, obviously, one of the reasons people buy used cars is because they are more affordable. As we get better at that, I expect we will see margin improvement. I think we are better and more disciplined in our inventory acquisition. We are much better and more disciplined in both the U.S. and the U.K. on aging management and pricing decisions to market, trying to use more technology in both markets. While I do not think you will see leaps and bounds of improvement, I do think the additional discipline and the lack of supply provides a floor on used car PRUs. Analyst: Incredibly helpful. Best of luck going forward. Daniel McHenry: Thank you. Operator: Our next question comes from Bret Jordan from Jefferies. Patrick Buckley: Hey, good morning, guys. This is Patrick Buckley on for Bret. Thanks for taking our questions. There have been some recent headlines around rising negative equity values. Have you seen similar trends with your customers? And has there been any impact on converting a potential customer to a buyer on the sales floor when they realize they have to write a check to make the transaction happen? Daryl Kenningham: The short answer is yes. Negative equity is high and can be a headwind. We watch affordability measures quite a bit. The average car payment is high, insurance rates are high, negative equity is high. But there is also evidence that affordability is actually a little better now than it has been in some time. When you look at car payments as a percentage of people’s salary and people’s pay, it actually takes fewer weeks on the measure that a lot of people watch. It is better in 2026 than it has been. So there are a lot of things going on with affordability right now. Negative equity is one piece of that puzzle. Things like tax rebate checks are another piece. I do not think it is a huge limiter; it is just another piece of the affordability puzzle now. Patrick Buckley: Great. That is helpful. Then focusing on the U.K., there has been a more prominent impact from recent energy spikes there. How has the consumer held up into Q2? It sounded like Q1 was a pretty healthy quarter from a demand side. Have there been any signs of a pullback more recently? Daryl Kenningham: One of the things that we were really pleased with in the U.K. in the first quarter was our order take rate going into the plate-change month in March—it was very high, higher than we had seen in several years. When you go into a plate-change month, you really know how it is going to come out by about February, because the order bank dictates what kind of volume you are going to do. We were really pleased all through January and February with our March order take. I do not see that has changed materially. On a relative basis, April is not a plate-change month, but on a relative basis, I do not see that has changed. One thing we are really pleased about going into the second quarter in the U.K. is the health of our used car inventory. Inventory is significantly better than it was a year ago. One of the challenges in the U.K. market is when you have two months—March and September—which drive so much of your new car volume, it creates these huge used car inventories in April and October. If you do not have a lot of discipline in the way you manage your used car inventory, you can get caught, and candidly, in the past, we have been caught. I am really pleased with our aging, our inventory levels, and our discipline this year in the U.K. Our used car inventories are in a much better place, and we hope that means better things for us in used cars this year there. Patrick Buckley: Great. That is all for us. Thanks, guys. Operator: Our next question comes from John Babcock from Barclays. Please go ahead with your question. John Babcock: Thanks for taking my question. The first one, on your plan to exit the JLR brand, where does that stand, and also, did that impact your U.K. operations, or is that now considered part of discontinued ops? Daryl Kenningham: It is not discontinued ops because, materially, it is a very small part of our business. We are in active negotiations on a number of them, both with the OEM and with potential buyers. We have closed one of the nine. We are in active discussions on several more and very close to contract finalization. Once we get those finalized, we will be able to announce those, but we are pleased with where we are on that. John Babcock: And then just back to the cost actions. With the 700 people that you cut from the workforce, where were those? I am sure they are spread across different teams, but were those more weighted to the sales side, or more in the back office? Any more color would be useful. Daryl Kenningham: It was across the board. We took SG&A as a percentage of gross targets by store, market, and business unit, and assigned headcount targets based on that. It came from across the enterprise—in the stores and at the corporate level. Fortunately, in some of our corporate activities, we have been able to implement technology which helps keep our productivity up, so we did not need some of that headcount. It was across the board, and that is done. We have already executed the headcount actions. John Babcock: Understood. Are you able to provide any split between U.S. and U.K.? Daniel McHenry: That is all U.S. It is Daniel here. The full $50 million was all U.S. headcount reduction. John Babcock: Thank you. Operator: Our next question comes from Rajat Gupta from JPMorgan. Please go ahead with your question. Rajat Gupta: Great, thanks for taking the question. I had a follow-up on the disposal question. The California stores that you divested—could you give us a sense of proceeds and any EBITDA or earnings impact we should dial in from that? I have a couple of quick follow-ups. Daniel McHenry: We do not typically disclose the proceeds. But it is fair to say the multiple that we received for those stores was much higher than the multiple that the company trades at. Both stores needed significant CapEx. They had fairly expensive real estate attached to them. For us as a company, we were pleased with the outcome for selling those stores. Rajat Gupta: Got it. That is helpful. And then on parts and service, thanks for calling out the weather impact. If I adjust for that, the U.S. business would have grown roughly 4% versus the 2% reported. How should we think about that in the context of your general outlook for mid-single-digit type growth? Maybe there is some warranty headwind. How should we think about that going forward? Daryl Kenningham: There is a little warranty headwind. On a year-over-year basis, warranty was only up 4% for us in the U.S. The mid-single digits is still the model, Rajat. Two things to keep in mind with us. We have converted some of our collision centers into shop space. You cannot just turn that off one day as a collision center and turn it on the next day as a service workshop; you have to put all new equipment in there and restaff it. There is transition time between when it stops being a collision center and when it starts being a productive workshop. So you see a big negative on our collision comps because of some of those collision centers that we have closed. In addition, what we see in the sector is a decline in the collision business in general, which exacerbates that. You see that in our wholesale parts numbers that were only up 2.8%—not very much—and that is a lower-margin part of our business. You take the collision decline, which is a lower-margin part, and the slower growth in wholesale parts, and you mix that into CP and warranty, and you see a slower number on aftersales growth. We had almost 6% same-store gross profit growth on customer pay in the U.S.—pleased with that. I always want it to be more, but when we pull all of our aftersales levers, that is generally directed at customer pay. Hope that helps. Rajat Gupta: That is helpful. Just one clarification: the F&I adjustment of $6.8 million—what was that tied to? Daniel McHenry: That was effectively a one-time, nonrecurring adjustment to our revenue calculations for retrospective rebates. Rajat Gupta: Understood. Thanks for all the color. Good luck. Operator: Our next question comes from Jeff Lick from Stephens. Please go ahead with your question. Jeffrey Francis Lick: Good morning. Thanks for taking my questions. Daryl, as you look at the first four months of this year, it has been pretty noisy. Could you parse out where you think the consumer is and maybe bifurcate the typical mass affluent or luxury consumer versus the volume consumer as we get through April? We have heard some of your peers say April has been okay but maybe feels a little weak, like people are being cautious because of the war. Curious for your thoughts on where things are at. Daryl Kenningham: I would not disagree with what I have heard so far from our peers and some of the industry experts on the consumer. There is no shortage of distractions for consumers these days, and in our industry, consumer confidence and the SAAR run together. As consumers lack confidence, it is a headwind. I do think there is evidence that consumers are still spending. Ex-weather, we have seen some decent performance. But there is no shortage of distractions for consumers right now. That is one of the reasons we took the cost actions we did, Jeff. We want to make sure we are lean enough if the SAAR stays in this range—mid-15s, 15.6, 15.7—so that we are able to compete effectively. Jeffrey Francis Lick: And then just to follow up, on the 700 headcount, obviously in the back of your mind you are thinking, if we do this, it could come back to haunt us in terms of operational abilities on the cost side or on the gross margin side. Where might you worry you could be cutting to the muscle, as you think about the dealership of the future and functions that can be performed by software? Daryl Kenningham: I do not think we cut muscle on this one. We tried to be very logical about it. Where we did touch what I will call “productive” people—those who sell and service vehicles—we focused on very low-productivity areas of our business. We are using a lot of technology in our sales department to manage customers, inbounds, leads, sales, and conversion. We feel like we have enough technology overlay to compensate for lower-productivity salespeople we may have separated with. On a technician basis, we touched very few technicians, and if we did, it was around very low-productivity roles. We have actually leaned into more technician investment during this period. There are things we did not touch: any of our people development initiatives, training initiatives, people retention initiatives, or our air conditioning project across our dealerships. We continue our technician mentoring program—three quarters of our hourly techs are part of a mentoring program now—which we feel is vital to retention and growth. We did not touch anything that impacts longer-term growth opportunities in aftersales. Daniel McHenry: Jeff, it is Daniel here. One typical example of where we cut costs: this quarter, Q1, we rolled out digital deal jacket across 100% of our dealerships. Effectively, deals are either signed online or are held online. Traditionally, we would have had a scanner in a dealership scanning roughly 100 pieces of paper that formed the deal jacket. Clearly, going 100% digital meant that that scanner was no longer required. Jeffrey Francis Lick: Scanner being a person. Daniel McHenry: Correct. Jeffrey Francis Lick: Okay. Awesome. Thanks for taking my questions, and best of luck in Q2 and the rest of the year. Operator: Our next question comes from David Whiston from Morningstar. Please go ahead with your question. David Whiston: Good morning. On the upcoming Geely U.K. locations, are they going to be standalone or in the existing Group 1 Automotive, Inc. footprint somewhere? Daryl Kenningham: They are in buildings we already own, usually part of either a franchise that we have or in a cluster of dealerships that we have. As an example, north of London near Watford, we have a site with a BMW store where we had a MINI standalone store and a BMW standalone store. MINI is now part of the BMW operation, which left us an empty showroom and service facility on the same campus, and we were able to put Geely in there. So we do not have to sell Geelys and BMWs in the same showroom, and it gives us a separate facility we already own. There is no incremental CapEx to do that except for some minor imaging investment. David Whiston: Okay, thanks. And then on the virtual F&I, I am trying to balance that it is great for efficiency and speed for the customer, but are F&I managers losing some opportunities here financially? Peter C. DeLongchamps: No, they are not. In fact, they are gaining because they become much more efficient. They are actually doing more deals at the store level. The key to this was customer convenience. As we perfected this, we have lowered turnover, lowered comp, and actually increased PRU on what I would call the bottom performers. This has been a terrific initiative that has paid off in multiple ways. Daryl Kenningham: One way to look at it is the productivity of the F&I producers. Many of the folks who are virtual F&I managers for us used to work in our stores. They now are virtual F&I managers doing deals all over the country. In an average day, an in-store F&I manager might do three deals. As a virtual agent, they can do seven, eight, nine, 10—that is what we see. We are really pleased with that. We are able to attract a different type of employee because we can offer things like part-time work and working from home. It has taken us two years to get here—it was not simple. The team worked really hard through our learning process on this. It was a long ramp up; that is one of the reasons we have not talked about it until now. But we feel there are productivity gains as well as quality of life benefits for our team. David Whiston: Thank you. Operator: Our next question comes from John Sager from Evercore. Please go ahead with your question. John Sager: Hey, Daryl. Thanks. I wanted to dig into the divergence between the U.K. and the U.S. and where you think you might have more impact on SG&A cost savings over time. Is there basically more low-hanging fruit in one region or the other? Daryl Kenningham: I do not think there is low-hanging fruit in any region, honestly. Since COVID, we have been pretty disciplined with our SG&A and I think we have demonstrated that. Our headcount is still lower than it was pre-COVID. In the U.K., there is still opportunity as we grow lines of business—we saw F&I grow, aftersales grow quite a bit, and nice same-store sales growth in new and pre-owned. We must ensure we contain cost as we grow. Whether it is marketing costs or people costs, some transaction costs, we do not have as much automation in our U.K. business as in our U.S. business. That is a focal area for us. In the U.S., it is about people productivity, whether it is a technician or a salesperson. How do we put them in a position to be as productive as possible? Those are areas we are really focused on in both markets. Daniel McHenry: John, one thing I would note in the U.S. specifically: January and February SG&A as a percent of gross was outsized, and some of that was around the weather we had in the U.S. March SG&A as a percent of gross was a lot healthier. With the actions we have taken, hopefully that will continue into Q2 and Q3. John Sager: That makes sense. Thank you very much. And then relative to the 84% in the U.K. for the full year '25, you had improvement in Q1. I would expect that to come back again in Q3. Could we end the year materially lower than that 84%, or is 80% still a bridge too far for this year? Daniel McHenry: The aim is to get as close to the 80% stated SG&A as a percent of gross as possible. On the basis of where we were in Q1, I think that is possible, but it will require consistent work. Operator: Our next question comes from Mike Ward from Citigroup. Please go ahead with your question. Michael Ward: Good morning. I just want to double check the math. The $7 million impact from weather was all on parts and service in the U.S. Is that correct? Daryl Kenningham: That is correct, Mike. That was our estimate, probably a little conservative. We assumed that all the vehicles sales we lost were replaced—whether that is true or not, who knows. But parts and service you are not likely to get back. Michael Ward: Okay. And if I do the walk, that $7 million was an 80-basis-point impact inflating the 70.5%. Is that right, Daniel? Is that what you were alluding to? Daniel McHenry: That is correct. Michael Ward: Okay. Then you have the cost savings which knock it down 150 to 200 basis points. I am assuming with the brand rollout there are some additional operating costs that are unusual as we go through this year. If we are at a steady state, are we getting down to somewhere in the mid-60s for SG&A as a percentage of gross in the U.S.? Is that the right way to think about it? Daniel McHenry: If you think about the walk and reverse the effect of the weather and assume we had the $12.5 million cost reduction, somewhere close to the high 67% is reasonable. That does not include any of the rebranding or other items. Daryl Kenningham: On your question on rebranding, we did have some incremental costs—for signage, uniforms, and things like that—in the stores we have completed. One thing I was really pleased to see in March was real leverage on our operating advertising spend. We saw some really good leverage in March. Some of that is because it is March and you have more volume to spread it over, but also we are doing more with Group 1 Automotive, Inc. advertising than we ever have because we have about 50 stores on it. Rather than advertising 50 different brands, we can now advertise one and get more leverage. Hopefully, we will see that continue as we go through the year. We are trying to do more advertising with one voice rather than 148 different store voices. Michael Ward: Makes sense. Turning to the U.K., what is your current position with the China brands? I saw that you are expanding your relationship with Geely. How many stores do you have, what do they represent, and where are we going? Daryl Kenningham: We have three that we have signed agreements with that will become live in Q2. We have a framework agreement with Geely so we can go beyond three. We have three stores with specific dealer agreements with Geely that will be operational in Q2. We are talking to Geely about more than three. We are also talking with other Chinese OEMs about representing them. We have taken a slightly slower pace. We were concerned some brands got over-dealered. We could have signed dealer agreements last year and been part of the sales growth, but it might have hurt profitability because the UIO is still growing. They have only done any real volume for six to eight months in the U.K., so there is not a lot of UIO yet to drive service departments. We are taking a measured approach, but we are in now and excited to learn how the retail model really works for Geely. We are in active discussions with some of the other brands. We will rely on our formula—we are good dealers, good representatives of OEMs, and they will want to do business with us. That formula has worked for us in both markets, and we feel like it will work well with the Chinese OEMs as well. Michael Ward: Makes sense. Daryl Kenningham: Thank you very much, everybody. Appreciate it. Michael Ward: Thank you. Operator: With that, we will be concluding today's question and answer session. I would like to turn the floor back over to Daryl Kenningham at Group 1 Automotive, Inc. for closing remarks. Daryl Kenningham: Thank you, Jamie. In summary, we remain committed to our strategic initiatives: local focus, operating excellence, differentiated aftersales, and disciplined capital management. We will continue to build on our results from the first quarter. The U.K. remains a priority as we build on improving our operating performance, execute on our various initiatives there, and shape the portfolio to drive better returns. We believe consistent execution against these priorities positions us to navigate near-term challenges while also building long-term value. Thank you for your time today. We look forward to discussing our second quarter results on our call in July. Operator: Ladies and gentlemen, this concludes today's conference call and presentation. Thank you for joining. You may now disconnect your lines.
Operator: Good day, and welcome to the Exponent, Inc. First Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. Should you wish to signal during the conference call, please signal an operator by pressing the [inaudible]. After the presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then 1 on your touchtone phone. To withdraw your question, you may press star and then 2. Please note this event is being recorded. I would now like to turn the conference over to Joni Konstantelos. Please go ahead. Joni Konstantelos: Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us on Exponent, Inc.'s first quarter 2026 financial results conference call. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website at investors.exponent.com. This conference call is the property of Exponent, Inc. and any taping or other reproduction is expressly prohibited without prior written consent. Joining me on the call today are Catherine Ford Corrigan, president and chief executive officer; Richard L. Schlenker, executive vice president and chief financial officer; John Pye, incoming president; and Eric Anderson, incoming chief financial officer. Before we start, I would like to remind you that the following discussion contains forward-looking statements, including, but not limited to, Exponent, Inc.'s market opportunities and future financial results, that involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in Exponent, Inc.'s periodic SEC filings, including those factors discussed under the caption Risk Factors in Exponent, Inc.'s most recent Form 10-K. The forward-looking statements and risks in this conference call are based on current expectations as of today, and Exponent, Inc. assumes no obligation to update or revise them whether as a result of new developments or otherwise. I will now turn the call over to Catherine Ford Corrigan. Catherine? Catherine Ford Corrigan: Thank you, Joni, and thank you everyone for joining us today. I will start off by reviewing our first quarter 2026 business performance and strategic positioning. Richard will then provide a more detailed review of our financial results and outlook, and we will then open the call for questions. Exponent, Inc. delivered double-digit revenue growth in the first quarter, reflecting the strength of our multidisciplinary portfolio and demand for our specialized expertise across a range of industries. Growth was driven by user research studies for consumer electronics clients who are integrating artificial intelligence into their devices. We are continuing to see diversification of this work not only across our client base, but also across the breadth of products and underlying technologies we support. Growth was also driven by risk management work for utility clients evaluating asset performance under extreme weather conditions. Reactive engagements also contributed to our growth, with increased dispute-related and failure analysis demand across construction projects, energy facilities, and medical devices. We saw increased activity from both domestic and international clients related to complex construction challenges and disputes. In energy, demand increased for work involving critical facilities where reliability, performance, and the consequences of failure are paramount. We also saw increased activity involving medical devices with scrutiny of product safety, quality, and performance. Trends in energy demand, infrastructure risk, and technological innovation continue to support demand for our deep technical capabilities, reinforcing Exponent, Inc.'s essential role in helping clients navigate complex, high-stakes decisions. The integration of AI and other advanced technologies into performance-critical and physical systems, combined with the rising expectations for safety and reliability, is increasing reliance on Exponent, Inc.'s specialized expertise, both proactively and in response to failures. This is evident across a wide range of applications from automated vehicles that must interpret complex real-world environments to avoid collisions, to health-related devices such as automated insulin delivery systems where performance directly affects patient safety, to utility systems using AI to anticipate asset risk and prevent wildfires and other high-consequence hazards. Engagements like these underscore the growing sophistication and interconnectedness of modern technologies as they move from concept to market. As a result, clients rely on Exponent, Inc. to evaluate failure modes, product performance, usability, and risk as they work to develop and deploy these systems quickly and responsibly. In these contexts, the question is no longer simply whether a system functions, but whether it can be trusted to perform reliably in high-stakes real-world conditions, raising the bar for performance across not just expected conditions, but also in edge cases, novel conditions, and complex interactions that fall outside of prior experience. As clients accelerate development timelines, they increasingly rely on Exponent, Inc. not only for the systems themselves, but also for the underlying data, testing, and evaluation strategies that support them. This includes assessing training data and potential bias, evaluating system performance in both laboratory and in-the-wild environments, and supporting the reliability of adjacent infrastructure such as battery energy storage systems and data centers. Across these efforts, the common threads are rising technical complexity and the increasing consequences of failure. This is where Exponent, Inc. stands apart. Our teams combine expertise in engineering, data science, human factors, health, and the physical sciences to help clients navigate challenges that do not fit neatly within a single discipline. As these technologies continue to evolve, we expect demand for Exponent, Inc.'s independent, multidisciplinary expertise to continue to grow. I will now turn the call over to Richard for more detail on our first quarter results as well as discuss our outlook for the second quarter and the full year. Richard L. Schlenker: Thank you, Catherine, and good afternoon, everyone. Let me start by saying all comparisons will be on a year-over-year basis unless otherwise noted. For the first quarter of 2026, total revenues increased 14% to $166.3 million, and revenues before reimbursements, or net revenues as I will refer to them from here on, increased 10% to $151.8 million as compared to the same period in 2025. Net income for the first quarter increased 11% to $29.6 million as compared to $26.7 million a year ago, and earnings per diluted share increased 13% to 59¢ as compared to 52¢ in the prior-year period. During the quarter, we realized a negative tax impact associated with accounting for share-based awards of $900 thousand, as compared to $500 thousand in 2025. The change in the tax impact associated with share-based awards was due to the difference of the value of the common stock between the grant date and the release date for the restricted stock units. Inclusive of the tax impact from share-based awards, Exponent, Inc.'s consolidated tax rate was 30.2% in 2026 as compared to 29.4% for the same period in 2025. EBITDA for the quarter increased 15% to $43.1 million, producing a margin of 28.4% of net revenues as compared to $37.5 million, or 27.3% of net revenues, in 2025. Billable hours in the quarter were approximately 399 thousand, an increase of 6% year over year. Average technical full-time equivalent employees in the quarter were 1,013, which is an increase of 5% as compared to one year ago. This increase was due to our recruiting and retention efforts. Utilization in the first quarter was 76%, up from 75% in the same period of 2025. The realized rate increase was approximately 4% as compared to the same period a year ago. In the first quarter, compensation expense after adjusting for gains and losses in deferred compensation increased 9%. Included in total compensation expense is a loss in deferred compensation of $1.1 million as compared to a loss of $9.3 million in the same period of 2025. As a reminder, gains and losses in deferred compensation are offset in miscellaneous income and have no impact on the bottom line. Stock-based compensation expense in the quarter was $9.1 million as compared to $8.2 million in the prior-year period. Other operating expenses in the quarter were up 6% to $12.8 million due to investments in our corporate infrastructure. Included in other operating expenses is depreciation and amortization expense of $2.5 million. G&A expenses increased 24% to $6.2 million for the first quarter. The increase in G&A expenses was primarily due to increases in travel and meals associated with business development, recruiting, and people development activities. Interest income decreased to $1.7 million for the first quarter, driven by a decrease in cash and lower interest rates. Regarding capital allocation, during the quarter, capital expenditures were $2.5 million. We distributed $16.6 million to shareholders through dividend payments and repurchased $79 million of common stock at an average price of $68.09. Additionally, our board approved a $50 million increase in our current stock repurchase program. This is in addition to the $17.7 million available for repurchases as of April 3, 2026, and reflects our conviction in Exponent, Inc.'s long-term growth trajectory. Turning to our segments, Exponent, Inc.'s engineering and other scientific segment represented 85% of revenues before reimbursements in the first quarter. Revenues before reimbursements in this segment increased 12% in the quarter. Growth during the quarter was driven by user research studies in consumer electronics and risk management in the utility sector, along with reactive engagements in energy and life science sectors. Exponent, Inc.'s environmental and health segment represented 15% of revenues before reimbursements in the first quarter. Revenues before reimbursements in this segment increased 2% for the first quarter. Growth in this segment was driven primarily by regulatory consulting in the chemicals industry. Turning to our outlook for the second quarter, as compared to one year prior, we expect revenues before reimbursements to grow in the high-single digits and EBITDA to be 27% to 27.8% of revenues before reimbursements. For fiscal year 2026, we are maintaining our revenue and margin guide. We expect revenues before reimbursements to grow in the high-single digits and EBITDA to be 27.6% to 28.1% of revenues before reimbursements. We expect our average technical full-time equivalent employees to increase approximately 5% year over year in 2026 and 4% to 5% for the full year 2026 as compared to 2025. We expect utilization in the second quarter to be 72% to 73% as compared to 72% in the same quarter last year. We continue to expect the full-year utilization to be 72.5% to 73% as compared to 72.5% in 2025. We expect year-over-year realized rate increases to be 3% to 3.5% for the second quarter and full year. For the second quarter of 2026, we expect stock-based compensation to be $6.5 million to $6.7 million. For the full year 2026, we expect stock-based compensation to be $27.9 million to $28.4 million. We continue to believe that our stock-based compensation program effectively attracts, motivates, and retains our top talent. For the second quarter, we expect other operating expenses to be $12.8 million to $13.3 million. For the full year, we expect other operating expenses to be $53 million to $53.5 million. For the second quarter, we expect G&A expenses to be $7.2 million to $7.7 million. For the full year, we expect G&A expenses to be $28.5 million to $29.5 million. We expect interest income to be $700 thousand to $900 thousand per quarter during 2026. In addition, we anticipate miscellaneous income to be approximately $300 thousand per quarter for the remainder of 2026. For the remainder of 2026, we do not expect any additional tax benefit or loss associated with share-based awards. For the second quarter of 2026, we expect our tax rate to be approximately 28% as compared to 27.9% in the same quarter one year ago. For the full year 2026, the tax rate is expected to be 28.5% as compared to 28% in 2025. Capital expenditures for the full year 2026 are expected to be $12 million to $14 million. In closing, we are pleased with our performance this quarter and remain confident in the strength of our business. I will now turn the call back to Catherine for closing remarks. Catherine Ford Corrigan: Thank you, Richard. Exponent, Inc. is well positioned to support the evolving needs of our clients as innovation accelerates and systems grow more complex, particularly as artificial intelligence becomes more deeply embedded in the world. These trends continue to drive demand for our differentiated multidisciplinary expertise, independent evaluation, and trusted insight. Altogether, supported by our exceptional talent and unique position in the marketplace, we remain focused on helping clients navigate their most complex challenges while delivering long-term value for our shareholders. Before opening the call for questions, I would like to introduce incoming president, John Pye, and our incoming chief financial officer, Eric Anderson. John Pye will assume the role of president effective tomorrow, May 1. A 25-year veteran of the firm, John has played a central role in advancing our capabilities and innovation agenda, helping Exponent, Inc. address increasingly complex client challenges as technologies evolve and systems become more sophisticated. John? John Pye: Thank you, Catherine. As a first timer here, let me start by saying how honored and excited I am to step into this role, particularly at such a time of broad opportunity for the firm. Looking across the markets we serve, there is accelerating innovation, there is increasing technical complexity, and there are expectations that are only rising around safety, around health, and around the environment. So much so that I cannot imagine a better time to be an engineer or a scientist, and I cannot imagine a better place to do that than here with my Exponent, Inc. colleagues. When our clients call us with their most challenging issues, they get our deep technical credibility. They get our multidisciplinary approach, and we put those together to help them navigate the challenges of emerging technologies and complex systems of systems, all while staying grounded in delivering real-world impact. I am excited to work with my partners on this call, Catherine, Richard, and you, Eric, as well as our entire leadership team, and continue to advance our capabilities in supporting the firm's long-term growth. Catherine Ford Corrigan: Thank you, John. Eric Anderson will assume the role of chief financial officer also effective tomorrow, May 1. Eric combines rigorous financial discipline with a deep understanding of our strategy and operations. Before I turn to Eric, however, I want to take a moment to thank Richard for his many years of outstanding service as chief financial officer. Richard will continue to play an important role as executive vice president advancing Exponent, Inc.'s strategic priorities while remaining actively engaged with investors. We are grateful for his continued leadership and support. With that, I will now turn the call to Eric. Eric Anderson: Thank you, Catherine. I am honored to step into this role as Exponent, Inc.'s chief financial officer and excited about the opportunity to work alongside our leadership team. I have been a part of this incredible company for over 20 years as part of the finance organization, working closely with our consulting team. I look forward to continuing to support Exponent, Inc.'s long-term growth objectives, strong operating model, and disciplined execution. I am also excited to engage more with the investment community as we move forward. Catherine Ford Corrigan: Thank you, Eric. Operator, we are now ready for questions. Operator: Thank you. We will now begin the question-and-answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then 2. At this time, we will pause momentarily to assemble a roster. We have the first question from the line of Tomohiko Sano from JPMorgan. Go ahead. Tomohiko Sano: Hi, everyone. Thank you for taking my questions. I would like to ask you about the macro trends, such as accelerations of AI innovation and rising energy demand impacting the nature of your projects, client base, and competitive positioning. Compared to the traditional engagements, are you seeing changes in the required expertise or the complexity of projects in Q1? And could you provide any more color for the second quarter and after, please? Catherine Ford Corrigan: Thank you, Tomo. The macro trends you mentioned really are driving growth of the business in a number of different dimensions. We mentioned the energy sector. This is one place where we are seeing our engagements evolve across all modalities of technology, from the traditional oil and gas issues that we see, through to wind power to solar power, and starting to look at things like small modular nuclear reactors. You can imagine the different kinds of risk models, proactive as well as reactive work, and the expertise that is required for that type of work. We are also seeing that play into our data center offerings. These are places where the innovation around the cooling systems is crucial, which involves our thermal scientists. We are seeing issues around corrosion, on the materials and metallurgy side. There are challenges connecting to power and the governance and specifications around that. AI is fundamentally that driver that is pushing on energy, and we are seeing both reactive as well as proactive projects. Another place where there is a real opportunity for even more highly specialized expertise is in robotics. This is a place where it would be wonderful to hear from John, as he has been active in growing our robotics efforts across military and other clients. John, would you share a few thoughts about that opportunity to specialize around robotics? John Pye: Thanks, Catherine, and good to hear from you again, Tomo. Robotics have been around a long time, but what is interesting and novel now is that physical AI is being applied to the robotic system. Those robotic systems are not just in factories on assembly lines, but they are in and amongst people, interacting with them in our warehouses and our homes, and maybe the biggest category is automated vehicles that are on our streets. There is opportunity there for a number of our disciplines Catherine mentioned. You have our human factors side where the robots are interacting with people and understanding intent and location. You have our biomechanics pulled in as the interaction becomes physical. You have our data sciences as systems interpret the world around them and try to make decisions. It really pulls on the entire organization across the entire stack that Catherine mentioned, from the power that drives the data center that runs the algorithm that powers the robotic system. We could not be more excited for what is happening there as those opportunities come our way. Tomohiko Sano: Thank you. And just one more, and then congratulations everyone on the new roles. This transition to a new president and CFO along with the changes to the board appears to mark an important new chapter for Exponent, Inc. Could you elaborate on why now is the right time for this leadership and governance refresh? What is the significance of this timing, and how do you see that positioning the company for future growth and transformation, please? Catherine Ford Corrigan: Thank you, Tomo. The timing is strategic with regard to how we are evolving the team because we see the macro trends that you mentioned in your first question—the increases in the penetration of artificial intelligence into physical systems, which is really where Exponent, Inc. lives. These are physical systems that are high performance, high reliability, high risk, and high consequence. The opportunity we see around these systems is from cradle to grave: proactively building the datasets to train them, through the hardware that delivers them, to the consequences of them being in the wild. There is enormous opportunity, and this evolution of leadership reflects that in order to accelerate what the company is doing. We have been demonstrating our ability to execute and capitalize on those opportunities for the last few quarters, and we intend to continue building on that. We must build the talent base around it, widen our competitive moat, and enhance our differentiation. With both John and Eric’s deep experience with the company—John on the technical and innovation side, Eric on the financial side—and with Richard continuing and becoming even more engaged on the governance side, we believe this positions us extremely well to capitalize on all of these trends we are talking about. Operator: Thank you. We have our next question from the line of Andrew Nicholas from William Blair. Please go ahead. Andrew Nicholas: Hi, good afternoon. I appreciate you taking my question, and congratulations to everyone on the call in their new roles. I wanted to touch on, Catherine, your comment on consumer electronics. Specifically, I think you mentioned seeing diversification or broadening of some of that demand across client types and products. Could you spend a little bit more time fleshing that out? And then, if possible, what does that broadening do to your conviction in continued growth in that part of your business? Catherine Ford Corrigan: Thanks, Andrew. There are a few broad categories of products where we are seeing diversification. One is health-related products. This has been an important part of the growth we are seeing in user research and human–machine interaction engagements where algorithms need to be benchmarked against ground truth. We are being asked by clients who want to deploy these technologies and hardware in clinical trials of a new device or a new drug to provide independent, objective advice on the best platforms and how to ensure that what the device is telling us is high-quality data. There are all the human–machine interaction aspects of that as well. Another important category is devices that are taking on novel form factors for the delivery of artificial intelligence. It is no longer just your phone or your tablet. We are talking about glasses, virtual reality and augmented reality systems, and unique hardware that does not have screens but still needs to have high-quality interaction with the human, whether through video, audio, and so forth. These may not be health-related, but they are novel devices that need to perform and ensure that the training datasets will drive the algorithm in the right way. Another category is all the hardware associated with that—think of it as the data center stack. There is everything from the chip to the rack, all the way up to the full system that is essential in the lifecycle of AI. We are all seeing the demand on compute that hyperscalers and others are facing, including the power requirements. These underpin the diversification we are talking about, and we believe it will continue. There is a push around innovation and speed to get that next feature and technology, and that speed of innovation, in addition to all of the safety, health, and risk implications, really make this a perfect area for Exponent, Inc. Andrew Nicholas: Thank you. That is super helpful. For my follow-up, I wanted to ask about the talent environment. Obviously, headcount growth year over year in the quarter was quite good, and you expect that to continue throughout the remainder of this year. Is it any harder in this environment to attract talent given the overlap between what you are doing and what a lot of the fastest-growing companies in the world are focused on with artificial intelligence? And I think part of the reason for the question is that you raised the amount of share-based compensation you expect to pay this year. Is there any through line between those two themes? Richard L. Schlenker: Thanks for the question, Andrew. It has always been a highly competitive market to go to top universities and pursue the top quartile—at times even the top 10%—of the PhD class. That talent has many opportunities, and it remains competitive. Exponent, Inc., as Catherine and John outlined, comes at this with a multidisciplinary approach. It is not about writing a better algorithm than our clients. We are not competing with clients at their core; we are helping them understand the human interaction, the compute that is necessary to have systems perform at the highest level, and all the consequences around that. That allows us to be very active in recruiting across adjacencies. We absolutely need to understand the algorithms—why did a car decide not to stop, or to turn left instead of right?—which comes down to analyzing sensors and software. We can play in that area, but it is about analysis rather than writing the best code. It will remain competitive, but we believe we are doing very well. Our acceptance rate on offers is as high as it has ever been, and that has been the case over the last year or two. We are feeling good about our ability to attract the people we want. We are always replenishing—bringing in 150 to 200 new people a year—adding talent that has been doing research in advanced areas using the newest tools. They have experimented with and used AI and machine learning in their disciplines, which helps us stay on top of our game. We feel pretty good about our ability to attract talent and move forward. Operator: Thank you. Participants, if you wish to ask a question, you may press star and 1. We have our next question from the line of Joshua Chan from UBS. Please go ahead. Joshua Chan: Hi. Good afternoon, and congrats, everybody, on their new roles as well. On the consumer market improvement, could you talk about the durability of these projects? In the past, consumer has been a bit more cyclical, so I am wondering about the pace of improvement here and the durability of this growth tailwind from consumer. Thank you. Richard L. Schlenker: We have definitely seen a gradual step up in the level of activity. We anticipated that early last year in 2025. If you remember, even in Q1 or Q2 we were talking about clients beginning to develop their projects and discussing their road maps. That really played out as anticipated in the late third quarter and into the fourth quarter. That momentum and those developments have continued into the first quarter and are continuing into the second quarter and beyond. Each client will be at a different point in the product lifecycle, so there will be some cycles. We went through an extreme back in 2023; we do not see that as we look across clients today. I cannot predict every quarter or where there might be slight step-downs followed by acceleration, but directionally everything points to the implementation of these algorithms and AI in physical systems. As they progress, what Exponent, Inc. is seeing—and what we are all reading about—is that those systems require much higher reliability. They need stronger curated datasets and testing against gold standards. Those are the things our clients are doing today and will continue developing in the future. The applications they go after will become more sophisticated. We saw this 5 to 10 years ago: fingerprints and facial recognition, then AR and VR, then health applications as clients gained confidence and tackled regulated areas. We think the long-term direction is very positive, especially as these integrate into the robotic world of automated vehicles and humanoids in the home, in retail environments, and everywhere humans interact. Joshua Chan: Thanks for the color, Richard. On the repurchase side of things, could you talk about the decision to repurchase that amount in Q1 and your willingness to continue to be aggressive on buybacks around similar levels? Richard L. Schlenker: We have always had conviction around letting cash build up and having an incremental amount we repurchase every year, while being more aggressive on pullbacks. We believe the company has a very strong future, producing strong profitability and cash flow, which should result in good future performance. As such, on this pullback, over the last four quarters the company bought back approximately $177 million of stock, almost 5% of our shares. We feel good about that, and that is why the board has given us additional authorization as we move forward. Operator: You are welcome. Thank you. We have our next question from the line of Tobey Sommer from Truist. Please go ahead. Tobey Sommer: I was wondering if you could update us on the portfolio of larger projects that the firm has and, reflecting upon prior substantial projects that were points of discussion over time, whether anything about AI or changes in the marketplace would change the scope of large projects going forward. Richard L. Schlenker: Exponent, Inc. has a very diverse portfolio of projects ongoing—we do about 10,000 projects a year. Roughly 20% of those make up 80% of our revenue, which is really traditional. We have had large projects that typically range in the 1% to 2% of revenues; that is a very large project for us. At times, we have had a few projects where the size reached 4% or 5% of revenues, and we called those out when they rose to that level. Those included the unintended acceleration issues for Toyota back in the early 2010s, PG&E’s gas line explosion in San Bruno and the work that followed, and the Camp Fire and analysis around wildfires for PG&E. As we have moved forward, we have large pieces of work, but none that elevate to that level. The portfolio continues to diversify, and the multidisciplinary nature of our firm continues to grow. Catherine Ford Corrigan: I can add on how AI changes the scope of engagements. In automotive product liability, for example—our dispute-related work—that is moving from questions like whether an airbag deployed timely enough to protect occupants, which was a narrower set of issues, to today’s complexity where an AI algorithm makes decisions about braking or steering inputs. Tracing that decision through the algorithm and the associated testing across different scenarios, or comparing products, becomes a much more complex matrix of tests. Where you might have run one test before, now you are running five or 10 to cover multiple scenarios with different systems. Another place we see it is in intellectual property matters. The complexity of products that contain AI algorithms—whether in wireless communications equipment or surgical robotics—drives not only the level of expertise needed but also the complexity of claims and the depth of research required. We always have a diversity of project sizes, but these are examples of how incorporating AI into the physical world increases complexity and therefore scope. Tobey Sommer: Thanks. If I could ask about two industry verticals: chemicals—what is the current and forecast state of demand there? And also the energy and utility sector, which, based on data center demand and other demand, seems to need to come to market with more supply at an atypical pace. With nuclear being involved again, what is the future of the energy and utility outlook from Exponent, Inc.’s perspective? Catherine Ford Corrigan: In chemicals, we have both reactive and proactive work. On the proactive side, this is a lot of regulatory work. Regulatory frameworks continue to become more complex and are relying more heavily on complex simulation technologies in lieu of animal testing. Being able to utilize high-end, sophisticated models is an area where we are well positioned, as technologies evolve—for example, assessing mRNA technologies and testing pesticides and other complex environments for the regulatory side. Think of chemicals like PFAS, where regulatory complexity is increasing. The PFAS environment also drives dispute-related work, whether related to OEM chemical manufacturers or entities using PFAS in their products—consumer products, electronics—and the drive to find substitutes for chemicals that perform so well. We see continued growth opportunity there. On the energy and utility side, the drive for more energy is intense. We are near the limits of available energy, and there is a push to expand to run data centers and deliver the required compute. We are seeing data center operators building their own gas-powered turbines to secure power without tapping the utility. This drives disputes as infrastructure investments are made. We are seeing challenges with backup power systems, including battery energy storage, where we are well positioned. It is also driving more inquiries about proactive risk modeling from utilities. Novel sources of power generation create unanticipated failure modes, and we are helping clients understand and quantify those risks. In both chemicals and energy/utilities, we are seeing growth opportunities across proactive and reactive engagements. Operator: You are welcome. Thank you. Ladies and gentlemen, that concludes the question-and-answer session. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Operator: Good day, and welcome to the Warrior Met Coal, Inc. first quarter 2026 conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touch-tone phone, and to withdraw your question, star then 2. Please note this event is being recorded. I would now like to turn the conference over to Mr. Brian M. Chopin. Please go ahead, sir. Brian M. Chopin: Good afternoon, and welcome, everyone, to Warrior Met Coal, Inc.’s first quarter 2026 earnings conference call. