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Operator: Good day, everyone. My name is Leila, and I will be your conference operator today. At this time, I would like to welcome you to the Ford Motor Company's First Quarter 2026 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Lynn Antipas Tyson, Chief Investor Relations Officer. Lynn Tyson: Thank you, Leila, and welcome to Ford Motor Company's First Quarter 2026 Earnings Call. With me today are Jim Farley, President and CEO; and Sherry House, CFO. Joining us for Q&A is Andrew Frick, President of Ford Blue and Model e, Alicia Boler-Davis, President of Ford Pro; Kumar Galhotra, Chief Operating Officer; and Cathy O'Callaghan, CEO of Ford Credit. Jim will give a high-level overview of the business, and Sherry will provide added texture on the financials and guidance. We'll be referring to non-GAAP measures today. These are reconciled to the most comparable U.S. GAAP measures in the appendix of our earnings deck. You can find the deck at shareholder.ford.com. Our discussion also includes forward-looking statements. Our actual results may differ. The most significant risk factors are included on Page 19 of our deck. Unless otherwise noted, all comparisons are year-over-year. Company EBIT, EPS and free cash flow are on an adjusted basis. Upcoming IR engagements include Navin Kumar, CFO of Ford Pro at the Deutsche Bank Global Auto Industry Conference in New York on May 19. And now I'll turn the call over to Mr. Farley. James Farley: Thank you, Lynn, and thanks to all of you for joining us. I wanted to thank the Ford team, all of our dealers and our partners for a strong start to this year. Our results this quarter, $43.3 billion in revenue, $3.5 billion in adjusted EBIT, reflect a sharp execution and the momentum we are building for our Ford+ plan. Accordingly, we're raising our full year adjusted EBIT guidance to between $8.5 billion and $10.5 billion. These results are encouraging, but the bigger story is the modern Ford that's now taking shape. For 5 years, we have relentlessly built the foundation of Ford+. We strengthened our industrial system, made real progress on quality, cost and advanced our software capability and customer experience. Earlier this month, we took the next step in that evolution by establishing an end-to-end organization, product creation and industrialization. We unified our advanced technology, digital and design teams with our global industrial system. This change aligns with the most intensive product and software rollout in our history. By 2030, almost all of our global volume will feature next-generation electric architectures and in-house software. This applies to every propulsion type as we deliver and scale high-quality software-defined vehicles. This new organization allows for faster decision-making and reduce complexity. This is the moment we integrate the digital soul of the vehicle, the software or the silicon and the user experience with our world-class industrial execution. Among other things, this alignment will support our high-margin software and physical services revenue, which was over $15 billion last year. And we expect to grow that $15 billion nearly 8% annually through the end of the decade. This service growth is driven by offering customers indispensable digital experiences and investing in aftermarket sales with a focus on customer uptime, expanding our parts catalog and enhancing our service network. We're also learning -- we're also leaning into the Skunk Works model to improve all of Ford. They've done an incredible job creating the UEV platform, which represents a step change in efficiency and cost, especially for the EV market. But at Ford, we're now integrating these Skunk Work breakthroughs back into our mainstream products and processes. We're applying their advanced tools and physics-based cost modeling to the highest volume internal combustion and hybrid lines. This, of course, will reduce our costs and improve quality across the board. Our product pipeline is aggressive. Between now and '29, we will refresh 80% of our North America portfolio and 70% of our global portfolio by volume. This includes the next-generation F-150 and Super Duty, among many others. It also includes the launch of our universal EV platform in 2027 from our Louisville assembly plant in Kentucky. We are scaling that plant for significant volume to accommodate a variety of vehicles off that single platform. And speaking of electrification, our strategy remains focused on powertrain choice, not nameplate complexity