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements according to the Private Securities Litigation Reform Act. Forward-looking statements by their nature address matters that are to different degrees uncertain. These uncertainties, which are described in more detail in the company's annual and quarterly reports filed with the SEC, may cause our actual future results to be materially different from those expected in our forward-looking statements. We do not undertake to update our forward-looking statements whether as a result of new information, future events, or otherwise, except as may be required by law. For more information regarding forward-looking statements, please refer to the company's press releases and SEC filings. We will also be discussing certain non-GAAP financial measures which are defined and reconciled to comparable GAAP financial measures in our first quarter press release furnished to the SEC on Form 8-K, which is also posted on our website. Additionally, we will be filing our Form 10-Q for the quarter ended March 31, 2026, with the SEC this afternoon. You can find additional information regarding the company on our website at warriormetcoal.com, which also includes a first quarter supplemental slide deck that was posted this afternoon. Today on the call with me are Mr. Walter J. Scheller, Chief Executive Officer, and Mr. Dale W. Boyles, Chief Financial Officer. After our formal remarks, we will be happy to answer any questions. With that, I will now turn the call over to Walter J. Scheller. Walter J. Scheller: Thanks, Brian. Hello, everyone, and thanks for taking the time to join us today to discuss our first quarter 2026 results. I will start by providing an overview of the quarter before Dale reviews our results in additional detail. The first quarter marked a defining milestone for Warrior Met Coal, Inc. We completed the final construction and project spending associated with the development of our transformational Blue Creek mine, delivering the project ahead of schedule and fully in line with our capital expenditure guidance. This achievement reflects years of planning, disciplined capital allocation, and exceptional execution by our team and concludes the construction and investment phase of Blue Creek. Our total project capital expenditures were a little over $1 billion. As a reminder, this is on budget and fully paid out of cash from operations without incurring any funded debt. The new Blue Creek mine was a major contributor to higher volumes and profitability in 2026, which led to record quarterly sales and production volumes. Our first quarter volumes were higher than our internal plans and are expected to be higher for the remainder of the year to meet our full-year outlook and guidance. As we look at the first quarter steelmaking coal market conditions, pricing remained notably strong in the premium quality segment and well above our original expectations, while the High Vol A quality segment underperformed expectations. We believe this strength in premium quality pricing was driven by tightness in the segment resulting from supply constraints stemming from weather disruptions and mine production-related challenges in Australia. These factors drove up premium quality prices by 15% in January, leading to noticeably higher demand for our Mine 7 premium quality product. As Australian supply chains have begun to recover from these events, the emergence of a new conflict in the Middle East introduced additional cost pressures, specifically in freight markets, while increasing the uncertainty around global energy availability. Steelmaking coal prices have remained strong as inflationary cost pressures from the rise in oil and diesel prices have asserted a firmer floor despite soft seaborne demand, especially in the spot market. However, from a global seaborne demand perspective, India continues to be a key market supported by firm domestic steel prices, improving margins, and growing steel production, which has helped sustain demand for high-quality steelmaking coal. Global pig iron production decreased by 2.1% for the first two months of 2026 as compared to the same period last year. India continued to demonstrate strength, showing a 3.1% increase for the same period. Chinese pig iron production declined by 2.7% during the two-month period. Our primary index, the PLV FOB Australia, rose very quickly in the first quarter as a result of supply constraints stemming from the previously discussed challenges in Australia, reaching a high of $229 in early February and averaging $213 per short ton. The index average was 17%, or $31 per ton, higher than the fourth quarter 2025 and was 27% higher than 2025. As for main second-tier indices, the Australian LVHCC index price experienced more modest gains and averaged $173 per short ton for the first quarter. This is $19 per ton, or 12%, higher than the fourth quarter 2025, and 30% higher than 2025. As a result, the relativity of the Australian LVHCC index price to the Australian PLV index price decreased from 85% in fourth quarter 2025 to 81% for 2026. In contrast to the Australian LVHCC index price, the average U.S. East Coast HVA index price only increased $8 per ton, or 6%, in the first quarter from 2025 and averaged $144 per short ton. As a result, the relativity decreased from 75% in 2025 to 68% for 2026. More importantly, this relativity dropped to an all-time low of 62% for a brief period during the first quarter and represents a significant spread difference with the Pacific Basin relativity. We achieved a gross price realization of 72% for the first quarter compared to 75% in 2025. Our gross price realization was lower and driven by a combination of factors. First, while the average of both main pricing indices increased in the first quarter compared to the fourth quarter 2025, the price spreads, or relativity, have widened, reaching one of the lowest values ever recorded. Second, our sales mix of High Vol A quality was 11% higher. Third, that higher sales mix was primarily sold in the Pacific Basin on a CFR basis with higher average freight rates due to the conflict in the Middle East. We sold 4% more volume into the Pacific Basin in the first quarter than in 2025. Warrior Met Coal, Inc. achieved a record high quarterly sales volume in the first quarter of 3 million short tons compared to 2.2 million tons in the same quarter of 2025. This represents a 38% increase, primarily due to the additional sales volume from the new Blue Creek mine. Our first quarter sales volume mix was 61% High Vol A, representing a 10% increase over the fourth quarter 2025. As production from Blue Creek continues to increase, we expect our sales volume mix to become more weighted toward High Vol A products and Pacific Basin destinations over time. Our sales by geography in the first quarter break down as follows: 61% into Asia, 25% into Europe, and 14% into South America. Our spot volume was 6% for the first quarter 2026. Sales volumes in the Pacific Basin were 61% for the first quarter, which were 4% higher than the fourth quarter 2025 and 18% higher than the first quarter of last year. Production volume in the first quarter 2026 was a record high 3.5 million short tons compared to 2.3 million in the same quarter of last year, representing a 55% increase. This increase reflects the significant contribution of Blue Creek. Our coal inventory levels increased to 1.9 million short tons at March 31, 2026, compared to 1.6 million tons at December 31, 2025. We expect to manage the excess inventory over the remainder of the year to maximize sales volume, profitability, and free cash flow. I will now ask Dale to address our first quarter results in greater detail. Dale W. Boyles: Thanks, Walt. Let me first highlight our first quarter financial results compared to 2025. Our first quarter adjusted EBITDA of $143 million was 54% higher than 2025, primarily due to the following factors—two positives offset by two negatives. First, our sales volumes were 4% higher in the first quarter, driven by an increase of tons sold from Blue Creek. Second, our average net selling price was $20 per ton, or 15%, higher in the first quarter primarily due to a 10% higher mix of High Vol A volume sold into the Pacific Basin on a CFR basis at elevated freight rates. Third, cash cost per ton were $2 higher in the first quarter, primarily attributable to higher variable costs for transportation and royalties, and were partially offset by Blue Creek's inherently low-cost structure and a $3 per ton benefit from the new 45X production tax credit from the One Big Beautiful Bill Act. And finally, operating cash flows were negative $12 million, which was $88 million lower than 2025. This result is attributed to the increase in working capital, primarily for accounts receivable and inventory. Accounts receivable were higher on higher sales volumes and higher steelmaking coal prices. In addition, sales volume for the quarter was heavily weighted to the month of March by 43%. Our spending for capital expenditures and mine development were a combined $24 million lower in the first quarter compared to 2025, primarily due to lower investments in Blue Creek. Now let me compare 2026 to the prior year's first quarter results. We recorded net income of $72 million, or $1.37 per diluted share, in the first quarter this year, compared to a net loss of $8 million, or $0.16 per diluted share, in the same quarter of 2025. We reported adjusted EBITDA of $143 million in 2026 compared to $39 million in the same quarter of 2025, an increase of 263%. Our adjusted EBITDA margin improved to 31% in 2026 compared to 13% in the same quarter of last year. On a per-ton basis, our adjusted EBITDA margin improved to $48 per short ton for 2026 compared to $18 in last year's first quarter. The primary drivers of these improvements were a 38% increase in sales volumes, a 10% increase in average net selling price, and a 14% reduction in cash costs, reflecting the increasing contribution from our new Blue Creek mine. Total revenues were $459 million in the first quarter of this year compared to $300 million in the same quarter of last year. The total increase of $159 million was primarily due to the impact of higher sales volumes of $113 million and the impact of an increase in average gross selling prices of $69 million. This was partially offset by the impact of a higher mix of High Vol A tons sold of $24 million. In addition, the bridge and other charges were $4 million higher compared to last year's first quarter. This resulted in an average net selling price of $149 per short ton in 2026, compared to $136 in the first quarter of last year. Cash cost of sales were $289 million, or 64% of mining revenues, in the first quarter of this year, compared to $244 million, or 83% of mining revenues, in the first quarter of last year. Of the $45 million net increase in cash cost of sales, there was a $93 million increase in costs which were attributed to the 38% increase in sales volumes and slightly higher variable transportation and royalty costs on higher average steelmaking coal price indices. These higher costs were partially offset by $48 million of lower costs that were driven by the leverage of lower-cost Blue Creek tons sold and $8 million of benefit from the 45X production tax credit. Cash cost of sales per short ton FOB port was approximately $96 in 2026 compared to $112 in the same quarter last year. The 14% decrease was primarily due to the factors I just mentioned on a dollar basis. Cash margins per short ton increased 127% to $53 in the first quarter from $23 in the same quarter of last year. Our first quarter 2026 SG&A expenses were $28 million and were $10 million higher than the same quarter of 2025, primarily due to higher employee-related expenses, including stock compensation expenses. SG&A expenses are on track with our full-year outlook and guidance. Depreciation and depletion expenses were $52 million in the first quarter, which was 15% higher than 2025, primarily due to the additional assets placed into service at Blue Creek and the higher sales volume in 2026. We recorded income tax expense of approximately $6 million on pretax income of $79 million in 2026. Our effective income tax rate varied from the statutory federal income tax rate of 21% primarily due to tax benefits recognized for depletion expense and a foreign-derived intangible income deduction, resulting in an effective income tax rate of 11%. Now let us turn to cash flows for 2026. Cash flows from operating activities were a negative $12 million in 2026 and were $23 million lower than the previous year's first quarter. Working capital increased by $146 million during the first quarter, primarily due to $115 million of higher accounts receivable. This outcome was primarily attributed to higher sales volumes, higher steelmaking coal prices, and the timing of quarterly sales volumes that were 43% weighted to the month of March, thereby pushing cash collections into the second quarter. In addition, inventory was higher as production exceeded sales volume during the first quarter. Free cash flow was a negative $890 million due to $12 million of cash used by operations combined with cash used for capital expenditures of $80 million. This outcome of negative free cash flow was expected and previously communicated on our last earnings call in February. Capital spending included the final $66 million invested for the completion of the Blue Creek development project. Our free cash flow was slightly more negative than anticipated in the first quarter, primarily due to timing of sales volume, and is expected to turn positive in the second quarter. We are pleased that we continue to maintain strong liquidity while delivering higher profitability. The total available liquidity at the end of the first quarter was $364 million and consisted of cash and cash equivalents of $[inaudible], short-term investments of $20 million, and $141 million available under our ABL facility. Finally, let me turn to our current outlook and guidance for the full year 2026, as detailed in our earnings release. We expect the steelmaking coal markets to remain generally consistent with recent trends absent any major disruptions in supply or demand, or a prolonged conflict in the Middle East. First quarter results were all on track and generally consistent with our expectations for the full year, and that is why we are reaffirming our outlook and guidance for 2026 as previously communicated in February. Having said that, there are a few cautionary notes to keep in mind. We are beginning to see some inflationary cost pressures on materials and supplies, such as steel roof supports, insurer bits, as well as diesel fuel. In addition, we are experiencing some tariffs and higher shipping costs on these raw materials. While we have not been materially impacted by inflation so far this year, we believe the remainder of the year could see an increase of a few dollars per ton. At this point, it is extremely difficult to predict any full-year impact to our cash costs. Obviously, we are taking all possible measures to mitigate any impacts of inflation. I will now turn it back to Walt for his final comments. Walter J. Scheller: Thanks, Dale. Warrior Met Coal, Inc. performed very well in the first quarter and our financial and operational results were better than expected as premium quality steelmaking coal prices were higher for a longer period of time and our volumes were slightly ahead of our internal plans. This strong beginning to 2026 supports our full-year outlook and guidance. Our current view of the steel and steelmaking coal markets is both positive and resilient. While we face uncertainty from the Middle East conflict and its effect on the global economy, at this point, the full impact of the conflict and its length are not quantifiable on the full year. As Dale noted, we may have to contend with some inflationary cost pressures. But right now, we see these potential impacts outweighed by higher production as a result of European protectionist measures and rising steel prices across nearly all geographies. As is often the case in such dynamic and unpredictable environments, disruptions may create short-term or region-specific opportunities that we fully intend to take advantage of. For now, expect steelmaking coal prices to remain above their 2025 average levels absent material changes in supply and demand. Most importantly, Warrior Met Coal, Inc. has the tools to continue to drive value creation for our stockholders by continuing to execute our strategy to optimize production, control our costs, and generate free cash flow. With our high-quality assets and low first quartile cost structure, we are as well positioned as we have ever been to thrive in a wide range of steelmaking coal environments. We will now open the call for questions. Operator? Operator: Thank you. We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Our first question for today will come from Nicholas Giles with B. Riley. Please go ahead. Nicholas Giles: Thanks, operator. Good evening, guys. My first question was just, obviously a fairly meaningful working capital build in 1Q, which you had foreshadowed. How much of this could we see unwind in the second quarter? And then another question would be, can you remind us of the cash flow and balance sheet implications for the 45X production tax credit? How much did that contribute to the build, if any? Thanks. Dale W. Boyles: Hey, Nick, it is Dale. Yes, it is hard to predict exactly how much of the working capital will turn around, but it is timing. A large portion will come back. I am not sure we will be back to breakeven. We will be shy of that probably on a year-to-date basis through the first half. As far as the 45X credit, that was worth about $8.4 million, or $3 a ton, for the quarter. Nicholas Giles: Understood. Thanks for that, Dale. You mentioned some initial inflationary pressures stemming from the conflict. I think Warrior Met Coal, Inc. is more insulated, but can you speak to the diesel usage across your operating platform, or if you have any kind of sensitivity or total consumption, just so we can try and understand that impact? Thanks. Walter J. Scheller: We do not do a lot of trucking of coal. We do truck a little bit to the barge load-out, so we are not a high user like strip mines or surface mines. We just do not use a lot of diesel. I do not have a projection for you because I have no idea how long oil prices will stay this high and what those pass-throughs could be. We are subject to pass-through surcharges and things like that, but as I said earlier, we have not seen anything material yet. It depends on how long this continues, so we could see some increase later in the year. We are seeing some other things, like the bits—that is tungsten coming out of China—and that is a challenge right now. We are starting to see and hear it from some other suppliers too on other materials and supplies. We just have not been able to quantify it yet. We are working hard to look for alternative vendors and sources—anything we can do to mitigate it. Nicholas Giles: Understood. That is still helpful perspective. Just one more if I could. Inventories have been rising for the past couple of quarters—I think 1.9 million tons is what you said. Most of the working capital build, I think, was more from receivables. Can you speak to how you could see those inventories unwind in the coming quarters, and what kind of mix we are working with? I assume it is mostly Blue Creek product. Walter J. Scheller: Our sales projections for Blue Creek are actually ahead of schedule from where we thought we would be in terms of placing Blue Creek for the year. It is just production levels have been so much higher that they surpassed our expectations. As we look out through the remainder of the year, we are still doing tests with different potential customers on Blue Creek, and the hope is to get more and more of that coal put to bed. When we look at how much of it is moving in the spot market, it is very little. As we put those tons to bed, we are going to do everything we can to bring inventory back down to what we consider to be a more normal level. It is going to take us all year to work at it. You will see a gradual decline over the next few quarters—nothing dramatic in a single quarter. The mines are running well, so production is coming in pretty good. And obviously, the highest amount of production or inventory that we have is High Vol A. Nicholas Giles: Got it. Okay. Well, sounds like a first-class problem to me. Thanks, guys. Walter J. Scheller: Thank you. Operator: The next question will come from Katja Jancic with BMO Capital Markets. Please go ahead. Katja Jancic: Hi, thank you for taking my questions. Maybe first on the volume that you ship to the Pacific Basin. So the 60% that you shipped there in 1Q—how much of that is on a CFR basis? And can you talk a little bit about the current freight cost to ship—what it currently is versus, let us say, recent quarters? And one last one: you mentioned all your operations are operating very well. Do you have any limitations on how much inventory you can hold at any time? Dale W. Boyles: All of it is on a CFR basis. Walter J. Scheller: Freight rates are averaging much higher. I know we saw some freight rates last week in the mid-$50s. I think it is averaging somewhere in the upper $40s for the second quarter, so it has been pretty significant. As for inventory limits, not really. From where we are today, we can hold a lot more inventory. You have to remember, a lot of this is Blue Creek, and Blue Creek, given its design, has multiple places where we can store significant amounts of inventory. So we are not bounded by anything at this point. Katja Jancic: Okay. Thank you. Operator: The next question will come from Nathan Pierson Martin with The Benchmark Company. Please go ahead. Nathan Pierson Martin: Thanks, operator. Good afternoon, gentlemen. Congrats on wrapping up Blue Creek. Now that the project has wrapped up, it would be great to hear about what your priorities are for free cash flow and shareholder returns going forward. Dale W. Boyles: Once we start to generate cash going forward, we would look to provide more shareholder returns since we have not done so in the last few months and quarters. It is hard to say exactly when—it depends on when we start to generate the cash and have it available to distribute. If we turn positive in the second half, it could be sometime in the second half, maybe the latter part of the year. That would be the earliest I think you could see or expect anything. Nathan Pierson Martin: Appreciate that, Dale. And what form—do you have any preference there? I know historically you have done the regular dividend but also some special dividends. Any thoughts on that versus maybe buybacks? Walter J. Scheller: We think we will stick to something similar to what we have used in the past, which is a rising fixed quarterly dividend supplemented by special dividends and some selected stock buybacks. That has done well for our shareholders that have held on to our stock over time. We have one of the highest PSRs over the last ten years in the sector, and that has worked really well for us. Nathan Pierson Martin: Got it. Appreciate that. And then any thoughts from you guys on how the recent Section 303 determination signed by the administration could impact Warrior Met Coal, Inc.’s business? Walter J. Scheller: If we look at it right now, things are going to continue to move as they are today. I do not think there are going to be any significant changes, so I do not think there will be much of an impact. Nathan Pierson Martin: I appreciate that, Walt. I will leave it there. Continued best of luck. Thanks. Walter J. Scheller: Thanks, Nate. Operator: That will conclude our question and answer session for today. I would like to turn the conference back over to Mr. Walter J. Scheller for any closing remarks. Please go ahead. Walter J. Scheller: That concludes our call this afternoon. Thank you again for joining us today, and we appreciate your interest in Warrior Met Coal, Inc. Operator: Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and welcome to First Solar, Inc.'s first quarter 2026 earnings conference call. This call is being webcast live on the Investors section of First Solar, Inc.'s website at investor.firstsolar.com. All participants are in listen-only mode, and please note that today's call is being recorded. I would now like to turn the conference over to First Solar, Inc. Investor Relations. Byron Jeffers: Good afternoon. Thank you for joining us. We are joined today by Mark R. Widmar, our Chief Executive Officer, and Alexander R. Bradley, our Chief Financial Officer. Mark will provide an overview of our first quarter performance and an update on technology, manufacturing, and market conditions. Alexander will then cover our bookings, financials, and our 2026 outlook. After our prepared remarks, we will open the line for questions. Today's discussion contains forward-looking statements. Actual results may differ materially due to risks and uncertainties as described in our earnings press release, other SEC filings, and earnings materials available at investor.firstsolar.com. We undertake no obligation to update these statements due to new information or future events. We will also reference certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are in our earnings press release and presentation. This non-GAAP financial information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with U.S. GAAP. With that, I will turn it over to Mark. Thank you, and good afternoon. Beginning on slide four, we delivered a strong start to 2026, with record first quarter revenue, record sales in India, meaningful margin expansion, and adjusted EBITDA above the top end of our first quarter preview range. Since our last earnings call on February 24, we secured gross bookings of 1.9 GW. Excluding domestic India volume, we booked 1.4 GW into our key U.S. utility-scale market at an ASP of approximately $0.35 per watt, inclusive of applicable adjusters. Turning to slide five. Our technology strategy is anchored in the premise that customers value not just nameplate efficiency, but lifetime energy production as well. CURE is central to that strategy. Extensive testing data has validated our expected bifaciality advantage, temperature coefficient, and degradation profile, with CURE anticipated to deliver up to 8% more lifetime specific energy yield than crystalline silicon TOPCon. I am pleased to report that CURE launch is complete in Perrysburg, and the first Series 6 line is ramping consistent with expectations. CURE is scheduled to be replicated across the Series 6 and 7 fleet through 2028 which, if achieved, supports the potential realization of up to $600 million of additional revenue from technology adjusters in the backlog, with the majority anticipated in 2027 and 2028. Turning to slide six. We produced 4.3 GW of modules in the quarter, with approximately 3 GW from our U.S. facilities and 1.3 GW from our international fleet. Our U.S. facilities operated at approximately 96% utilization. The South Carolina finishing facility is on track for production start in 2026, with equipment installation beginning this quarter. Upon completion, this facility is expected to provide finishing capacity for Series 6 modules initiated at our international factories and optimize freight, tariff, and domestic content outcomes, while benefiting from Section 45X module assembly tax credits. Our international facilities in Malaysia and Vietnam continue to operate at a significantly reduced utilization, consistent with current trade dynamics and lower ASP expectations for internationally produced modules. Turning to slide seven. Our competitive position in the United States and India continues to strengthen, underpinned by differentiated technology, a domestic manufacturing footprint and bill of material, and independence from Chinese crystalline silicon supply chains. In the United States, headwinds for crystalline silicon continue to build in our view, including trade remedy enforcement, indications of restrictive FEOP regulations, and the intellectual property litigation actions we have discussed on recent calls. On IP specifically, in March the U.S. International Trade Commission instituted our Section 337 investigation with respondents representing a significant share of TOPCon modules currently imported into the United States. We expect an initial determination within approximately 11 months and a final decision within 15 months. In India, our presence reflects the same strategic logic that underpins our U.S. manufacturing investment: energy security and supply chain independence. The policy framework, including the existing Approved List of Models and Manufacturers, or ALMM, and the anticipated implementation of the ALMM at the cell level, as well as domestic content requirements, currently favors vertically integrated manufacturers such as First Solar, Inc. Near-term demand is supported by both utility-scale and distributed solar applications, including agricultural land developments, where our CdTe technology’s energy yield in hot, humid conditions is a meaningful differentiator. Overall, our differentiated technology, our domestic manufacturing footprint, and our independence from Chinese supply chains are attributes that are increasingly valued by our customers, and we remain well positioned to deliver on our 2026 commitments. I will now turn the call over to Alexander to discuss our bookings, financial results, and outlook. Alexander R. Bradley: Beginning on slide eight, as of 03/31/2026, our contracted backlog was 47.9 GW at an aggregate transaction price of $14.4 billion, exclusive of technology adjusters, with deliveries through 2030. During the first quarter, we sold approximately 3.8 GW, recorded gross bookings of approximately 1.7 GW, and recorded debookings of 0.1 GW. In India, our guidance assumes that production is largely sold domestically in a book-and-bill market at near full capacity. In the first quarter, we sold approximately 1 GW in-country at an average selling price of approximately $0.20 per watt. In the United States, our domestic production is substantially committed through 2028 under existing contracts, resulting in relative pricing clarity through this period. We continue to take a highly selective approach to incremental U.S. bookings as we await clarity from current policy and regulatory matters, in particular, the pending 232 polysilicon derivatives tariff decision and proposed FEOP rulemaking. During the first quarter, our U.S. gross bookings of 0.9 GW were at an average selling price of approximately $0.34 per watt, inclusive of applicable adjusters. With respect to our international fleet, demand for Series 6 modules produced end-to-end in Malaysia and Vietnam remains constrained, which is reflected in the reduced production Mark mentioned earlier. Turning to slide nine. Net sales of $1.0 billion were a record first quarter for the company and grew 24% year-over-year. This was driven by a 31% increase in volume, partially offset by a lower average sales price reflecting a higher proportion of India deliveries. Our gross margin in the first quarter was 47%, and expanded approximately six percentage points as compared to 2025. The drivers were primarily a higher volume of modules qualifying for Section 45X tax benefits, and significantly lower sales freight costs, including lower detention and demurrage. On a per-watt basis, sales freight cost fell to approximately $0.017 per watt, or roughly half of first quarter costs last year. Furthermore, as part of our plan to rationalize approximately $100 million of warehouse costs by 2027, we delivered a $22 million sequential reduction in warehouse costs from Q4 2025. On balance, these savings were partially offset by a lower average sales price due to a higher mix of India sales and an increase in tariff costs year-over-year. Operating expenses for the quarter were $141 million, including R&D of $67 million, up $15 million year-over-year, primarily reflecting perovskite development and ongoing CURE launch work. Adjusted EBITDA was $520 million, above the high end of our first quarter preview range of $400 million to $500 million. Adjusted EBITDA margin was 50%. Net income was $347 million, up 65% year-over-year, with diluted EPS of $3.22. Moving to slide 10. We ended the quarter with $2.4 billion of cash, cash equivalents, restricted cash, and marketable securities, and a net cash position of $2.0 billion, at the high end of our targeted resilient cash range of approximately $1.5 billion to $2.0 billion. Operating cash outflows of $215 million reflected normal first quarter working capital dynamics, a meaningful decrease from outflows of $608 million in 2025. Capital expenditures were $119 million, primarily for our South Carolina finishing facility. We also completed a $45 million scheduled principal payment on our India DFC loan. Turning to slide 11. Our full-year 2026 guidance remains unchanged. For the second quarter, we expect volumes sold between 3.4 and 4.0 GW, and adjusted EBITDA of $400 million to $500 million. In summary, our first quarter performance reaffirmed guidance for the full year and reflects the strength of our strategy of reshoring and scaling domestic manufacturing, progressing our technology roadmap, enforcing our intellectual property, and maintaining a selective approach to new bookings in light of key pending trade and policy determinations. We will now open the call for questions. Operator? Operator: We will now begin the question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, press 1 again. We ask that you pick up your handset when asking a question, and if you are muted locally, please remember to unmute your device. Your first question comes from the line of Brian K. Lee from Goldman Sachs. Brian K. Lee: Hey, good afternoon. Thanks for taking the questions. Just had two here. First, on the module gross margins, I think it is around 7% in Q1 when we adjust out the 45X even with the high India mix. So curious, the guide for Q2 implies margins are flattish. Why not more improvement given some of the sequential improvement in freight costs, warehousing, etcetera? And then what kind of tailwinds maybe help into Q3 and Q4 for the margins beyond just volume growth? And then on the ASPs, maybe I will just squeeze in the second question here. This could be nitpicking, but on slide eight, you show 900 MW of U.S. bookings at $0.34 in Q1. You mentioned 1.4 GW since the last quarter at $0.35. So it maybe implies recent bookings in March and April are higher at $0.36–$0.37 per watt. Anything to read into that? What kind of customer engagements and discussions are you having here more recently ahead of more policy certainty? Thanks. Mark R. Widmar: I will do the ASP first, Brian, and then Alexander will talk to the gross margin. So the 1.4 is call-to-call, so that is a little bit of a clarification there, which would include a fair half-and-half. So half of that happened after the last call but before the quarter end, and the other half happened after quarter end. And the average ASP for the call-to-call volume of that 1.4 was $0.35. One other note to include in there is that there is about another 700 or so that is an option. We are seeing a lot of M&A activity. What is great about First Solar, Inc., we have had very strong strategic partnerships with very competent, obviously well-capitalized, partners, and they are actually seeing a lot of development acquisition opportunities. We are actually talking with the team about another deal right now that one of our customers is in the process of acquiring. It is looking for incremental volume to support that acquisition. So what happened was we booked a deal for about 700 MW. Our customer is actually now in the process of looking to acquire another development asset, of which then they would exercise that option, which would have to be exercised here over the next several quarters upon completion of that acquisition. So what I would say is there is still a lot of momentum and activity going on, Brian, from a market standpoint. We are being very disciplined, as we have in the prior quarters, with how we are engaging the market and how we are seeing through pricing. So still good momentum, discipline on our part, trying to realize good ASPs, which I think we did here in the last, call it, eight weeks since the last earnings call. Alexander R. Bradley: Brian, on the gross margin, if you think about India on an aggregate per-watt or dollar-contribution basis, it is certainly lower than the U.S. If you look at where India’s pricing sits on a gross margin percent basis, it is not materially different to the U.S. So despite having a high India mix, on a percentage gross margin basis, not a material impact. If you look at the full-year guide, it was 7%. We have not changed the guide. That still holds, and that is right where we came in ex-IRA benefit in Q1. Thinking forward, next quarter we are guiding to the same guide that we had in Q1, so it is relatively flat, which implies the second half is going to be stronger. Incremental volume will be beneficial to gross margin. There is a little bit of value on the fixed-cost side. The other piece in terms of the back end of the year is that right now our assumption on tariffs is that Section 122 tariffs carry through 150 days from announcement, which takes us through to the July timeframe. After that, we are not modeling tariffs beyond that for finished goods coming in. There is still other tariff impact in there on the 232. That is the modeling assumption we have today given uncertainty around what could happen. As you are probably aware, the administration has launched several 301 cases with the intent, we believe, to try and replace the 122 with that 301 later in the year. But as of now, I am not modeling that. So the guide has stayed where it is. The guide assumes no tariff replacement back end of the year. That would imply you might get some incremental gross margin; however, if we do see additional tariffs, we will reflect that in a guide later. And operationally, quarter-on-quarter from a gross margin standpoint, we ran Malaysia and Vietnam at higher utilization rates in the first quarter than we anticipate running in second quarter. So you are going to see more underutilization charges in the second quarter. To your question about sequential gross margin performance, we will see a little bit of headwind in the second quarter because of lower utilization rates for Malaysia and Vietnam. Operator: Your next question comes from the line of Julien Patrick Dumoulin-Smith from Jefferies. Please go ahead. Julien Patrick Dumoulin-Smith: Hey, guys. This is Deshaun here for Julien. I guess two quick ones. Could you quantify the amount of adders on that $0.34 or $0.35 ASP? Is it like $0.02 to $0.03 that you discussed before? And then second, real quick one. How do you think about the Southeast Asian capacity going forward? Thank you. Mark R. Widmar: I will take the adders and Alexander can talk to Southeast Asia. One of the things is now with the launch of CURE, the product we are going to price going forward, given that CURE is being launched, is going to be the technology which we anticipate to deliver in its full entitlement. If you look at the bookings that we reported at 1.4 GW since the last earnings call, half of that volume actually sits out in 2029. So it is encouraging, and we are starting to see more momentum in the outer years, and that is a pure product that we expect to deliver. When you look at the adder, in some cases the volumes that we are seeing right now, there are no adders because we are pricing the technology; therefore, you will not see an adder to that deal. When you look at the blended average of the adder, the entitlement of the adders is still, call it, $0.03 or so, but half of the volume that we booked did not have adders on it; the other half did. So the blended average of the adder is going to be, call it, a penny and a half or something along those lines. As we move forward, especially now with the launch of CURE, we are pricing the technology we will deliver, and we will price all the energy attributes embedded in the base price. We are still in that transitionary period. You are going to see some contracts that potentially have the combination of two: the base being our current semiconductor, which we refer to as QED, plus an adder. For the windows in which we, for sure, are going to be delivering the CURE product, we will just price it as the contract and you will not necessarily continue to see the adders. So as we transition in that direction, you are probably going to see less volume with adders on it and just full entitlement of the technology being priced. Alexander R. Bradley: As it relates to Malaysia and Vietnam, we talked on our previous call about maintaining an option around that capacity, and we are still doing that. What we are waiting on is policy clarity around the 232, which really could spur potential demand around fully finished international product. If you go back to the original guide, we had $115 million to $155 million of underutilization costs. That was a function both of Malaysia/Vietnam underutilization running at very low capacity through the year as well as some of those costs associated with the new finishing line that we are bringing up. Right now, we are continuing to maintain that near-term option. We will continue to evaluate that. Likely, the decision point we are waiting on is around the 232, which we expect most likely to come in Q2. Operator: Your next question comes from the line of Analyst from Barclays. Please go ahead. Analyst: Good evening. Thank you for taking my question. I actually wanted to know if we should think that there is an impact from the Section 232 changes on steel and aluminum for the Southeast Asian imports. I was under the impression that aluminum might be less than 15% of the weight of a full module, but now that you are going to be importing just the front of the module, how should we think about that? And then I think you also said on the last call that 5 GW of the backlog was international modules. Was the plan just to mostly import that at the beginning of the year, and it tails off at the end of the year? If you could just talk about the cadence of that as well. Alexander R. Bradley: I got the first one. Repeat your second question, and I will make sure I have it. Analyst: My second question: the 5 GW of the backlog—I thought that was the international portion. Was it not? Mark R. Widmar: Yes, that is about right. I think that is the approximate number. That was entering the year. We had about 5 GW of Series 6 international backlog. Those shipments would go across 2026, 2027, and then into 2028. So that was a multiyear backlog. We will run that production to meet that demand. That portion of the backlog—call it a little bit more than 25%, around 25%—would be for this year. The balance would sit in the outer years as it relates to that. On the 232, yes, aluminum is still included in the tariffs. I think part of your question was as well, what happens with the semi-finished product that comes into the U.S. That will come in; the glass will come in obviously without the aluminum frame. As of now, we will continue to import the aluminum frames into the U.S., and because they continue to be imported, they will be subject to the applicable rates associated with the 232 for aluminum. So yes, 232 is still applicable for aluminum based on the classification of the product we are bringing in, and no real change to that just because we are bringing in a semi-finished product from Malaysia. Analyst: Okay. And then you have been doing a lot of India volumes in this quarter and the full year assumes full utilization. I just saw in one of your disclosures about India there is a proposal to increase the minimum efficiency of PV modules for manufacturers to be included in the ALMM beginning in 2027. Could you talk through what is going on there and what your options are to work around it? I realize that it is still just a proposal. Mark R. Widmar: A couple of things. There is a lot of moving pieces in India, including the requirements by 2028 to have qualification of the wafer being domestically manufactured in India in order to qualify for any projects that actually connect to the federal grid or the state grid. That is moving in and will, I think, further enhance our opportunity to continue to support the India market given a vertically integrated model. As it relates to the consideration for the efficiency threshold, we will be launching CURE beginning of next year in India. So our first Series 6 facility that we will launch in India will be CURE, which will give us an opportunity to improve the efficiency of the technology as well as continue to enhance the energy attributes—better bifaciality, better temperature coefficient, better long-term degradation rate—as we continue to work with MNRE in particular and other parts of the administration, informing and educating them on the value of energy attributes, which is also what our customers pay for: energy, not labeled efficiency. We have a very good and constructive dialogue in that regard. The key enabler to make sure we manage through any potential revisions to those requirements will be the launch of our next-generation CURE technology in India. Operator: Your next question comes from the line of Analyst from RBC Capital Markets. Please go ahead. Analyst: Thank you. I just wanted to follow up on the earlier question from Jefferies in regards to the Southeast Asia offtake agreement. Can you maybe walk through a bit of the possible decision tree here depending on the tariff outcome or an offtake agreement you are thinking about for that facility, and when would we have a potential decision as to what you all do longer term? Thanks. Alexander R. Bradley: Right now, there is ample demand for the product at a certain price, but when you factor in the tariff implications of bringing that product in, and then the risk allocation around that tariff, it is not necessarily the right risk profile for us to take today. Depending on an outcome of a 232, you could potentially see much higher pricing or risk tolerance from buyers whereby we will be able to more appropriately price that product and more appropriately allocate the risk around changes in tariff policy, which would then enable us to be comfortable long-term contracting that product. So a lot of it depends on availability of supply in the U.S. and where tariff and risk can be allocated. We think the 232 is most likely the main determinant of that. The outcomes there could be: we continue to run that product at full capacity end-to-end and ship fully finished goods into the U.S.; it could be that there is demand and we could add an incremental finishing line in the U.S. and finish that capacity here; or it could be that neither of those occur and then we are into potential shutdown of that capacity. Those are really the pieces we are looking at. Mark R. Widmar: One thing to help remind everyone: historically, we have had about 7 GW of capacity between Malaysia and Vietnam. Half of that is now going to come to the U.S. to support our South Carolina finishing line—so 3.5 GW. That leaves the other 3 to 3.5 GW. As we indicated on the last earnings call, about half of that 3.5 is largely no longer available because we are moving some of that back-end capacity to the U.S. to support our perovskite pilot line. Our perovskite full-size Series 6 pilot line will be available in 2027, so we lose the back-end capacity. As a result, we are losing some throughput for the facility. When you really look at how much of the Malaysia/Vietnam facility would be available as fully manufactured, assembled modules to be shipped into the U.S., there is only about, call it, 1.8 GW—maybe closer to 2 GW—of real capacity. So from a full-size finishing module capacity perspective, there is slightly less than 2 GW that is in play, and that would tether back to a 232 decision point. As you think through your analysis, half of the 7 GW is already going to be coming to the U.S. as a semi-finished product; some capacity has been reduced because we are moving the back-end tools to support our perovskite pilot line; and now we are left with slightly less than 2 GW in Malaysia/Vietnam that will be tethered back to whatever decision is made with 232. Operator: Your next question comes from the line of Philip Shen from Roth Capital Partners. Please go ahead. Philip Shen: Hey, thanks for taking my questions. On the 232, I was wondering if you might be able to share a little bit more color on what the framework of that decision might be. I think we published earlier this week that there could be a minimum import price in the $0.38 per watt level. Does that resonate with you at all? And on your slide number seven, you talked about the timing being Q2. We have seen this push a bunch. It was supposed to be year end 2025, but then the shutdown happened, and a bunch of other reasons have driven this a little bit later. As we are a month into Q2, what is the confidence level that it comes out in May or June? And then on the technology front, Mark, I think you just talked about a full-scale line of perovskite in 2027, which is really interesting. Could you give us a little more color on that—what kind of costs are you seeing? Is that a base CdTe on the bottom cell and then perovskite on the top cell? Any other color in terms of efficiency and durability? Mark R. Widmar: On the 232 framework, there are still a lot of moving pieces. What I can say right now is that the engagement we are having with the administration and the structure of what we are proposing—which again is not a percent; it is basically a cents-per-watt metric on the cell or module, and could include a minimum import price, to your point—the feedback we continue to get is very positive to looking at that as the best way to address polysilicon and its associated derivatives. It is encouraging feedback, but as you know, these things continue to evolve, and we have to stay well connected to continue to advocate for that type of position. On the timing, the feedback we are getting is still a resolution by the end of this quarter. It could move into early Q3 potentially, but it is dependent on other events. The intention is to bring this to a conclusion and communicate an outcome, but, as you know, these things can move. What we represented on the slide is our best information and expectations based on communications around an outcome and communication around 232. On technology, we are currently on a timeline that would have us running a pilot line in 2027 for perovskites. I am not going to get into specific costs. That pilot line, which is a 1 GW pilot line, by definition is not going to be an HVM-type cost entitlement. To get cost out, you need high throughput and scale. For an initial product to get it into the market and to get field validation and customer feedback, we think it is appropriate to do that upon launch. As we continue to evaluate, we will move into scaling, but it is going to be a higher-cost product upon launch. As it relates to the construct—single junction or tandem—we are looking at two different paths and still evaluating the right launch product. The most important thing initially is to get something in the field to validate the performance of the perovskite: degradation, performance across conditions including open circuit and partial shading, etc. There is complexity in a tandem construct—different electrical properties and temperature coefficients—so we want to first validate perovskite durability and bankability in the field before adding that additional complexity. Operator: Your next question comes from the line of Vikram Bagri from Citibank. Please go ahead. Vikram Bagri: Good evening, everyone. My first question, Mark, probably for you. We understand that the market for contracting panels at $0.33 a watt or higher is not as deep, and customers are hesitant in pricing the Section 232 risk as of now. Once it comes out—based on your assumption sometime in late Q2—how quickly can you move to book volumes? Put it another way, how much demand is waiting for Section 232 to come out? What should we look for in bookings immediately after 232 comes out? Mark R. Widmar: There are unknowns. Once it gets communicated, the key will be what the impact is. We have some customers looking at multiple gigawatts of volume, and they are waiting. We have also said to some of those customers that once this gets communicated, depending on the outcome, it could impact the current price at which we are negotiating. The risk we run is that it ends up being lower than anticipated; the risk they run is it ends up being higher than anticipated. There is quite a bit of demand that should provide an opportunity for us to move through and book over a multi-month period. It really depends on the outcome; that is what the current bid-ask relates to. We are trying to create a price point reflective of the midpoint, and we will see what comes out. If we are wrong, we may see a little bit of ASP pressure; if we are right, we may see a little bit of upside relative to that marker we have engaged the market with right now. Operator: Your next question comes from the line of Analyst from Oppenheimer. Please go ahead. Analyst: Thanks so much. It is a two-part question. First, as you move from Series 6 to Series 7 with CURE, can you talk about the key technical elements that you are working on right now and things that we should be watching for success? And then can you talk about any impact that you are seeing from the incremental domestic capacity that is coming online to some of your pricing negotiations? Mark R. Widmar: From a technical standpoint, Series 6 to Series 7 is not really a significant technical challenge; it is more of a form-factor change. For the Series 7 launch, for the front contact buffer, we are working with our glass suppliers to allow them to deposit within their facility so we will receive glass that includes the revised front contact buffer needed for CURE. That will simplify factory operations versus depositing that layer in-house as we do now for Series 6. There are a couple of new tools because the BCAM process is different for CURE versus our existing product, and those tools need to be seasoned and validated for the larger form factor. So it is less about core technical risk and more about process differences and tool scaling. We are validating now and will replicate as quickly as we can across the fleet once comfortable. On capacity, excluding our fully integrated capacity in Ohio, Alabama, and Louisiana, the new facility in South Carolina is semi-finished product. It is a Series 6 form factor; it does have domestic content but not as much as the product manufactured in Ohio. It creates a nice opportunity to blend for our customers, adding value through domestic content and enabling a broader portfolio of projects to benefit from the domestic content bonus, which is extremely valuable—often $0.15 to $0.20 or more per watt at the project level for the ITC. Operator: Your next question comes from the line of Praneeth Satish from Wells Fargo. Please go ahead. Praneeth Satish: Good evening. Thanks. With the IPA tariffs repealed and import tariffs on India-produced modules down to 15%, how are you thinking about selling the India capacity into the U.S. versus selling it in the Indian market? Is that something you are still considering, maybe if we get a positive 232 outcome? And to the extent that you are, what is the lead time and retooling cost required to enable that? And then just a quick housekeeping question on the 1.7 GW of bookings this quarter. Are you able to break out roughly how much of that is from U.S. capacity versus international? Thanks. Mark R. Widmar: Right now, there is a lot of demand in India. We just sold 1 GW last quarter, and if you look at the actual gross margin on that product, effectively it is the highest gross margin that we have, including the benefits of 45X. So the gross margin, on a percentage basis, is attractive. The changeover from fixed-tilt to tracker is not efficient, even though we try to optimize it. We are looking at this through a lens of keeping that product running given demand, at least through the first half of the year. Q3 we see a little bit of softness in India, and then a stronger Q4. There may be a little bit of volume in Q3—tens to low hundreds of megawatts—of WIP share product from India brought into the U.S. and finished here, and we are doing some of that in the first half to help enable U.S. demand. The challenge is the 122s expire in July, and we do not know what happens with the 301s, so until we have a better understanding of the long-term tariff environment after the 150-day window from January, we will focus on a market with very strong demand and continue to support it. Alexander R. Bradley: Praneeth, on the housekeeping question, of the 1.7 GW, 0.9 GW was U.S. and 0.8 GW was India bookings. Operator: Your next question comes from the line of Analyst from Mizuho. Your line is open. Please go ahead. Analyst: Hey, thanks for the questions. Just one housekeeping on the first half versus the second half cadence. If I look at EBITDA versus the volumes, it looks like EBITDA is 36% in the first half, but 44% of the volumes. Is that because India shipping is higher in the first half, or is it SG&A skewing the EBITDA in the first half/second half? Alexander R. Bradley: It is mostly driven by India volumes. As Mark said, we had a strong Q1 for India. It will drop down in Q2 and Q3, and potentially pick back up in Q4. The guide assumes that imbalance, which is why you are seeing that. Analyst: Got it. Thank you. Operator: Your next question comes from the line of Joseph Osha from Guggenheim Securities. Please go ahead. Joseph Osha: Hi. Thank you. I am still trying to understand the composition of 3.5 GW in South Carolina. Is perovskite part of that, and are you saying that no matter what happens, you are going to run 1 GW and change it through a fixed route there, and the rest is optional? I am trying to put together where this 3.5 comes from. Thank you. Mark R. Widmar: Thanks for the question, Joseph. The 3.5 GW in South Carolina is our CURE Series 6 product and has nothing to do with perovskite. Think about it as the substrate glass with deposition on it with cell scribing, then shipped to the U.S. to be finished, which will include the cover glass, junction box, frame, interlayer, and all other components. That is CdTe product. In addition, we will be launching a perovskite pilot line next year. We announced we acquired IP from Oxford PV for perovskites, which enhances the IP we already have. That pilot line will have up to 1 GW of capacity and will be in our Perrysburg facility, leveraging existing space and some back-end processing capabilities there. So South Carolina will be CdTe product started in Vietnam/Malaysia and finished in South Carolina. Alexander R. Bradley: Maybe part of the confusion: of the original 7 GW capacity in Malaysia/Vietnam, 3.5 GW will be used for the front end of the product that then comes to be finished in South Carolina. The remaining 3.5 GW—some of those back-end tools will go into the perovskite line in Perrysburg. That is why the remaining CdTe capacity in Southeast Asia comes down. It is not mixing CdTe and perovskite; it is that some back-end tools will no longer be used there and will be used in that 1 GW pilot line for perovskite. Operator: Our final question comes from the line of Ben Kallo from Baird. Please go ahead. Ben Kallo: Hey, guys. I just have a follow-up question, and then another one. Just to Joe’s question, after all that is done—because I think, Mark, you said that you lose some capacity in Vietnam and Malaysia—I want to make sure we have the volume number correct as we enter next year. And then my follow-up question is on TOPCon and your patent and what Tesla is doing. How do you think about them starting manufacturing here and if that is going to violate your patent? Thank you. Alexander R. Bradley: If you go back to the deck that we presented in February, we gave capacity and production for 2026–2027, and the assumptions have not changed. On a production basis, we said 2027 would be around 19 to 20.5 GW, with $19.7 billion as the midpoint production—those numbers and the geographical breakout are unchanged from that deck. Mark R. Widmar: On Tesla and our TOPCon patent: what we know is that TOPCon products, as reflected by our filings and the number of manufacturers who have produced TOPCon and sold it into the U.S., have been infringing on our IP. If Tesla chooses to go with TOPCon, my assessment, given what I see in the market, is that unless Tesla redesigns the product such that they would not infringe on our IP, there would be some form of infringement. We are more than willing to work with any counterparty to engage in a commercial conversation around the licensing of our IP. We are not prohibiting that conversation. We just want to be paid fair value. That is why we licensed the IP to Trina; Trina is demonstrating willingness to pay fair value for the technology enabling the product they will manufacture. We will do that with other counterparties. If Tesla chooses to use a TOPCon product that uses our IP, then we will enter into a commercial conversation with them and happily engage on licensing that IP. Tesla establishing capability here in the U.S. market—we have always said we need a robust and resilient domestic supply chain, completely vertically integrated, beyond just thin film CdTe; it is also why we are evolving toward perovskite as next-generation thin film. Tesla bringing in that capacity and capability and creating a domestic supply chain enhances and supports the overall strategic intent around long-term energy independence and national security. Operator: At this time, there are no further questions. This concludes today’s call. Thank you all for attending. You may now disconnect.
Operator: Welcome to the Ardelyx First Quarter 2026 Earnings Call. All participants will be in a listen-only mode. I would now like to turn the conference over to Unknown Speaker, Senior Vice President of Corporate Communications and Investor Relations. Unknown Speaker, you may begin. Thank you, Ross. Unknown Speaker: Good afternoon, everyone, and welcome to our first quarter 2026 financial results and business update call. Earlier today, we issued our earnings release, which can be found on the Investors section of our website at ardelyx.com. Slides that accompany today's call can also be found on our website. On today's call, I am joined by Michael Raab, President and CEO of Ardelyx, who will share our Q1 progress towards our 2026 priorities. Eric Foster, Chief Commercial Officer, will provide an update on the performance of Ibsrela and Exposa. And Sue Hohenleitner, our Chief Financial Officer, will provide some key highlights from our financial results. Before we begin, I would like to remind that some of the statements made during the call today are forward-looking statements, which are subject to a number of risks and uncertainties that may cause our actual results to differ materially, including those described in our Annual Report on Form 10-K, our Quarterly Report on Form 10-Q, which was filed today, and from time to time in our other documents filed with the SEC. While we may elect to update these forward-looking statements in the future, we specifically disclaim any obligations to do so, even if our views change. I will now pass the call over to Michael Raab. Michael? Michael Raab: Thank you. Good afternoon, everyone. It is great to be with all of you today. Before we dive in, I want to take a moment to welcome Lisa to the team. We are excited to have her on board leading our IR efforts as our new head of investor relations. 2026 is poised to be another significant year of growth for our company, and we are already off to a great start. At Ardelyx, we are building an innovative pipeline of medicines for patients with unmet medical needs. Our first quarter performance reinforces our confidence in the strategy we have laid out and in our ability to capture the opportunities ahead to create long-term value. As we build on this momentum, our focus is on executing on our four key priorities: accelerating the growth of Ibsrela, maintaining the Exposa momentum, building and expanding our pipeline, and delivering strong financial results. Starting with Ibsrela. In the first quarter, our disciplined commercial execution drove 58% year-over-year revenue growth. With more than 7 million prescriptions written for IBS-C-indicated medicines last year, Ibsrela is well positioned as a differentiated mechanism for patients who continue to experience symptoms despite treatment with a secretagogue. Our strategy continues to positively impact demand drivers and today, Ibsrela is helping tens of thousands of patients with IBS-C, and we remain on track to deliver at least $1 billion in annual revenue in 2029. With Exposa, our patient-first strategy continues to guide our execution with demand growing. Today, more patients have access to Exposa than ever before, and we remain committed to supporting patients irrespective of payer coverage. Next, our pipeline. As a result of our performance and execution, we are at a stage where we have the financial flexibility to further invest in our pipeline, positioning our company for durable long-term growth. Earlier this year, we initiated the EXCEL trial, a Phase 3 clinical trial evaluating Ibsrela for chronic idiopathic constipation, or CIC, as part of our efforts to expand our label and to reach more patients. This trial has rapidly gained attention from clinicians and patients alike, and all pre-identified sites have been initiated in under four months and are engaged in patient recruitment activities. We remain on track to complete enrollment by year-end and to announce topline data in 2027. If EXCEL reads positive, Ibsrela will expand treatment options for more patients. In addition, we have a strategy to expand the use of Ibsrela which may help pediatric patients with IBS-C and has potential to extend SNDA-related patent life for an additional six months. Our ongoing pediatric program consists of several studies evaluating Ibsrela in patients with IBS-C and functional constipation, the pediatric equivalent to adult CIC. This effort is an example of our ongoing strategy to extend tenapanor, which includes our recently announced Orange Book-listed 2099 patent covering the commercial formulations of Ibsrela and Exposa, building additional value for these franchises. Also included in our pipeline is our development program for our next-generation NHE3 inhibitor, 531, which continues to progress through IND-enabling studies, building on our foundational experience in NHE3 inhibition. 531 may extend our reach into other therapeutic areas, which would drive additional value for shareholders. We are excited for this next phase of Ardelyx’s evolution as we execute on our pipeline and explore various external opportunities that align with our mission and core capabilities and meet our disciplined capital allocation approach. We have been growing our team at Ardelyx and now have a deep bench of talent at the executive level. I am excited with the two newest additions who have joined the executive team: Felicia Attenberg, our Chief Legal Officer, and Dr. Rajani Dharavahi, our Chief Medical Officer. Felicia’s broad legal training and experience as a business partner, as well as Rajani’s experience advancing innovative therapies from development to patients, will be beneficial to Ardelyx as we build upon our commercial foundation, invest in our pipeline, and focus on delivering meaningful outcomes for patients. I would also like to take a moment to thank Dr. Laura Williams, our Chief Patient Officer, who has been serving the dual role of CMO and CPO while helping to guide us on this journey and has done an outstanding job advancing our clinical programs. Thank you, Laura. Finally, we remain in a position of financial strength. Our Q1 revenue performance positions us to reiterate our previously communicated full-year 2026 revenue guidance for Ibsrela and Exposa. We have the flexibility to allocate capital to both near-term commercial execution and investments that would expand our pipeline to drive long-term growth and value for the company, our patients, and our shareholders. I am confident in our strategy and our team’s ability to deliver on our key priorities. Together, we are advancing a growing, differentiated, innovative pipeline of medicines that address unmet patient needs. With that, I am pleased to turn the call over to Eric to walk you through our commercial success. Eric? Eric Foster: Thank you, Michael. It is great to be with you all again. In Q1, we continued to build upon the incredible commercial momentum and execution and performance from last year. Ibsrela grew in total writers, new and refill prescriptions, and total prescriptions year over year. For Exposa, we continue to ensure patient access regardless of payer coverage, which drove an increase in total expenses and paid prescriptions year over year. Our commercial team remains focused on expanding adoption among HCPs, creating greater brand awareness for patients, and ensuring the fulfillment of written prescriptions. Our investments to improve the HCP and patient journey and expand access to our medicines have turned into consistent year-over-year growth for both Ibsrela and Exposa. Let me start with Ibsrela. Ibsrela continues to be our main revenue driver and our commercial execution generated 58% product revenue growth year over year. During the quarter, we saw robust demand trends, notwithstanding expected first-quarter market dynamics and temporary disruption from two severe winter storms. Our growth in demand is a result of our efforts to capture more of the IBS-C market in 2026 by driving Ibsrela as the first-line therapy following a secretagogue failure. Ibsrela is a first-in-class innovative medicine with a winning and sustainable position in a growing market with nearly 7 million prescriptions written last year. Through research, we know that as many as 77% of patients on a secretagogue continue to experience symptoms despite treatment, demonstrating a high unmet medical need for additional options. I will now walk you through our key demand drivers which include growing both breadth and depth of writing, increasing patient activation, and lastly, improving prescription pull-through and fulfillment. Beginning with growing breadth and depth of writing. We are focusing on high-writing health care providers who are responsible for approximately 50% of the IBS-C total prescriptions, and our field sales team is driving greater reach across those targets. These efforts resulted in an increase in the number of writers in Q1, underscoring the effectiveness of our commercial activities. We are also seeing deeper prescribing within existing accounts. When an HCP is familiar with the access path and sees positive patient experiences, they are more likely to prescribe Ibsrela more broadly. Our end-market messaging focused on Ibsrela’s differentiated mechanism of action and its established safety and efficacy profile is resonating and continuing to drive HCPs to prescribe Ibsrela. With respect to patients, the IBS-C population is highly engaged in managing their condition. As awareness of Ibsrela’s effectiveness and safety increases, patients are more likely to initiate conversations with their physicians, which in most cases results in a prescription. We continue to focus on identifying and reaching patients through multifaceted marketing efforts. We are currently seeing robust engagement across digital and social channels while we continue to explore new channels to reach and engage with the sizable IBS-C patient population looking for something different. One such initiative is through our partnership with the LPGA, where we will educate, empower, and mobilize patients to take control of their IBS-C by seeking new information and talking to their doctor about their symptoms and the treatment options that are available. We chose to partner with the LPGA due to their clear strategic alignment between the LPGA’s legacy of empowering women and Ardelyx’s mission to empower patients to proactively manage their health. Patients deserve open dialogue about their symptoms and their options, and we are excited to partner with the LPGA to accomplish this goal. Lastly, our full commercial organization is focused on driving prescription pull-through to help ensure that all patients prescribed Ibsrela get on treatment. Based on prior success, we are increasing the presence of our field reimbursement managers who support patient access. This team is talking directly to prescribers and supporting them with account education and patient pull-through to improve patient access. To drive further adoption, we are continuing to encourage HCPs to send prescriptions to the Ibsrela Pharmacy Network, a limited group of specialty pharmacies that offer a patient-centric, high-touch experience and who are best equipped to handle prior authorizations and the payer hurdles that can restrict patient access. As prescriptions go through our specialty pharmacy network, fulfillment rates are higher, and we see on average an additional refill per year for patients. This is a high-value opportunity that we will continue to help achieve our projected revenue growth. We are united in our purpose to make a meaningful difference to patients impacted by IBS-C, and we are moving with urgency to capture the opportunities ahead and realize our full potential. Moving on to Exposa. Our high-performing, patient-focused Exposa team is committed to achieving the full potential of Exposa and bringing this important medicine to patients in need. I continue to be proud of the team’s ability to improve patient access and drive growth. As a result, we saw an increase in total expenses by 32% and paid prescriptions by 19% compared to the same quarter in 2025, which is important as the overall prescription market declined by 10% over the same time period. We are broadening our reach by employing targeted sales initiatives and a cross-channel strategy to increase HCP and patient engagement. We saw solid growth across key metrics in Q1, with notable increases in total writers, new and refill prescriptions, and total prescriptions across the non-Medicare segments compared to the same time period last year. This growth shows progress against our key strategic initiatives, which includes optimized HCP targeting and enhanced access messaging to support pull-through. Exposa continues to be an important contributor for Ardelyx, and we remain focused on supporting and ensuring access for all patients regardless of payer coverage. With the majority of patients treated with binders not having fully controlled phosphorus, the high unmet need is clear. I am confident in the team’s ability to deliver on our priorities for both Ibsrela and Exposa this year. The entire organization is executing incredibly well at a high level in a fast-paced environment, consistently achieving our shared goals as a result. At the same time, we are making prudent investments across the commercial organization to strengthen our position in the market, support patients along their journey, and accelerate long-term growth. I will now turn it over to Sue. Sue? Sue Hohenleitner: Thank you, Eric. As you heard from Michael and Eric, we are continuing to advance our commercial momentum to drive significant value creation. We are leveraging disciplined capital allocation into a clear strategic advantage by investing with purpose in commercial growth and building our pipeline. We are driving towards profitability and meaningful cash generation, allowing us to strengthen our balance sheet, invest in growth, and build long-term shareholder value. Now let me walk you through the financials. Our quarter-over-quarter total product revenues were $93.4 million compared to $67.8 million in the same period last year, representing 38% growth. That growth was driven by a significant increase in Ibsrela demand with Q1 2026 revenues of $70.1 million, an increase of 58% compared to 2025. The Q1 2026 demand for Ibsrela increased despite the expected Q1 seasonal dynamics that were further exacerbated by the winter storms. We continue to expect Ibsrela revenues to grow quarter over quarter for the remainder of the year. Revenue for Exposa during the quarter was $23.3 million and, on an as-reported basis, remained consistent with the prior year revenue. However, it is important to understand the underlying business results we are seeing. As you may recall, in Q1 2025, we recorded a $3.8 million favorable adjustment related to product returns. Taking that adjustment into account, our paid prescriptions of Exposa actually grew 19% year over year. Now turning to expenses. R&D expenses for 2026 were $20.2 million compared to $14.9 million for the same period in 2025. This increase primarily reflects development activities for the EXCEL Phase 3 trial for CIC. SG&A expenses were $102.3 million for 2026 compared to $83.2 million for the same period in 2025. This increase was reflective of the ongoing investments to drive commercialization, demand, and adoption of Ibsrela. Our net loss for 2026 was $37.6 million, or a loss of $0.15 per share, compared to a net loss of $41.1 million, or $0.17 per share, for the same period in 2025. The net loss for Q1 2026 included $14.2 million for non-cash expenses from share-based compensation, compared to $12.1 million for the same period in 2025. We are in a position of financial strength with $238.1 million in total cash, cash equivalents, and short-term investments as of the end of the first quarter. To capitalize on the favorable market conditions, we recently refinanced our existing debt with SLR. You may recall we entered into a loan agreement with SLR in 2022 that provided a total of $300 million of cash, of which $200 million has been drawn down. The remaining $100 million of cash is available for drawdown this year. We are pleased with the positive outcome of this refinancing with SLR, which extended the maturity and interest-only period of our loan by two years and lowered our overall cost of capital and annual interest expenses throughout the term of the loan. Now turning to guidance for 2026. We are reiterating our 2026 revenue guidance for Ibsrela between $410 million and $430 million. That represents 50% to 57% year-over-year growth. We expect the growth to be driven by quarter-over-quarter increases in demand along with improved prescription pull-through. Our long-term growth expectation for Ibsrela remains to reach at least $1 billion in 2029, representing a 38% CAGR. Now turning to Exposa. We are reiterating our revenue guidance between $110 million and $120 million in 2026. We continue to invest at an appropriate level to ensure that Exposa remains a contributor of financial growth for Ardelyx. Our full-year product revenues are expected to grow between 38% and 46%, outpacing our operational expenses, which will grow by approximately 25%, consistent with prior guidance. We are at a stage in our development where it is necessary for us to prudently invest in our growth accelerators: our commercial operations and our pipeline, all of which require high-impact investments in R&D and SG&A. In 2025, we grew our cash balance year over year even as we increased investment in both commercial execution and pipeline development. As we transition into more steady and measurable cash flow in the near future, I think it is important to begin to share our capital allocation priorities as we head into this new era. Our priorities include: one, accelerating Ibsrela growth, as this is our highest ROI use of capital today; two, investing in our current pipeline to create additional growth drivers and expand with external business development opportunities; and three, maintaining our financial strength. Importantly, we are funding current operations and pipeline from our revenue base, which demonstrates the growing financial maturity of Ardelyx. In addition, as I stated previously, we have proactively refinanced our debt and reduced our cost of capital while preserving optionality for BD partnerships or other future opportunities. Ultimately, all of this builds towards sustainable profitability. We hope this view of our capital allocation priorities is helpful as you continue to support the strategic value of our now and as we evolve into the future. With that, I will hand it back to Michael. Michael Raab: Thank you, Sue. As you heard, we are focused on executing our priorities: significantly grow Ibsrela, maintain Exposa momentum, further advance our pipeline, and continue delivering strong financial results. We are moving with purpose, urgency, and discipline against these priorities, and we look forward to demonstrating continued progress as the year unfolds. To our investors, employees, and especially the patients, thank you for your continued engagement and support. We are encouraged by the progress we have made and excited about the opportunities ahead. We remain focused on disciplined execution and long-term value creation, and we appreciate your continued confidence as we move forward. We will now open the call for questions. Operator? Operator: If you would like to ask a question, you will be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you would like to ask a question, please press 1 on your phone now. Our first question comes from Roanna Ruiz from Leerink Partners. Please go ahead, Roanna. Roanna Ruiz: Yep. Thanks. A couple from me. First one, thought it was interesting you mentioned the Ibsrela demand increased despite the storms and seasonality. How should that flow through to the next quarters and in light of your current guidance? Michael Raab: Sure. I will ask Eric to comment a bit on it. For us, seeing what we all went through in the first quarter, which is normal seasonality and those two storms, seeing that continued growth in demand only strengthens our conviction in terms of where we are seeing this business grow, and we are very, very pleased with those results. Eric, anything to add? Eric Foster: Yeah. Thanks, Roanna, for the question. Very pleased with what we saw in terms of demand in Q1 and very similar to the patterns that we have seen in the past. We expect to continue to see quarter-over-quarter growth as we move forward. I feel very confident with the team that we have in place and continuing to invest in access and making sure that all patients that are written a prescription can get fulfillment. So I feel very comfortable about the strategy that we have in place and our ability to be able to continue the strong execution, and you should see that continue to grow as we move through the year. Roanna Ruiz: Great. And the other question I had, I was curious about any color you could share about OpEx throughout 2026. How should we think about this with the Phase 3 CIC study ramping up as well? Sue Hohenleitner: Sure. Yeah. Thanks, Roanna. Yeah. I would say that we have said before we are going to guide, and we are up to about $520 million in total OpEx, and that would be consistent throughout the quarter. So you saw in first quarter that we recorded about $122 million of that OpEx expense. So what I would see is a bit of a ramp up as we move through. As we continue to enroll the patients in the study, you will see more of those expenses come through the rest of the year. Michael Raab: And to be clear, that was all factored into the guidance that we gave, the expectation of the spend that we would have for CIC. Roanna Ruiz: Understood. Thanks a lot. Operator: Thanks, Roanna. Our next question comes from Joohwan Kim from Citi. Please go ahead. Joohwan Kim: Hi. This is Joohwan Kim on for Yigal. Congrats on the progress and thanks for taking our question. Maybe just a quick one from us. Have you tracked towards your December enrollment completion target for the Phase 3 CIC trial? Can you provide any color on the pace of enrollment relative to internal expectations so far? And are there any learnings from the IBS-C TEMPO enrollment experience that are helping you optimize recruitment? Thanks. Oh, interesting question in regards to TEMPO. Michael Raab: As I stated in my comments, we have all the pre-identified sites up and running, and that pace of enrollment of the sites was wonderful to see, and it was on par with what we expected out of the TEMPO program. As I also noted, the enthusiasm both by treating physicians and patients is evident, and that enrollment continues at pace. So we are very confident with the timeframe that we have shared where we would be able to expect both for it to be completed and the data to be shared. Joohwan Kim: Great. Appreciate it. Eric Foster: Thank you. Operator: Our next question comes from Dennis Ding from Jefferies. Please go ahead, Dennis. Dennis Ding: Hey, guys. Thanks for taking my questions. I had several questions around Ibsrela. So number one, Q1 had some seasonality, and on a quarter-over-quarter basis, it was a bigger step down relative to last year, which is totally fine because it is a bigger base. But in terms of the recovery, should we also expect a bigger recovery than what we saw last year as well? I believe consensus for Q2 assumes about a $30 million quarter-over-quarter recovery for Q2. Question number two, just specifically around the specialty pharmacy dynamic. Can you share if that shift away from retail is working out in terms of better fill and reauthorization rates relative to last year? The channel is about 30% of the mix, but how much higher can that go? And then I have one more. Michael Raab: Let me just quickly address some of those and I will ask Eric to comment. I think the Q2 recovery—rather than recovery, it is just a normal course of business. I think that term is an important one to think about. It is what we expect and what we plan for given the predictable dynamics that everyone sees in Q1. Now the surprise was the storms—the two storms, both the Mid-Atlantic one and the one in the Northeast—and that clearly had a meaningful impact in that sector of the country. And if you think about where many distribution centers are, they were smack dab in the middle of the Ohio River Valley where much of that was hit. So one cannot predict—we are not weather people, and they are wrong 50% of the time at least. So we do not try to predict storms, but it is one thing that is notable. I am very confident with the data that you see every week, that we are on the path to what we expected out of Q2. I do think, again, just to reemphasize, it is not a recovery, rather just a pattern of the business. I will ask Eric to comment a little bit more on that in terms of what they saw in the field. But the IPN, the Ibsrela Pharmacy Network, is a fundamentally important part of our strategy moving forward, given Eric’s comments in his opening statements. It is better for patients, and I will let him talk about the dynamics in terms of the shift. At this point, it is early for us to say what we think the ultimate potential percentage of the business that would go through that is. It is probably a little bit too much detail that will become evident through the data. That we know is imperfect, but it will become evident over time. Eric Foster: Yes. Thanks, Michael. And thanks for the question, Dennis. As far as Q1 goes, we had talked about the seasonality, and as Michael said, for us, we have the experience and the knowledge to know most of that is coming. What we were not aware of, obviously, were the storms. So we feel like the team planned accordingly. We were able to push through the temporary disruption there and, just like we saw last year, we really started to see the acceleration in the back half of the quarter, and we certainly see that, which gives us great confidence as we moved into Q2. With regards to the Ibsrela Pharmacy Network, we continue to be very excited about that opportunity and really to bring Ibsrela to patients that are prescribed Ibsrela. If we think about the fulfillment rate and your question around is there better fulfillment—absolutely there is when it goes to the Ibsrela Pharmacy Network. That is really the driver for us to make sure that patients that are prescribed Ibsrela can get on therapy. We will continue to work on moving business into the Ibsrela Pharmacy Network. We expect that to continue through the year. It is also important to note when that happens, there is an additional, on average, prescription or refill in that year. So it is really great for patients. You get a higher fulfillment rate, you get a better refill rate as those prescriptions go through the Ibsrela Pharmacy Network. Sue Hohenleitner: Yeah, and one thing I would add, Dennis—you kind of talked about the guidance—we were pretty overt about Q1 with kind of a soft guide, but that was all factored into our full year, and that is all factored into our year guidance. We are not going to provide similar color going forward. We felt like that was appropriate for Q1 just given the storms and some of the volatility, but I think as we go forward, as we said, we are going to continue to grow quarter over quarter. Dennis Ding: Okay. Perfect. And then as my follow-up. Lilly is running a Phase 2 with its GLP-1 agonist for IBS-C. Data might be in 2027. So I am curious how you are thinking about that study and the durability of the Ibsrela franchise over the long term in the 2030s, and you will be well north of $1 billion in revenue. Thanks so much. Michael Raab: Yeah. I mean, I think for us, what we need to do is follow the data, and anything that helps patients is a good thing. I think that is just a fundamental way that we—and I—look at this business. Anything that is going to help patients is the right thing to do. The realities are, if you look at the potential patients that could, should, or might be taking GLP-1s, it is a relatively small percentage who actually are versus those who would benefit from it. So I would not imagine there is going to be a massive degradation of the market, given the positioning that we have for Ibsrela in that market. I do not see that as a massive threat on the horizon. Is it better for patients if it works? Of course it is, and that is something we should all cheer. Dennis Ding: Perfect. Thanks so much. Michael Raab: Thanks, Dennis. Operator: Our next question comes from Christopher Raymond from Raymond James. Please go ahead, Chris. Christopher Raymond: Hey, yes, thanks. We have talked to some KOLs who indicate they are already using Ibsrela to some extent in CIC. Michael, I know you are not going to want to give too much color here, but just maybe in broad strokes, can you talk about what kind of CIC use you are seeing in the field? I mean, LINZESS, TRULANCE, Amitiza—they all have CIC on their labels already. Maybe second part of that question is would the competitive dynamic in this indication be maybe similar to what we have seen with IBS-C, or are you thinking something different? Thanks. Michael Raab: So yes. What is important about what you said is all the others have dual indications. Clearly, we have heard and understand what you have described as volunteer in your KOL clinician discussions. As you know, physicians, in the art of what they practice, can prescribe things off label. We cannot promote things off label, and we will not and do not. That is a fundamental part of this business, as everyone understands. If a physician feels it is appropriate for CIC, they should. What is really interesting—if you have not looked at Rome V, which was just published—the changing definition of CIC, functional constipation, IBS-C, which we know, given our experiences on the front lines, is a continuum of care. Understanding how the Rome Foundation has evolved its definitions is one of the fundamental reasons why we moved into the CIC program. It is a natural course. As we have spoken over the years, would we have loved to have both indications at launch? Of course. But as you know, I am cheap, and we did not have the money to invest in both indications. Now that we are in a place that we can, we are, to provide those benefits and try to eliminate some of the barriers in the way that physicians think about this and the further hurdles that the prior authorizations will put them through if it is an off-label indication. I agree with everything that is the genesis of your question, and what we are doing with the CIC program is specifically designed to address that, coupled with what has happened with Rome V. Christopher Raymond: Thank you. Michael Raab: Thanks, Chris. Operator: Our next question comes from Ashley Marie Aloupis from Piper Sandler. Please go ahead, Ashley. Ashley Marie Aloupis: Hi. This is Ashley on for Ali. Congrats on the quarter and all the progress made. Just two questions from us. You talked about this in your prepared remarks, but could you talk a little more about the Ibsrela pediatric trials and the workings of the potential six months of additional patent life and how meaningful those additional six months could be for Ibsrela? And then also, just wondering once the IND is filed, do you have any line of sight into timelines around getting 531 into the clinic and how quickly you plan to move if the IND studies are positive? Thank you. Michael Raab: We will work at pace if those studies are positive because it is the right thing to do. Fundamental again to what we do is we follow the data, and all this pre-IND work is really critical for us to understand. Let me remind you that when we created tenapanor back in 2009, it was based upon a huge amount of preclinical work that we had done to understand all aspects of where this molecule engages, certainly with animal models and ultimately into man. So we have good experience in this, and there are very tried-and-true approaches that one takes in order to make the decision to file or not to file an IND. The data tell us what the right thing is to do. With regards to the pediatric indication, this is tried-and-true practice that everyone does in the industry. One of the things that the FDA put in place was the Pediatric Research Equity Act to encourage companies to develop drugs for the pediatric population. Now, it is pretty hard—IBS-C—given different age groups, the inability or challenge to describe pain. It is subjective. So it is a harder population; it is a smaller population. But the mere operational effort to put this in place, primarily to show safety—one of the fundamental tenets of pediatric development—allows you flexibility to treat the younger patients if you demonstrate the safety that we expect to demonstrate, given our long history of utility of this molecule. So the benefit of that six months—you look at whatever peak it is that you have modeled, just look at each incremental month of value that that will generate, and that will tell you the value in your modeling of what those six months are worth. It is significant. Ashley Marie Aloupis: Got it. Thank you for the color. Operator: Our next question comes from Joseph Thome from TD Cowen. Please go ahead, Joseph. Joseph Thome: Hi there. Good afternoon, and thank you for taking my questions. Maybe a little bit of an extension of a prior question, but can you walk through the physician-type point differences between CIC and IBS constipation? If you are successful in CIC, would you need to go a little bit more into a primary care segment with your sales force? Or by the time they are presenting to a level where they may be in the GI office? Anything around that would be helpful. And then you mentioned about it a couple times, obviously, on the call. Can you talk a little bit about the company's willingness to maybe lever up the balance sheet, given what your expectations are for the growth of Ibsrela, to do something maybe a little bit larger in size? Michael Raab: Sure. Let me address the first one and ask Eric to comment too. As we said when we announced the EXCEL program, the CIC market is significantly larger than the IBS-C market. However, the vast majority of those patients are effectively treated with over-the-counter medications. So I think that is an important distinction as you look at the epidemiology in these populations as to what the differences are and not get over your skis in terms of what that market sizing might be. It is an important distinction that those who are not served by OTC meds are the ones that end up going and being referred to other offices. Eric, do you want to comment a little bit on what we would do in the field, if anything? Eric Foster: Yeah. Thanks, Joe, for the question. As you know, today we focus on high-writing GIs, APPs, and high-writing non-GI. That does put us in more of the primary care setting. I feel really confident about the targeting that we have right now for IBS-C, and you can see a lot of the great momentum that we have. With regards to CIC, I do think you are correct. As Michael mentioned, it is a bit of a larger patient population, and we do see and expect more patients to be going to their primary care. At some point, as we are continuing to look at that patient population and making sure that we have the right reach, we will make that decision at that time. Certainly, I can see that there is more utilization in the primary care market. That is something that we definitely will consider as we look at the right-sizing of the team as we get closer to product being approved. Michael Raab: And, Joe, a fundamental part of that is—as Eric has talked about in the past—we call on 50% of the HCPs today that write for IBS-C and, frankly, CIC-indicated drugs alike. That is the 14 thousand HCPs. The other 50% is about 182 thousand HCPs, and we are not going to cover them all. So it is going to be an optimization of those who might be writing a disproportionate amount for CIC, which you can find through the data. A little bit of a cautionary note not to take this as though we are going to double or triple the size of the organization, but rather an optimization as you have seen us do this year. With regards to levering the balance sheet, we are at such an incredible, pivotal time for the evolution of the company, where—not really reading between the lines—Sue has said explicitly we are going to generate more top line than expense. So that journey that we are on, that horizon, is not that far away. What we are trying to do—I will ask Sue to comment. I am not sure how much leverage is needed versus execution in the way we are doing, but certainly, we are not afraid of doing the right thing for opportunities that present themselves. Sue Hohenleitner: Yep. And as you heard, we already did do a refinance of our debt. We still have access to an extra $100 million of that loan. So we have got that. We have got plenty of options to do that if and when it is necessary or a great opportunity presents itself. Joseph Thome: Great. Thank you. Michael Raab: Thanks, Joe. Operator: Our next question comes from Laura Kathryn Chico from Wedbush Securities. Please go ahead, Laura. Laura Kathryn Chico: Thank you very much for taking the question. Three for me. First, I thought I heard Eric mention an expansion of the field manager level, and I am just trying to understand if that is more impactful on the depth of prescribing or the breadth of prescribing. Which of those two levers impacts hitting the upper range of guidance or kind of impacts the guidance swing there? I have two quick follow-ups. Eric Foster: Yes. Thanks for the question, Laura. I hate to say it, but both, actually. It is very hard getting the physician to write that first prescription, and so we want to make sure when they write the prescription that they have confidence that it will be filled. That is what the field reimbursement manager does. They work with the physician’s office to ensure, as they navigate the payer dynamics, that they are able to pull through and get that prescription filled. With regards to physicians as they continue to increase their depth of prescribing, that same confidence is important that not just the first one goes through, but subsequent ones. That team is really focused on helping prescriptions get pulled through, whether it is the first prescription or subsequent ones. I think you heard me say in my prepared remarks we saw an increase in writers as well as an increase in depth of prescribing as well. So we are having impact across both of them. That is why I go to both of them to say that it is important to make it happen across both. Michael Raab: Laura, when Eric first started talking about hiring this skill set, one of the things that really opened my eyes is a very simple example. If I am the salesperson, I worry that that script is going to be filled—that is the way you are going to compensate me. So if I am spending my time looking at Dr. Foster and whether or not that script is actually getting filled, I am not calling on Dr. Raab, because I am worried about that. Bringing on the field access managers allows the account-based directors to have confidence that they can drive the top of the funnel and that there will be those there to help pull through at the bottom of the funnel, resulting in compensation ultimately in incentive comp. I do not think I would ever imagine not having both in the launch of a drug going forward. Laura Kathryn Chico: Okay. Two quick follow-ups and kind of related to that. I think in the prepared remarks, I heard that the Exposa paid rate was also up. Just curious if you could quantify that. And then with respect to EXCEL, the site activation on the pre-identified sites has moved really rapidly. How are you monitoring—any conversation around quality checks that you can do to ensure you are getting sites to adhere to protocols and recruiting the right patients would be helpful—but also what are your assumptions around discontinuation rates? Michael Raab: Once the site is up and running—do we not pay any attention to it? No. You are right. The quality of the patients is really, really important. As you get the enthusiasm of startup, there is training and reminding people of why you started, and any clinical trial has screen failures that happen. Then the sites get better and better at identifying the patients. That is just a natural progression of clinical development and recruitment. Rajani— a couple weeks now onto the job—is into this with both feet and both arms, and we all feel very good about both the quality of the sites as well as, as those sites learn and get better at enrollment, that we see those failure rates begin to taper, which is something you factor into your projections of how you enroll. We all feel very good about what we have said, and ultimately the quality of the patients is going to be there, defined by our inclusion and exclusion criteria. So we feel very good about that quality that Rajani’s team and our CRO are following through with. In regards to your first question, what is important is, on a GAAP basis, of course, the year-over-year quarters look similar. It is so important—what Sue reminded everyone of—that $3.8 million return reserve reversal that we did in Q1 2025 should be excluded as you look at the base business that we have defined, which is a non-Medicare business, which grew by 19%. If you look at our sequential growth, even since we started this effort to not participate in TDAPA, because we believed what we are now seeing is ultimately what was going to be true, it is proving out. The growth that we are seeing in that non-Medicare segment, with all the challenges dialysis organizations are facing, further emphasizes the value of this program and the product for patients who need phosphorus management. It is an opaque and difficult business that we have chosen to partake in in the way that we have, but the numbers are showing that we are helping the patients that we anticipated that we would. Laura Kathryn Chico: Thanks very much. Michael Raab: Thanks, Laura. Operator: Our next question comes from Prakhar Agrawal from Cantor Fitzgerald. Please go ahead, Prakhar. Prakhar Agrawal: Hi. Thank you for taking my questions. Congrats on the quarter as well. Firstly on Exposa, maybe I missed this, but I did not hear you reiterate the long-term guide of $750 million. I know the speed is a little bit more conservative, but just wanted to check if you are reiterating that. You talked about investing in high-value opportunities as well. Has there been a change in the level of investment for Exposa this year and maybe in the future too? Secondly, maybe if you can talk about the gross-to-net for both products for Q1 and trends for rest of the year. And last question, given the investments you are making both on the R&D and SG&A, how should we think about the cash flow profitability? Thank you. Sue Hohenleitner: Thanks, Prakhar. That is a lot for me, so let us see if I can hit it all. In terms of the high-value opportunities with Exposa, yes, we ensure that Exposa continues to be a contributor. We do not necessarily tease out separate product P&Ls, but rest assured, we continue to ensure that all of the spending that is done—any investments we make behind those patients and that growth—makes it a financial contributor. In terms of the gross-to-net, you probably saw in what we filed we are a little over 36.4% GTN, and that is a blend. We do not necessarily split that out. What I would say is first quarter is going to be your highest quarter in terms of GTN, just given all the dynamics with copays and deductibles, etc. What we have always said before is it is about low-30s when you think about a blended total GTN rate for the year. You will see that high in Q1 and then taper off as we go into further quarters. Before I leave Exposa, yes, we will reiterate the $750 million, and I am reiterating that. So within the guidance, we have given the $1 billion for Ibsrela and the $750 million for Exposa. In terms of R&D and SG&A and cash flow, it is something that we are continuing to monitor. As you can see with the top-line guide being $520 million to $550 million and our OpEx only $520 million, there is a possibility we will get to cash flow positivity. But certainly, we want to continue to see how the year unfolds and make sure that we are hitting on all cylinders, and then we will likely come back with an update if it is appropriate on cash. Michael Raab: We appreciate the question of wanting to traject quarter to quarter, but we are not going to get into the practice of quarter guidance. I think the yearly guidance that Sue just went through is really important. Prakhar Agrawal: Thank you so much. Operator: Our next question comes from Matthew Caufield from H.C. Wainwright. Please go ahead, Matthew. Matthew Caufield: Hi. Thank you, guys. With the investor focus on sales execution, is there further granularity that you could share on Ibsrela growth between the new patient starts versus refill persistence trends? And then where things may stand presently for the total penetration among target prescribers there? Thanks for any color on execution overall. Michael Raab: I think that is getting into detail that we probably would not get into specifics on. You can begin to look through your script data in terms of NRx and TRx and tease that out to some extent with what you do. I recognize that it is going to be imperfect data. Suffice it to say, with Eric’s prepared remarks, that we are seeing both— with the other question that was asked—breadth and depth. We are seeing great refills, and we are seeing lots of new prescriptions coming through as well. Eric, anything to add? Eric Foster: [inaudible] Matthew Caufield: Thank you. Operator: Our next question comes from Julian Harrison from BTIG. Please go ahead, Julian. Julian Harrison: Hi. This is Andrew on for Julian. Congratulations on the results this quarter, and thanks for taking our question. On Ibsrela, which of the growth drivers would you say you believe still has the most room to grow: writers, new prescriptions, refill, or pull-through? Thank you. Michael Raab: I think Eric will probably say yes to all of the above. What is interesting is, for the 7 million prescriptions for IBS-C-indicated products that I referenced in my opening remarks, it is a very small percentage of the market one needs to penetrate in order to get to our guidance of peak. There is massive opportunity out there. Eric, any granularity around the specifics would be great. Eric Foster: Sure. I am very excited about all of them, as you list them. As we think about the Ibsrela opportunity, as Michael said, there are 7 million prescriptions written for IBS-C on an annual basis, and we continue to see that market grow. We feel very confident in the position that we have—winning position, sustainable over time—that we have had for the past three years. We continue to see an increase in writers, total writers, new writers, as well as depth of prescribing, and that is really important. What that tells you is physicians continue to have confidence in Ibsrela and look at it as a viable option for their patients that are in need. Of those patients, we know that 77% continue to have symptoms despite treatment with a secretagogue. Very healthy market, strong position for Ibsrela, continuing to grow writers as well as depth of prescribing, and we feel really good about the opportunity we have moving forward. When you think about the Ibsrela Pharmacy Network and being able to improve the fulfillment rate as well as the number of refills for patients, it really leads to success across the business in those important drivers. That is what gives us that confidence to the $1 billion in 2029 and beyond. Operator: There are no further questions at this time. This now concludes today’s conference call. Thank you for joining. You may now disconnect.
Suhasini Chandramouli: Good afternoon, and welcome to the Apple Inc. Q2 Fiscal Year 2026 Earnings Conference Call. My name is Suhasini Chandramouli, director of investor relations. Today’s call is being recorded. Speaking first today is Apple Inc. CEO, Timothy D. Cook. John Ternus will be joining after that for a brief set of remarks and he will be followed by CFO Kevan Parekh. After that, we will open the call to questions from analysts. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast, including risks related to the potential impact to the company’s business and results of operations from macroeconomic conditions, tariffs and other measures, and legal and regulatory proceedings. For more information, please refer to the risk factors discussed in Apple Inc.’s recently filed reports on Form 10-Q and Form 10-Ks and the Form 8-Ks filed with the SEC today along with the associated press release. Additional information will also be in our report on Form 10-Q for the quarter ended March 28, 2026, to be filed tomorrow and in other reports and filings we make with the SEC. Apple Inc. assumes no obligation to update any forward-looking statements which speak only as of the date they are made. I would now like to turn the call over to Tim for introductory remarks. Timothy D. Cook: Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Before we get into the quarter, I wanted to take a moment to talk about the transition we recently announced. I just celebrated my 28th anniversary of being here at Apple Inc.—15 years as CEO. In fact, this will be my 89th earnings call. I will always be proud of the impact Apple Inc. has had on our users’ lives and I cannot begin to express how grateful I am for our amazing teams. It is because of them that there is no company like Apple Inc., and I truly believe there never will be. This moment for the transition is the right one for a number of reasons. First, our business has been performing extremely well. The first half of this year was very strong, growing double digits year over year. Second, our roadmap is incredible. And most importantly, we have the right leader ready to step into the role. As I have said, there is no one on this planet I trust more to lead Apple Inc. into the future than John Ternus. John is a brilliant engineer, a deep thinker, a person of remarkable character, and a born leader. I know he will push us to go further than we think is possible in order to deliver the greatest products and services for our users. I have been so proud to call him a colleague and a friend and I will be even more proud to call him Apple Inc.’s CEO. Over the coming months, John and I will be working closely together to make sure this transition is perfectly smooth. I very much look forward to stepping into the role of executive chairman on September 1. As I have told John, I will be here to support him in any way he needs and in any way I can. I am incredibly optimistic about Apple Inc.’s future and I know we have the right team in place to deliver on the promise of this company. I also want to take just a moment to share my profound gratitude for our shareholders, especially our long-term shareholders, for believing in Apple Inc. and for your support over the years. It means a great deal to all of us. With that, I would like to bring John on the call for a moment to say a few words. John? Thanks, Tim, and thanks to everyone on the call. John Ternus: In my view, Tim is one of the greatest business leaders of all time. Stepping into the role of CEO is incredible, and it means a great deal to me to have Tim’s trust and confidence. I want to echo Tim’s sentiment about our shareholders, especially those who have been with us for many years. Thank you so much for your confidence in our company. As you know, one of the hallmarks of Tim’s tenure has been a deep thoughtfulness, deliberateness, and discipline when it comes to the financial decision-making of the company. And I want you to know that is something Kevan and I intend to continue when I transition into the role in September. This is an especially exciting moment for Apple Inc. As Tim mentioned, we have an incredible roadmap ahead. And while you are not going to get me to talk about the details of that roadmap, suffice it to say, this is the most exciting time in my 25-year career at Apple Inc. to be building products and services. There are so many opportunities before us, and I could not be more optimistic about what is to come. For now, let me simply say I am deeply grateful to Tim, to the executive team, and to everyone at Apple Inc., and I look forward to all of the important work ahead. And with that, let me turn it back over to Tim. Timothy D. Cook: Thanks, John. Now let me turn to the quarter. Today, Apple Inc. is proud to report $111.2 billion in revenue, up 17% from a year ago and a March record, which was above the high end of our guidance range despite constraints. Customer enthusiasm for iPhone has been extraordinary, with revenue growing 22% year over year to achieve a March record. Services reached an all-time revenue record, growing 16% from a year ago, while EPS set a March record of $2.10, up 22% year over year. We set March revenue records and grew double digits in every geographic segment, including strong double-digit growth in Greater China and the rest of Asia Pacific. We also achieved March revenue records in both developed and emerging markets and saw double-digit growth in nearly every emerging market we track, including India. We recently marked Apple Inc.’s 50th anniversary with celebrations in our retail stores and with users around the world. It was a special moment for us to reflect on the incredible journey we have shared with our users, to thank everyone who has been a part of it, and to look forward to writing the next chapter in our story of innovation. We have always believed that people who think different can change the world, and we have been proud to build tools and technologies that allow them to do just that. In March, we put an amazing showcase of human creativity and ingenuity in action with updates across iPhone, iPad, and Mac. Through an unforgettable week of innovation, we also unveiled MacBook Neo, giving us an opportunity to bring the power of Mac to more people than ever before. I will have more to say on that and all the things we delivered for our customers over the last few months. Now let us take a closer look at results from across our product line, beginning with iPhone. As I mentioned earlier, iPhone had an excellent quarter with $57 billion in revenue, a March record despite supply constraints. During the quarter, we welcomed iPhone 17e, the newest addition to what is already the strongest iPhone lineup we have ever had. It brings outstanding performance and core iPhone experiences at a remarkable value for everyone from enterprise teams to consumers. Across the lineup, this is the most powerful, capable, and versatile iPhone family we have ever created. That starts with the latest in Apple silicon for iPhone—A19 and A19 Pro—which include neural accelerators in the GPU to deliver a huge boost to AI performance. With incredible performance and battery life, and deep integration of Apple Intelligence, iPhone continues to set the standard for what a smartphone can be. Customers are capturing stunning photos and videos with our most advanced camera system ever on iPhone 17 Pro and Pro Max, including an 8x optical-quality zoom and the all-new Center Stage front camera, unlocking entirely new ways to frame, create, and share their moments. In fact, during their recent mission, Artemis II astronauts captured some truly otherworldly images of Earth and space using iPhone 17 Pro Max. Meanwhile, iPhone Air users are tapping into the pro-level performance in our slimmest iPhone ever. And with iPhone 17, we are seeing a strong response not only from customers upgrading from previous generations, but also from people choosing iPhone for the very first time. We have been enormously pleased with how the entire lineup has been received. In fact, the iPhone 17 family is now the most popular lineup in our history when looking at the launch through March. And according to IDC, we gained market share during the quarter. Mac revenue was $8.4 billion for March, up 6% from a year ago despite supply constraints driven by higher-than-expected levels of demand. We are delighted with the reception of what is the most advanced Mac lineup in our history. We set March records for upgraders and customers new to Mac. And according to IDC, we gained market share in the quarter. From Mac mini to MacBook Pro and everything in between, Mac is the best platform for AI, with Apple silicon delivering exceptional performance, industry-leading efficiency, and the ability to run advanced models locally in ways that simply were not possible before. It is so exciting to see how strongly users are embracing on-Mac AI capabilities. There is tremendous enthusiasm for MacBook Neo, which made its debut during March, opening up an entirely new way to experience Mac at a breakthrough price. We have also further improved MacBook Air—already the world’s most popular laptop—with M5, making everyday tasks faster and more responsive than ever. MacBook Pro reaches new heights with M5 Pro and M5 Max, delivering extraordinary performance and dramatically advancing what users can do with AI on a portable system. And for desktop users, Studio Display pairs beautifully with Mac, while the all-new Studio Display XDR takes things even further, bringing unmatched image quality and an extraordinarily immersive experience to pro workflows. Turning to iPad. Revenue was $6.9 billion, up 8% from a year ago. iPad continues to be a great choice for students, small business owners, artists, and so many others because it empowers entirely new ways to work, learn, create, and connect. It is not just about mobility. It is about versatility, delivering a uniquely flexible experience that adapts to whatever users want to accomplish. Today, our iPad lineup is stronger than ever, led by the arrival of the M4-powered iPad Air. With a remarkable leap in performance, it raises the bar for what users can do on iPad—from advanced creative workflows to powerful productivity and immersive learning. And with the addition of our latest Apple silicon along with the N1 wireless networking chip and C1X modem, users can stay seamlessly connected wherever they are. Across Wearables, Home, and Accessories, revenue for March came in at $7.9 billion, up 5% from a year ago. Apple Watch Ultra 3, Apple Watch Series 11, and Apple Watch SE continue to play an essential role in users’ lives, going far beyond fitness tracking to deliver meaningful insights and support for their health and well-being. From helping users stay active and reach their fitness goals to delivering powerful, science-backed health insights that can prompt meaningful conversations with care providers, Apple Watch is with them every step of the way. It is tremendously meaningful to see how Apple Watch continues to empower users to better understand their health, make more informed decisions, and in many cases change and even save lives. During the quarter, we introduced customers to a new level of audio experience with AirPods Max 2, delivering stunning sound quality and our most advanced active noise cancellation yet. At the same time, AirPods Pro 3 combine an incredibly immersive listening experience with intelligent features that adapt to how users move, train, and live. And whether it is a call across town or a conversation across continents, AirPods make it effortless to stay connected. AirPods can bridge languages too, thanks to Live Translation powered by Apple Intelligence. In addition to Live Translation, Apple Intelligence brings together dozens of powerful capabilities—from Visual Intelligence to Cleanup in Photos—that are seamlessly integrated into the moments that matter most to our users every day. And we look forward to bringing a more personalized Siri to users coming this year. What truly sets Apple Inc. apart is how Apple Intelligence is woven into the core of our platforms, powered by Apple silicon and designed from the ground up to deliver intelligence that is fast, personal, and private. This is not AI as a standalone feature, but AI as an essential, intuitive part of the experience across our devices. It builds on years of innovation—from the Neural Engine to advanced on-device processing—enabling capabilities that are not only incredibly powerful, but also respectful of user privacy. Increasingly, that same foundation is drawing AI researchers to our products as powerful platforms for building and running agentic AI, thanks to the unique combination of performance, efficiency, and on-device capabilities. When you combine this level of integration with our relentless focus on the customer experience, it becomes clear why Apple Inc. platforms are the best place to experience AI. Now let us turn to Services, which set an all-time revenue record with $31 billion. We saw double-digit growth in both developed and emerging markets and set new all-time revenue records across most of the Services categories. There is no better place to find celebrated storytellers than Apple TV+. Audiences are applauding the return of shows like Your Friends and Neighbors, Shrinking, and For All Mankind, while discovering new favorites like Widow’s Bay. Apple TV+ has also earned its place among the most decorated names in entertainment, with more than 800 wins and more than 3.4 thousand nominations in the six years since launch. This is a great time for sports fans on Apple TV+ too. Formula 1 season kicked off in March, and Apple TV+ subscribers in the US have one of the best views of the track. The new MLS season is also well underway, and subscribers in more than 100 countries and regions can watch every match with no blackouts. And Friday Night Baseball returned for its fifth year on Apple TV+ with a full season of marquee matchups. In Retail, we had a March revenue record and saw very high levels of store traffic throughout the quarter. From New York to Chengdu to Paris, it was wonderful to see stores around the world at the center of Apple Inc.’s 50th anniversary celebrations. We were also thrilled to open the doors to our sixth store in India. It has been wonderful to see how we have continued to grow in India in recent years, part of our larger efforts to connect with even more customers in emerging markets all over the world. At Apple Inc., we believe powerful innovation and uncompromising quality can go hand in hand with sustainability. Over the last year, we have reached new milestones in the environment, including the use of recycled content in 30% of the materials in all of our products shipped in 2025, the most we have ever had. That includes the use of 100% recycled cobalt in all Apple-designed batteries and 100% recycled rare earth elements in all magnets. We have also achieved our goal of removing plastic from packaging, with every Apple Inc. product now shipping in fiber-based packaging. All of this is a testament to the outstanding, forward-thinking, and innovative work of our teams. We are also making great progress in advancing American supply chain innovation, as part of our $600 billion commitment to the US. We were pleased to share recently that Mac mini production is coming to America later this year, expanding our factory operations in Houston with a brand new facility. In March, we were thrilled to welcome four new companies to our American manufacturing program to help manufacture essential materials and components for Apple Inc. products sold worldwide. These include sensors that support key iPhone features like camera stabilization and integrated circuits essential for features like crash detection and activity tracking. These efforts build on the progress we have made in the American program, including the work we are doing to advance an end-to-end silicon supply chain across the US. At TSMC’s Arizona facility, for example, Apple Inc. is on track to purchase well over 100 million advanced chips. As we are accelerating our long-standing support for US innovation, we are also investing in America’s workforce. We are looking forward to opening the doors to an all-new advanced manufacturing center in Houston later this year, which will provide hands-on training led by Apple Inc. experts and tailor-made for students, supplier employees, and American businesses. Whether around the world or in our own backyard, we are proud of the difference Apple Inc. has made to enrich lives and support the communities we serve. Looking ahead, we are delighted to welcome developers back to Apple Park for WWDC 2026. We cannot wait to share what we have been working on. From AI advancements to exciting new software and developer tools, it is going to be an incredible week. As always, we remain in relentless pursuit of even more powerful innovations, guided by our North Star—our users. As we celebrated 50 years of Apple Inc., we are even more excited and more optimistic about the next 50 years and beyond. With that, I will turn it over to Kevan. Thanks, Tim. Kevan Parekh: Good afternoon, everyone. Our revenue of $111.2 billion was up 17% year over year, a March revenue record. We saw strong performance around the world, with March revenue records in every geographic segment. Foreign exchange was about a 2.5 percentage point tailwind to the March growth rate. We also faced supply constraints on iPhone and, to a lesser extent, on Mac. We believe if we remove the favorable benefit from foreign exchange and add back the unfavorable impact from supply constraints, we would have had a higher growth rate for total company revenue for the quarter. Products revenue was $80.2 billion, up 17% year over year, driven by double-digit growth on iPhone, setting a new March record. Our installed base of over 2.5 billion active devices has reached another all-time high across all major product categories and geographic segments. Services revenue was $31 billion, up 16% year over year. We saw strong performance across the board, with double-digit growth in the vast majority of the markets we track. Company gross margin was 49.3%, above the high end of our guidance range, and up 110 basis points sequentially. Products gross margin was 38.7%, down 200 basis points sequentially. Services gross margin was 76.7%, up 20 basis points sequentially. Operating expenses landed at $18.9 billion, up 24% year over year. This was slightly above the high end of our guidance range due to a one-time expense in SG&A. Net income was $29.6 billion and diluted earnings per share was $2.10, up 22% year over year. Both net income and diluted EPS achieved March records and drove a very strong level of operating cash flow at $28.7 billion. Now I am going to provide some more details for each of our revenue lines. iPhone revenue was $57 billion, up 22% year over year, driven by the iPhone 17 family. iPhone grew double digits in the majority of markets we track, including the US, Latin America, Greater China, Western Europe, India, Japan, and Southeast Asia. The iPhone active installed base grew to an all-time high, and we set a March record for iPhone upgraders. According to a recent survey from Worldpanel, iPhone was a top-selling model in the US, urban China, the UK, Australia, and Japan. We have been extremely pleased with the positive reception of the iPhone 17 family. In fact, customer satisfaction for the iPhone 17 family in the US was recently measured at 99% by 451 Research. Mac revenue was $8.4 billion, up 6% year over year, driven by the strength of the recent product launches including MacBook Neo. We grew in both developed and emerging markets, with double-digit growth in many emerging markets, including India and Indonesia. As Tim mentioned earlier, we had a March record for customers new to the Mac, and this helped drive a new all-time record for the overall Mac installed base. And in the US, customer satisfaction for Mac was recently reported at 97%. iPad revenue was $6.9 billion, up 8% year over year, driven by the continued strength of the A16-powered iPad and the M5-powered iPad Pro. The iPad install base reached a new all-time high as iPad continued to reach new customers around the world. During the quarter, over half of the customers who purchased an iPad were new to the product. Many of these customers are in our emerging markets, where we grew iPad revenue by double digits, including in India, Mexico, and Thailand. And based on the latest reports from 451 Research, customer satisfaction was 98% in the US. Wearables, Home, and Accessories revenue was $7.9 billion, up 5% year over year, driven by strength in wearables and accessories. We were pleased to see strength in our emerging markets where we set a new March revenue record. The wearables installed base reached a new all-time high, with over half of the customers purchasing an Apple Watch during the quarter being new to the product. And in the US, customer satisfaction on Apple Watch was measured at 96%. Our Services revenue reached an all-time high of $31 billion, up 16% year over year. The strong performance was broad-based, with all-time records in both developed and emerging markets. And as Tim mentioned, we also set all-time revenue records in most of the Services categories. We are optimistic about the future of our Services business. With our large installed base of over 2.5 billion active devices, we have an incredibly strong foundation for growth opportunities. Both transacting and paid accounts reached new all-time highs in the quarter, as we continue to see more customers leveraging our Services offerings. And we continue to improve the quality and expand the breadth of our Services—from the expansion of features like Tap to Pay, now available in over 50 markets, to deeper support for enterprise customers. Building on this, we launched Apple Business, a new all-in-one platform that combines our hardware, software, and enterprise services, enabling companies to efficiently manage their deployments and scale their business. We continue to see more organizations in enterprise choosing Apple Inc.’s devices for performance and productivity. Marsh, a leading professional services firm, deployed a large-scale refresh of corporate devices to iPhone 17 as part of a commitment to security, alongside adopting Mac for internal AI development. With Apple silicon and its powerful unified memory architecture, leading AI developers like Perplexity are choosing Mac as their preferred platform to build enterprise-grade AI assistants that power autonomous agents and boost workplace productivity. Across the Mac lineup, customers are finding the right device for their needs—from MacBook Pro and MacBook Air to our newest addition, MacBook Neo, which delivers an unprecedented combination of quality, value, and industry-leading security that is resonating strongly in enterprise and education. Kansas City Public Schools, for example, is switching their high school students from Windows laptops and Chromebooks to MacBook Neo, completing their transition to an all-Apple district. And in India, leading enterprise software provider Freshworks deployed over 5 thousand MacBook Pro and MacBook Air to accelerate their AI development. Let us turn to our cash position and capital return program. We ended the quarter with $147 billion in cash and marketable securities. We had $5.8 billion of debt maturities and commercial paper remained unchanged at $2 billion, resulting in $85 billion in total debt. Therefore, at the end of the quarter, net cash was $62 billion. During the quarter, we returned $15 billion to shareholders. This included $3.8 billion in dividends and equivalents and $11 billion through open-market repurchases of 42 million Apple Inc. shares. Our repurchase activity at any time can be affected by a number of factors that we take into account, and as you are aware, we recently announced a CEO transition. Taking a step back, we plan to continue our capital allocation philosophy of, first, making all the necessary investments needed to support the business, and then returning excess cash to shareholders over time. Net cash neutral has been a valuable framework for our capital structure, and since 2018, we have significantly right-sized our balance sheet and reduced net cash by over $100 billion. As we move ahead, we are no longer providing net cash neutral as a formal target, and we will independently evaluate cash and debt. Capital returns will continue to be important to our overall approach by delivering long-term shareholder value. Accordingly, our Board has authorized an additional $100 billion for share repurchases, and we are also raising our dividend by 4% to $0.27 per share of common stock. This cash dividend will be payable on May 14, 2026, to shareholders of record as of May 11, 2026. As we move ahead into June, I would like to review our outlook, which includes the types of forward-looking information that Suhasini referred to. Importantly, the color we are providing assumes that global tariff rates, policies, and their application remain in effect as of this call, and the global macroeconomic outlook does not worsen from today. We expect our June total company revenue to grow by 14% to 17% year over year, which comprehends our best view of constrained supply. On iPad, keep in mind we face a difficult compare driven by the launch of the A16-powered iPad in the prior year. We expect Services revenue to grow at a year-over-year rate similar to what we reported in March, after removing the favorable year-over-year impact from foreign exchange tailwinds. Keep in mind, during March, FX was a 2.5 percentage point tailwind to the total company growth rate, and for Services, that impact was slightly more favorable. We expect gross margin to be between 47.5% and 48.5%. We expect operating expenses to be between $18.8 billion and $19.1 billion. We expect OI&E to be around $250 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 17%. With that, Tim and I will take questions. Suhasini Chandramouli: Thank you, Kevan. We will now open the call for questions. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator: Certainly. We will go ahead and take our first from Erik Woodring with Morgan Stanley. Erik Woodring: Great, thank you very much for taking my questions, guys. And Tim, I will save the congrats for next quarter. But it has been a pleasure working together. I would love, maybe, Tim, if I could ask you to contextualize the supply constraints you alluded to in your prepared remarks, meaning how much did demand outpace supply for iPhone and Mac in March? And does your June guidance also reflect supply constraints for those segments, or is that an unconstrained guide as you see it today? And then a quick follow-up, please. Thank you. Timothy D. Cook: Hi, Erik. Thanks for your comments. We were constrained during March. This was primarily on iPhone and, to a lesser extent, on Mac. And as we talked about in the last call, the constraints were primarily driven by the availability of the advanced nodes our SoCs are produced on. If you look forward to June, the majority of our supply constraints will be on several Mac models, given the continued high levels of demand that we are seeing, and we have less flexibility in the supply chain than we normally would. For Mac in June, there are two factors that are driving the constraint. One is that on the Mac mini and the Mac Studio, both of these are amazing platforms for AI and agentic tools, and the customer recognition of that is happening faster than what we had predicted, and so we saw higher-than-expected demand. The second reason is that the customer response to MacBook Neo has just been off the charts, with higher-than-expected demand. And we set a March record for customers new to the Mac, partly due to the Neo. We think looking forward that the Mac mini and the Mac Studio may take several months to reach supply-demand balance. And so, hopefully, that gives you a view of both Q2 and Q3 on the supply side. Erik Woodring: Thank you very much for that color, Tim. And then, Kevan, I would love to turn to you and the surprise little announcement there talking about net cash—great path, but no longer providing this as a formal target. Could you maybe expand on that a bit? Are we thinking about any different type of capital return policy? It does not seem so, but maybe give a little bit more detail when you talk about making investments. Is that organic versus inorganic? Just tease that comment out a little bit more for us. Be super helpful. Thank you so much, guys. Kevan Parekh: Sure, Erik. Thanks for the question. Let me reiterate what we said, which is really more of a comment on the capital structure. Our goal of net cash neutral has really served us well and been a valuable framework for our capital structure since 2018. We believe we are at a stage where evaluating cash and debt independently is the right approach for us and allows us to make more optimal economic decisions around how we best utilize our debt and cash portfolios to support the business based on business factors and market conditions. We also believe we can manage this flexibility while also being very efficient and remaining disciplined. With all that being said, we remain very committed to returning excess cash to shareholders. As we talked about, our investment in the business comes first and foremost, and then we look to return excess cash to shareholders. We have a very good track record of being disciplined—we have returned over $1 trillion to shareholders from the start of the program, over $850 billion of which has been through share repurchases. And as part of that, we have increased our buyback authorization by another $100 billion, on top of the leftover capacity from the prior authorization. You can see the capital return piece is very important to us and important to our overall approach to delivering long-term shareholder value. Suhasini Chandramouli: Thank you, Erik. Operator, could we get the next question, please? Operator: Our next question is from Ben Reitzes with Melius Research. Please go ahead. Ben Reitzes: Thanks. I will ask two myself. First, there has been a lot of talk around agentic smartphones—the way, I do not even know what that means, but there are comments about AI on the edge and that agents could catalyze smartphones but also shift the smartphone form factor or maybe not. With the rise of agents, how would you like us to think about that? Does this mean there are new products coming, a totally new form factor? Or does it change the game? Anything high level you might want to say about that trend or potential non-trend? Thanks. Timothy D. Cook: Hi, Ben. We do not get into our future roadmap, and so I do not want to give too much info there, but I would just say that we are thrilled with how the iPhone is doing, growing 22% in the quarter and following up an incredible Q1 cycle—the strongest we have ever had in our history from the launch through March. We could not be happier with it. Ben Reitzes: Thanks, I appreciate that. I am sure we will hear a lot more. Then regarding constraints and whatnot—and, Tim, I may push you one more time—the big concern out there is margins after the June quarter given component trends and all these constraints. Is there some overarching philosophy you want us to think about? Do you or maybe Kevan see a lot of variability in the model, or is 47%–48% kind of a range you think you might be able to stay in? Is there just no visibility beyond June to answer this? Any comfort level there would be so helpful. Thanks. Timothy D. Cook: Ben, let me talk about memory specifically, which I think is the root of the question. I will go back to December for a moment and walk you through the chronology. In the December quarter, we really had a minimal impact due to memory, and you can see that in the gross margin results. We said it would be a bit more in the March quarter, and we did see higher memory costs in the March quarter, and they were partially offset by benefits from carry-in inventory that we had. For the June quarter—and what is embedded in the guidance that Kevan went through earlier—we expect significantly higher memory costs. They are also partly offset by the benefit of carry-in inventory. And while we do not give color beyond June, I can tell you that beyond the June quarter, we believe memory costs will drive an increasing impact on our business, and we will continue to evaluate this. As we have said before, we will look at a range of options. Suhasini Chandramouli: Thank you, Ben. Operator, could we have the next question, please? Operator: Our next question comes from Michael Ng with Goldman Sachs. Please go ahead. Michael Ng: Good afternoon, thank you for the questions. I have two as well. First, given the success of the MacBook Neo, could you talk about how it has helped drive penetration with new customer segments—whether education, value, or emerging markets? And then, how do you think about opportunities in underpenetrated markets more broadly, and how will your future product roadmap inform that strategy? Thank you. Timothy D. Cook: Right now, we are supply constrained on the MacBook Neo. We were very bullish on the product before announcing it, but we undercalled the level of enthusiasm. It is very much focused on getting the Mac to even more people than we were reaching before. We are very focused on customers new to the Mac and customers that have been holding on to their Mac for a very long period of time. We are doing well with both of those. And as Kevan alluded to in his comments, we are seeing school systems like the Kansas City Public Schools switching from Chromebooks and Windows PCs to the MacBook Neo. I am hearing anecdotally more and more of those stories, both at the school system level and at the individual consumer level. We could not be happier with how things are going at the moment. Michael Ng: Great, thank you, Tim. And for the second question, I wanted to ask about advertising within Services. I think Apple Inc. introduced new inventory to ads on the App Store earlier this year. Has that new ad inventory on the App Store been a notable contributor to the Services growth and outperformance in the quarter? And then could you talk more broadly about your ad strategy given the plans to also introduce ads to Maps this summer? Thank you. Kevan Parekh: Yep, Mike, thanks for the question. In advertising, we did see year-over-year growth in our advertising business. As you alluded to, we recently introduced additional ads across the App Store search results to provide developers with more ways to drive downloads on platforms that users trust. And this summer, in the US and Canada, Apple Maps will feature ads during key search and discovery moments, creating a new way for local businesses to reach customers and explore new places. Importantly, we believe it is possible to help businesses of all sizes grow via advertising while still delivering a great customer experience and respecting people’s fundamental right to privacy. Suhasini Chandramouli: Thank you, Michael. Operator, could we get the next question please? Operator: Our next question is from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan: Thank you so much. Tim, you noted higher impact from memory as you look beyond June. Clearly, you have a lot of scale, supply chain efficiencies, relationships from a long time. As you think about product and pricing relative to competition, do you think in such times of dislocation that Apple Inc. would be strategically more focused on share gain—where potentially you do not raise pricing and perhaps at lower ends of the portfolio where your competitors are struggling—or more focused on profitability? What is the right framework as you enter that period? And I have a follow-up. Timothy D. Cook: Wamsi, we will look at a range of options with memory costs increasing, and I really do not want to go beyond that at this point. Wamsi Mohan: Okay. As a follow-up, is Apple Inc. thinking about broader monetization in the agentic AI world? What parts of the stack do you think Apple Inc. will be focused on internally versus leveraging partners? As we think longer term, where will Apple Inc. invest more heavily over the next several years, and is this at all related to your net cash comments in terms of perhaps building out more infrastructure as we enter an AI-centric world? Thank you. Timothy D. Cook: We are clearly investing more. You can see that in the OpEx numbers. If you look a step deeper at R&D separate from SG&A, you will find that R&D is accelerating much higher than the company overall. We are investing in products and services, and we see opportunities in both. We could not be more excited about how the future is playing out. Kevan Parekh: And building on what Tim said, from the start we have believed AI is a really important investment area for Apple Inc., and we are going to be doing that incrementally on top of what we normally invest in our product roadmap. Suhasini Chandramouli: Thank you, Wamsi. Operator, could we get the next question please? Operator: Our next question is from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani: Good afternoon, everyone. First, going back to the iPhone performance—for a couple of quarters you have had 20%+ growth despite supply constraints, and the guide implies the momentum will continue in June. Could you double click on the levers driving this impressive iPhone growth despite supply constraints, and what is the durability of this growth? Timothy D. Cook: It is the iPhone 17 family that is driving it, despite the supply constraints we are experiencing. Customers love the design, performance, durability, the camera, Center Stage, and that Apple Intelligence is integrated across the platform. From where we are seeing the growth, it is amazing—we are seeing double-digit growth in the majority of the markets we track, from the US to Latin America to Greater China to Western Europe to India to Japan to Southeast Asia. We set a new March record for upgraders as well. Customer satisfaction for the 17 family in the US, as an example, is 99%. These numbers are just unheard of. We are thrilled with how things are going. Amit Daryanani: Thank you. And then, Tim, I think we have you for one more earnings call, but I would appreciate if you could share a bit about the upcoming transition. You have historically talked about the advice that Steve gave you when you took over—around do not ask what I would do, just do the right thing. What advice are you giving John to help him build on Apple Inc.’s strengths while shaping the next chapter for the company? Timothy D. Cook: Steve’s advice to me lifted a huge burden, and it served me well over the 15 years. For John, what I have told him is that one of the most important decisions he will make is where to spend his time. Spend it where the greatest benefit to the company and the users are. And never forget the North Star for the company. We are about making the best products in the world that really enrich other people’s lives. If you keep focusing on that and make your decisions around that, it will produce a great business, and we will be able to build more products and do it all over again. Thank you for the question. Suhasini Chandramouli: Thank you, Amit. Operator, could we get the next question, please? Operator: Our next question is from David Vogt with UBS. Please go ahead. David Vogt: Thanks for taking my question. Tim, coming back to the supply chain for a second—I do not think I heard you state in your prepared remarks or in response to a question that the iPhone is constrained in June. Can you walk through how you are thinking about your ability to secure not just SoC, but also memory? Are you thinking about using alternative sources of memory outside of your traditional partners? And what is driving the confidence that the iPhone is not constrained given the amount of share it sounds like you are taking? Then I have a follow-up as well. Timothy D. Cook: David, the constraint in March and June—the primary constraint—is the availability of the advanced nodes our SoCs are produced on, not memory. I do not want to predict our ability for supply and demand to match. Realistically, on the Mac mini and the Mac Studio, I believe it will take several months to reach supply-demand balance. We are not at the point where we are saying this is going to end anytime soon. It is not because of a problem per se, other than we undercalled demand, and there are lead times as you know. For this quarter—the June quarter—the majority of the constraint will be on Mac: Mac mini, Mac Studio, and MacBook Neo. It is all of those. David Vogt: Maybe on Services—relatively strong gross margins yet again. Are we getting to a point, given the product mix within Services, where it is increasingly more challenging to scale profitability? Or is there still low-hanging fruit in terms of volume leverage or lower losses in some categories that can continue to scale gross margin across the Services base? Kevan Parekh: David, as you know, our Services portfolio contains a wide range of businesses that have different business models and profitability profiles and are growing at different rates. At any given time, the relative performance of those can impact gross margin. In Q2 specifically, Services margin increased 20 basis points sequentially, primarily driven by mix. It is hard to speculate how that evolves over time, but we are encouraged by what we are seeing. We do have some Services that are improving in profitability as they gain scale. Overall, we are encouraged by the trajectory. Suhasini Chandramouli: Thank you, David. Operator, could we get the next question, please? Operator: Our next question is from Samik Chatterjee with JPMorgan. Please go ahead. Samik Chatterjee: Hi, thanks for taking my questions. Tim, last quarter you talked about Apple foundational models and a two-pronged strategy: the collaboration with Google as well as continuing to work on your own models. Can you give us an update in terms of balancing those two priorities? Do you feel like you need to double down and invest more to balance those side by side? A follow-up for Kevan after. Timothy D. Cook: It is a good question. We are investing more—you can see that in the OpEx numbers. R&D in particular has scaled rather significantly year over year. The collaboration with Google is going well. We are happy with where things are, and we are happy with the work we are doing independently as well. Samik Chatterjee: Great. Kevan, the sequential moderation in product gross margin this year is relatively muted compared to what we have seen over the last couple of years. Is it primarily mix, or was there an FX tailwind as well? How would we break it down versus what we typically see, and could you clarify the FX impact on gross margin for the quarter? Kevan Parekh: Sure, Samik. On products for Q2, product gross margin decreased by 200 basis points sequentially, driven by seasonal loss of leverage and higher memory costs, as Tim alluded to. If I zoom out to overall company gross margin, the sequential impact was +110 basis points, driven by favorable mix and lower tariff-related costs, partly offset by seasonal loss of leverage and higher memory costs. I want to turn it over to Tim to provide some clarity around the lower tariff-related costs. Timothy D. Cook: Thanks, Kevan. For March, the gross margin of 49.3% did include the impact of tariff-related costs. However, tariffs in March versus December were lower because we had lower product volume sequentially from Q1 to Q2, and there was the full-quarter benefit from a reduction in the IPEA tariff rates as well as the reduced global tariff rate under Section 122. In terms of applying for a refund of tariffs paid, we are following the established processes, and we plan to reinvest any amount we receive back into US innovation and advanced manufacturing. These would be new investments and would be in addition to our prior commitments in the US. Kevan Parekh: And one last point on your FX question: we did not see any sequential impact related to foreign exchange going from Q1 gross margin to Q2. Suhasini Chandramouli: Thank you. Operator, could we get the last question, please? Operator: We will go ahead and take our last question from Aaron Rakers with Wells Fargo. Please go ahead. Aaron Rakers: Congrats on the quarter. I wanted to ask about a few of the end markets. Tim, could you comment on what you are seeing specifically in China? From a competitive perspective, are you seeing advantages from supply constraints impacting some of your competitors? Any thoughts on the China market? And I have a quick follow-up. Timothy D. Cook: We are thrilled with the performance in Greater China. The first half of the year grew 33%. In March, revenue was up 28%—a quarterly revenue record for us. The performance is really driven by iPhone, which was also a March record. If you look at individual products, iPhone was the top-selling model in urban China. The Mac mini was the top-selling desktop in China, and the MacBook Air was the top-selling laptop model. We are doing well across the board. I was over there in March—the traffic in our stores grew by double digits. We were celebrating Apple Inc.’s 50th anniversary there. It was amazing to be a part of the community. I am really happy with how things have gone in the first half of this year. Aaron Rakers: And then similar question on the India market. How are you seeing the market in India evolve around the base of iPhones and the rising middle class—just the overall opportunity set in that large mobile market? Timothy D. Cook: I think it is a huge opportunity for us. We have been focused on this for a while. It is the second-largest smartphone market in the world and the third-largest PC market. Despite doing extremely well there for quite some time, we still have a modest share, which speaks to the opportunity we have. There are a lot of people moving into the middle class, and we have some great products for them, both currently and coming. In the majority of our categories—from iPhone to Mac to iPad to Watch—over half of customers are new to that product there. It speaks very well to growing the install base. Net net, I am over the moon excited about India. Suhasini Chandramouli: A replay of today’s call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor, and via telephone. The number for the telephone replay is (866) 583-1035. Please enter confirmation code 2803309 followed by the pound sign. These replays will be available by approximately 5 PM Pacific time today. Members of the press with additional questions can contact Josh Rosenstock at (408) 862-1142, and financial analysts can contact me, Suhasini Chandramouli, with additional questions at (408) 974-3123. Thanks again for joining us today. Operator: Once again, this does conclude today’s conference. We do appreciate your participation.
Operator: Good afternoon, everyone, and welcome to AXT, Inc.'s First Quarter 2026 Earnings Conference Call. Leading the call today is Doctor Morris S. Young, Chief Executive Officer, and Gary L. Fischer, Chief Financial Officer. In addition, Tim Bettles, VP of Business, will be participating in the Q&A portion of the call. My name is Tracy, and I will be your coordinator today. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star 1 to raise your hand. I would now like to turn the call over to Leslie Green, Investor Relations for AXT, Inc. Leslie, go ahead. Leslie Green: Thank you, Tracy, and good afternoon, everyone. Before we begin, I would like to remind you that during the course of this conference call, including comments made in response to your questions, we will provide projections or make other forward-looking statements regarding, among other things, the future financial performance of the company, market conditions and trends, emerging applications using chips or devices fabricated on our substrates, our product mix, global economic and political conditions, including trade tariffs and import and export restrictions, ability to obtain China export permits, timing of receipt of export permits, our plan to list our subsidiary, Tongmei, in China, our ability to increase orders in succeeding quarters, to control costs and expenses, to improve manufacturing yields and efficiencies, or to utilize our manufacturing capacity. We wish to caution you that such statements deal with future events, are based on management's current expectations, and are subject to risks and uncertainties that could cause actual events or results to differ materially. In addition to the matters just listed, these uncertainties and risks include, but are not limited to, the financial performance of our partially owned supply chain companies and increased environmental regulations in China. In addition to the factors just mentioned or that may be discussed in this call, we refer you to the company's periodic reports filed with the Securities and Exchange Commission. These are available online by link from our website and contain additional information on risk factors that could cause actual results to differ materially from our current expectations. This conference call will be available on our website at axt.com through 04/30/2027. Also, I want to note that shortly following the close of market today, we issued a press release reporting financial results for 2026. This information is available on our website at axt.com. I would now like to turn the call over to Gary L. Fischer for a review of our first quarter results. Gary? Gary L. Fischer: Thank you, Leslie, and good afternoon to everyone. Revenue for 2026 was $26.9 million, compared with $23 million in 2025 and $19.4 million in 2025 last year. To break down our Q1 2026 revenue by product category, indium phosphide was $13.6 million, primarily from data center applications. Gallium arsenide was $5.4 million, germanium substrates were $0.2 million. Finally, revenue from our consolidated raw material joint venture companies in Q1 was $7.6 million. In 2026, revenue from Asia Pacific was 78%, Europe was 21%, and North America was 1%. The top five customers generated approximately 32% of total revenue, and no customers were over the 10% level. Gross margin showed a substantial improvement in the first quarter. Non-GAAP gross margin was 29.9%, compared with 21.5% in 2025 and a negative 6.1% in 2025 last year. For those who prefer to track results on a GAAP basis, gross margin in the first quarter was 29.6%, compared with 20.9% in Q4 and a negative 6.4% in 2025. Moving to operating expenses, total non-GAAP operating expense in Q1 was $8.6 million, compared with $7.5 million in Q4 and $8.5 million in 2025. On a GAAP basis, total operating expenses in Q1 were $9.6 million, compared with $8.7 million in 2025 and $9 million in 2025. Our non-GAAP operating loss for 2026 was $0.55 million compared to the non-GAAP operating loss in 2025 of $2.6 million and a non-GAAP operating loss of $9.6 million in 2025. For reference, our GAAP operating line for 2026 was a net loss of $1.6 million compared with an operating loss of $3.8 million in 2025 and an operating loss of $10.3 million in 2025. Non-operating other income and expense and other items below the operating line for 2026 was a net loss of $0.035 million. The details can be seen in the P&L included in our press release today. In 2026, we made substantial progress towards profitability. We had a non-GAAP net loss of $0.585 million or $0.01 per share, compared with a non-GAAP net loss of $2.3 million or $0.05 per share in the fourth quarter and a non-GAAP net loss in 2025 of $8.2 million or $0.19 per share. On a GAAP basis, the net loss in Q1 was $1.6 million or $0.03 per share compared to a net loss of $3.6 million or $0.08 per share in the fourth quarter and $8.8 million or $0.20 per share last year in 2025. Weighted average basic shares outstanding in 2026 were 53.3 million. Cash, cash equivalents and investments decreased by $5.1 million to $123 million as of March 31. By comparison, at December 31, cash, cash equivalents and investments were $128.4 million. Accounts receivable increased by $5.2 million, almost exactly the same as the change in cash. Depreciation and amortization in the first quarter was $2.4 million. Total stock comp was $1 million. Net inventory was up approximately $8.5 million for the first quarter to $90.2 million. This concludes the discussion of our quarterly financial results. Turning to our plan to list our subsidiary, Tongmei, in China on the STAR Market in Shanghai, we remain very interested in completing the IPO, particularly in light of the rapidly evolving AI infrastructure build-out in China and China's development of its semiconductor supply chain, which is fueling increased China-based demand for indium phosphide substrates. We have continued to keep our IPO application current, and Tongmei remains in process as a part of a much more selective and smaller group of prospective listings than a few years ago. Though the current geopolitical environment is dynamic, Tongmei is considered a Chinese company and continues to be regarded in China as a good IPO candidate. We will keep you informed of any updates. With that, I will now turn the call over to Doctor Morris S. Young for a review of our business and markets. Morris? Morris S. Young: Thank you, Gary. This is an incredibly exciting time for AXT, Inc. As many of you are aware, last week, we completed a capital raise for $632.5 million in support of Tongmei’s indium phosphide capacity expansion, as well as R&D investment in new products, like 6-inch indium phosphide, and other working capital needs. With our backlog of orders and customer forecasts achieving record levels, we are laser focused on adding capacity to support customer requirements. I am pleased to report that we are running ahead of our plan to double our indium phosphide capacity this year from 2025 levels. Our capability to scale up quickly is unique among our peers. Unlike our competitors, AXT, Inc. designs and builds our own crystal growth furnaces, has our own supply of critical raw materials, and has the manufacturing space in place to achieve our expansion goal this year. As you can imagine, longer-term capacity planning is one of the most important discussions we are having today with customers and major supply chain players in our space. The message we are having for them is this: AXT, Inc. is stepping up. Beyond our 2026 capacity expansion, we are planning to double our indium phosphide capacity again in 2027 with a new facility near our current one that will be dedicated to indium phosphide wafer production. Our 2028 planning is also underway and we expect to expand again meaningfully. This is an industry in which scale matters. The barriers to entry are high, even for most skilled manufacturers. As the market continues to grow, capacity has become a critical enabler. What we are hearing from industry sources and echoed from our customers is the expectation that the market for optical components will increase significantly in the coming years, driving a four to six times increase in the substrate market overall in the next three to five years, driven by both scale-out and scale-up applications. Beyond pluggable transceivers, we are seeing a very large developing market for CPO, co-packaged optics. We are actively engaging in discussions with customers about their technical and timing requirements and believe this could represent another inflection point in our business beginning in late 2027 and beyond. With this massive growth cycle ahead of us, we are actively working with a multitude of players from our direct customers to the end customers with whom we have not historically had direct relationships. We are there to understand their longer-term requirements and to align our growth and innovation plans accordingly. This will be a thoughtful and measured process, but we believe we are in the best position competitively to support and enable our industry in meeting its current and future needs. Over the last few quarters, the expansion of our indium phosphide customer base has been gratifying. We are now supporting nearly all leading customers in the optical space. This includes tier-one laser manufacturers and optical transceiver module makers, both around the globe and in China. In alignment with our customers' technical requirements and roadmaps, we are making important progress on our 6-inch indium phosphide product for both In-doped and S-doped specifications. A significant part of our capacity expansion will be focused on 6-inch crystal growth technology to support the planned roadmap of 6-inch capability by our customers. We are excited to be able to demonstrate the technological advantage of our low EPD wafers as the market moves to optical devices with higher speeds and greater sophistication for both scale-up and scale-out applications. Now turning to Q1. Export permits in our first quarter came in slightly better than our guidance and are off to a solid start in Q2. Gary will take you through our full guidance in a few minutes, but we are expecting to achieve sequential revenue growth in Q2, driven primarily by growth in indium phosphide. In fact, Q2 would be expected to be our largest quarter for indium phosphide in AXT, Inc.'s history. This derives from an indium phosphide backlog that has now reached a new high of over $100 million. As we mentioned last quarter, customers are giving us more visibility into their expected demand and we are working closely with them in this supply-constrained environment to meet their needs as we continue to expand our capacity. From our geographic demand perspective, the massive AI infrastructure build-out and planned CapEx spending by cloud services and AI platform providers in the U.S. is the primary driver for EML and silicon photonics-based optical transceivers, as well as high-speed photodetectors. We believe that today, our material is being used in multiple U.S. hyperscalers. We expect that end-customer use will continue to broaden. We are also seeing significant growth in China as China moves to accelerate its capability throughout the AI supply chain. Our revenue related to the indium phosphide-based laser market in China more than doubled in Q1 from the prior quarter and we expect it to double again in Q2. This highlights China's increasing investment in AI infrastructure supply chain for the global market. This is a great opportunity for AXT, Inc. as there is no permit required to ship our product within China. Turning to gallium arsenide, in Q1, demand for semiconducting wafers for industrial robotics and data center laser applications all held steady from the prior quarter. We continue to see demand for semi-insulating wafers for wireless RF devices and believe that we have a strong opportunity for market share expansion. However, this is gated primarily by our ability to obtain export licenses, which came in light in Q1. Finally, our raw material business continues to be a crown jewel in our growth strategy. We are pleased to report that our subsidiary Jinmei has begun to refine high-purity indium, which gives us direct control of and a guaranteed supply of other critical material for indium phosphide substrates. We are also investing to help Jinmei expand its capability so that as AXT, Inc.'s demand grows, Jinmei will continue to provide a meaningful portion of our raw material requirements. Globally, there continues to be a greater awareness of the importance of earth materials and we are decades ahead of the curve in developing our unique integrated supply chain. We will continue to invest in our portfolio as we believe it is a major competitive differentiator. In summary, we believe AXT, Inc. is entering one of the most consequential chapters in our company's history. The investments we are making today in capacity, in technology, and in our unique integrated supply chain position us to meet extraordinary demand we see building across the optical and AI infrastructure markets. Our customer engagement is deepening, our visibility is improving, and our competitive differentiation is strong. While we remain disciplined and thoughtful in our execution, we are confident that the groundwork we are laying now will enable us for meaningful growth in the years to come. With that, I turn the call back to Gary for our second quarter guidance. Gary L. Fischer: Thank you, Morris. To reiterate a couple of key points from Morris' commentary, we are seeing a strong increase in our indium phosphide wafer demand related to AI and the ongoing data center upgrade cycle. Given the geopolitical complexity surrounding this market trend, our customer base is diversifying and expanding, and customers are placing longer-term orders and providing greater visibility into their needs. With all of these positive market and AXT, Inc.-specific growth drivers, the most significant single factor to our growth in Q2 and beyond is the success and timing of getting export permits. Therefore, guiding for future revenue is somewhat tricky for us right now, as we cannot predict future timing of permits or our success in obtaining them for any customer or individual order. But drawing on what we know and what we have experienced thus far in the export permitting process, we can offer the following insight into our expectations for Q2. As of today, we have approximately $34 million in revenue that can be realized in Q2 across our substrate product lines and raw materials for which we either already have a permit to ship or for which an export permit is not required. We have a high degree of confidence in recognizing this revenue in Q2. We could see upside, even significant upside, to this number in Q2 should we receive permits for additional orders for which we have the inventory to support. But we do want to stress that the timing for permit issuance is not predictable nor in our control and does not align with our quarterly reporting. We continue to focus on gross margin improvement. Further improvement depends on a number of factors including total revenue as it relates to revenue mix by product, absorption of fixed costs, and our ability to continue to drive better manufacturing efficiency. With regards to OpEx, we expect that it will be approximately $9.3 million in Q2 on a non-GAAP basis and approximately $10 million on a GAAP basis. With these factors in mind, we expect to achieve profitability on both a GAAP and non-GAAP basis in Q2. We believe our non-GAAP net income will be in the range of $0.06 to $0.08 and our GAAP net income will be in the range of $0.05 to $0.07. We estimate share count for Q2 will be approximately 63.5 million shares. Okay, this concludes our prepared comments. We will be glad to answer your questions now. Morris S. Young: Tracy? Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 now to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Finally, please limit yourself to one question and one follow-up. Please stand by now while we compile the Q&A roster. Your first question comes from the line of Timothy Paul Savageaux with Northland Securities. Your line is open. Please go ahead. Timothy Paul Savageaux: Hey, good afternoon, and congrats on the step up in backlog and the strong guidance for next quarter in indium phosphide. I guess my first question, you mentioned backlog and customer forecasts at record levels, and we certainly saw that with $100 million in backlog. With regards to long-term capacity planning with customers, are you at the point of coming to any sort of long-term supply agreements with various customers and, if so, what sort of timing might you expect on that? Tim Bettles: Thanks, Tim. Yes, we are talking to a number of customers right now on long-term supply agreements as we build our capacity out and try to understand where their demand is going. Nearly all of the larger customers in this space are talking about long-term supply agreements with us, and we expect to come to resolution with some of those in the very near future. Timothy Paul Savageaux: Great. And just following up on that, you had mentioned last quarter that you are developing some relationships with tier-one customers or tier-one suppliers who had not necessarily been close relationships or customers over time. I wonder if we can get an update on that, and I have one more follow-up after that. Tim Bettles: Yes, thanks. That is going really well, actually. We have qualification wafers in with a lot of customers and we are finding paths and avenues to get wafers into a lot of these tier-one customers. As we see this market grow, there is a lot of opportunity for us, and we have said in the past that we have really been focused on these next-generation technology products that require high-quality material that, frankly, only AXT, Inc. can build and can supply. And with emerging supply chain constraints within indium phosphide, we are in the strongest position to grow capacity. So we are qualifying and we are supplying wafers to a lot of new tier-one customers in this field. So it is exciting times for us. Morris S. Young: I want to add one point. From my perspective, I started to hear three months ago from some of the tier-one customers, but now I am starting to hear even from the end hyperscalers. In other words, the customer’s customer, the end users, are also interested in seeing how we develop the supply chain guarantee for their growth plan. Tim Bettles: Yes, that is correct, Morris. It is a good point. There have been a lot of press releases about long-term supply agreements into our customers from the hyperscalers and from the hardware companies, and there has been a lot of encouragement from those hyperscalers and hardware companies for their suppliers to enter into long-term supply agreements with AXT, Inc. That is actually driving a lot of the discussions that we are having on long-term supply agreements, and of course it has given us a lot more visibility into what the market demands are at the hyperscaler side of things and how that trickles down to demands for AXT, Inc. It also gives us a lot of visibility into technical demands as we move forward into high-end lasers and detectors in these new products. Timothy Paul Savageaux: Great, and that makes sense. Maybe somewhat related to those discussions, I would be interested in an update on what you are seeing in terms of pricing for indium phosphide substrates? Tim Bettles: That is a good question. We are raising some of our prices. We are seeing some recent pricing increases in raw materials and specifically with indium. So we are having conversations with our customers to align our costs and maintain or grow gross margins. We are also globalizing our pricing. Certain geographical regions have been more aggressive in the past on price targets, especially for lower-end markets such as GPON. We are standardizing our pricing across those geographical regions. Morris S. Young: Let me add to that. The pricing opportunity for us is also the fact we are migrating more towards larger size. Some of the smaller sizes are more traditional and more price sensitive, and there are more competitors who can fill those needs. But when you get to 4-inch and 6-inch, as well as higher specification requirements, that is where our product shines. Timothy Paul Savageaux: Thanks very much. Appreciate it. Gary L. Fischer: Thanks, Tim. Operator: Your next question comes from the line of Matthew Bryson with Wedbush Securities. Your line is open. Please go ahead. Matthew Bryson: Hey, thanks for taking my question and great results. I just wanted to hone in on gross margins a bit. Obviously, you saw a pretty big uptick in Q1. I am not quite getting to the peak you had back in the COVID time frame, but I am getting pretty close. Could you talk a little bit about how much of that is higher utilization levels versus how much of it is increased pricing, and whether my math is roughly accurate? Gary L. Fischer: For Q1, there is some impact from increased pricing, but the primary drivers are the traditional two that we highlight. One is volume is up, and the other is the mix is rich towards indium phosphide. As a matter of fact, if you look at it percentage-wise, indium phosphide was just a tad north of 50% of total revenue, which really helped. The pricing effects are being put in place, but you will see the impact from your viewpoint later this year. Matthew Bryson: Got it. For Q2, Gary, if I said that the gross margins are coming in roughly around 40%, is that in the ballpark? And again, can you just talk to how much that is mix versus utilization versus price? Gary L. Fischer: I think that is too aggressive. You know us—we like to be a little bit more conservative. We are definitely going to be crossing the 30% threshold, which we have said for several years: if we can get to $30 million in revenue and have a good mix, then we could be above 30% in gross margin. I would encourage you to maybe knock that down a bit. We can talk about it later. Having said that, we are headed in the right direction. Gross margins should go up and we feel very confident that they will. How fast and to what exact level is to be determined. All the indicators are exactly what I have been saying for many years: the mix is rich for indium phosphide, and the volume is up. Inside the company, we are very pleased. Morris S. Young: I would argue our supply chain strategy will start to shine. AXT, Inc. is like a train with a strong locomotive. When we are accelerating, all the cars behind us—such as our Jinmei, BoYu (which makes our crucibles), high-purity materials, etc.—all move along with us. When we slow down, of course, they compress against us. But right now is a good time—we are moving very strongly. You are going to see their contribution to our ability to make profit grow too. Matthew Bryson: Got it. And then just my one follow-up: I noticed, going back to the last filing, that you had gotten export licenses, I think, for every geography except for the U.S. Any more thoughts on getting licenses for shipping in the U.S., and how important is that in terms of being able to fully utilize that additional capacity you are bringing on? Morris S. Young: We are not giving up on the United States. It is still pending. Tim Bettles: We are still being encouraged to apply for export permits for U.S. customers both in the U.S. and in other global regions. At the moment, we are getting permits pretty readily for U.S. customers based in other global regions. But that does not mean we are stopping any work on trying to obtain permits for the U.S. We have been contacted by the Ministry of Commerce in China on a number of U.S. applications to submit more data. That gives us an encouraging sign that they are still looking at U.S.-based permits, and there is still a possibility to get a permit for the U.S. in the near future. In the meantime, we are supplying wafers globally to other regions as well. This is a very global supply chain and a very global market, and we are taking advantage of all the avenues that we can. Matthew Bryson: Thanks again. Operator: Just a reminder that if you would like to ask a question or a follow-up, please press star 1 to raise your hand now. Your next question comes from the line of Analyst with Needham. Your line is open. Please go ahead. Analyst: Hi, thanks for taking my question. I want to ask you more about the capacity and the capacity build plan here. I think your last COVID high for indium phosphide quarterly record was $17.7 million. That was achieved in the second quarter of 2022. You are basically implying you are going to be at or above that level in this coming Q2. But I recall back in 2022, you probably also built above that $17.7 million because back then you thought you would have indium phosphide demand from the premium electronics company for smartphone applications. What is the max factory output for your existing factory today? How utilized is the existing factory, and what is the expected factory output once you add the next two factories? I think that is something you talked about after the follow-on offering. If you can provide any color on the numbers, that would be great. Morris S. Young: We usually say our highest indium phosphide revenue per quarter was $17 million—you have a very good memory. We said in Q4 that we increased our capacity by about 25% in 2025, and in 2026 we are going to double that. In our capacity planning, we think we are going to get about $35 million per quarter capability by the end of 2026. Do not forget, capacity is increasing every month. In the next quarter, indium phosphide revenue is going to be above the $17 million per quarter—it will be a new record in Q2. We are acquiring land near our existing factory in Beijing. We are in the process of negotiating, buying the land, and doing the design. We are probably going to start building it, but because it is a greenfield, it will probably take about a year, maybe a year and a half to complete. Our capacity expansion is in stages. Sometimes the cleanroom is the most critical—if you do not have cleanroom space, you cannot put in your machines—so that is more digital. Some of the crystal growth capacity is more incremental. Right now, the cleanroom capacity is greater than our crystal growth capacity, so we are increasing our capacity gradually. In the next year or so, once the greenfield is under construction, it will be more digital to expand our cleaning capacity. Tim? Tim Bettles: Morris talked about doubling our capacity to a rate of $35 million per quarter in indium phosphide by the end of this year. Remember, that is in a brownfield site that was once a crystal growth facility used for gallium arsenide. As we relocated gallium arsenide, we have been able to move into that. We are in a position that nobody else in the indium phosphide world is in—that we can double our capacity so quickly. Looking into the next growth, we are acquiring a facility right next door to us—again, extremely fortunate. The building is already there, and that allows us to double yet again. By the time we have completed that expansion, which should be by 2027, maybe early 2028, we should be somewhere in the region of $65 million to $70 million of capacity per quarter. Then, as Morris mentioned earlier, we are looking at where we need to go from there, looking at other opportunities and other ways to expand beyond that, probably in a greenfield site somewhere else. Gary L. Fischer: To be a bit more specific as a detailed guide, $17 million we have already achieved. By the end of this year, we will be at $35 million per quarter. Annualized, once fully ramped, that implies roughly $140 million at the 2026 exit rate, and a year later it could be approximately $280 million at the exit rate, recognizing capacity increases are continuous, not instantaneous. Analyst: Maybe a follow-up on the capacity expansion. Investors ask why you cannot do a “China plus one” strategy like many companies in the global electronics supply chain—continue to build in China to satisfy China demand, but also build outside of China to supply the rest of the world. Is there anything from the business perspective preventing you from doing that, and why? Tim Bettles: There is certainly a lot of opportunity both within China and outside of China for us to consider. As part of our plan for 2028 and beyond—which is going to be meaningful capacity expansion—we are working closely with our customer base to understand the long-term requirements and aligning the plans globally. Our recent capital raise will be fundamental to expanding as we enter this next growth plan, which could include more capacity within China and potentially capacity outside of China. Morris S. Young: I want to add one point. Adding capacity versus being able to deliver wafers are two different things. You are going to hear a lot of people say, “I am going to add capacity.” Indium phosphide is not easy. Investors ask why do you not triple or quadruple? Our need is 10 times. It is not easy. Tim Bettles: That is a really good point, and that is why our focus over the next two years has been on Beijing and increasing the capacity on our existing Beijing Tongmei site. Morris S. Young: It is also for the good of our customers. Their demand is so aggressive. The guaranteed way to satisfy that demand is to do what we can now. Do we have other plans? You bet. We do. We are stepping up. Analyst: Thanks, Morris. Last question: you talked about 6-inch versus 4-inch or below. What is in the backlog right now in terms of mix between 6-inch and 4-inch or below? Also, the mix between In-doped and S-doped—one for lasers and the other for photodetectors—what is the mix within that $100 million-plus backlog? Morris S. Young: In-doped is coming up big time. We used to see about 10-to-1 in favor of S-doped prior to this. Right now, especially at the large diameters, it is almost like In-doped is 40% and S-doped is 60%. Correct, Tim? Tim Bettles: Yes. When we look at backlog and customer demand over the next few quarters into next year and beyond, we see there is still a lot of 3-inch out there, specifically for the laser—so S-doped is still going strong on 3-inch. There is a transition to 4-inch on n-type material for the laser, whereas the high-speed detector has pretty much all transitioned to 4-inch already. We are seeing a lot of 3-inch continuing, a lot transitioning over to 4-inch. Looking into the future, 6-inch is incredibly important, with a lot of interest and opportunity. At this moment, a lot of production and capacity is still focused on 3-inch and 4-inch, with a longer-term plan to transition to 6-inch within the next year or so. Morris S. Young: The signal is very strong. A lot of customers are telling us, can we get more 4-inch? 6-inch is a little more out, but people are warning us it is coming. 4-inch is real. I would say the ratio for 3-inch to 6-inch right now is maybe 4-to-1 in favor of 3-inch. Going out about six months to a year, it could become 2-to-1 in favor of 3-inch in wafer count. 3-inch is still the majority, but because 4-inch is at a lower base right now, it is going to grow very rapidly in the coming quarters. Analyst: Thanks. Great color. Appreciate that. Thank you. Morris S. Young: Thank you. Operator: Your next question comes from the line of Richard Shannon with Craig-Hallum. Your line is open. Please go ahead. Richard Shannon: Hi, thanks for letting me ask a couple of questions here. I would love to understand how to think about the CapEx requirements for these capacity builds. You talked about a brownfield one this year that is doubling, and then a greenfield one that is going to happen in 2027 or maybe going into 2028. Can you give us some numbers or at least some statistics to think about what that will require and over what period of time? Gary L. Fischer: For this year, it is mostly adding high-tech equipment for crystal growth—furnaces—and some back-end tools for polishing. As Tim and Morris have said, we have an existing footprint. Our current indium phosphide crystal growth site has room for more furnaces, and we are repurposing our gallium arsenide crystal growth that was in Beijing for even more. So this year, compared to future years, CapEx is probably going to be about $35 million—maybe $30 million, maybe $40 million—somewhere in that range. To be honest, we will spend as much as we can as fast as we can because we are uniquely positioned to be able to add capacity quickly. Next year, as we go into building out the facility next door, plus capacity through our supply chains, we are looking somewhere in the region of about $100 million or so. Tim Bettles: And then beyond that, if we were to build a greenfield site somewhere else, we are looking at somewhere in the region of $220 million to $250 million, depending on what capacity we put in that greenfield site. If we are putting meaningful capacity there, you are looking at $200 million plus. Richard Shannon: Okay, fair enough. Thanks for that detail. I want to ask on your indium phosphide business by geography. You made a couple of interesting comments: last call you said China was going to grow about 60% in the first quarter, and then you said it actually was up 100%, and then double again in the second quarter. What kind of percentage of your indium phosphide business in the second quarter is China going to be? Tim Bettles: We are seeing a lot of growth in China, and it is not just because we are seeing data center growth in China, but we are seeing China in the global supply chain market for optical transceivers and potentially co-packaged optics as we go forward. A lot of transceiver companies that manufacture within China are driving to a Chinese supply chain of laser diodes and other detectors. In Q2, we estimate that Chinese demand is probably about 30% of the overall indium phosphide global market demand that we are seeing, and we are seeing that increasing through Q3 and Q4 as well. As we get into Q4, it could be as high as something pushing up to 40% share of the total indium phosphide market. Richard Shannon: That is helpful, Tim. I will ask one last question on the topic of gross margins. Gary, you have talked in the past about hoping to get to 35% with kind of an upside goal of 40%. When you are talking about the strong mix shift towards indium phosphide and even about price increases, could that go higher at some point? I am not asking for any time soon, but are you looking for a ceiling of gross margins above that 40% level? Gary L. Fischer: Internally, as a management team, we are definitely targeting something that begins with a four, but it is far out. We do not know yet. I would still stick with my sense that somewhere in the 35% range is very reasonable for the outside world—it is a safe arrival point. That does not mean that we are satisfied with it, and we think we can do better, but we need to get farther down the road and prove that first. Richard Shannon: That is all I wanted to hear. That is all for me, Gary. Thank you. Gary L. Fischer: You are welcome, Richard. Good to hear from you. Operator: There are no further questions at this time. I will now turn the call back to Leslie Green, Investor Relations at AXT, Inc., for closing remarks. Leslie Green: Thank you, Tracy, and thank you all for participating in our conference call. We will be participating in the B. Riley Securities 2026 Annual Investor Conference and the Craig-Hallum Institutional Conference in May, as well as the Northland Virtual Conference in June. We hope to see many of you there. As always, feel free to contact us if you would like to set up a call. We look forward to speaking with you all in the near future. Thanks. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good afternoon, and welcome to Sandisk Corporation's Third Quarter Fiscal Year 2026 Earnings Conference Call. All participants will be in listen-only mode. To ask a question, please press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Ivan Donaldson, Vice President of Investor Relations. Please go ahead. Ivan Donaldson: Before we begin, please note that today's discussion will contain forward-looking statements based on management's current assumptions and expectations, which are subject to various risks and uncertainties. These forward-looking statements include expectations for our technology and product portfolio, our business plans and performance, our capital allocation priorities, market trends and opportunities, and our future financial results. We assume no obligation to update these statements. Please refer to our Annual Report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. We will also make references to non-GAAP financial measures today. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the written materials posted in the Investor Relations section of our website. With that, I will turn the call over to David. David V. Goeckeler: Thanks, Ivan. Good afternoon, and thank you for joining Sandisk Corporation's fiscal third quarter earnings call. We delivered another strong quarter with excellent performance across all key metrics, reflecting the strength of the Sandisk Corporation franchise. Before turning to our end markets, I would like to provide an update on a priority we previously outlined. Last quarter, we were engaged in discussions with customers on multiyear supply partnerships—what we refer to as new business models, or NBMs. I am pleased to share that we have successfully advanced those conversations, with five multiyear partnerships signed so far. These partnerships are structured to lock in committed supply for our customers and committed financials for Sandisk Corporation. Our customers' commitments are backed by firm financial guarantees. These partnerships support durable, structurally higher earnings and a significantly more predictable and less cyclical business for Sandisk Corporation. We believe this marks a fundamental evolution of our business centered on deeper customer alignment, enhanced visibility, and long-term value creation. These NBMs reflect the strategic value of our world-class NAND technology, which is built on decades of innovation. Investment we have made in R&D and manufacturing, including tens of billions of dollars in cumulative CapEx and IP, have built the foundation for a powerful new business model in which we manage the full stack—from front-end manufacturing through chip and system-level design to final back-end assembly and test. Both the extension of our joint venture with Kioxia and the supply agreement for DRAM following our investment in Nanya further strengthen our supply chain resiliency. This leverage is enabling us to drive stronger customer engagement, allowing long-term conversations with partners who value technology performance and long-term supply assurance. With increased engagement and optionality across the portfolio, we can optimize our end-market mix more effectively. Together, these transformations have resulted in a step change in what we believe to be sustainable gross margins, free cash flow generation, and earnings power in a market that we expect to grow in the double digits for the foreseeable future. Data center is a clear example of this strategy in action, with revenue growing 233% sequentially. This milestone reflects years of preparation and our deliberate shift toward what is now the most strategic and fastest-growing end market. While we have made substantial progress, there are significant growth opportunities ahead driven by the fundamental shift in underlying infrastructure requirements of artificial intelligence. We are witnessing extraordinary growth not just in model size, but in resulting token generation, the duration and complexity of model runs, and the increasing importance of context. As AI models scale from billions to trillions of parameters, and deployments advance from simple inference to deep reasoning in increasingly autonomous agentic systems, NAND has become a critical component of the underlying infrastructure. Inference optimizations such as KV cache, along with workloads like RAG, require substantial high-performance, low-latency flash to deliver real-time responsiveness and quality of user experience. These workloads expand the amount of data that now needs to be stored on low-latency flash well beyond the model itself, as systems must retain context, intermediate data, and large external data sets. As a result, NAND flash is emerging as the only economically viable solution to deliver the capacity, performance, and efficiency required to keep models accessible for real-time inference at scale. This shift in understanding the critical nature of our technology comes at a time when our product differentiation is strongest, anchored in what has been recognized as an industry gold standard for NAND technology with BiCS 8, and a broad, leading portfolio with TLC and QLC offerings. We are confident that our world-class product portfolio and technology leadership will continue to drive data center customers to see Sandisk Corporation as a partner of choice over the long term, and we are already seeing that preference translate into results. Our fiscal third quarter revenue was enhanced by strong demand for our TLC-based enterprise SSD portfolio, which powers performance-intensive compute workloads where speed and latency are paramount. Looking ahead to the fiscal fourth quarter, we expect to begin shipping our QLC Stargate solutions for revenue, adding another layer of revenue growth. Together, TLC and QLC serve distinct but complementary roles, reflecting how we are deliberately architecting our portfolio to meet evolving customer needs with our broad portfolio of AI-focused data center products. In edge, we are seeing a continued shift toward premium devices across both PC and smartphone markets. These platforms are increasingly incorporating on-device capabilities, which are driving higher storage requirements and greater demand for high-performance solutions. As a result, our mix continues to shift to high-value configurations and customers that assign the appropriate value to our technology. Consumer saw strong year-over-year revenue growth across all key storage categories and regions despite evolving consumer industry dynamics. This performance was supported by our strong brand recognition and channel presence as we focused on the most financially attractive demand. In February, we unveiled our next-generation portable SSD portfolio designed to support faster, more demanding workflows and AI-enabled content creation. This launch reinforced our innovation and leadership in the SSD category, generating meaningful external visibility with coverage across multiple global media outlets. We also continue to strengthen global consumer engagement through new brand-led go-to-market activities such as our “Space to Hold More” campaign, which is driving deeper customer connection by localizing global narratives and engaging diverse communities worldwide. Together, these efforts reflect our focus on our end markets and commitment to driving demand through brand recognition, product innovation, and strong go-to-market execution as we shift our portfolio toward higher-value opportunities and transition away from legacy upsell models. Our broad end-market exposure sets us apart, and we remain committed to serving customers across these markets. With that, I will turn the call over to Luis to dive deeper into our financial performance and guidance. Luis Visoso: Thank you, David. I will begin with an update on our new business models, or NBMs, which are designed to provide us with demand certainty and provide our customers with supply assurance. We signed three agreements in the third quarter and an additional two so far in the fourth quarter, and we are currently in active negotiations with several other customers. These agreements are tailored to meet the needs of our customers and, in aggregate, provide us with demand certainty at financials that we expect will be consistent with our fiscal fourth quarter guidance. The duration of these agreements varies, with the longest contract extending to five years. In aggregate, volume commitments increase during the life of the contracts, with quarterly commitments and a combination of fixed and variable pricing. These agreements with variable pricing allow us to capture upside if prices rise, while allowing our customers some upside if prices decline over time. As you will see in our 10-Q, the three contracts signed during the quarter provide minimum contractual revenue of approximately $42 billion. We will update you as we make more progress. Each contract is secured with financial guarantees that protect us if the purchase obligations are not fully performed by our customers. In aggregate, the five agreements signed so far include financial guarantees that exceed $11 billion and include prepayments and other financial instruments managed by third-party financial institutions. Out of these agreements, $400 million in prepayments are included in our Q3 balance sheet. These five new business models account for over a third of our bits in fiscal year 2027, which we expect to increase as we conclude additional agreements over the next few months. We expect these new business models to reduce the historical cyclicality of our business, improving visibility and resulting in pricing and margins that reflect the value of our technology and investments, ultimately delivering higher, more consistent, and durable returns for shareholders. Moving on to our results for the quarter. Revenue for the third quarter was $5.95 billion, up 97% sequentially and up 251% year-over-year. This compares favorably to our guidance of $4.4 billion to $4.8 billion and was driven by both a mix shift toward higher-value customers and higher pricing. Our bit shipments were flat year-over-year and down high-teens sequentially as we build higher inventory levels, primarily to support strong BiCS 8 QLC demand in the fourth quarter Stargate ramp and to prepare for our recently signed new business models. In line with our mid- to high-teens growth model, bit shipments increased 18% fiscal year-to-date. Moving on to the end markets. Sequentially, data center revenue grew 233% to $1.467 billion. Edge grew 118% to $3.163 billion, and consumer came in at $820 million, down 10% in line with our historical seasonality. Our portfolio planning strategy focuses on delivering attractive long-term economics, with diversification remaining a core strength. We remain committed to serving all three end markets to maximize long-term value creation. Our non-GAAP gross margin for the third quarter was 78.4%, up from 51.1% in the prior quarter. This compares favorably to our guidance of 65% to 67% and was driven by our shift toward higher-value mix and the overall pricing environment. Non-GAAP operating expenses for the third quarter were $448 million and represent 7.5% of revenue, as compared to 13.7% of revenue in the prior quarter, as we generate additional leverage. This compares favorably to our guidance range of $450 million to $470 million. As a result, non-GAAP operating margin was 70.9%, up from 37.5% in the prior quarter. Non-GAAP EPS was $23.41, up from $6.20 in the prior quarter. This compares favorably to our guidance range of $4.12 to $14. Key GAAP to non-GAAP reconciliation items include $20 million in stock-based compensation, net of taxes, which represents 0.3% of revenue, and $46 million related to the write-off of unamortized issuance fees as a result of our repayment of the remaining $650 million balance in our TLB. We closed the quarter with $3.735 billion in cash and cash equivalents on our balance sheet. Moving on to free cash flow. During the quarter, we generated $2.955 billion in adjusted free cash flow, which represents a 49.7% margin. Cash flow from operations came in at $3.038 billion, partially offset by $83 million from net cash capital spending. Gross capital expenditures totaled $240 million and represented 4% of revenue. Our capital plan is designed to balance growth opportunities and generate attractive returns while supporting our ongoing BiCS 8 transition. We remain highly disciplined in how we evaluate such investments to protect the long-term sustainability of our business financials. Moving on to guidance. For the fourth quarter, we forecast revenue between $7.75 billion and $8.25 billion from both bits growth and higher pricing. Our forecast for non-GAAP gross margin is between 79% and 81%. We expect non-GAAP operating expenses between $480 million and $500 million as we continue to invest in innovation and R&D. We expect non-GAAP interest and other income between $10 million and $30 million and non-GAAP tax expenses between $775 million and $875 million. We forecast non-GAAP EPS between $30 and $33, assuming 158 million fully diluted shares. Moving to capital allocation. The priorities we outlined in February were to invest in the business, achieve a net cash position, and then return cash to shareholders. In line with these priorities, we have taken steps over the last two quarters to solidify our supply chain, including extending our JV with Kioxia through December 2034 and investing approximately $1 billion in Nanya to secure long-term DRAM supply. We have also taken actions that put us in a strong net cash position by paying off the remaining balance of our TLB. Given the strong progress, today we are announcing that our board of directors has authorized a $6 billion share buyback program of outstanding shares of common stock. The repurchase authorization is effective immediately with no expiration date. With that, I will turn the call back to David for closing remarks. David V. Goeckeler: Thank you, Luis. In summary, we continue to execute with conviction at a critical inflection point for this business. NAND has always been a foundational technology, empowering the world's best-in-class semiconductor storage solutions required to drive the largest technological movements, including PC, mobile, cloud, and now artificial intelligence. Data center has become our fastest-growing market, and the workloads driving that demand—including inference, reasoning, and agentic systems—represent a structural and durable shift in how the world's most consequential technology is built and deployed. Our new business models reflect this shift. Five signed agreements to date, over $11 billion in financial guarantees, and over a third of our bits in fiscal year 2027 under firm customer commitments represent a fundamental reshaping of our business, providing visibility, pricing protection, and more consistent, durable returns. Our technology and product portfolio are intersecting this extraordinary demand at exactly the right moment. Equipped with a complete portfolio that now includes a scaled and rapidly growing enterprise SSD business, we are allocating supply to the highest-value opportunities and establishing a new pillar of growth for Sandisk Corporation. This progress has converged in a single moment. We believe our margins are sustainable, we have achieved our net cash target, and we have announced plans to return capital to shareholders through buybacks—all while reinforcing our operational foundation. Combined with our multiyear NBMs and the acceleration in the data center end market, this gives us both financial strength and structural resilience. The result is a durable growth model, a valuable franchise, and a business built to generate substantial, sustained cash flow. With that, Ivan, let us see if there are any questions. Operator: Thank you. We will now open the call for questions. To ask a question, please press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Mark Newman with Bernstein. Please go ahead. Mark Newman: Thanks very much for taking my question, and congrats on another great quarter. A couple of quick questions here. So the EPS guidance you have given, $30 to $33—these are fantastic numbers. It does imply that the rate of price increase is slowing a bit into the current quarter. I wondered if that is either being conservative on your side because we are still quite early in the quarter, or is that related to some of these very long-term agreements that you signed? And with regards to the long-term agreements, I believe you mentioned about a third of bits for FY '27 in some kind of long-term agreement. I would like to ask to what degree is price fixed in the coming quarters, just so I can get a sense for that. Thank you very much. Really appreciate it. David V. Goeckeler: Hey, Mark. It is good to hear from you, and thanks for the comments. First, on next quarter and pricing, we do not really guide pricing, but I think you saw in FQ3 rather extraordinary pricing acceleration across the business, so we are very happy about that. And you are right, it is early in the quarter and it is an extremely dynamic market, so it pays to be a bit conservative when you are going down that path. But we are very confident in the numbers. On the agreements, I will make a few comments and Luis will have something to say as well. You were asking about pricing being fixed. These agreements are really tailored to individual customers. They have different elements depending on the customer and on the length of the agreement that give us assurance on consistency of demand, which is what we need. We run a fab. We have very consistent output. We need very consistent consumption. One of the major attributes of these agreements is they give us that. Our customers understand the dynamic very clearly. These agreements do not just happen overnight. It is not just about prepaying for a couple of quarters’ worth of supply. This is about establishing up to a five-year agreement on supply that is very consistent quarter over quarter. And as we said, there are financial instruments in place such that if that consumption does not happen on that very predictable time frame, there are financial commitments that come to us immediately. The pricing has fixed elements and variable elements. Maybe I will let Luis talk about it in a little more detail. Luis Visoso: I just want to reinforce what David was saying. These models are here to deliver more durable, more predictable, more attractive, more consistent financial results. They are very good, and, frankly, a win-win for us and for our customers. We provide supply; they provide demand. We have visibility for many years, all the way to five years, so we are very happy about that. You have never heard us talk about RPO, or remaining performance obligations, in this business, and we started to talk about that. You will see it in our 10-Q—about $42 billion of RPO in this business. On pricing, it is a combination of fixed and variable. To address your question directly, the shorter term within the contract is more fixed; the longer out you go, there is more variable. You can assume most of the pricing in the very short term is mostly fixed, and as you go out, there is a little bit more variable for us to capture upside and for our customers to capture some upside if prices were to go down. Mark Newman: Thanks so much. I really appreciate it. David V. Goeckeler: Thanks, Mark. Operator: The next question comes from Joseph Moore with Morgan Stanley. Please go ahead. Joseph Moore: Great, thank you. I wonder if you could talk about the growth in enterprise SSD that you saw—pretty impressive. How much of that is the market, and how much of that is you putting the product portfolio in a better place? David V. Goeckeler: Like a lot of things, when you see 233% sequential growth, Joe, there are a lot of elements to that. It starts with the portfolio. The portfolio is in great shape. Our TLC product—this is almost exclusively our TLC product. We are going to start shipping our Stargate product for revenue next quarter. So really strong performance, very strong product, and a broadening of qualifications. It takes a while to get into all these accounts, so we are now in a large number of accounts. And there is strong market pull. There is a lot of demand in the market for these high-performance enterprise SSDs. We have the right product at the right time, and we are really happy to see this part of the portfolio expand and get to the levels where we expect it to be. We were 25% of the portfolio this quarter, and we expect that to increase as we go forward. Joseph Moore: And my follow-up: where do you see that in a few years? It seems like hyperscalers want everything you can make and then some. Just how much of the business could be enterprise in the long term? David V. Goeckeler: It could be a significant amount. You have known for a long time we value a balanced portfolio. We want to mix in the way that gets the best financial return for us, and that changes quarter over quarter. The key point is we are in a position where we can mix into data center in a way that we have never been able to do before. I expect that number to keep rising over the next several quarters and the next several years. Operator: The next question comes from Analyst with Melius Research. Please go ahead. Analyst: Hey, guys. It is great to be on board here. I almost feel like I am on a software call here. You said one-third of bit growth next year is contracted. Where do you see this going based on your conversations? It is one-third next year, but can this be above 50% where you know how much is kind of done going into the year? And then I have a follow-up. Thanks. David V. Goeckeler: First of all, welcome. We are glad you are here. We are still in a lot of conversations about how we are changing this business. It takes a while depending on the customer. Some customers come into the conversation really concerned about multiyear supply agreements, so it is an easier conversation. Other customers are used to the way the market has worked in the past—commit volume and negotiate price every quarter. That is not the kind of agreement we are interested in. We are interested in agreements that give us certainty of economics. A key point of what Luis said in the script: there are fixed and variable elements of these agreements, but we are targeting financials for the five agreements we signed that are in line with what we just forecasted to—this is very attractive business. We are in active conversations for our supply going forward—that includes next year all the way through the next five years. We said at least a third; we are over a third, and I expect that number to go up over the next several quarters. Where can it get to? I definitely think it can get above 50%, and we have a desire to drive it quite high. Analyst: And with regard to margins, when you do these kinds of agreements, can you lock in margins? Is there a target margin range you are comfortable talking about? You could argue the stock is trading like your margin is going back into the 40s. David V. Goeckeler: I do not think we are there yet to talk about a target. When we get a little further along, we will wrap this all up in a new model for everybody. We are very proud of our technology. I think for the first time in decades in this business we are getting to the point where the value of our technology is getting recognized by producers. We are not interested in trading away that value for certainty; we are interested in getting that value and getting certainty as well. We are very focused on getting the cyclicality out of this business. It is corrosive to how we invest our CapEx and to our customers' ability to get sufficient product to drive their businesses. We have taken meaningful steps: very significant commitments from very significant customers. We will move this entire business to a very different spot to everybody’s benefit. It was questionable if we could make that progress; people told me it would never happen. It is happening—but we are still in the early stages. As we make continued progress, we will continue to give updates. Luis Visoso: Thanks. Operator: The next question comes from C.J. Muse with Cantor Fitzgerald. Please go ahead. C.J. Muse: Good afternoon. Thanks for taking the question. Curious to get your thoughts around supply-demand going forward for NAND. We are getting only limited greenfield, mostly layer count driving bit growth, while new greenfield is being prioritized for DRAM. With that construct and the agentic AI incremental growth, how are you thinking about when the industry might get into balance? David V. Goeckeler: My point of view is the industry is always in balance—markets always balance supply and demand. Implicit in your question is, if you lower the price, will you meet more demand? We are working around that whole environment. On the demand side, we continue to see data center accelerate. We would raise our calendar year '26 data center growth number to the mid-70s from the 60s just three months ago, which is up from the 40s three months before that and the 20s three months before that. Very strong growth in data center. Outside of data center, we are seeing some contraction due to unit decline; we expect that to bounce back in '27. On the supply side, a major benefit of this franchise is that we can increase supply through nodal transitions. We have a very productive R&D pipeline with our JV partner and the BiCS roadmap. We can continue to drive the mid- to high-teens bit growth through nodal transitions. We need to add some cleanroom space because each node has more steps, so there is some additional CapEx, but it is not like other markets where you must add capacity because you are not getting that much from the nodal transition. This is what makes this franchise such a spectacular cash generator: CapEx as a percent of revenue continues to go down substantially. The absolute CapEx is still there, but relative to revenue generation we have years of runway into what nodes are going to be and what the bit growth will be. We will continue to invest in those and drive nodal transitions to grow the market in that mid- to high-teens rate, and that is basically what we see across the NAND players. C.J. Muse: Very helpful. Just quickly, in terms of capital structure, you are now no debt, $3.7 billion cash. What do you think you need to retain given your view today and the new contracts, and how should we think about buybacks from here? Luis Visoso: We announced a $6 billion share buyback with this call. We will keep tracking our cash flow—we are generating good cash—and as things change and as we execute the share buyback program, we will keep you updated. Operator: The next question comes from James Schneider with Goldman Sachs. Please go ahead. James Schneider: Good afternoon. Thanks for taking my question. One more question on the new business models. Can you talk about whether any of the five largest U.S. hyperscalers are included in those contracts thus far? And related to this, on a go-forward basis, do you plan on providing any sort of ACV or confirmed contract value per your normal disclosures? Luis Visoso: We are not going to disclose the names of our customers, but as David said at the beginning, we have some very meaningful customers who are joining and more that we are working with. To your second question, we will provide the RPO metric, which is how much of the business is already contracted, and that is based on minimum prices. We will continue to give that information every quarter, and you will have that visibility as we make progress. James Schneider: Thank you. As a quick follow-up, given these new business models and your visibility on customer demand, what is the state of your discussions with Kioxia in terms of potentially increasing bit supply? Are you contemplating anything above the sort of 20% range of growth you have outlined previously? David V. Goeckeler: We still have the same plans. The conversations with Kioxia are always very robust and ongoing, and the teams are working on this every day. We have our BiCS 8 transition plan that we have aligned on, and we are executing to it. It is going extremely well. James Schneider: Thank you. Luis Visoso: Thanks, Jim. Operator: The next question comes from Aaron Rakers with Wells Fargo. Please go ahead. Aaron Rakers: Hi. This is Jake on for Aaron. Congrats on the great results, guys. Looking at Stargate starting to ship for revenue in April, can you give some color on how meaningful that ramp could be over the next few quarters? David V. Goeckeler: There are two major products in the data center space. There is the compute-focused enterprise SSD—lower capacities and much higher interface speeds—and then there are much higher densities. The progress we have seen so far is coming off that compute-focused TLC drive, and now we are going to bring the whole QLC product to market, which has been under qualification with some major players for well over a year. We are not going to forecast a specific market segment, but we are very proud of that product, and we think it is going to do quite well in the market. Aaron Rakers: Thanks. As a follow-on, with more powerful LLMs released over the past few weeks, how are you thinking about the KV cache opportunity as we see agentic AI grow? Has that meaningfully changed over the last few quarters, and how have customer discussions changed there? David V. Goeckeler: We have advanced our understanding a lot over the last quarter or two since it became a major part of the conversation. When you drill into that opportunity and try to size it, it gets complicated quickly—number of concurrent sessions, average input tokens, cache hit ratios, storage durations, and more. We need to stay very close to our customers because they will have the detail on the infrastructure they are building. Those doing infrastructure at scale have great insight into how those variables come together. This reinforces the business model conversation as our customers understand the significance of NAND—this is a foundation for striking two-, three-, or five-year deals that are very substantial in demand. It is an extremely dynamic situation. Our customers are responding very positively to our products. They are willing to commit years of purchasing with a financial model that is very attractive for us and gives them guaranteed supply. They are putting up billions of dollars of collateral through various financial instruments that will survive for the life of these contracts, and if they do not meet their obligations on consistent purchasing every quarter, that financial commitment immediately comes to us. We do not expect to collect those because our customers are extremely serious about needing this product. The normal case is we sign an agreement and within weeks we are having a conversation about increasing the amount of product. The market is moving very quickly—literally every day—and that makes it difficult to forecast. We want to solve a bunch of issues for our business: get a fair return for our product, leverage our substantial investments in IP and fabs with our JV partner, and get the cyclicality out of the business. There are now very substantial customers that do not want to play the quarter-by-quarter price game. They want the best products on a consistent basis so they can plan their own business. That opens the opportunity to fundamentally change how this business has worked for decades. There are lots of other technology industries that understand recurring revenue models—it is a very powerful financial model, and we think we can bring it to our franchise. Operator: The next question comes from Asiya Merchant with Citigroup. Please go ahead. Asiya Merchant: Thanks for taking my questions and a great set of numbers. David, I think I heard you say some client demand with PCs or smartphones may be snapping back; you sounded optimistic on that into next year. Are you seeing anything—AI on edge devices—that underpins your optimism? And given that demand seems tilted toward meeting hyperscaler demand, what gives you confidence you can meet some of that client demand if it snaps back? And for Luis, CapEx used to be mid-teens as a percentage of revenues. How should we think about that going forward? David V. Goeckeler: Looking at '27, we see PC and phone units are down now as you would expect; we see those flattening out and up slightly in '27. That reflects the market’s ability to adapt. Device companies are spectacular—very smart people that understand how to change their portfolio mix. We will still see content per device increase this year—phones up, PCs flat—and we will see both inflect up next year while units are flat to up slightly. What will we supply? We are going to supply the customers that we have agreements with. That is the change we have been talking about. We are talking to edge customers as well about these NBMs—multiyear agreements with the same characteristics. Those customers understand their businesses extremely well; if we reach the finish line, we will have great insight into their demand because they will have told us and put a financial commitment behind it. We are navigating away from a market where we just show up and see what demand and price are, to one where customers commit demand we can really count on—and they can really count on us. Luis Visoso: On CapEx, we continue to invest toward a mid-teens capacity growth over time. You should think about it more in dollars than percent of revenue. It is a little bit of an increase into the next several quarters as we continue transitions—we did the easier conversions first, and the next conversions will be a little more expensive on a dollar basis to deliver the same kind of growth. Nothing dramatic, and no change in philosophy. Operator: The next question comes from Vijay Rakesh with Mizuho. Please go ahead. Vijay Rakesh: Phenomenal set of results. On the guarantees and RPO: data center is already at $1.5 billion, an annualized $6 billion run rate. Are the $11 billion in guarantees and the $42 billion RPO mostly in data center? And on pricing in these guarantees, is it mark-to-market as you look out two to three years? Luis Visoso: We are not disclosing customers or segment mix tied to the $42 billion RPO. That $42 billion is the minimum contractual revenue from the three deals signed before the end of the quarter. If you include the other two signed so far in Q4, that would be a larger number—you will see that number in our next quarter, but it is not part of the $42 billion. Regarding the $11 billion, they are different financial instruments used to protect us. There is a portion in prepayments—around $400 million you will see on our balance sheet—and there are other financial instruments managed by third-party financial institutions, triggered if the contract is not fulfilled. Vijay Rakesh: As you look at your NAND roadmap, you have a pretty disruptive technology coming in terms of high bandwidth flash. Any thoughts on how that is progressing? David V. Goeckeler: We are happy with how it is going—steady as she goes. We are having conversations with customers on how they would deploy it. We are building the technology—the NAND die and the controller. We are still on the timeline we talked about earlier of having the NAND late this year, and looking for more of a system with the controller early to mid next year. Operator: The next question comes from Blayne Curtis with Jefferies. Please go ahead. Blayne Curtis: Maybe following on that: you are hearing more discussion about different memory tiering—maybe accelerators using more DRAM. Any perspective on where high bandwidth flash fits into that? Any change over the last quarter on where that storage will be? David V. Goeckeler: Not really. The tiering architecture that came out maybe a quarter ago is what is being deployed. High bandwidth flash is not a substitute for an enterprise SSD; it is a way to bring a lot more to inference in a different way. You can see it in our numbers—enormous pull on the portfolio of high-performance enterprise SSDs as these architectures get deployed and inference scales. NAND is the most scalable semiconductor technology in the world and is now a critical component of that architecture. We still expect refinements as we go forward. That is why we are staying close to customers deploying at scale. Understanding what that means for demand on our product is driving demand signals years into the future for us, allowing us to align our business model around that demand. Operator: The next question comes from Ruplu Bhattacharya with Bank of America. Please go ahead. Ruplu Bhattacharya: Hi. Thanks for taking my question. Two quick ones. For Luis: on the long-term agreements, is there any restriction on when you can raise prices? Is it allowing for annual price increases, or are there conditions when you can raise prices? And for Dave: how do you see interest in QLC flash trending, and how do you see the mix of TLC versus QLC trending over the next couple of quarters? Luis Visoso: We cannot go into pricing details for each contract. As said, there are fixed-price components and variable components, and it is different depending on each agreement. There is no overall answer on pricing cadence. David V. Goeckeler: On TLC versus QLC, across the whole portfolio it is roughly two-thirds TLC and one-third QLC. In data center, for us it is predominantly TLC, and we will be launching major QLC products next quarter. There is a lot of demand for TLC in enterprise SSDs given the inference architectures and the importance of KV cache, which can scale dramatically based on use case assumptions. That said, we expect our QLC products to do very well. Operator: This concludes our question and answer session. I would like to turn the conference back over to Ivan Donaldson for any closing remarks. Ivan Donaldson: Yes. I just want to say thank you, everyone, for joining the call today. Thank you for your support. David V. Goeckeler: We look forward to speaking with you throughout the quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Beacon Financial Corp. first quarter 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. To ask a question, simply press star 1 on your telephone keypad. To withdraw your question, it is now my pleasure to turn the call over to Dario Hernandez, corporate counsel. You may begin. Dario Hernandez: Thank you, Tina, and good afternoon, everyone. Yesterday, we issued our earnings release and presentation, which is available on the Investor Relations page of our website, beaconfinancialcorporation.com, and has been filed with the SEC. This afternoon's call will be hosted by Paul Perrault and Carl Carlson. During the question and answer session, they will also be joined by Mark Meiklejohn, the Chief Credit Officer. This call may contain forward-looking statements with respect to the financial condition, results of operations, and business of Beacon Financial Corp. Please refer to page two of our earnings presentation for our forward-looking statement disclosure. Also, please refer to our other filings with the Securities and Exchange Commission, which contain risk factors that could cause actual results to differ materially from these forward-looking statements. Any references made during this presentation to non-GAAP measures are only made to assist in understanding Beacon Financial Corp.'s results and performance trends and should not be relied on as financial measures of actual results or future predictions. For a comparison and reconciliation to GAAP earnings, please see our earnings release. At this time, I am pleased to introduce Beacon Financial Corp.'s President and Chief Executive Officer, Paul Perrault. Paul Perrault: Thanks, Dario, and good afternoon, everyone, and thank you for joining us for our first quarter earnings call. I am pleased to share that we achieved a major milestone in our integration process in the quarter with the successful completion of a core systems conversion in mid-February. I would like to recognize the hard work and dedication of our teams in executing on this very critical step and, just as importantly, their efforts to achieve strong client retention throughout that process. That outcome reflects months of preparation, disciplined execution, and a continued focus on serving clients during a period of significant change. From a financial perspective, I am very disappointed with our first quarter results. Loan growth and the margin fell far short of our expectations and reflect some near-term pressures, uncertainty in the economic environment, and the tail end of merger activity. GAAP earnings for the first quarter were $0.55 per share and operating earnings were $0.70 per share, excluding merger-related charges. While operating results were below both our prior quarter and our expectations, the core returns remained good with operating ROA just over 1% and operating return on tangible common equity of 11.25%. As we discussed coming out of the fourth quarter, the operating environment during the first quarter remained quite challenging. Balance sheet contraction, margin pressure from declining rates, and lower fee income all weighed on our results. Importantly, several of these headwinds are not structural in nature. They were influenced by seasonal dynamics, timing, and the uncertainty created in the economy from persistent inflation, extremely thin pricing, global events, and the prospect of rent control legislation in our major markets. Collectively, these headwinds impacted loan volumes. While the pipelines remain strong, clients are cautious yet optimistic as the economic environment remains quite fluid. Excuse me. On the positive side, we continue to make progress on the strategic priorities we laid out at the time of the merger. Expense discipline remains strong. Core funding costs improved sequentially. Capital levels are robust with CET1 at 11% and tangible common equity at just over 9%. And while credit metrics moved modestly higher during the quarter, they remain manageable and well reserved, reflecting proactive credit management in a still uncertain environment. Now that the systems conversion is behind us and merger charges are largely complete, our focus shifts squarely to execution, stabilizing the balance sheet, restoring growth momentum, and fully capturing the revenue and efficiency we outlined when we announced the merger. We believe the pieces are now in place to close the gap between current performance and our planned runway as we move through the remainder of the year. Before I turn it over to Carl, I will note that our board approved a quarterly dividend of $0.3225 per share, consistent with our commitment to returning capital to stockholders. In addition, the board authorized a $50 million stock repurchase program, subject to regulatory approval, reflecting our confidence in the franchise, our capital strength, and the long-term value creation opportunity that we see ahead. I will now turn it over to Carl to walk us through the financial results in some more detail. Carl? Thank you, Paul. Carl Carlson: I will begin with the high-level summary of the quarter and then walk through the income statement, balance sheet, and credit trends in more detail. First quarter operating results declined sequentially, driven primarily by balance sheet contraction, modest net interest margin pressure tied to the rate environment, and lower noninterest income. GAAP earnings totaled $46.2 million, or $0.55 per share. Operating earnings were $58.4 million, or $0.70 per share, which excludes $13 million of one-time pretax merger-related charges. Operating return metrics remained healthy: operating ROA was 1.01%, operating return on tangible common equity was 11.24%, reflecting continued expense discipline and solid core profitability even with lower revenues. Turning to the income statement in more detail. Net interest income was $190.8 million, down $8.9 million, or 4%, from the fourth quarter. This decline was driven by lower average earning assets and a modest reduction in asset yields as rates moved lower in late 2025. The net interest margin declined by 4 basis points to 3.78%. Importantly, funding costs improved sequentially. Interest-bearing deposit costs declined 17 basis points and we expect continued improvement as pricing actions taken continue to flow through. As balance sheet growth resumes, we believe this positions the margin more favorably ahead. Noninterest income totaled $23.9 million, down $2 million, or 8%, from the prior quarter. The decline was primarily driven by lower deposit fees and reduced gains on loan sales as SBA activity moderated from a very strong fourth quarter. These declines were partially offset by higher mark-to-market income on derivatives, tax credit investment income, and relatively stable wealth management fees. On the expense side, operating costs remain well controlled. Total noninterest expense was essentially flat compared to the fourth quarter, and came in nearly $1 million below budget. This performance reflects disciplined cost management and continued execution against merger synergies, offset modestly by seasonal increases in occupancy costs and a true-up in FDIC insurance. Excluding merger charges, the operating efficiency ratio for the quarter was 59.5%, underscoring the underlying expense discipline in the business. Now turning to the balance sheet. Total assets declined $992 million to $22.2 billion, driven primarily by lower cash balances associated with point-in-time payroll fulfillment deposits. Loans declined approximately 1%, reflecting continued runoff in the commercial real estate and consumer portfolios, partially offset by growth in core commercial lending. Loan originations and draws totaled $734 million, with a weighted average coupon of 7.628%. Sixty-seven percent of originations were floating rate. Deposits declined 6%, driven largely by payroll deposits and brokered balances. Excluding payroll and brokered deposits, core customer deposits declined approximately 2%, reflecting typical seasonal outflows related to tax payments and commercial activity. Turning to credit. Credit metrics deteriorated modestly during the quarter. Nonperforming loans increased to 83 basis points of total loans, driven primarily by migration of Boston office exposure and several rent-controlled multifamily properties in New York City. Net charge-offs totaled $13.6 million, or 30 basis points annualized, reflecting resolutions of a small number of larger credits. The allowance for loan losses closed the quarter at $244 million, representing 1.36% of loans. Given portfolio composition and current risk trends, we believe reserve coverage remains appropriate. Provision expense declined modestly from the prior quarter, and we continue to expect provisioning to be less than net charge-offs as we work through existing criticized credits. Capital generation remains a clear strength. CET1 ended the quarter at 11%, tangible common equity at 9.1%, and tangible book value increased $0.16 to $23.48 per share. Importantly, with the core systems conversion completed in early February, we have now recognized the final significant merger charges. Total merger costs were in line with expectations, and management is confident the announced cost synergies of the merger have been realized. Looking ahead, we anticipate improving earnings momentum now that merger costs and system conversions are completed and announced expense synergies have been realized. We expect loan growth to remain soft in the second quarter, then strengthen throughout the remainder of the year. We expect the margin to stabilize around 3.80% and gradually improve. While near-term macro and rate uncertainties remain, we believe the franchise is well positioned to improve performance and close the gap to our targeted run rate over the coming quarters. That concludes my prepared remarks. Back to you, Paul. Paul Perrault: Thank you, Carl. We will now be joined by Mark Meiklejohn and Michael McFerrity, and we will open it up for questions. Operator: As a reminder, to ask a question, press star 1 on your telephone keypad. Our first question comes from the line of Justin Crowley with Sandler. Please go ahead. Justin Crowley: Hey, good afternoon, everyone. Just wanted to start out on the margin. In the outlook there, can you, Carl, maybe provide a little more detail on the reset on accretion expectations, what changed from the original assumptions that went into that, and what got you from $15 million down to that $12 million number just on a go-forward basis? Carl Carlson: Sure. Thanks for the question. When we first estimated the purchase accounting, we tried to take out the impact of prepayments and things of that nature, and we were estimating it around $15 million. A lot of the schedules suggested that. We have these all set up in our systems to track as loans pay down, and it is coming in a little bit lower. We are not seeing any kind of prepayment activity at this point that is meaningful to the amounts. For this quarter, it came in at $12.1 million. I believe it was over $13 million last quarter. I am feeling more confident that the $12 million range is something, now that the system conversions have taken place—we had two general ledger conversions and old systems conversions onto a new system. I feel more confident that this will be the number going forward. Justin Crowley: Okay. Understood. And just, I guess, some of the moving pieces there. If I look at the average balance sheet and just loan yields, that 5.96% was down over 30 basis points. You pointed it out, but without a huge swing in accretion income—and I know we had lower rates filtering through—it seemed like a big move. So I was just curious if there is anything else underneath the surface there that drove that yield down for the quarter? Carl Carlson: As you mentioned, the purchase accounting did come down in the quarter from $13.8 million to $12.2 million, so that was $1.6 million of the impact, which was about 7 basis points. On the other side, the movements in the fourth quarter in rates—75 basis points moved by the Fed—we saw that throughout the quarter really impact Q1 as you see the full impact in the quarter. You still have some loans that reprice every three months and things of that nature coming in and repricing down as well. I would say we are not particularly surprised by where the yields came in when you exclude the purchase accounting impact. What did not help us here is we expected a little bit more loan growth and at more current yields. We are originating loans in the 6.20% range right now, so you are not getting that lift from new originations as much. Justin Crowley: Okay. Then just one other one sticking with the margin. Can you flesh out a little more your thoughts on deposit costs from here? We have heard from a lot of your competitors that we are at a point where there could now perhaps be some upward pressure on funding with rate cuts off the table for the time being. It sounds like you instead see some more room to go lower there. What factored into that and what repricing may be left on the book? Carl Carlson: Sure. We were going into a systems conversion, and we probably lagged our deposit costs on moving down our nonmaturity deposit costs a bit. I think we will see the benefits of that more so in the second quarter into the third quarter. We probably could have done a little bit more, but going into a systems conversion, it did not make a lot of sense to be moving rates at that point. On the nonmaturity deposits, we see opportunity there. The CD book is roughly $1.4 billion to $1.5 billion that will be repricing. I do not see tremendous opportunity there. I think things that are rolling off—at the rates that they are rolling off—there will be some opportunity, 10, 20, maybe even 30 basis points there, but the competition is pretty tough, so we have to be competitive in the market. On the rest of the funding book, Federal Home Loan Bank advances and brokered deposits, we are basically at market at this point. Not a lot of benefit on that side. Things are kind of rolling into current at rates that are current rates now. Paul Perrault: The margin gain is going to be with better loan production. In that environment, that is the better lever that I can see as I look a few months down the road. Justin Crowley: Okay. Great. We will leave it there. I appreciate it. Operator: Yep. Okay. Your next question comes from the line of David Bishop with Hub Group. Please go ahead. Paul Perrault: Yeah. Good afternoon. David Bishop: Hi. Hey. Quick question, Paul, Carl. In terms of the investor CRE—I appreciate the slide at the back there—looks like a slug of that is coming up for maturing or repricing. Just curious, in terms of the risk you point out there, is that more of debt service coverage risk or refinance risk, or both? Paul Perrault: I did not catch the preface, David. I could not clearly hear what the preface was. What is it that you are asking about? David Bishop: On the investor CRE portfolio that is coming up for maturity here in the next couple of quarters, I think in the slide deck, you mentioned some risk factors there. Just curious if that is more pertinent in terms of debt service coverage risk, refinance risk, or a combination of both—where you see the risk in that book? Thanks. Paul Perrault: Mark will answer that. Mark Meiklejohn: Yes, I will take that. We have the maturity and refinance—there is a fair amount coming up over the next four quarters. As we look forward through it, I was taking a look at it the other day, and there is one substandard loan in that portfolio. It is a property that is being redeveloped. We expect that to work itself out, and there are two smaller criticized loans. The rest of that is a pass book. So I think we feel pretty good both with maturity and repricing as we move through those maturities, whether they are hard maturities or pricing maturities. David Bishop: Got it. And then I noticed just the linked-quarter trends—the loan 90-day past due seemed to decline the same amount nonaccruals went up. Is it the right way to read into it that they just migrated to nonaccrual from past due? Mark Meiklejohn: Yeah. I think that is fair to say. David Bishop: Got it. Then just one follow-up in terms of the board approval for the buyback there. Any color or indication when you might be getting regulatory approval? I do not know if there is any sort of a time frame you would feel comfortable sharing. Paul Perrault: Well, there is a little time frame. I never try to predict exactly what the Federal Reserve is going to do, but we expect it to happen reasonably quickly, within the month. David Bishop: Got it. Thank you. Carl Carlson: Okay. Who is next in line? Maybe it is only a few days. Paul Perrault: Who is up next? Operator: I am sorry. Your next question comes from the line of Karl Shepard with RBC Capital Markets. Please go ahead. Karl Shepard: Hey. Good afternoon, guys. Paul Perrault: Echo. Karl Shepard: Just maybe to get ahead of ourselves a little bit on the regulatory approval of the buyback—but maybe just high-level thoughts—how do you want us to think about what could go into your decision-making process if you want to go ahead and use it? I know you have the CRE issue or concentration, but you also have lots of capital. So maybe can you frame up a little bit? Paul Perrault: We are actually pretty far ahead on the real estate piece of it for the leverage concentration. We have created an opportunity to do these kinds of things with that. Go ahead, Carl. Any other factors? Carl Carlson: No. We still remain committed to that 300%. The board is certainly behind that and wants us to hit that and stay on target. But as capital continues to grow, and the size of the balance sheet, I think we are in good shape to be able to continue to move forward with at least this initial authorization. Karl Shepard: Okay. So let me just try it one more time, I guess. If you feel like you are on pace to get under the 300% by the 2027 year, you are comfortable using a little bit of buyback. Is that a fair way to think about it? Paul Perrault: Yeah. Particularly when you couple it with the current shrinking of the balance sheet with originations being way off from what we are used to, and payoffs still coming in. So when you look at the current environment, the idea of a buyback seems to fit in very nicely. Karl Shepard: Great. I appreciate that. I know it is a topic for investors. And then I guess on a follow-up question here for you guys, both of you used the term “close the gap,” and I was wondering if you can help us understand what gives you the confidence that the macro or environmental headwinds you saw this quarter are starting to fade and then, once you get one quarter past the conversion, what kind of tailwinds do you see at the core from not having to spend the time and energy and focus on getting that right? Paul Perrault: I expect people to move from making sure we have customer retention and problem solving—you always have those things associated with a massive conversion like this. We are at the point now where I think of it as like you built a new home. When you move in, there is a punch list of things that need to get done, and that is where we are. I am expecting that our bankers and support personnel will now continue to shift toward loan production and fee income production, which will get us on the right track to where we had hoped we would be. Carl, do you want to add anything? Carl Carlson: No. I think just the uncertainty in the market—so we feel good about our loan pipelines. We feel good about what is going on out there, but we know they could be better. There is a lot of uncertainty in the market. In late February, and then we have the geopolitical things that are going on. We have seen interest rates increase, particularly the yield curve steepening, which sets people back even if it is momentarily. We also have the multifamily proposals for rent control in the Boston market, which has a lot of folks in wait-and-see mode, and in Rhode Island. In Rhode Island, it was passed in Providence. So there are a number of things that we think will get resolved sooner rather than later—or hope to get resolved sooner rather than later—that take some of that uncertainty off the table and move things forward. Karl Shepard: Thank you both. Paul Perrault: Okay, Carl. Operator: Your next question comes from the line of Stephen Moss with Raymond James. Please go ahead. Carl Carlson: Hey. Stephen Moss: Carl, maybe starting for you—I will just circle back to the margin here. In terms of just thinking about the day count here, you do have, it looks like, a certain five to six basis points drag or increase potential in the upcoming quarter on the margin. Just curious if you could be a little bit over the 3.80% number for the second quarter here? Carl Carlson: Anything is possible. Day counts always come into play. As far as I am concerned, I am less focused on the margin number and more on the actual net interest income that we earn. Just to give you a little sense around that, payroll deposits are something that drags us on the margin. We have average payroll deposits that are substantial. In the first quarter, they were about $1.2 billion in average balances. They are highly volatile during the week, and depending on what day of the week we close for the quarter, that is the ending balance of those balances. Usually the first quarter is the highest quarter for average balances—that is because of tax and other things that go through that—and it was about $200 million more than the fourth quarter. We expect that the average balance in Q2 will be lower, and it will be lower still in Q3, then bounce back in Q4. But those balances we have very little spread on. That is mostly a fee-income business, and the margins around that may be around 35 to 40 basis points. As those balances move, it could move the margin overall. Paul Perrault: As Carl is learning about the payroll business, it is not because he is not doing his job. It was a legacy Berkshire business that they have been in for some time. It is quite volatile. I look at it daily and it goes, I think the lowest I have seen is about $600 million in deposits to a little over $2 billion in deposits. We do not employ it as we do our other sources of funding. Carl Carlson: On the loan side, on the commercial side, the CRE loans and the C&I loans are actual day-basis loans, and the others are 30/360. We will get a pickup—there is an extra day next quarter. I will let you guys figure out how you want to calculate the margin; I see it get calculated in lots of different ways. Stephen Moss: 100% on that. Okay, that is fair enough. And then, the second thing here for me, in terms of credit and the provision and charge-off guidance—so provision to exceed charge-offs—how are you thinking about the level of charge-offs for the remainder of the year? Mark Meiklejohn: I think we provided some guidance on the provision. I think those are good numbers, probably trending a little bit towards the high end of that guidance. Charge-offs, I expect to exceed the provision, and that is as a result of the aggressive reserving that we have in place, and the credit marks that we have in place. As an example, we have about $80 million on our substandard portfolio, and net of substandard, we are at about 91 basis points coverage. Those charge-offs will effectively be funded out of that reserve. So I expect provision will run lower than charge-offs. Stephen Moss: Okay. So pretty substantial charge-offs then as the year goes on? Mark Meiklejohn: That is hard to say. It depends on how we resolve some of these loans. They will be in excess of provision. Stephen Moss: Okay. Fair enough. And then, sticking with credit for the moment, in terms of the office loan that went to nonaccrual here and the multifamily, maybe just color around the LTVs and debt service coverage ratios for those properties and timing on resolution? Mark Meiklejohn: I will start with the larger loan, which is the office property. That is a downtown Boston property. It is a larger loan. We have a participant in that deal. Our share of that deal is around $17 million and change. There is about 50% occupancy, about a 0.7x debt service coverage. On that particular loan, we are working with the sponsor on a potential sale of that property. Between specific reserves and then customer reserves that we hold against the loan, we have about 40% coverage on that loan. Even though it is a somewhat new nonaccrual, we feel like we are in a pretty good place from a reserving perspective and we will be able to work with the borrower through that. As far as the rent control, I want to make a comment on New York rent control. We only have seven rent-control properties in New York. It is a total of $18 million, so that represents the entire portfolio. This was two particular loans. They are related to each other. They total $9 million. I do not have the statistics on those loans—loan-to-value, debt service coverage—but, again, we are about 40% coverage on a reserve basis, and we are potentially looking at selling either the notes or the loans near term. Stephen Moss: Appreciate that color there. Maybe just on the loan growth outlook for the second quarter and the pipeline here—just kind of wrestling a little bit with the flattish comment for the upcoming quarter. Is it just more CRE runoff at the end of the day than you expected that drives that, versus the pipeline, or are they both typically driving it? Paul Perrault: It might be equal, but it is the distraction and the internal focus that everybody has had now for a number of months, coupled with more prepayments than we expected, coupled with customers and prospects not moving as quickly as we thought on purchases or activity that would cause loan drawdowns. To get that cranking again, it is going to take a little while. But we are on it. I think it will happen. How quickly and how deeply, I would be speculating, but we all know what we need to do to get there. Stephen Moss: Okay. Great. That is everything for me at the moment. Appreciate all the color. Operator: Our next question comes from the line of Laura Havener Hunsicker with Seaport Research. Please go ahead. Laura Havener Hunsicker: Yes. Hi. Good afternoon. Carl Carlson: Hi, Laurie. Laura Havener Hunsicker: Just wanted to stay with credit here. I really appreciate the details on slide 5.06. The $192 million criticized office—how much of that is coming due this year and next year? Are there any lumps, any colors you can give us? Obviously, you referenced some maturing. I just did not know the amount. Mark Meiklejohn: I will go over it again for you, Laurie. Over the next four quarters, in terms of criticized and classified, the total is about $55 million. Twenty million of that is substandard. Again, I mentioned earlier, that is a property that is being redeveloped for a major retail tenant. That is a relatively new event, so I think that is going to help us with a favorable resolution there. The other two loans are both special mention, and they have very strong sponsors. I do not expect any issues with those. One is $18 million maturing in the third quarter, and the other is $17 million maturing in 2027. That represents the total of criticized or classified loans in office. Laura Havener Hunsicker: Okay. And I am sorry. Just to clarify, the $18 million and the $17 million, those are office? Mark Meiklejohn: Correct. Paul Perrault: Okay. Carl Carlson: Okay. Laura Havener Hunsicker: Great. And how much office charge-offs were there this quarter? Mark Meiklejohn: It is in the deck, but there was a single charge-off for just under $7 million, and that represented the resolution of a downtown office property that we have had in nonaccrual for some time. We took the charge-off in the first quarter. That loan will resolve in the second quarter. The deal has been inked, and we are just waiting for it to close, but we went ahead and took the charge on that. Laura Havener Hunsicker: Okay. And I am so sorry. What is the total balance of that loan? Mark Meiklejohn: $23 million. Laura Havener Hunsicker: $23 million. Okay. So great. So all of your CRE charge-offs this quarter were office. Mark Meiklejohn: It was a single loan, Laurie, just to be clear. One single loan. Laura Havener Hunsicker: One single loan. Right. Yeah. Okay. Great. And then your C&I charge-offs were $6.6 million. I am thinking most of that is the discontinued specialty vehicles or the Eastern Funding—can you help us think about what that is and what the nonperformers are on those two categories? Mark Meiklejohn: That was split pretty evenly between SBA and Eastern Funding. In the case of Eastern Funding, it was a charge-down of a loan that has been a long-term workout. In the case of SBA, it was an SBA charge-off. In terms of the nonperforming balances, Vehicle was at $3.9 million. Macrolease is at $5.5 million—that is down pretty significantly from prior quarter. We did have a resolution of an $11 million loan. It was that Orangetheory franchise that we talked about last quarter, I believe. That resolved itself, and I expect it will be back accruing within the current quarter. I am sorry—it is accruing already. It will be upgraded within the current quarter. And you did not ask, but Firestone is a little under $1 million. Laura Havener Hunsicker: Oh, that is great. Okay. Great. And then just one last question for me. Carl, your final one-time charge is $13 million, a little bit higher than the $10 million you had expected. Can you help us think about what were the differences there? Thanks so much. Carl Carlson: Sure. On the compensation side, those numbers came in a little bit higher. Accounting and tax came in a little bit higher. Some of the contract terminations came in a little higher than I expected for the quarter. But overall, we came in on top of what we originally announced—$93 million was our original estimate when we announced the transaction. We came in basically right on top of that number, but in different buckets than we thought. The IT folks did a great job of negotiating and executing on a lot of the contracts and the conversion costs, which helped pay for some of the things that went over. At the end of the day, we came in right on top of the original $93 million, and merger charges are over now. They are done. If anything sneaks through, it is not going to be a merger charge. It will just go in the operating run rate. Laura Havener Hunsicker: Perfect. Thanks so much. Paul Perrault: Okay, Laurie. Operator: Next question comes from the line of David Konrad with KBW. Please go ahead. David Konrad: Yeah, hey. Good afternoon. I just want to circle back on the NIM a little bit because it is pretty important with what the stock is doing today. I just want to clarify the language of the 3.80% stabilized NIM. Are you thinking about that for the second quarter and then build from there, or is 3.80% kind of the full 2026 average NIM in your thoughts? Carl Carlson: I really liked the 5.80% you threw out there. I just wish I was there. We feel pretty good about the 3.80% for Q2 and feel that we will be building on that. Again, a lot of this is dependent on loan growth—that really drives a lot of this. I think the second quarter will be more about the funding side as well as loan growth. I expect that we will get the funding rates down to where they are supposed to be on some of our deposit products. Of course, everything changes in the market, but we have a little bit of a steeper yield curve, so I feel good about how things look going forward. Now, if rates drop 25 basis points—just to throw that out there, even though there is no expectation of this right now—if rates happen to drop 25 basis points, that would cost us about $6.8 million a year in net interest income, and that is a parallel move. I do not think anybody is expecting rates to go up—we will see what happens. Paul Perrault: A lot of our loan originations are in the five-year neighborhood, and those originations should be helpful as we go forward into the second and third quarter. David Konrad: And so commercial yields—the commercial loan book at around 6.20%—that is probably pretty good for now, so that will just benefit from the mix as it grows. The key is to grow the commercial real estate at 5.74% to get that up to the 6.20% range. Paul Perrault: Yes, but I would add that we are still on track to target getting to the 300% leverage of commercial real estate to capital. We are probably ahead of the original schedule, and so we have turned the real estate lenders back on because we can easily absorb some decent production and still make the targets to get to the 300% in plenty of time. That is all good news. Carl Carlson: Just to add a little bit of color on the loan origination side of things. The CRE loans we originated this quarter had a WAC of 6.30%. The C&I loans were at 6.34%, and the consumer loans were coming in at 6.03%. The spot weighted average coupon on those books at the end of the quarter: commercial real estate at 5.57%, C&I at 6.75%, and consumer loans at 5.01%. We are originating at higher coupons than what is on the book. Those coupons do not include purchase accounting; that is just the rate on the loan. Paul Perrault: Right. David Konrad: And then last one, just building off of that on the bond book. You actually had decent lift there. What is new money going in at on the bond portfolio? Carl Carlson: That is going in at around 4.29%. I think we purchased about $130 million during the quarter. Durations are in about 3.5 to 3.8 on that book. Paul Perrault: Got it. David Konrad: Okay. Thank you. That is all I had. Carl Carlson: Appreciate it. Okay. Operator: And our final question comes from the line of Daniel Cardenas with Brain Capital Research. Please go ahead. Daniel Cardenas: Good afternoon, guys. Just a couple follow-up questions on the office—the Boston office credit that went on NPAs this quarter. Was that Class A property or a Class B? Paul Perrault: It is a B. Daniel Cardenas: Okay. And the occupancy rate that you gave out, that 50%—is that kind of indicative of the overall marketplace? Paul Perrault: No. I do not think so. There is certainly pressure, and occupancy is down. I think it is about 75% occupancy—about 25% vacancy would be the number. So that is low. How much of that is being unused but still under good lease—you can speculate on what that may or may not be. But I think we read about some green shoots in leasing that have been happening, not the least of which is JPMorgan moving into the big new building over the South Station area—quite a few floors. So they will introduce some competition maybe. Daniel Cardenas: Got it. And how does the rest of your portfolio look? I am sure you have taken a deep dive. Are there any concerns in that Boston office portfolio? Mark Meiklejohn: We have taken a deep dive. We have about $1.2 billion in office, and only about $200 million is in downtown Boston. We have talked about two problem loans on the call already—one that we took the charge-off on and then the new nonaccrual. Those are our two largest nonaccruals in our book. Beyond that, the portfolio is criticized, but we have good reserves. We look very closely at all those loans, and we reassess the reserves all the time. Carl Carlson: Okay. Daniel Cardenas: Perfect. And then last question for me is, as I think about operating expenses for you guys— Carl Carlson: Daniel, I think we lost you, but you asked about operating expenses. I am getting this question all the time, so I am going to guess what you are asking. We are certainly on target, if not better, than what we originally anticipated and targeted for operating costs, and we laid that out in the deck. We feel good about where we are right now going forward. Paul Perrault: Are you there, Daniel? Carl Carlson: Is anybody there? We have lost Daniel. Mark Meiklejohn: Yeah. Operator: With no further questions in queue, I will hand the call back over to CEO, Paul Perrault, for closing remarks. Paul Perrault: Thanks, Tina, and thank all of you for joining us today, and we look forward to talking with you next quarter. Have a good day. Operator: Thank you again for joining us today. This does conclude today’s conference call. You may now disconnect.
Operator: Thank you for standing by. Welcome to the Benchmark Q1 Fiscal Year 2026 Earnings Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Paul Mansky, Benchmark Investor Relations. You may begin. Paul Mansky: Thank you, operator, and thanks, everyone, for joining us today for Benchmark's First Quarter 2026 Earnings Call. With us today are David Moezidis, our President and CEO; and Bryan Schumaker, our CFO. After the market closed, we issued an earnings release pertaining to our financial performance for the first quarter of 2026, along with a presentation, which we will reference on this call. Both are available under the Investor Relations section of our website. This call is being webcast live, a replay of which will be available approximately 1 hour after we conclude. The company has provided a reconciliation of our GAAP to non-GAAP measures in the earnings release as well as in the appendix to the presentation. Please take a moment to review the forward-looking statements disclosure on Slide 2 of the presentation. During our call, we will discuss forward-looking information. As a reminder, any of today's remarks which are not historical statements of fact are forward-looking statements, which involve risks and uncertainties as described in our press releases and SEC filings. Actual results may differ materially from these statements. Benchmark undertakes no obligation to update any forward-looking statements. For today's call, David will start with an overview, followed by Bryan's further detail of our Q1 results and guidance. We'll then turn the call back to David to share his perspective on sector trends and closing remarks. If you please turn to Slide 4, I'll turn the call over to our CEO, David Moezidis. David Moezidis: Thank you, Paul. Good afternoon, and thank you for joining us today. In the first quarter, we delivered revenue of $677 million and EPS of $0.58, both coming in towards the higher end of our expectations. Our first quarter performance reflects solid execution across the business and meaningful progress in our strategic priorities. As we look ahead, the combination of improving end-market conditions and our momentum in Semi-Cap and AC&C and the operational discipline we've been emphasizing gives us greater confidence in our outlook for the year. We now expect full-year revenue growth to be in the 9% to 10% range, up from our prior expectations of mid-single-digit growth. We also expect EPS growth to outpace revenue as we remain focused on execution and disciplined expense management. Turning to Slide 5. During the quarter, we saw evidence of improvement across a broad cross-section of our end-markets, reflecting the benefits of our well-balanced portfolio. Medical revenue continued to accelerate year-over-year and Semi-Cap returned to double-digit sequential growth. Within AC&C, the AI-related wins we've discussed on prior calls have begun to ramp, and our confidence continues to improve. Meanwhile, performance across the rest of the portfolio was in line with our expectations. These are early but clear signs that the customer-first initiatives we began implementing over the past 2 years are taking hold. That shows up in more disciplined customer engagements, clearer program prioritization and more consistent execution across the portfolio. We also delivered another quarter of solid bookings performance. This consistency reinforces our confidence in both the pacing of the year and the sustainability of our growth outlook. Operationally, we continue to drive leverage, with both operating income and earnings growing faster than revenue year-over-year. At the same time, our sustained focus on working capital efficiency drove another quarter of strong free cash flow despite stepped-up investments to support future growth. While we remain mindful of the broader environment, demand signals are stronger today than they were 90 days ago. Regardless, our priorities do not change; stay close to our customers, execute with consistency and continue to build a more resilient operating model. In short, we're encouraged by how the year has started and by the momentum we're seeing as we move forward. With that, I'll turn the call over to Bryan to walk through the financial details for the quarter. Bryan Schumaker: Thank you, David, and good afternoon, everyone. Please turn to Slide 6. Revenue in the quarter was $677 million, up 7% year-over-year and above the midpoint of our prior guidance of $655 million to $695 million. Non-GAAP EPS was $0.58, which was at the higher end of our prior guidance range of $0.53 to $0.59. As a reminder, our non-GAAP results exclude stock-based compensation, amortization of intangible assets, restructuring, impairment and other items as detailed in Appendix 1 of this presentation. For the first quarter, non-GAAP gross margin was 10.3%, improving 20 basis points year-over-year and decreasing 30 basis points sequentially, primarily due to volume. Non-GAAP operating margin of 4.8% was also up 20 basis points year-over-year, but down 70 basis points sequentially, driven by lower revenue and higher variable compensation. Our first quarter non-GAAP effective tax rate was 27.4%, slightly above our prior guidance range, driven by jurisdictional mix. Please turn to Slide 7 for the first quarter 2026 revenue performance by sector. Semi-Cap revenue, while down slightly year-over-year, increased 12% (sic) [ 2% ] sequentially, reflecting improved momentum as we progress through the quarter. As expected, industrial and A&D moderated year-over-year, down 3% and 2%, respectively. Meanwhile, medical revenue grew 24% and AC&C grew 41% year-over-year. Please turn to Slide 8 for our trended non-GAAP financials. Year-over-year, we saw a consistent improvement across revenue, profitability and earnings. This reflects continued discipline in execution and mix. Although these metrics were sequentially down this quarter due to seasonal volume and variable expenses, we expect both sequentially and year-over-year improvement for revenue, profitability and earnings throughout the balance of 2026. Please refer to Slides 9 and 10 for a discussion of our balance sheet, cash flow and working capital trends. In the first quarter, we generated $47 million in operating cash flow and $29 million in free cash flow despite investing in both inventory and capital equipment to support our future growth. As of March 31, we were $120 million net cash positive. Our cash balance was $325 million, representing a $3 million sequential increase. We had $145 million outstanding on our term loan and $60 million outstanding on our revolver, leaving $486 million in available borrowing capacity. We invested approximately $18 million in capital expenditures during the quarter. Our fourth PT building in Penang remains on track to begin operations in Q3. Based on the momentum we are seeing in the business, we expect full-year 2026 capital spending to track to the higher end of the 2.0% to 2.5% range. Demonstrating our continued commitment to return value to shareholders, we distributed $6 million in cash dividends and repurchased $6 million in stock during the quarter. At quarter end, we had approximately $117 million remaining under our share repurchase authorization. Our cash conversion cycle for the quarter was 67 days, which is a 19-day improvement year-over-year and consistent with our strong fourth quarter performance. A key contributor to that progress was disciplined inventory management. Inventory days declined 14 days year-over-year even as we grew the top line over the same period. This discipline translated into an improvement in turns to 4.8 as compared to 4.0 in the prior year period. Please turn to Slide 11 for our second quarter guidance. For the second quarter of 2026, we expect revenue to be within a range of $700 million to $740 million, representing 12% year-over-year growth at the midpoint. We expect non-GAAP gross margin to be between 10.4% and 10.6%, and non-GAAP operating margin to be between 5.1% and 5.3%. We anticipate GAAP expenses will include approximately $6.1 million of stock-based compensation and $0.8 million to $1.2 million of non-operating expenses, including amortization, restructuring and other charges. Our non-GAAP diluted earnings per share is expected to be in the range of $0.65 to $0.71. Interest and other expenses are expected to be approximately $3.5 million. We continue to advance initiatives aimed at structurally improving our tax rate over the long term. However, for the second quarter and full year, we expect our effective tax rate will be in the range of 26% to 27%. Finally, for the quarter, our weighted average share count is expected to be approximately 36.3 million. With that, I would like to turn the call back over to David for our outlook by market sector and closing remarks. David Moezidis: Thanks, Bryan. Let's turn to Slide 12 for our outlook by sector. Within Semi-Cap, since late last year, we've been sharing our view that a potential recovery in 2026 was showing more promise. This became more evident in the first quarter as revenues were stronger than expected, increasing double digits sequentially. Over the past several years, we supported existing programs, secured new wins and invested in capacity, including investments such as our Penang 4 facility in anticipation of an industry upturn. Looking ahead, we expect this to translate into both sequential and year-over-year growth throughout the year. Within industrial, revenue was in line with our expectations, and we see modest growth in 2026. Within the sector, we're seeing good performance from transportation and agriculture, while automation and HVAC saw softer conditions. Overall, we remain positive on the outlook for the sector longer term. Turning to aerospace and defense. Our commercial air business continues to perform well. After 2 years of double-digit growth, we expect A&D to moderate in 2026, driven primarily by program timing within defense. Importantly, bookings activity across defense and space remains strong, positioning the sector for a return to growth as these programs are expected to ramp later in the year and into 2027. Medical delivered another standout quarter in Q1, and we expect this performance to continue over the next several quarters, supporting our growth for the year. I'm particularly encouraged by the breadth of the growth drivers in medical, which includes our competitive wins, strong end-markets and new program ramps. Lastly, in AC&C, we delivered exceptional year-over-year results in the quarter, driven by the initial ramp of AI-related wins we've discussed over the past several quarters. These wins were enabled in part by our liquid cooling capabilities, which supported our HPC programs and are now seeing traction in clustered AI solutions. While still early in the ramp, our visibility continues to improve, leading us to expect strong growth from this sector in 2026. As a validation that our customer-first initiatives are working, I'm pleased that we were recently named HP Enterprise's 2026 Manufacturing Partner of the Year, a meaningful acknowledgment from a strategic customer. In summary -- turning to Slide 13. We are pleased with our first quarter performance and how 2026 is taking shape. The progress we're seeing did not start in Q1. It reflects the work we've put in over the past several years, which gives us the confidence to raise our full-year revenue outlook to 9% to 10%, with operating income and earnings growing faster than revenue, both sequentially and year-over-year throughout the remainder of the year. At the same time, we remain committed to investing in the business with customer satisfaction as our central focus. This includes continued capacity expansion around the world, as well as ongoing investment in our leadership and capabilities. Whether capacity, talent or manufacturing efficiency, these investments share a common objective to deepen customer engagement, accelerate innovation and support the opportunities ahead of us. With that, I'd like to thank our customers, our shareholders and the entire Benchmark team around the world for their continued trust, dedication and execution. Operator, we can now open for questions. Operator: [Operator Instructions] And your first question comes from the line of Max Michaelis with Lake Street Capital Markets. Maxwell Michaelis: Congrats on the quarter as well as the guide. First one for me, kind of want to stick to semi here. With Penang 4 opening up in Q3, can you remind me how much capacity -- excess capacity that will bring online? David Moezidis: Max, we don't discuss kind of how the capacity online is. But what we can tell you is the additional capacity that is coming online is setting us up to serve our customers inside of 2026 and positioning us for further growth in 2027. Maxwell Michaelis: Perfect. And then sticking with semi, I mean, when we think about this strength here going throughout 2026, are you seeing this broad-based strength across your entire customer base? Or is it kind of a onesie-twosie deal? David Moezidis: No, no. This is broad-based. This is definitely broad-based. And we started hearing the signals at Semicon in October, and I shared that information in one of our earlier calls. And those signals started materializing into orders. And now we're up and running, as you could see with our performance. Maxwell Michaelis: And then last one, just with AC&C. You talked about strong momentum with enterprise AI clusters as well as on-prem cloud infrastructure. Any other use cases you can touch on, or maybe potential visibility into future orders that you're in conversations with right now? David Moezidis: Well, what I can say is those are the 2 key drivers, but we're also anticipating as we exit the year and enter 2027, HPC is going to actually start picking up on its own and contributing nicely as well. Operator: And the next question comes from the line of Steven Fox with Fox Advisors. Steven Fox: I had a couple of questions as well. I guess, first of all, I was wondering if you could dial in on the operating leverage you're seeing as per the guidance for Q2. I was wondering, first of all, if there's any sort of unusual headwinds like as you ramp capacity that maybe is limiting that? And as your mix shifts, how do we think about operating leverage as you get into the second half of the year? And then I had a follow-up. Bryan Schumaker: Yes. So if you look at our operating leverage -- Steven, thanks for the question. As we've referenced, I mean, we expect kind of the bottom line to kind of grow to 1.5 to 2.0 is what we're thinking on dropping to the EPS, so as you get throughout the year. Now the current operating margin will be impacted a little bit as we've expanded kind of the overall growth by some variable compensation and a little bit of impact from just other corporate expenses due to some ramp and some other things. But overall, I mean, we feel good about the back half and being able to leverage up on the operating margin as we continue throughout the year. So, you see some of that from Q1, our guide in Q2 and then kind of throughout the remainder of the year, you'll see that coming through. Steven Fox: Great. That's helpful. And then just as a follow-up, David, I mean, you mentioned new programs that you've been working on for years, capabilities, et cetera, in the Semi?Cap space. Can you give us a better sense of like what's coming to fruition now that maybe changes the mix or supports the growth? I'm just trying to get a sense for how some of those efforts are paying off maybe in the next 6 to 12 months. David Moezidis: Yes. I would frame it into 2 areas. One is we're increasing our share of wallet with our existing customers. And two, we're actually winning new share with some new customers, so newer brands, newer logos, if you will. So it's contributing from both fronts. And from our perspective, this is an area that we made investments in over the course of the last several years, and we're starting to see the fruits of those labors. Steven Fox: And if I could just follow up on that real quick. When you talk about some of these wins, like does the product or the services you're providing in the future, is it similar mix to what you would say you've done over the last 2 to 3 years? Or there's any changes on that front? David Moezidis: Yes, Steven. I would say it's very similar for the most part. Now, you'll see products change with regards to the level of complexity, but how we serve our customers in the semiconductor capital equipment space is a combination of our precision technology solutions as it relates to machining and such, as well as electronic, mechatronics, system integration and PCBA assembly. So it's really the total breadth of services that we're able to bring to bear for our customers. Operator: And the next question comes from the line of Anja Soderstrom with Sidoti. Anja Soderstrom: Congrats on the quarter here. So, I'm just curious, in the Semi Cap, you say you expect sequential growth, but do you expect the second half to be much stronger still or... David Moezidis: Yes. Anja, this is David. We do. And we're looking at -- we don't typically go out and start providing specific sector growth rates, but we decided that for this sector specifically because there's been a lot of questions for us to share with you that we'll be somewhere around the mid-teens from an overall growth in this space. Anja Soderstrom: Okay. And then also for AC&C, how should we think about that? That was very strong for the quarter. And do you expect that to step up? Or is it going to be on the same sort of level as the first quarter? David Moezidis: Yes. I would say, as we continue our ramp, we expect it to continue to improve. Now to what extent, we'll report back at that on that next quarter. Anja Soderstrom: Okay. And then just remind me again for Penang, is that higher margin business? Or is it corporate average? Bryan Schumaker: Yes, Anja. This is Bryan. So yes, it is higher margin. So it's primarily focused on precision technology Semi-Cap. So, that's why it is bringing the higher margin. So just to take that into consideration and then you look at our overall portfolio, you have the growth that we're seeing in the Semi-Cap space and you also have the AC&C, which is the lower end that kind of offset. But yes, as far as PT goes and that expansion, it is on the Semi-Cap, the higher end. Operator: [Operator Instructions] Your next question comes from the line of Anja Soderstrom with Sidoti. Anja Soderstrom: Sorry, I just had one more. I wanted to squeeze in. Do you see any sort of difficulty in the supply chain or component availability at all? David Moezidis: Yes. Anja, we're starting to see select lead times increasing in pockets. And we're seeing the same challenges as pretty much everybody in the memory space. And really, we're doing our very best to get in front of it and make sure that we manage the supply chain properly. Operator: And we do have a follow-up question coming from the line of Steven Fox with Fox Advisors. Steven Fox: I was just curious, maybe some of this takes a little time to matriculate, but how do you think the conflict in Iran is impacting defense program run rates, maybe not this quarter but over the back half of the year? Is that something we should think about beyond just sort of the secular trends that you're writing? David Moezidis: Yes, Steven. Our view on that is even if you have immediate resolution, defense is going to perhaps remain strong for the next 12, 18 to 24 months as those investments will need to really be there for replenishment purposes. That's probably -- and that's my opinion on that. But from an order perspective and market share and bookings, we continue to see momentum there. We're winning defense programs. And as I shared in my script, we're also winning in space. So, we remain very positive in this sector, and we see it picking back up in 2027. Operator: I'm showing no further questions at this time. I would like to turn it back to Paul Mansky for closing remarks. Paul Mansky: Thank you, operator, and thank you, everyone, for participating in Benchmark's First Quarter 2026 Earnings Call. For updates to upcoming investor conferences and events, including a replay of this call, please refer to the Events section of our IR website at bench.com. With that, thank you again for your support, and we look forward to speaking with you soon. Operator: And this concludes today's conference call. You may now disconnect.
Operator: Good afternoon, and thank you for standing by. Welcome to Western Digital Corporation’s Third Quarter Fiscal 2026 Conference Call. Presently, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. At that time, if you would like to ask a question, you may press star 1 on your phone. As a reminder, this call is being recorded. Now I will turn the call over to Ambrish Srivastava, Vice President, Investor Relations. You may begin. Thank you, and good afternoon, everyone. Ambrish Srivastava: Joining me today are Irving Tan, Western Digital Corporation’s chief executive officer, and Kris Sennesael, Western Digital Corporation’s chief financial officer. Before we begin, please note that today’s discussion will contain forward-looking statements based on management’s current assumptions and expectations, which are subject to various risks and uncertainties. These forward-looking statements include expectations for our product portfolio, our business plans and performance, ongoing market trends, and our future financial results. We assume no obligation to update these statements. Please refer to our most recent Annual Report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. In our prepared remarks, our comments will be related to non-GAAP results on a continuing operations basis unless stated otherwise. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that have been posted in the investor relations section of our website at investor.wdc.com. Lastly, I want to note that when we refer to we, us, are, or similar terms, we are referring only to Western Digital Corporation as a company and not speaking on behalf of the industry. With that, I will now turn the call over to Irving for introductory remarks. Irving? Irving Tan: Thanks, Ambrish, and good afternoon, everyone. Thank you for joining us today. Western Digital Corporation started calendar year 2026 with great execution, driving strong sequential and year-over-year revenue growth in our cloud, consumer, and client businesses while expanding gross and operating margins. Gross margin exceeded 50% driven by our continued innovation and focus on improving total cost of ownership for our customers through higher capacity drives and increased adoption of our UltraSMR products. With strong operating leverage, lower interest expense, and an efficient tax structure, these efforts resulted in nearly a doubling of our EPS compared to last year. These results underscore our commitment to leading-edge innovation and strong execution. This is an exciting time to be part of Western Digital Corporation, a focused HDD company and a strategic partner to hyperscalers and cloud service providers in this AI-driven data economy. We are well positioned with business momentum building across our entire portfolio with greater visibility into long-term customer demand. Looking at the bigger picture, it is clear that data and data storage are becoming more critical and valuable. As AI workloads extend from training to large-scale inferencing, data generation is at an inflection point. This year, inference is expected to account for roughly two thirds of all AI compute. This larger focus on inference increases the amount of data generated, which in turn increases the need for data storage. The scale of what is happening is also considerable. One leading hyperscaler’s LLM processes over 16 billion tokens per minute via direct API used by their customers, while another AI company processes over 2.5 billion prompts every single day from 900 million active users. While the resources that are used to create tokens are recycled, the data that is being created must be stored. Every token, every prompt, and every query answered and checkpoints saved create data that require persistent, scalable, and cost-efficient storage, and the majority of this data is stored on hard disk drives. As we look ahead, we see the rise of agentic AI, the next wave and arguably the biggest yet. What we are seeing with agentic AI frameworks represents a structural shift from AI that answers questions to AI that continuously executes workflows. That transition materially increases data generation and extends data retention cycles. Every hour of autonomous agent work and every action an agent takes creates data that must be stored. As a result, we expect agentic AI to drive a step-function increase in capacity-oriented storage demand, particularly in cloud and enterprise environments. Beyond agentic AI, two more waves are building simultaneously. Synthetic data, the primary fuel for physical AI, is by design orders of magnitude larger than real-world inputs that seed it. Across industries, physical AI data factory frameworks are being designed to transform limited training data into larger synthetic datasets. At scale, robotics, autonomous vehicles, and vision AI—and physical AI itself—robots, industrial systems, autonomous fleets—generate continuous streams of video, sensor, and motion data that must be stored, versioned, and fed back into training loops. These forces are not additive; they are a compounding loop. Inference creates data; agents consume and generate more data. Physical AI creates data and trains synthetic models that create more data, and ultimately, the loop accelerates. We are truly seeing that the AI-driven data economy is creating an unprecedented demand for high-capacity, reliable, high-performance storage on HDDs. This reinforces our conviction that long-term data storage growth will be greater than 25% CAGR. Western Digital Corporation’s technology and product roadmap is purpose-built to meet this growing demand. As we shared on our innovation day in February, we continue to innovate to meet our customers’ needs through a combination of capacity leadership and performance innovation. Our high-capacity drive roadmap now extends from our 44-terabyte HAMR and 40-terabyte EPMR drives that are currently in qualification to a roadmap that goes beyond 100 terabytes. On HAMR, we are accelerating our development, and we are now in qualification with four customers. We are qualifying our 40-terabyte EPMR drives with three customers and are on track to start volume production in the second half of calendar year 2026. Our UltraSMR technology, which works across both EPMR and HAMR, is expanding our customer base significantly. Three of our largest customers have now adopted the technology; two are already meeting nearly all of their exabyte demand with UltraSMR, while the third is rapidly ramping in that direction. We plan to have all of our major customers qualified on UltraSMR by the end of calendar year 2027. We are delivering on major areal density improvements along with a focus on performance innovation with our high-bandwidth drives. Customer response to our innovation has been very positive. Our high-bandwidth drives are currently sampling with two hyperscale customers, with an additional customer scheduled to start this quarter. Our dual-pivot technology is being built specifically for new AI workloads and an open API approach aimed at simplifying deployment at scale. Based on our industry-leading technology and product roadmap, we are well positioned to support growing customer capacity demand and address their AI workload needs. Our long-term visibility continues to improve, with the duration of our agreements now extending into calendar year 2028 and calendar year 2029. We continue to see strong demand from across our client, consumer, and OEM enterprise customers as well. In summary, the tailwinds shaping our industry today are both exciting and dynamic, and at Western Digital Corporation, we remain focused on meeting our customers’ needs while enhancing the value proposition and delivering long-term shareholder value to our investors. With that, let me now hand it over to Kris to share our Q3 results and outlook for Q4. Kris Sennesael: Thank you, Irving. Good afternoon, everyone. The Western Digital Corporation team delivered strong results, making solid progress against our strategic priorities with continued focus on innovation and disciplined execution while advancing key initiatives and remaining tightly aligned with our customers’ growing exabyte demand. As we move forward, we are encouraged by our momentum and remain confident in our ability to deliver sustainable revenue growth, expand gross and operating margins, and create long-term value for our shareholders. During fiscal Q3 2026, revenue was $3.3 billion, up 45% year over year, driven by strong demand across all our end markets and an improved pricing environment. Earnings per share was $2.72, almost double compared to a year ago. Revenue, gross margin, and earnings per share were all above the high end of the guidance range. We delivered 222 exabytes to our customers, up 34% year over year. This includes over 4.1 million drives or 118 exabytes of our latest-generation EPMR with capacity points up to 32 terabytes, demonstrating our ability to quickly ramp new technologies and products in support of strong customer demand growth. Cloud represented 89% of total revenue at $3.0 billion, up 48% year over year, driven by strong demand for our higher-capacity nearline product portfolio and a stronger pricing environment. Consumer represented 6% of revenue at $186 million, up 24% year over year. Client represented 5% of total revenue at $179 million, up 31% year over year. Both client and consumer segments saw strong year-over-year exabyte growth and improved pricing. Gross margin for the fiscal third quarter expanded to 50.5%. Gross margin improved 1,040 basis points year over year and 440 basis points sequentially. The drivers of strong gross margin performance include continued mix shift towards higher-capacity drives, along with ongoing execution of our pricing strategy and tight cost control. Operating expenses were $397 million, or 11.9% of revenue, a 40 basis point sequential improvement, demonstrating further operating leverage in the model. The sequential increase of operating expenses was driven by the acceleration of R&D project expenses as we continue to expand our HAMR qualifications with more customers. Strong top-line growth, expanding gross margin, and leverage in the model drove operating income to $1.3 billion, up 106% year over year, translating into a strong operating margin of 38.6%, up 1,260 basis points year over year. Interest and other expenses were $24 million, and our effective tax rate for the fiscal third quarter was 16%. Taking into account the diluted share count of 385 million shares, earnings per share was $2.72, an increase of 97% year over year. During the third fiscal quarter, we significantly strengthened our balance sheet by monetizing 5.8 million shares of SanDisk, which led to a $3.1 billion reduction in our debt. As a result, only $1.6 billion of convertible debt remains outstanding, and with $2.0 billion in cash and cash equivalents, we ended the quarter in a net positive cash position of $450 million. At quarter end, we still owned 1.7 million shares of SanDisk. Additionally, during the quarter, we received an upgrade from Standard & Poor’s and Fitch to investment-grade level. Operating cash flow for the third fiscal quarter was $1.1 billion and, in combination with a disciplined approach to capital expenditures—CapEx of $145 million—this resulted in strong free cash flow generation of $978 million for the quarter and a free cash flow margin of 29%. During the quarter, we made $43 million of dividend payments and increased our share repurchases to $752 million, repurchasing 2.9 million shares of common stock. Since the launch of our capital return program in fiscal 2025, we have returned $2.2 billion to our shareholders by way of share repurchases and dividend payments. Also, given the board and management confidence in the business, the board has approved a 20% increase of the cash dividend from $0.125 per share of the company’s common stock to $0.15 per share, payable on 06/17/2026 to shareholders of record as of 06/05/2026. I will now turn to the outlook for fiscal Q4 2026. As we continue to operate in a strong demand and pricing environment, with longer-term visibility across our cloud, consumer, and client businesses, we anticipate revenue to be $3.65 billion, plus or minus $100 million. At midpoint, this reflects growth of 40% year over year. Gross margin is expected to be in the range of 51% to 52%. We expect operating expenses in the range of $385 million to $395 million. Interest and other expenses are anticipated to be $10 million. The tax rate is expected to be 16%. As a result, we expect diluted earnings per share to be $3.25, plus or minus $0.15, based on a non-GAAP diluted share count of 385 million shares. In summary, this quarter’s results and outlook highlight our commitment to disciplined execution, focus on innovation, and deep customer engagements. Our strengthened balance sheet and robust free cash flow empower us to invest with confidence in the business. With strong momentum and a clear capital allocation framework, we are well positioned to drive durable earnings and free cash flow growth and create long-term shareholder value. With that, let us now begin the Q&A. Ambrish? Ambrish Srivastava: Thank you, Kris. Operator, you can now open the line to questions, please. And to ensure that we hear from as many analysts as possible, please ask one question at a time. After we respond, we will give you an opportunity to ask one follow-up question. Operator? Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer portion of today’s call. If you have a question, please press 1 on your phone. If you would like to withdraw your question, please press 2. And today’s first question comes from Erik Woodring at Morgan Stanley. Please go ahead. Erik Woodring: Great, guys. Thank you so much for taking my question. Irving, congrats on the really nice results. I would love if you could maybe go into a bit more detail on the specific tailwinds that HDDs and Western Digital Corporation are seeing from agentic AI—meaning exactly what parts of the workflow in agentic are ripe for HDDs—and again, just tying that back to your comment on greater than 25% long-term exabyte growth, where does that go as a result of agentic AI? Thank you so much. Irving Tan: Thanks, Erik, for the question. We really see three core drivers of HDD growth going forward. One that we have seen for quite a while is the ongoing storage requirements associated to training. That is not going to end. Training will continue—relearning, reinforcement learning is going to happen—and what we are seeing from our customers is as they retrain and reinforce learning with these models, the quality of the model results improves. They continue to store all the data they are generating to enable improved quality of the model. So that is one continued driver that we see. The second driver is the rise of agentic AI and inferencing. With every inference that happens, new data is generated, and what is happening is that all that new data is getting stored as well to both feed back into training models and be stored to support future inferences. So that is the second key driver in terms of agentic AI and inferencing. The third driver for data storage for HDDs is physical AI. As we have highlighted before, physical AI with the limited datasets that it has—whether it is autonomous vehicles or robotics—is using AI to generate a lot of synthetic data to further train and enable physical AI as well. Any data that is generated out of it gets stored and feeds that whole training and synthetic data development loop. So those are the three big drivers of growth that we see going forward, Erik. That is why we have the confidence to see exabyte growth going beyond 25% CAGR. Ambrish Srivastava: Thank you, Erik. And did you have a follow-up? Erik Woodring: Yeah, just a quick one for Kris. Over the last four quarters, you have really shown a lot of gross margin expansion. I think it is 260 basis points on average over the last four quarters, and you just did 4.5 points of gross margin expansion. For June, guidance implies about 100 basis points of gross margin expansion. Is there conservatism baked into that forecast, or are there any emerging headwinds we need to consider given you should be accelerating cost downs and you are seeing really nice pricing growth? Some context around the June gross margin would be helpful. Thanks so much. Kris Sennesael: Yes, Erik. First of all, I am really pleased that we delivered strong gross margin in the third quarter and broke into the 50% gross margin range with 50.5%. For Q4, we are guiding to 51% to 52%, so some further good improvement in gross margins. If you look at the incremental gross margins on a year-over-year or quarter-over-quarter basis, for three quarters in a row now—and including the fourth quarter that we guided—you see very strong incremental gross margins in the plus-70% to plus-75% range on a year-over-year and quarter-over-quarter basis. We believe that we will be able to continue to further improve gross margins. Obviously, we are only guiding one quarter at a time, but based on the strong pricing environment that we operate in—which is based on more and more value that we provide to our customers—as well as a better mix as we move to higher-capacity drives with EPMR and later on moving to HAMR, and more and more driving adoption of UltraSMR, we expect further gross margin uplift. Then, of course, we continue to execute well from an operations point of view. When you put it all together, we are very pleased with the gross margin and the gross margin trends going forward. Ambrish Srivastava: Operator, next question, please. Operator: Thank you. And our next question today comes from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani: Thanks for taking my question, and congrats on a nice set of numbers here. My first question is on the pricing side. On a per-terabyte basis, pricing was up high single digits in March. It is a big step up from the flattish trends we have seen in the last few quarters. Could you help us understand what is enabling this step up? Is it reflective of some of these LTA contracts that you have engaged in? Irving, is this the new normal on pricing as we go forward? Irving Tan: Thanks, Amit. Pricing was up 9% year over year. It reflects a couple of things: the ongoing value that we are creating for our customers, better TCO value—as we said, our whole pricing philosophy is to enable better TCO value for our customers and to be able to share in that value creation through pricing. As we highlighted at innovation day, and as Kris highlighted also, we said that as we move forward towards the latter part of calendar year 2026, we would see pricing increase more towards the high single-digit range. That is what you are seeing from us. That is reflective of the timing of new LTAs coming on board as we move forward to new periods of LTAs. We are about to deliver our next generation of EPMR in the second half of this calendar year. That will be a step up in capacity point that will deliver more TCO value; therefore, we are able to share in better pricing as a result of that as well. Ambrish Srivastava: Do you have a follow-up, Amit? Amit Daryanani: I do. Thank you, Ambrish. On the other side of this, cost per exabyte was down again roughly 10% in the quarter. What is the right framework for us to think about cost-per-exabyte declines? Should we expect a bigger step down as you transition towards the higher-density next-gen EPMR into this year? Thank you. Irving Tan: If you look at the cost down, we delivered 10% year over year, and that is probably the right way to look at it going forward. We continue to be focused on delivering higher areal density—that is a big cost driver. As I mentioned, we will be introducing and ramping up our next-gen EPMR in the second half of the year. We also have an increasing uptake of customers on UltraSMR, which is a good cost driver for us as well. We get 20% uplift on capacity without the associated cost. By the end of fiscal year 2027, close to about 60% of all the exabytes that we ship will be on UltraSMR. Our teams continue to work on platforming the products to drive further cost downs and ongoing value engineering to reduce high-cost elements of our bill of materials, and we continue to drive supply chain efficiency across procurement and manufacturing operations. Putting that all together, we feel confident that we can continue to deliver the trend that we have mentioned. Ambrish Srivastava: Thank you, Amit. We can go to the next question, please. Operator: Absolutely. Our next question today comes from Aaron Rakers at Wells Fargo. Please go ahead. Aaron Rakers: Congrats on the results. I want to go back to the 25% growth rate and think about as you see agentic AI drive incremental structural demand, how you are thinking about the capacity to fulfill that demand. Is it a continued ability to just mix higher, or is there a point in time where some capacity investment might have to play itself out? Irving Tan: Thanks for the question, Aaron. At this juncture, we still do not see any need to increase unit capacity, so we have no plans for that. Our focus is to continue to improve areal density. As we introduce our next-gen EPMR—which is a 40-terabyte drive—that will be a 25% step up from our current drives at the 32-terabyte capacity range. There is also the opportunity to further mix up with our customers. We have seen an acceleration of mix up, and as we introduce the high-capacity drives in the next two quarters, we will see an acceleration of that going forward as well. Ambrish Srivastava: Follow-up, Aaron? Aaron Rakers: Yeah, I do. Thanks, Ambrish. Maybe on the capital structure now with the debt-for-equity transfer behind you. You have still got 1.7 million shares of SanDisk, and I know that you increased your dividend—20%. Kris, any updated thoughts on how you are thinking about capital return—building cash on the balance sheet versus returning what appears to be very strong free cash flow generation going forward? Thank you. Kris Sennesael: Yes, Aaron. I agree with you; we have very strong free cash flow and free cash flow margin. The free cash flow margin last quarter was 29%, and so we are approaching our above-30% free cash flow margin. In terms of capital allocation and capital return to our shareholders, we are not changing our policy or framework. We are returning all excess free cash flow back to shareholders through a combination of our dividend program and share buyback program. As you have seen last quarter, we will continue to do so going forward. We are increasing the dividend with a 20% increase to $0.15 per quarter, and we will continue to execute on our share buyback program. Ambrish Srivastava: Thank you, Aaron. Operator: Our next question today comes from Thomas O’Malley at Barclays. Please go ahead. Thomas O’Malley: Congrats on the good results. I am looking at peers’ results, which were out tonight too, and I am seeing over 100% sequential pricing increases. I know you guys got asked about pricing already, but from a 30,000-foot view, with the gap kind of exploding between NAND and some of the hard disk drive players, how much appetite do customers have to keep on taking pricing increases, and what is your strategy there about how much you could push given the gap is moving higher? Secondarily, you are hearing about some of the industry potentially doing long-term agreements where you have prepay fronts. Could you talk about your appetite to do that and what that would mean for the industry if you saw some of that? Thank you. Irving Tan: Thanks, Thomas, for the question. In terms of pricing, our philosophy is to provide predictable pricing to our customers. The one thing they appreciate and want to avoid is volatility in pricing. Our focus is to provide predictable pricing. As we deliver more value and better TCO through higher-capacity drives and performance innovation—whether it is throughput or bandwidth enhancements, as we laid out at innovation day—that gives us the opportunity to create more value for our customers and to share in that through better pricing. Our philosophy is to ensure we do that in a very predictable way. Predictable pricing enables our customers to make long-term architectural decisions. That is our focus and gives us the confidence behind our roadmap and our investments. We are not looking to be opportunistic from a pricing standpoint, but rather provide predictability so customers can make long-term architectural decisions that support the structural change in the hard drive industry. On LTAs, we continue to make progress and now have LTAs that extend into calendar year 2029. As we have shared in the past, those LTAs are exabyte-based with a degree of pricing associated with them. The LTA volume we put together for our customers does not meet their full requirement, and anything we deliver above and beyond the base volume requirement we have agreed is subject to a different pricing regime that gives us an opportunity to drive some incremental upside. Ambrish Srivastava: Alright. No follow-up for Mr. O’Malley. We will go to the next caller, please, operator. Thank you. Operator: Absolutely. Our next question today comes from Asiya Merchant with Citi. Please go ahead. Michael Cadiz: Hi. Good afternoon. This is Michael Cadiz for Asiya Merchant at Citi. Congratulations on the quarter. My first question: would you be able to provide any additional color on yields and reliability, and as a result, are there any implications to the cost-per-bit decline that we should think of? Kris Sennesael: Sure. Irving Tan: If you look at EPMR products that we are shipping today and what we are anticipating as we go into volume ramp in the second half of the year for next-generation EPMR, they continue to be in the 90% range for yields. Quality, which has been one of our key considerations, remains very high. This is the hallmark of who we are as a company—high yields and known quality products—and that is something we will continue to focus on, both in our EPMR products and in our HAMR products, where our focus right now is to ensure we have the right reliability, the right quality, and the right manufacturing yields as well. In terms of current yields and quality, we do not see any changes. Michael Cadiz: Thanks. Given the price differential currently between hard disk drive and flash, would you attribute the strength in HDD demand because of that? Are you seeing any architectures changing? I think you said at this point it is not. Irving Tan: Look—flash is a great technology. It has a specific role in the storage stack. We both play in slightly different spaces. If you look at large-scale object storage, which requires long-term retention, that is where HDD really comes to the fore—that is 80% of all data stored within hyperscale data centers. If you look at workloads that require high IOPS and high throughput, that is where flash comes to the fore. Even in inferencing, we see a symbiotic relationship: the new data created from inferencing typically will get stored on HDDs, while the vectoring data required for inferencing is stored on flash. Some of the new innovation we are delivering—our high-bandwidth drives, for example, and dual-pivot technology—will improve throughput and bandwidth and continue to improve the performance of our HDDs, delivering more value to our customers. We do not see any major structural changes to architecture at this point, but that is why we want to ensure predictability in pricing so customers can make architectural decisions not one year out, but two, three, five years out as well. Thank you, Michael. Operator: Thanks. Next question today comes from JPMorgan. Please go ahead. Analyst: Hi. Thanks for taking my question. Maybe for the first one, on the quarter—you had a strong set of numbers including both revenue and gross margins coming in above the high end of your guide. The outperformance in gross margin was a lot more relative to the outperformance on revenue. Is there something more specific going on with gross margins—maybe in terms of cost reduction? What really outperformed relative to your expectations is what I am trying to get to in terms of the magnitude of the outperformance on those two metrics. Thank you. Kris Sennesael: On gross margins, there are three major drivers. The first is pricing and the pricing environment, which continues to be very strong and was a little bit better during the quarter than we expected when we provided guidance. As we have indicated, not all pricing going into the quarter is locked, and so we do have some opportunities—not only in our cloud business, but also in our client and consumer businesses—where we see further opportunities in terms of pricing. Secondly, mix: we are making good progress driving to higher-capacity drives and more adoption of UltraSMR, and that is playing out really well. Third, the teams continue to execute really well on driving down cost across the board throughout the supply chain. There was great execution during the quarter, and I expect similar levels of execution going forward. Ambrish Srivastava: Do you have a follow-up? Analyst: Yes, please. Looking at the cost per exabyte and as a follow-up to Amit’s question earlier, you are doing roughly a 10% decline in cost per exabyte right now. As you start shipping the 40-terabyte EPMR and then eventually the HAMR drive, why should we not expect that cost-per-exabyte decline to accelerate? I am thinking about trajectory as you ship those lower-cost overall profiles—why not accelerate from where it is today? Thank you. Kris Sennesael: We are only guiding one quarter at a time, but I have confidence that the teams will continue to execute on the three levers I discussed a moment ago. We are ramping the next-generation EPMR in the second half of calendar year 2026—that is not far out. As Irving already talked about, we are feeling good about that ramp, the manufacturability, and the yields. For the HAMR ramp, we are making really good progress on the qualifications—now with four customers, getting really good feedback. We expect to ramp that in 2027. There is still a little bit of work to be done in terms of yield, reliability, and quality, but good progress is being made by the operations teams. There is going to be an adoption curve; we are not switching overnight to those new products. The improvements will be phased in over the ramp period. Operator: And our next question today comes from Wamsi Mohan with Bank of America. Please go ahead. Aisling Grueninger: Hi. This is Aisling Grueninger on for Wamsi. Congrats on the results. You mentioned the UltraSMR JBOD platform as a way to broaden beyond your current target base. Does that primarily expand your reach into tier-two CSP customers or enterprise customers, and how material could this opportunity become over the next one to two years? Thanks. Irving Tan: We definitely see it as an opportunity to expand our reach into tier-two CSPs, including in the Asia region as well. That is one of the enablers behind our forecast that by the end of calendar 2027, the vast majority of our key customers will be on UltraSMR—either fully adopted or materially underway in qualification. That also gives us the confidence that by the end of fiscal 2027, close to 60% of the exabytes that we ship will be on UltraSMR. Ambrish Srivastava: Thank you, Aisling. Operator: Thank you. And our next question today comes from C.J. Muse at Cantor Fitzgerald. Please go ahead. C.J. Muse: Good afternoon. Thank you for taking the question. Curious on the agreements, particularly as they extend out into 2027, 2028, and beyond—how should we think about pricing and what is embedded inside there? Is there a fixed-versus-variable construct or different percentages? Irving Tan: Thanks for the question, C.J. The construct of the LTAs broadly includes an exabyte volume tied to it and pricing tied to it. Depending on the duration, there may be periods of pricing adjustment as we introduce new capacity points and new capabilities. That gives us the opportunity to adjust pricing going forward. Ambrish Srivastava: The follow-up, C.J.? C.J. Muse: Curious on the remaining SanDisk position now that it is beyond 12 months. Is that now taxable? Any implications beyond that window, and how are you thinking about the time frame for monetization? Kris Sennesael: Yeah. So we still have 1.7 million SanDisk shares after we did the debt-for-equity monetization in 2026. It is our intention to monetize the remaining 1.7 million shares in an equity-for-equity transaction. We have indicated it is our intention to do that before the end of calendar year 2026, and this will be in a tax-free manner. Ambrish Srivastava: Thank you, C.J. Operator: Thank you. And our next question today comes from Karl Ackerman at BNP Paribas. Please go ahead. Karl Ackerman: Thank you. I have one for Irving and one for Kris, if I may. Irving, when would Western Digital Corporation consider adding internal heads or media capacity to support these multiyear commitments from customers? For example, have you had discussions regarding prepayments for future capacity adds? Irving Tan: We are definitely looking ahead in media investments. As we said in the past, we are not making any investments in adding unit capacity. When we talk about areal density improvements or increasing the capacity per drive, that does involve technology investments to support new media recipes, new media substrates, new head designs, as well as the potential to increase disk count over time—as we highlighted on our innovation day—where we are able to get to 14 disks over time. Our number one focus is to increase terabytes per disk to make sure we are very competitive within the industry, and beyond that, we can add more platters to the drive as well. That is the most cost-effective way to deliver incremental capacity to our customers. We will definitely look at heads and media capacity investments if it makes economic sense, but not unit capacity investments. Ambrish Srivastava: Karl, do you have a follow-up for Kris? Karl Ackerman: Yes. Kris, when you note that you have agreements extending into 2028 and 2029 with your major customers, could you delineate that with respect to build-to-order and LTAs? Do you have build-to-order contracts addressing much of your nearline capacity this year, or does it extend into 2027 as well? Thank you. Kris Sennesael: Manufacturing lead times are now about a year, and so most of the purchase orders are being placed a year in advance. Beyond the first year, we move into those LTA frameworks as explained by Irving. There is still a little bit more variability beyond the first year. Ambrish Srivastava: Thank you. We will go to the next question, please. Operator: Absolutely. Our next question today comes from TD Cowen. Please go ahead. Analyst: Hey, guys. This is Eddie for Krish. Irving, when you look across your four largest hyperscale customers, are you seeing demand patterns that are broadly similar, or is there a meaningful divergence in how aggressively different customers are scaling based on their AI roadmaps? Anything specific outside overall CapEx growing that is driving demand for HDDs? Irving Tan: In general, the profile is quite similar. As I have highlighted, the demand for storage is increasing because storage is persistent. In inferencing, the resources used—compute and memory—can get recycled, but the data generated is not recycled. All that data is getting stored, and that stored data is persistent. That is consistent with what we see with all our top four customers, whether their business model is in search, advertising, or enterprise software. It is really the ongoing data storage requirements to support training, improvements in training, to support the demands of inference, and to support synthetic data being driven by physical AI. Thank you, Eddie. Operator, we will go to our last caller, please. Operator: Absolutely. Our last question for today comes from Goldman Sachs. Please go ahead. Analyst: Good afternoon. Thanks for taking my question. Could you talk about, at some point in time in the future—say, at the end of calendar 2027—what level of coverage you would expect to be shipping in terms of HAMR on an exabyte basis? Irving Tan: We do not have a number that we are putting out there right now. Our focus—as we have stated repeatedly—is to ensure we de-risk the transition for customers to HAMR. We have taken a dual-track process: we continue to deliver areal density improvement and high-capacity EPMR drives even as we introduce HAMR. That gives customers confidence in the transition while allowing them to enjoy better TCO through higher areal density. When we get to the right reliability and yields, we will make that transition accordingly to HAMR to make it the main share of exabytes that we ship. Kris Sennesael: Just to add, we indicated we have now four customers in qualification with HAMR. We are somewhat ahead of schedule compared to our initial plan. The feedback we are getting from all our customers is very positive, and our HAMR development is going really well. Ambrish Srivastava: Thank you. Operator: Thank you. That concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tan for any closing remarks. Irving Tan: Thank you. As we shared today, we are really excited about the opportunity ahead of us, and the roadmap that we put forward in Western Digital Corporation positions us well to address our customers’ needs and the demands that they have going forward. I want to take this moment to thank all of Western Digital Corporation’s employees and business partners for their commitment to our customers and all that they do for Western Digital Corporation. Thank you again for joining us today, and hope all of you have a great rest of the day. Operator: Thank you. This concludes today’s conference call. Thank you for joining. You may now disconnect your lines.
Operator: Greetings. Welcome to Cullen/Frost Bankers Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Ed Mendez, Senior Vice President and Director of Investor Relations. Thank you. You may begin. Unknown Executive: Thanks, Sherry. This afternoon's conference call will be led by Phil Green, Chairman and CEO; and Dan Geddes, Group Executive Vice President and CFO. Before I turn the call over to Phil and Dan, I need to take a moment to address the safe harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available on our website or by calling the Investor Relations department at (210) 220-5234. At this time, I'll turn the call over to Phil. Phillip Green: Thanks, A.B. Good afternoon, everyone, and thanks for joining us. As is our practice, today, we'll review the first quarter 2026 results for Cullen/Frost and our Chief Financial Officer, Dan Geddes, will provide additional commentary and guidance updates before we take your questions. In the first quarter of 2026, Cullen/Frost earned $169.3 million, an increase of 13.4% compared to the $149.3 million earned in the first quarter of last year. Per share earnings for the first quarter were $2.65, and that was an increase of 15.2% from the $2.30 in the first quarter last year. Our return on average assets and average common equity in the first quarter were 1.32% and 15.15%, respectively and that compares with 1.19% and 15.54% in the first quarter of last year. Average deposits in the first quarter were $42.2 billion, an increase from the $41.7 billion in the same quarter last year and average loans grew to $22 billion in the first quarter, up from $20.8 billion in the first quarter of last year. In past quarters, we've discussed the success of our organic branch expansion strategy in the Houston, Dallas and Austin regions. I thought it would be helpful to point out that those results have excluded the successes of a growing number of new locations that we have opened in markets outside of those announced regions. For example, since the initial launch of our first Houston expansion in late 2018, we've actually opened 8 of these financial centers outside of those announced regions. That's the same number of locations we opened in our 20 -- excuse me, in our Houston 2.0 expansion. So going forward, we'll incorporate all the new locations as we talk about the performance of our branch expansion strategy, and Dan will talk more about these numbers in his prepared remarks. Turning now to our consumer line of business. Our consumer bank earned the J.D. Power award for customer satisfaction in consumer banking in Texas for the 17th consecutive year. While we don't do this for the awards, this sustained consistency in delivering excellence signals that our culture remains strong even after tripling our locations in Dallas doubling our locations in Houston and doubling our footprint in the Austin region. It also sends a powerful message to prospects that Frost is here to help them. In an extremely competitive banking market with many new entrants, our industry-leading customer experience continues to drive what we believe is some of the strongest organic growth results in the industry. Year-over-year, consumer checking households grew 5.3%, and year-over-year consumer loan balances increased 19%. Consumer loan growth totaled $154 million in the first quarter alone, which is nearly double Q1 2025 growth. This success was driven by our mortgage products, which grew $124 million in the quarter and reached $719 million in total outstanding balances. Looking at consumer deposits, I like to... [Technical Difficulty] Operator: Ladies and gentlemen, I apologize for the technical difficulties. I would now like to turn the call back over to management. Phillip Green: We're sorry for the delay. I'll start back approximately where I was or I believe I was when we had a technical difficulty. We were looking at consumer deposits, and I wanted to look at what was happening with consumer checking and savings balances because those 2 categories to me, are less interest-sensitive and reflect, I think, what's happening with households. And if I adjust out the loss of balances from one extremely large account in the fourth quarter, as a result of activities surrounding the administration of this account owners estate, consumer checking and savings balances increased 3% and 2%, respectively, on a linked-quarter basis. Our commercial business continued to perform well, and I am encouraged by the momentum we're seeing in this segment. For example, looking at new relationships. This marked the fourth consecutive quarter where we delivered over 1,000 new relationships. The 1,016 we generated represents our highest first quarter performance on record. 46% of our new relationships came from the 2 big [indiscernible] banks and 8% came from, what I'll call, disruption, represented by organizations going through an acquisition. Looking further at our loan pipeline, our growth pipeline, what I'll call, new opportunities was $6.8 billion and represented a 55% increase over the previous quarter and represented our all-time high. It reflected origination strength across regions, segments and deal sizes. Our 90-day weighted pipeline increased 38% from the prior quarter and at almost $2 billion represented our highest weighted pipeline on record. Our overall credit quality remains good by historical standards with net charge-offs and nonperforming assets both at healthy levels. Nonperforming assets were $73 million at the end of the first quarter and were in line with the $72 million from last quarter and $85 million a year ago. The year-end nonperforming asset figure represents 33 basis points of period-end loans and 14 basis points of total assets, both the same as last quarter. Net charge-offs for the first quarter were $5.8 million compared to the same $5.8 million figure last quarter and $9.7 million a year ago. Annualized net charge-offs for the first quarter represent 11 basis points of average loans, the same as last quarter and down from 19 basis points a year ago. Total problem loans, which we define as risk grade 10 or higher, otherwise known as OAEM, totaled $989 million at the end of the first quarter up from $857 million last quarter and $889 million a year ago. All of the net increase can be attributed to loans in the risk grade 10 category and we expect to see some large resolutions in the second and third quarters. Overall, I continue to be pleased with these results and the success of our people, expanding our business. while providing world-class service as evidenced by the awards we continue to receive. With that, I'll turn it over to Dan for some additional insights. Dan Geddes: Thank you, Phil. Let me start off by giving some additional color on our branch expansion growth. As Phil mentioned, this performance now includes 8 additional branches opened since we began Houston 1.0 and outside of our announced expansions in Houston, Dallas and Austin. During the first quarter, our branch expansion delivered $0.14 or 5.6% of EPS accretion. We continue to be pleased with the volumes we've been able to achieve. On a year-over-year basis, average loans grew 33% and represents 12.7% of loans up from 10.1% a year ago, while average deposits grew 21%, representing 8.3% of deposits versus 7% in the same period last year. The expansion branches have now grown to $2.9 billion in loans, $3.6 billion in deposits and have added approximately 95,000 new households. As we have said in the past, our organic growth strategy is both durable and scalable. We opened 2 new locations in the first quarter, one in the Austin region and one in the Dallas region. Our current plan is to open an additional 10 to 12 branches over the balance of 2026. Now moving to the first quarter financial performance for the company. Our net interest margin percentage was 3.74% for the quarter, up 8 basis points from the 3.66% reported last quarter. Lower interest-bearing deposits and repos during the quarter, which negatively impacts net interest income had a positive impact on net interest margin due to a lower relative spread to the overnight rates. Looking at our investment portfolio. The total investment portfolio averaged $19.9 billion during the first quarter, flat with the previous quarter. Investment purchases during the quarter totaled $2.3 billion, consisting of $1.23 billion of treasuries, yielding 3.66%, $618 million of Agency MBS securities, yielding 5.09% and $423 million of municipals yielding 5.71% on a tax equivalent basis. Maturities during the quarter included $400 million of treasuries with an average yield of 3.44%, $540 million of municipals at an average tax equivalent yield of 3.53% and $430 million of Agency MBS paydowns. The net unrealized loss on available-for-sale portfolio at the end of the quarter was $1.15 billion compared to $1.04 billion reported at the end of the previous quarter. The tax equivalent yield on the total investment portfolio during the quarter was 3.85%, up 3 basis points from the previous quarter. The taxable portfolio averaged $12.7 billion flat with the prior quarter and had a yield of 3.39%, up slightly from 3.38% in the prior quarter. Our tax-exempt municipal portfolio averaged $7.1 billion down $76 million from the prior quarter and had a taxable equivalent yield of 4.73%, up 9 basis points from the prior quarter. At the end of the first quarter, approximately 69% of the municipal portfolio was pre-refunded or PSF insured. The duration of the investment portfolio at the end of the fourth quarter was 5.2 years, down from 5.3 years at the end of the fourth quarter. Looking at our funding sources. On a linked-quarter basis, average total deposits of $42.2 billion were down $1.1 billion from the previous quarter. This seasonal decrease was about 30% noninterest-bearing and 70% interest-bearing. The cost of interest-bearing deposits in the first quarter was 1.55%, down 20 basis points from 1.75% in the first quarter. Customer repos for the first quarter averaged $4.2 billion, down $426 million from the fourth quarter. The cost of customer repos for the quarter was 2.70%, down 17 basis points from the fourth quarter. Looking at noninterest income and expenses, I'll point out a couple of seasonal and onetime items impacting the linked quarter results. Regarding noninterest income, insurance commissions and fees were up $6.9 million. Recall that the first quarter is a seasonally strong quarter. Other income was down $4 million as we received our annual VISA volume bonus of $5.4 million in the fourth quarter. Salaries and wages were down $16.3 million compared to the linked quarter. Last quarter included approximately $4.2 million in onetime expenses related to our payroll transition from bi-monthly to biweekly. Additionally, the prior quarter included $7.2 million in higher stock compensation related to our stock awards granted in October of each year, some of which by their nature, require immediate expense recognition. FDIC deposit expense was up $8.6 million compared to a quarter ago as we reversed $8.4 million of our special FDIC insurance accrual in the fourth quarter of last year. Regarding our guidance for full year 2026, our current outlook includes 125 basis point cut for the Fed funds rate in the fourth quarter. We expect net interest ... [Technical Difficulty] Operator: Ladies and gentlemen, thank you for your patience. Due to technical difficulties, we are unable to continue today's call and will need to cancel. We apologize for the inconvenience and ask that you please keep an eye on a press release for rescheduling detail shortly. Thank you for understanding.
Operator: Good morning. My name is Myron, and I will be the conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Incorporated 2026 First Quarter Conference Call. This call is being recorded. All lines have been placed on mute to prevent any background noise, and after the speakers’ remarks, there will be a question-and-answer period. It is now my pleasure to turn the floor over to your host, of Granite Construction Incorporated, Vice President of Investor Relations, Michael Barker. Thank you, and over to you. Michael Barker: Good morning, and thank you for joining us. I am pleased to be here today with President and Chief Executive Officer, Kyle T. Larkin, and Executive Vice President and Chief Financial Officer, Staci M. Woolsey. Please note that today’s earnings presentation will be available on the Events and Presentations page of our Investor Relations website. We begin with a brief discussion regarding forward-looking statements and non-GAAP measures. Some of the discussion today may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are estimates reflecting the current expectations and best judgment of senior management regarding future events, occurrences, opportunities, targets, growth, demand, strategic plans, circumstances, activities, performance, shareholder value, outcomes, outlook, guidance, objectives, committed and awarded projects or CAP, and results. Actual results could differ materially from statements made today. Please refer to Granite Construction Incorporated’s most recent 10-Ks and 10-Q filings for a more complete description of risk factors that could affect these forward-looking statements. The company assumes no obligation to update forward-looking statements, except as required by law. Certain non-GAAP measures may be discussed during today’s call and from time to time by the company’s executives. These include, but are not limited to, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted earnings per share, cash gross profit, and cash gross profit per ton. The required disclosures regarding our non-GAAP measures are included as part of our earnings press releases and in company presentations, which are available on our website, graniteconstruction.com, under Investor Relations. Now I would like to turn the call over to Kyle T. Larkin. Kyle T. Larkin: Thanks, Michael. Before turning to our first quarter results, I want to take a moment to discuss our recent acquisition. As a reminder, our approach to M&A is guided by a disciplined investment framework that we use to allocate capital across CapEx and M&A in ways that support growth and enhance shareholder value. That framework is anchored by two pillars: support and strengthen, and expand and transform. Over the last several years, we completed numerous acquisitions to strengthen our Western businesses while also building and expanding our Southeastern platform through disciplined, materials-focused acquisitions and targeted investments. With an expanded corporate development team, a dedicated integration management office, strong operational engagement, a solid balance sheet, and strong cash flow, our approach to M&A has fundamentally changed from the past. The ability to self-source and integrate bolt-on transactions, while simultaneously pursuing larger bank-led deals, is a differentiator that allows us to accelerate our growth through acquisitions. Consistent with this strategy, we recently announced the acquisition of Kenny Sain Construction. Kenny Sain Construction is a leading provider of infrastructure construction services and construction materials in Utah County, Utah. Founded in 1985, the company has built a strong reputation for operational excellence and end-to-end project delivery across a diverse set of infrastructure end markets. Kenny Sain Construction operates a vertically integrated business model with capabilities that include earthwork and site preparation, concrete work, utility installation, project management and contracting, aggregate production, and materials processing. The business brings end-market diversification with over half of its revenue derived from education infrastructure and the remainder from civil infrastructure and private sector work. These markets align well with our focus on public funding and infrastructure demand. We expect Kenny Sain Construction to add $150 million in revenue annually with an accretive adjusted EBITDA margin in the high teens. This acquisition expands our home market presence in a strong Utah market while deepening our capabilities in attractive end markets. We are excited to welcome the team to Granite Construction Incorporated. Now let us move to the Construction segment. We ended the quarter with CAP of $7.2 billion, a $200 million increase from the fourth quarter. CAP increased despite a reduction of approximately $300 million related to the cancellation of a public sector highway project in California where expanded scope exceeded available funding. While cancellation of a project in CAP can occur and happened in this circumstance, it is very rare in our experience. The increase in CAP reflects a bidding environment that remains robust at the federal, state, local, and private levels. We added a second tactical infrastructure project to CAP and ended the quarter with $1.3 billion of federal CAP, of which $640 million is related to tactical infrastructure projects. We are proud to support the infrastructure needs of the various branches of the federal government. We have made significant investments in our federal business and expanded this platform significantly over the last several years. These projects are evidence of the progress we have made building capabilities and customer relationships over time. Looking forward, I believe that our federal business is positioned to generate more than 15% of our Construction segment revenue as we continue to grow this part of our business. At the state level, funding and bidding opportunities remain strong. As we ramp up for our busy season, our CAP and potential new projects give us confidence that we will meet our organic growth expectations for the year. In the private sector, we are focused on end markets that can drive growth and further improve the quality of CAP. First, we are seeing opportunities in the rail market, including intermodal facilities for Class I railroads. We have relevant experience and strong customer relationships in this end market, and we have successfully completed multiple intermodal projects for rail clients. Second, we are seeing growing opportunities in mission-critical data center projects, which include civil site development as well as water and power generation for the data centers. We have formed a dedicated team to oversee and focus on key client relationships and support our regional teams from pursuit to execution on pursuing or building projects with these clients. We have completed numerous data center projects in several of our home markets, and we believe Granite Construction Incorporated is uniquely positioned to construct these schedule-intensive projects. Overall, we believe we have a great opportunity to continue to build CAP. We have built what we believe is the highest-quality project portfolio in Granite Construction Incorporated’s history by focusing on our home markets and best-value projects that better position us for success. With our CAP, the opportunities ahead of us, and the continued emphasis on operational excellence, we believe the Construction segment is well positioned to deliver sustainable growth and margin expansion. I will now turn to the Materials segment, which had a fantastic start to the year. The first quarter has traditionally been seasonally slower. We are encouraged by demand across our geographies and by the performance of our newly acquired companies, led by Warren Paving. Our margin improvement expectations for 2026 were based on the inclusion of acquired businesses for a full year, modest volume growth across the company, mid-single-digit aggregate price increases, and improved cost efficiency through plant automation and process improvements. Through the first four months of the year, I believe we are on track to meet or exceed our expectations. Aggregate and asphalt orders were ahead of the prior year, and we are meeting our pricing expectations. During the quarter, oil prices increased due to the conflict in Iraq. Granite Construction Incorporated’s primary oil exposure is through purchases of liquid asphalt and diesel usage in equipment and barge transport. We regularly work to mitigate exposure to pricing fluctuations in the energy sector. For instance, we enter into fixed forward contracts, maintain physical storage, apply financial hedges, and include energy surcharges for material sales. While we will continue to monitor the market closely, we do not presently expect that the current increases in oil prices will have a significant impact on our annual outlook. Overall, we believe the Materials segment is well positioned for continued growth and transformation. Now, I will turn it over to Staci M. Woolsey to review our financial performance for the quarter. Staci M. Woolsey: Thanks, Kyle. Building on the momentum from Q4, we are off to a strong start in 2026 compared to the same period of the prior year. Revenue increased 30% to $912 million; gross profit increased 31% to $110 million; adjusted net income increased by $12 million to end at $12 million; and adjusted EBITDA increased by $30 million to arrive at $58 million. In the Construction segment, revenue increased $151 million, or 25% year over year, to $756 million. Of the growth in the quarter, $43 million came from the acquired businesses, and the remaining $108 million was organic. With record CAP entering the quarter, we achieved revenue growth in a number of home markets across the company. While gross profit margin decreased due to a revision in estimate related to a favorable claim settlement in the prior year, which did not recur in the current year, gross profit increased with the higher revenue. As we enter the heart of the construction season, we believe the Construction segment is on track for an outstanding year. Materials segment revenue increased $61 million year over year to $146 million, with gross profit up $9 million to end at $8 million. The revenue increase was primarily due to $50 million from the acquired businesses, led by Warren Paving. Cash gross profit increased $15 million year over year to $26 million, or 18% of revenue, a great result in what is typically our most weather-impacted quarter. While most volume increases came from the acquired businesses, we also saw organic volume increases ahead of expectations. With materials orders ahead of the prior year and pricing meeting expectations, the segment is on track for another year of growth. In the first quarter, SG&A as a percent of revenue is typically higher due to seasonally lower revenue and the timing of stock-based compensation expense. SG&A in the quarter was in alignment with our expectations. Turning to cash flow, we used $31 million in operating cash in the quarter compared to an inflow of $4 million in the prior year. The prior year benefited from the collection of a long-outstanding contract retention balance as well as the receipt of funds from a settled legal dispute. As expected, in the first quarter, there was a seasonal use of cash as plants and projects ramped up across the business. Our operating cash flow expectation of approximately 10% of revenue for the year remains unchanged. In the first quarter, we completed privately negotiated transactions to settle $100 million principal amount of our convertible bonds that were scheduled to mature in 2028, leaving $274 million outstanding. The total cash used to settle the bonds, net of the associated capped call unwind proceeds, was $233 million. As we have said previously, we continue to evaluate the capital markets and opportunities to proactively manage our capital structure, including our convertible bonds. Our balance sheet remains well positioned to execute on capital allocation priorities. Following the quarter, we utilized our revolving credit facility to fund the purchase of Kenny Sain Construction, and we now have $1.4 billion of debt outstanding and $415 million available under our revolving credit facility. Now let us turn to an update on guidance for the year. With our strong start to the year, we are increasing our revenue guidance to a range of $5.2 billion to $5.4 billion from a range of $4.9 billion to $5.1 billion. This increase reflects an additional $200 million of revenue from our new tactical infrastructure contract and $100 million in revenue from Kenny Sain Construction. With this revenue growth, we are decreasing our SG&A as a percent of revenue guidance to a range of 8.25% to 8.75%, down from a range of 8.5% to 9%, inclusive of approximately $48 million in stock-based compensation expense. As we continue to grow organically and through acquisition, we believe there are additional opportunities to further improve SG&A leverage over time. With the decrease in SG&A as a percent of revenue, we are also increasing our adjusted EBITDA margin guidance to a range of 12.25% to 13.25%, up from 12% to 13%. We continue to build high-quality CAP in strong public and private markets, and we believe we will realize our expected margin expansion in 2026 and our 2027 targets. Finally, our CapEx guidance of $141.16 billion and our estimated adjusted effective tax rate in the mid-20s remain unchanged. Now I will turn it back over to Kyle. Kyle T. Larkin: Thanks, Staci. I will close with the following points. The start of 2026 reinforces my confidence in Granite Construction Incorporated’s ability to achieve the financial goals that we have set for both 2026 and 2027. Our federal, state, local, and private markets continue to fuel growth in CAP. During the last two years, the public transportation market has led the way. While this market remains robust, we are also benefiting from years of investment in our capabilities and relationships across federal, rail, and mission-critical data center markets. I expect each of these end markets to continue to grow and be meaningful components of our Construction segment in the future. In the Materials segment, the acquisition of Warren Paving continues to transform the performance and trajectory of the segment. We have seen demand exceed our original expectations and expect to see further gains as the integration of the Southeastern platform continues throughout the year. There continues to be a long runway of growth and margin expansion for this segment, both in the Western footprint and Southeast platform. We raised our 2026 guidance this quarter. It is still early in the year, but we see many great opportunities ahead of us to continue to raise the bar in 2026. Finally, we are already in the process of integrating Kenny Sain Construction into our Utah operation, and I am excited to see growth in our Utah home market. Our M&A pipeline continues to evolve as we evaluate new targets, and I believe we have the opportunity to add several acquisitions this year to bolt on to our existing businesses or further expand our footprint. Operator, I will now turn it back to you for questions. Operator: Feel free to jump back in the queue if you have additional questions. We have the first question from the line of Steven Ramsey from Thompson Research Group. Please go ahead. Steven Ramsey: Good morning. Congrats on the good results and the acquisition. Maybe we can start with the acquisition of KSC, clearly very strong margin. Can you talk about the growth story that you can bring to KSC on a revenue or margin basis as it touches your existing operations in the area? And then, sticking with the M&A theme, the Warren deal seems to be going very well, and you pointed out demand was better than expected. Can you talk about or give us a flavor of what that demand is, and is it still something that is shaping up to be good this year? Lastly, on the SG&A leverage, is there any way to break that out a bit on how much of that is the border wall work flowing into the year versus the Kenny Sain contribution? Kyle T. Larkin: Yes, Steven, and thanks for the question. We are obviously very excited to have Kenny Sain Construction as part of our business moving forward. As I mentioned, it does about $150 million a year in terms of revenue, and we expect it to contribute about $100 million in 2026, and it is a high EBITDA margin business. The business operates at a high level. It is essentially a contractor of choice in that market and really just well positioned. I would say there are really three things that we would point to around Kenny Sain and why we are the right owner and the value that we can bring to it. One is we can support their scale in the market. We think that their materials business is an opportunity for us to also scale and grow. And then they just bring a different end market to us within our Utah business around education, health care, and even some mission-critical work around data centers as opportunities. I think we can really share each other’s client base, both inside the Utah market as well as outside of the Utah market. On Warren Paving and overall materials demand, we could not be more pleased with the Warren Paving acquisition, the integration, and the performance of the business. It is just an incredible team to have as part of Granite Construction Incorporated, and they are performing at a really high level so far this year. We expect that to continue. In our materials business, we had a really nice quarter. We saw volume growth and also cash gross profit margin growth, and a lot of that did come from our Warren Paving acquisition, particularly on the aggregate side. But even outside of that, our legacy business also had some really nice growth in the quarter in our aggregates business and our asphalt business. So in general, Warren Paving is performing well, and our legacy business is doing the same. Staci M. Woolsey: On SG&A leverage, with our SG&A change in guidance, really that is being driven a lot by the revenue increase. The increase in our guidance on revenue of $300 million for the rest of the year is about $200 million coming from the tactical infrastructure job and $100 million of revenue from Kenny Sain Construction. We are working to continue to get better efficiency out of SG&A, but at this time, it is the revenue piece that is driving the improvement. Steven Ramsey: Okay. Thank you. Operator: Thank you. We have the next question from the line of Michael Stephan Dudas from Vertical Research Partners. Please go ahead. Michael Stephan Dudas: Good morning, Staci and Michael. First, Kyle, maybe your comment about your federal exposure. Certainly very solid performance getting those projects down south of the border. But also, maybe you can touch on a little bit of what is going on in Guam and other parts of federal, and that move to 15% of your total revenues over time seems pretty reasonable. How does that compare? Is there any margin difference or any risk difference or cash collections difference in that business versus some of the others? Kyle T. Larkin: We have been working on our federal business and really that division for years. I think it is one of the first opportunities for us to take an end-market strategy and overlay it across our geographical home market strategy, and our teams have done a really nice job. We started off with revenues in that space of less than 5% of our revenue. We have grown it up to around 10% previously. Now, with the additional tactical infrastructure work at the border, we see that contribution being right around that 15%. We think, with our continued focus—whether it is in Guam, which continues to have tremendous opportunities, or military installations within our home markets, or shoreline protection work that we see as opportunities down in the Southeast—we can continue to grow that to being above 15% of our revenue even as the projects along the border wind down over the next couple of years. Michael Stephan Dudas: As a continued diversification theme, you touched on some pretty interesting private sector opportunities—you say rail, you say data center. Is that something that can continue to grow as a percent of total? Is that because the overall market is coming to you there and because of your positioning, and even some of the acquisitions in the Southeast certainly give you better exposure to those types of markets? Kyle T. Larkin: We have engaged in mining, rail, and industrial for a while. It is more an overall company strategy. We still see what we call mission critical, which includes the data center work, having tremendous opportunities for the company. As mentioned in the remarks, we actually have dedicated leadership in place to pursue that work and support our teams. Most importantly for us, it is about aligning that dedicated leadership with our local business unit leaders so we can leverage those key clients, and we can support the work with the local resources we have within the home markets. We have been making a lot of progress. We are successfully delivering or supplying materials to projects in Washington, Oregon, Nevada, Arizona, Louisiana, and Mississippi within those home markets today. We are able to tackle it from a civil component, water component for the lane business, and materials. We do expect it can grow up to around 10% of our overall revenues moving forward, with opportunities to grow. We will see how we perform, but so far, we are off to a very good start. Operator: Thank you. We have the next question from the line of Kevin Gainey from Thompson Davis. Please go ahead. Kevin Gainey: Good morning, Kyle, Staci, Michael. Congrats on the quarter. Maybe if we could start with a little discussion on the CAP outlook. How do you see that shaping up as you move through the year? And then maybe you could touch on the California job—what are the chances that job comes back? Kyle T. Larkin: We are excited about our CAP. One of the things we have been able to say consistently now is that we have had CAP growth as well as the highest-quality CAP, at least in our opinion, we have ever had in our company history. We are continuing to bid more work and capture more work, and that is driving CAP up and allowing us to see growth. We are off to a really strong start in the first quarter, and we think the CAP is going to allow us to continue to grow our business not just in 2026 but into 2027. Regarding the project in California, the scope exceeded the available funding. That project was one that we were selected on back in 2020, and the costs the state expected in 2020 did not end up being the costs of the project in 2026 dollars. It is unusual. I think the project will come back; I am not sure in what form and what size, so that is still to be determined. Kevin Gainey: Appreciate the color. And then expectations for Construction margins—how are they going to move throughout the year? I know Q1 had the year-over-year impact, but what gives you confidence in the outlook for the balance of the year for margins? Kyle T. Larkin: We feel great. In the first quarter, we had a solid Construction performance. We were about 60 basis points down in the first quarter year over year, but we did have a one-time insurance recovery in the first quarter last year that was about 130 basis points. If you adjust that out, we are actually 70 basis points ahead of where we were last year at this time. So our Construction margins, net of that insurance recovery, are trending well above last year. With our increased full-year adjusted EBITDA margin guidance, we are where we want to be—at the midpoint around 12.75%—on track with where we want to be in 2027, getting to that 13.5% adjusted EBITDA margin by the end of that year. We feel really good about our Construction margins. The CAP supports that, and we are right where we want to be. Kevin Gainey: Great. Sounds good. Thank you. Operator: We have the last question from the line of Adam Bubes from Goldman Sachs. Please go ahead. Adam Bubes: Hi, good morning. The tactical infrastructure projects—nice to see those come in. Those are a little larger in size and pretty quick burns. Which risk parameters or project attributes gave you comfort in taking on those projects that you have been evaluating for some time? And can you talk about how margins on those projects compare to the base Construction business? Also, can you expand on your cost tied to fuel or energy? Is there a way to frame what percent of COGS in Construction and Materials are tied to energy, the different levers to pull to offset fuel costs, and whether there is any higher cost impact you are baking into the balance of the year? Kyle T. Larkin: Thanks, Adam. You are right, some of these projects are getting a little bit larger than originally contemplated, but we are excited about the two projects that we have today. We have the one in Southeastern Texas that has about $140 million remaining, and then the recent win in Laredo, Texas, which is about $500 million. It is a quick burn. That project burns over around 14 months, and so we expect to be around 40% complete in 2026. That is one of the reasons why we are in a position to raise our guidance. As a reminder, we have decades of experience delivering on these projects, and we solicited resources from our entire company to ensure we can deliver successfully for both ourselves and our client. We actually have the capacity to take on more, and we continue to pursue these projects. We will see if we can be successful in picking up another one before they get through the letting process, which we think will probably occur between June and July. We are remaining very disciplined. I would frame the risk in three categories. One is schedule—these are fast-burn projects that move very quickly, which is why we had to ensure the resources were available. The second is remoteness—access, logistics, recruiting people—and we believe we have that risk largely mitigated. The third risk is subcontractors and suppliers. With a very large program along the border, there are many subcontractors and suppliers participating at levels they typically do not, so there is some risk that some take on more work than they can handle. We are being very selective about our partners. We feel we understand the risk because we have a lot of experience doing this work, and we have been able to mitigate it with these projects. On energy, the short answer is our teams have done a really nice job. I am proud of what our team has done to mitigate volatility within liquid asphalt, diesel, and natural gas. Overall, we have not seen a negative impact on the business; if anything, it has been slightly positive. A couple of things are important to point out. One is the energy surcharge we put in place after 2021 in our Materials business, which has provided good protection around cost increases. We also work for public owners that have escalators and de-escalators. A big part of our business is public works, and they have some sort of backstop related to liquid asphalt and diesel, and in some cases, cement and steel. Then there are fixed forward contracts, storage, and financial hedges. It is hard to provide a single number for what those cost increases are, but we have done a really nice job, credit to our team, and if anything, it has been more positive than negative. Operator: Thank you. This is the end of the Q&A. I would now like to turn the call back over to Mr. Larkin for closing comments. Kyle T. Larkin: Thank you for joining the call today. As always, we want to thank our teams for delivering a strong first quarter. Granite Construction Incorporated is an industry leader in safety, and I look forward to joining many of you next week as we recognize Construction Industry Safety Week. Let us continue to raise the bar and make 2026 our safest year yet. Thank you for joining the call and for your interest in Granite Construction Incorporated. We look forward to speaking with you all soon. Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Operator: Good afternoon, everyone. This is Kate, and I will be your conference coordinator today. Welcome to Roblox Corporation Q1 2026 Earnings Conference Call. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, please press star and then the number one on your telephone keypad. We ask that you please limit yourself to one question and rejoin the queue if needed. Now I will turn the call over to Jamie Morris, Roblox Corporation's Head of Investor Relations. Jamie Morris: Good afternoon, everyone. Thank you for joining us to discuss our Q1 2026 results. With me today are Roblox Corporation's Co-Founder and CEO, David Baszucki, and our Chief Financial Officer, Naveen K. Chopra. Before we begin, I would like to remind you that our commentary today may include forward-looking statements which are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those described in our forward-looking statements. A description of these risks, uncertainties, and assumptions is included in our SEC filings, including in our most recent reports on Form 10-Ks and Form 10-Q. You should not rely on our forward-looking statements as predictions of future events, and we disclaim any obligation to update these statements except as required by law. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics can be found in our shareholder letter and supplemental slides, which are available on our Investor Relations website. With that, I will turn the call over to David Baszucki. David Baszucki: Thank you. Good afternoon, and thank you for joining us today. We continue to make progress towards our target of capturing 10% of the global gaming content market on our platform and an even greater share of the U.S. market. In Q1, we had revenue of $1.4 billion, which grew 39% year over year; bookings of $1.7 billion, which grew 43% year over year; and I will note that is roughly twice what we have shared with investors as our long-term growth trajectory. We generated $629 million in operating cash flow and $596 million in free cash flow, up 4,240% year over year, respectively. Monthly unique payers increased to 31 million, up 52% compared to a year ago, and we had strong payer growth in international markets with continued solid growth in the U.S. and Canada, up 19% year over year on a larger payer base. We also saw year-over-year user and engagement growth: DAUs of 132 million, up 35% year over year, and DAUs outside of the U.S. and Canada grew 40%. DAUs in the U.S. and Canada grew 17%; DAUs in Japan grew 96% year over year in Q1; and DAUs in India grew 84%. Hours of engagement were at 31 billion, up 43% year over year. Outside of the U.S. and Canada, hours grew 50%. Hours in the U.S. and Canada grew 21%. Hours in Japan grew 101% year over year in Q1, and hours in India grew 91% year over year. For our 18 and up numbers, as of Q1, over-18 users represent 26% of DAUs who have age checked. In the U.S., DAUs and hours for the 18 and up cohort grew over 40%; within that, our 18 through 34 cohort grew over 50%, faster than any other age cohort. Additionally, in the U.S., the over-18 users spend 50% higher than our under-18 users. As we expected, DAU growth, while very healthy at 35%, has declined from the roughly 70% growth rates we saw in the past two quarters. User acquisition and engagement were also impacted by our global rollout of age checks to access chat in January. At Roblox Corporation, we are committed to setting the global standard for healthy, safe, and age-appropriate digital engagement, and we are building a platform for all ages as part of the core vision to connect a billion users with optimism and civility. As part of this commitment, in Q1 we became the first large online gaming platform to introduce age checks to access chat on a global basis, and we are the first large platform with a major announcement in our plans to introduce age-based accounts, which leverage our age-check technology, and we expect this to roll out globally in June. Because we have globally introduced AgeCheck, we have been able to introduce kids accounts within our core app. These proactive measures are setting a new industry benchmark, and we have been incorporating input from policymakers and regulators around the world. Note that not all of our users have age checked, even as the percentages continue to grow. In the United States, we are at 65% age checked. In Australia, where we started a bit earlier, we are at 70% age checked. This is in addition to our robust text filtering technology that we are continuously improving, and also our open-source voice safety tech. We are now better able to understand the impact in the short term of age checking. For communication engagement, we have had a follow-on reduction in the percent of users communicating on our platform, because people who have not age checked are not allowed to communicate. In addition, along with age checking, we have now banded communication so we no longer allow adults to communicate with users 16 and under, even with our existing industry-leading filters and with no image sharing. We believe this reduction in comms does affect both people who have age checked as well as those who have not, because those who have age checked do have fewer people to communicate with. Also, as we push towards 10% of gaming, we believe our discovery algorithms should be focused primarily on driving incremental long-term platform retention over short-term monetization, especially to grow our 18 and up user base. We are implementing this transition now. As we continue to adjust to local customs and regulations, we do foresee some restrictions of content to both non–age-checked users relative to their age range and also as part of region-specific content guidelines. We believe, as a result of age check, reduced communication, and discovery that we have weighted more towards monetization, we have seen a reduction in app store ratings, and we believe this may be contributing to a reduction in organic sign-ups that typically flow from app stores. We believe the strategic upside of everything we are doing is significant and the right thing to do for the long-term health of the platform. Kids accounts and select accounts offer the long-term opportunity of increasing safety and civility, which in turn drives organic engagement growth, in line with our mission to connect a billion users with optimism and civility. We are unique among large platforms in our focus on the safety of users who are under 13, especially given the reality that a large number of young people under the age of 13 have access to phones and to other large platforms, and these platforms typically are not designing safety systems for those under 13. However, as a result of this, we do expect to see continued short-term bookings headwinds, and this will lead to a revision in our full-year guidance. Naveen will discuss more in his remarks. Now to address the short-term friction, we are taking a number of steps across several key areas. Age checking is our vision of the future, and we believe this tech will continue to scale across the industry. We expect to see continued adoption by other companies in the gaming, social networking, social media, and AI chatbot spaces. Through Q1, 51% of global Roblox Corporation DAUs have age checked. As we work to set the global standard in safety, full adoption of age check will take time. We expect our new age-based account framework to drive an increase in age check penetration rates, and we are focusing on additional means to drive our percent of users that have age checked to a level that long term we hope to bring above 90%, which will unlock our ability to significantly improve our native communication features. Communication engagement is fundamental to our user engagement and retention, and following the global rollout of age check to access chat, we see new opportunities to enhance communication features and boost engagement through our higher-confidence user age data. Over the next few months, we are rolling out several enhancements designed to increase communication adoption and improve the chat experience on Roblox. This includes global chat, which allows players across multiple servers in the same game to communicate in a single shared room, which we believe will increase in-experience chat density, and we are integrating party chat directly into the in-experience chat window, which we believe will remove the need for users to leave an experience to coordinate with friends. We plan to expand party chat between trusted friends—when appropriate age and necessary parental consent is granted—to include voice and avatar video, and we are not sharing a ship date for this. We have also planned a system for preset messages that will enable all users to easily coordinate gameplay. Collectively, these investments, paired with our incentives for age check, will be engineered to drive on-platform communication beyond our pre-check levels and deepen user connection. We continue to evolve our discovery system. Last year, we enhanced the discovery of long-tail content and improved content diversity. We are now focusing on high-quality games with deeper long-term engagement, and we are currently experimenting with enhanced discovery algorithms designed to optimize for 28-day retention and beyond. Some of our creators have already taken notice, as I tweeted this week, and we are implementing changes to level the playing field for high-quality, long-term experiences. We continue to see an acceleration of AI toolchain use by our top creators. Nearly half of the top 1 thousand creators on Roblox now leverage either Roblox Assistant—our own AI entry point—or MCP (model context protocol) to compress dev timelines. In addition to our own Assistant AI, our creators are using tools like Quod Code, Cursor, Codex, and other third-party tools tightly with Roblox Studio. These technologies are being used to support creators on everything ranging from light assistance to fully vibe-coded content. We ultimately believe gaming is a much more complex space than the coding space, and we are driving to achieve iterative Wiggins-loop-style programming because games are not just based on code, but 3D assets, NPC AI, core gaming loops, and live ops, among others. We want to get to the point where devs can have Roblox Studio working overnight on their game and come back in the morning and see those improvements. We want to do for game creation what tools like Codex, Cursor, and Quod Code are doing for coding—radically accelerating speed—and we believe we are uniquely poised to innovate and solve this given the integrated architecture we have from our cloud to our engine to our developer tools to our native AI. In April, we called that the month that Roblox Studio went agentic. Creators can now engage in focused conversations with our Assistant about the design, implementation, and test plan of new features. Assistant executes a plan, launches a suite of building agents to test, and delivers new features with minimal creator engagement. On the 3D side, to complement coding, we are introducing new mesh and procedural model generation capabilities to allow creators to build richer worlds, and we have introduced an NPC testing agent that can navigate complex 3D worlds and execute gameplay actions as part of game development. The vision for NPCs at Roblox goes beyond NPCs you might interact with in-game or NPCs used for safety; a key part of that vision is testing. We believe NPC testing agents can be part of a foundational model that we are building to help creators iterate quickly on their games using NPCs in addition to humans for testing. All of this is to enable small teams to produce super high-quality content very quickly. We believe AI will fundamentally accelerate gaming, and we are in a unique position to lead in this transformation. Yesterday, we shared on our blog our vision for the future of integrated AI and gaming and the creation of photorealistic multiplayer gaming and creation that is easy for anyone to participate in. This is our most ambitious technical innovation to date. We call it the Roblox Reality Project. This patent-pending architecture integrates hyperscale multiplayer simulation with our current Roblox cloud engine, photorealistic rendering, and persistent world state into a hybrid, unified architecture built on our global edge cloud and infrastructure. The goal of Roblox Reality is to enable creators to construct interactive environments that are high fidelity and drive this new technical frontier—the introduction of the first easy-to-use multiplayer photorealistic platform that we are uniquely poised to build. More details are on the blog post if you want to read up on it. In general, on the AI side, to wrap up, we have over 400 models running over 1.5 million inferences per second on-prem and on our cloud. This powers, in addition to creation and Roblox Reality, everything from discovery recommendations to communication safety, marketplace recommendations, and 3D generation. We are now investing in four in-house proprietary models for 3D generation, NPC behavior, our newly shared video super upsampler initiative, and coding assistance and generation. Finally, we have announced several initiatives on our novel games initiative. As we shared, there is a very large opportunity for us in the over-18 cohort. Over 18 represents 20% of the DAUs who have age checked, and once again, in the U.S., DAUs and hours within our 18 through 34 cohort grew over 50% year over year. Today, we announced an increase in the DevEx rate for age-checked 18 and up users in the U.S. Starting on June 8, creator earnings for in-experience spend generated by age-checked 18 and up users in the U.S. will increase to 37.8% from 26.6%. What makes this possible is age check. Games that do this must meet our definition of novel games, which means they will utilize our R15 avatar framework. We are also now working with several well-known game studios to bring reimagined versions of their beloved mobile games to Roblox, with more details on this in the coming months. We have announced an internal jump-start and incubator program to support existing creators with novel game creation. The initial response to this has been strong, and with our existing creators, with our white-glove service, we have roughly 100 novel games being onboarded into the program. In Q1 we delivered a large number of technical milestones designed to enhance realism and expand creator capabilities, in parallel with the longer-term Roblox Reality project. These support high-quality, immersive experiences that scale dynamically from 2 GB Android devices all the way up to high quality on a gaming PC. We have introduced our new R15+ avatar framework with dynamic heads. This provides a foundation for more lifelike avatars on the platform, including recently released avatar makeup. Together with deep tech like instance streaming, mesh streaming, texture streaming, server authority, and SLIM, these updates remove barriers our creators have seen in creating more original experiences for older users. We are committed to the long view. Our confidence in the future of gaming on our platform has never been higher. With that, I will turn the call over to Naveen. Naveen K. Chopra: Thanks, Dave, and good afternoon, everyone. I am going to share a few observations about Q1 and then discuss the changes to our guidance. With respect to Q1, as Dave highlighted, we saw strong top-line growth of 43% in bookings. I think that demonstrates the ability of our platform to grow at a very healthy rate without the benefit of viral hits. We also saw an improvement in content diversity. Games outside of the top 10 saw a 43% growth in engagement and 41% growth in spending, and as a group, those outside the top 10 accounted for 65% of the growth in spending. We think this is a healthier level of concentration than what we have seen in the recent past. DAUs did come in weaker than anticipated—we will talk about that more in a minute—but very importantly, user metrics like engagement and monetization remained stable relative to the year-ago period. As Dave pointed out, we made a number of important safety-related changes to the platform, starting with the age gating of communications in January. On our last call, we noted that we expected some headwind to engagement and bookings as a result of the rollout of age checks. We now better understand the second-order impacts of reduced communications engagement on things like word of mouth and organic content growth. Additionally, the monetization bias of our recommendation engine likely negatively impacted app store ratings and ultimately sign-ups. We do have additional safety features, including kids and select accounts, rolling out later this year. Those have huge long-term benefits. We have always viewed safety as a compounding moat for Roblox Corporation, and these features are an important ingredient to that. But it does mean continued friction in the short term until we get the benefit of continued adoption of age checks, the planned updates to our communications features that Dave described—which we believe will improve chat vitality and chat density—and discovery enhancements that result in better content recommendations. As a result, we are lowering our guidance for full-year top-line growth to account for a continuation of these safety headwinds that we have experienced to date. Our revenue guidance for the full year will now be 20% to 25%, and our full-year guidance for bookings growth is 8% to 12%. That guidance is based on the expectation that DAUs will continue to contract between Q1 and Q2 and then return to sequential growth in Q3. Consistent with our prior guidance, we do not assume any major viral hits in those numbers. The reduction in our bookings expectation will also impact margins this year. As you would expect, much of that is related to fixed-cost deleveraging given the change in our bookings expectation, although roughly a quarter of the margin reduction relative to our prior guidance is related to the incremental investments we are making in the 18 and over DevEx increase. Even though those investments are incremental to our prior margin expectations for this year, in future periods we plan on them being funded by the capture of additional operating leverage. Even more importantly, we are highly enthusiastic about what they can unlock in terms of long-term growth, which continues to be our North Star. With that, we will open the line for questions. Operator: We will now open the call for questions. At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We request you limit yourself to one question and rejoin the queue if needed. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Eric Sheridan with Goldman Sachs. Your line is open. Eric James Sheridan: Thanks so much for taking the question. Maybe a two-parter, if I can. With respect to incenting the development out of the 18-plus community, could you go a little bit deeper into what signal you were getting in terms of that type of content from developers and what it might mean for the long-term health and compounded growth for the business? And second, with respect to the change on DevEx, can you help us better understand why that was the right number to move to in terms of higher DevEx? Thanks. David Baszucki: Great question. There was a big invention on Roblox Corporation a while back when we moved from a platform without Robux and DevEx to DevEx, and we saw immediately that the incentive of creating a closed-loop ecosystem—where Robux could be used by our users, devs could build interesting experiences, and they could then cash those out—created a virtuous cycle that has been somewhat of a machine driving Roblox Corporation ever since. We have seen massive organic behavior from that virtual economy. We have been very careful in increasing the creator DevEx rate over time, but we have slowly increased it, as we did at RDC recently. The 18 and up market—now that we have age check, we can know quite accurately who is a real 18 and up player—and in addition, that market globally is roughly 80% of the global gaming market, which is astounding given our low, although quickly growing, penetration. Those users also, as we shared, monetize at 1.5x where we are today, and that is a big part of our future in addition to our existing under-18 base. We know systems drive behavior. We want to see novel games on our platform. We want to make it very profitable for creators to make amazing content. We want them to trust our discovery systems that will organically reward experiences with long-term retention. This is a continuation of Roblox Corporation being a systems company, focusing on this big area we are moving towards. Operator: Your next question comes from the line of Matthew Cost with Morgan Stanley. Your line is open. Matthew Andrew Cost: Thank you. Naveen, could you dive one step deeper into the reduction in the guidance? You gave a lot of helpful detail about the behavior of people related to age check. Is the entire guide down driven by the change in behavior versus the severity that you have observed because of age check, or are there other material factors worth calling out? That is question one. And second, on Roblox Reality, are there any increased cloud expenses or CapEx that you are expecting to support that going forward? Thank you. Naveen K. Chopra: Yes, thanks, Matt. With respect to the change in guidance, I would characterize it as largely safety related. There are a number of aspects to that, as we spoke about. It is age checking, it has a follow-on impact to communications, and that affects both users that have age checked as well as those that have not. There are a number of things, as Dave laid out, that we are doing from a product perspective to reignite communications engagement on the platform. We also believe that some of the dynamics we saw around discovery being more monetization biased than we would like plays into that. Content recommendations were probably not as optimal as we would like to see them. So it is the combination of those dynamics, but largely driven by what we are doing from a safety perspective. In terms of Roblox Reality, Dave? David Baszucki: First off, Roblox Reality will not be free. The type of technology we are showing combines the Roblox hybrid engine and cloud, which, if you look into our financial statements, you can see we run at less than a penny per hour roughly. Simultaneously, building close-to-photoreal or photoreal experiences—especially when multiplayer—is very difficult and takes enormous production budgets. Part of what Roblox Corporation is about is democratizing creation for everyone. We believe this is the ultimate combination of both traditional 3D networked multiplayer gaming engines like Roblox, which is somewhat unique given its cloud, with the future research we see in video models moving more and more towards real time. We have the opportunity to build a very Roblox-specific video world model that we call a super upsampler that can key both on video as well as 3D spatial information to do what we believe will be a beautiful job of upsampling with developer prompts. We are right on the edge—in the whole AI space—of running real-time photoreal video models to 2K at 60 hertz, and that is why we say this is an up-and-coming project. When we launch this, it will not be free. This will use cloud compute. We will have some kind of way of subscribing or paying for this, and because of that, we think we will offset the real-time inference side of it. On the training side, we may have additional needs. I do not think we are fully showing them this year. Naveen K. Chopra: Just to put a finer point on the expense side, we have not changed our expectations for CapEx this year. A lot of what we are doing in terms of landing GPU in our data centers will cover what we will need this year. There is some cloud training that we will be doing. That is now factored into the updated margin guidance. As this technology continues to develop, we will use a combination of cloud as well as our own data center capacity to execute both training, and as Dave said, inference will be funded by usage. Operator: Next question, please. Your next question comes from the line of Ken with Wells Fargo. Your line is open. Kenneth James Gawrelski: Thank you. Two, if I may. Naveen, I am puzzled. Ninety days ago you had bookings guidance of 22% to 26%, and you gave the first-quarter guide, which you came near the high end of, and now the guide is meaningfully cut for the full year. How much of this is impacts that you are seeing already in the Q2 period versus expectations of changes rolling out in the June period? And secondly, for Dave, philosophically, on the changes you are making in terms of what content can be discovered by younger users—there are changes that involve embargoing some content—how does that fit with your notion of democratizing publishing, content, and discovery? It feels like a tension between content safety and moderation and democratizing the platform. Where do you see the balance of those today? Naveen K. Chopra: Hey, Ken. I will start on the first one and then hand it over to Dave. We launched AgeCheck in January, and as we said, we expected to see some headwind in hours and DAUs. What we did not fully understand until we had the benefit of three to four months of experience is how that impacts the platform more generally with respect to communications engagement and the knock-on impacts from that. A couple of important things: when we look at what has happened over the last few months, engagement has remained strong, monetization has remained strong, and retention has remained strong. What we have seen is challenges at the top of the funnel—new users coming in. When we think about the rest of the year, we are not going to see the bookings impact of that right away, hence the performance in Q1. But we do know that the fact we had more sign-up headwind over the last few months is going to put pressure on bookings over the remainder of the year. However, when we start to get back to sequential DAU growth in Q3, given the strength of monetization and engagement, we feel confident that we will be able to drive the bookings growth that we are guiding to, which—given the comps in the back half of the year—equates to relatively low single digits. We are not trying to do something heroic in the back half. It is largely driven by a return to DAU growth. David Baszucki: Great question on democratizing creation. Two metrics you can look at for Roblox Corporation over many of the past years: first, total dollar value creators participate in—DevEx every year—which is growing rapidly; second, the growth rates of creator 1, 10, 100, and 1 thousand. Consistently, the total amount goes up, and the growth rate of creator 1 thousand is faster than 100, 10, or 1. That is a metric to measure democratization, and I believe that will continue. Relative to what we have done with kids and select accounts, we believe we are striking a very good balance, and we have the ability to strike this balance because we age check. Other platforms that do not age check have a wide range of users signing up at various ages. We know what age everyone is, and it allows us to align the appropriate content with them. We are doing that with kids and select accounts. The corpus of that content will be very large. It will cover a significant proportion of what they play today, and it will allow creators to participate in a UGC space for 16 and up to introduce innovative concepts, while we are careful with what content reaches under 16. I am optimistic you will continue to see democratization. Operator: Thanks, Ken. Your next question comes from the line of Cory Carpenter with JPMorgan. Your line is open. Cory Alan Carpenter: Thanks for the question. Two related ones. Naveen, you mentioned a few times the expectation to return to DAU growth in Q3. I understand it is a seasonally strong quarter, but you are also rolling age-based accounts out in June. What gives you confidence in the return to DAU growth that quarter? And, probably unrelated, could you elaborate on the changes you are making to address communications friction points and the timeline for rolling those out? Thank you. Naveen K. Chopra: Thanks, Cory. The reasons we are speaking to DAU growth in Q3 are a few things. Number one, as you pointed out, it is a seasonally strong quarter, so we expect tailwinds. Number two, we will have a number of the product changes that Dave will touch on rolled out by then. Number three, regarding the impact of kids and select accounts during that period, we do not expect that to be as dramatic as what we did in January with respect to communications. When we started age gating access to communications, it was a binary experience—users lost complete access to comms—and that had knock-on impacts on overall vitality, sentiment, and app store ratings. What we are doing with kids and select accounts will have some impact, but it is not as big a change because kids or people who have not age checked will still have access to 20 thousand games that represent more than 97% of engagement on the platform from those cohorts. It is not nearly as drastic as age gating communications. David Baszucki: On the comms roadmap: some things are in the pipeline and live in experiment. Global chat is live in an experimental mode with a subset of users. This gives a feeling of chat density even if a subset of people are not age checked and not on comms, because it allows people playing the same experience to connect with people on nearby servers. Preset messages support common Roblox gameplay coordination without requiring full chat and can be safely used across age bands—this is coming soon. The bigger initiative is to move party chat fully natively within experiences, with common functionality friends use when playing Roblox—text and voice—side by side, potentially on a second device. We are not giving a date on this. This is the third top priority on our comms roadmap. Operator: Your next question comes from the line of Jason Bazinet with Citi. Your line is open. Jason Boisvert Bazinet: I had a quick question on the over-18 DevEx incentives. When you roll out incentives like this and the developer community responds and then users respond, how long does that gestation period take? David Baszucki: Great question. This goes back to a board-level discussion prior to doing DevEx at all, when Roblox Corporation was a hobby for many and there was no way to make a living on the platform, much less create a studio making $10 million, $20 million, or $50 million. When we introduced DevEx and Robux, the quality of experiences on Roblox Corporation increased much more quickly. Creators were able to make it a full-time job and dedicate themselves to it, which is why we now have thousands of people who make their living on Roblox Corporation. Over time, we have continuously made incremental updates to the DevEx rate—it started low and has climbed, including at RDC. We have substantial evidence that when creators can trust they will make a certain amount of revenue from their experience, they will put more effort into creating quality experiences. We have seen this pay off time and time again in higher-quality content that creators can trust to build. Operator: Your next question comes from the line of Andrew Marroque with Raymond James. Your line is open. Andrew Marroque: Hi. Thanks for taking my question. Could you give a bit more detail on the shift in discovery algorithms you mentioned—going from shorter-term monetization factors to longer-term health factors? How might that be evidenced from a user perspective, and how does that encourage increased chat density over time? Thank you. David Baszucki: From a user perspective, this is something we and our creators can intuitively see on the home page—the quality and types of experiences and their ratings. We have made great leaps in discovery using ML to predict many factors for each user-game pair. Now that we have developed this capability, and given the potential for 18 and up, we determined we want to drive user growth of that segment, even if we slightly less weight short-term monetization. Our creators welcome this because they want to invest in long-term, high-quality properties, and it can be frustrating to see shorter-term monetization-type games that are not built for longevity. Intuitively and systemically, we believe this is the right thing to do. Operator: Your next question comes from the line of Omar Dessouky with Bank of America. Your line is open. Omar Dessouky: In Q3 2025, your European and U.S. daily active users were about 60 million. In the first quarter, it is 51 million. You characterized the viral surge of the third quarter as a big user acquisition event, and that a lot of your users look the same. Would you still consider that a high watermark you can get back to if you get through the growing pains you talked about today, or does this change your view on retention? Naveen K. Chopra: Hey, Omar. First, to put the DAU trend in context for Europe and the U.S., there are roughly 4 million DAUs that came out due to the Russia block. That is important to note. On the broader question, we expect that we will return to DAU growth as we get through some of the safety friction on the platform. We have said the users we acquired through viral games last year had similar retention characteristics to the platform at large, and that continues to be true. As I mentioned earlier, the nature of this friction is that retention has remained strong. The reason DAUs have come in weaker than we expected is largely top of funnel—sign-ups—which we believe is related to communications friction and how that has been reflected in organic growth through the app stores. Operator: Thanks, Omar. We will take one more question. Your next question comes from the line of Brian Pitz with BMO Capital Markets. Your line is open. Brian Joseph Pitz: Hey. Thanks for taking the question. Dave, you talked about working with some well-known studios to bring their mobile games into the Roblox ecosystem. On the conversation of higher DevEx for the over-18 cohort, what are your expectations for how the revenue share with those creators might compare to the broader mix-shift revenue share on the platform? David Baszucki: We do everything linear, and we do it as a system. We have never cut a custom revenue-share deal. We have had discussions in the past about accelerators and de-accelerators, but DevEx is consistent across everyone. The benefit of raising it for 18-plus is those studios will receive that as part of it. One of the most attractive things to studios—whether traditionally mobile or PC game creators—is the unique architecture of Roblox Corporation: the same build, the same game, whether it is PC, tablet, console, or phone, dynamically scaling with tech like SLIM, texture streaming, and mesh streaming. There is the ability to unify a single build for both platforms, which is very attractive to many studios we talk to. David Baszucki: I am getting the cue, so we will wrap up here. I appreciate all of your questions and feedback, and I will kick it back to Naveen for closing remarks. Naveen K. Chopra: Thank you, everyone, for joining us this afternoon. We look forward to speaking with you next quarter. Operator: This concludes today’s conference call. You may now disconnect.
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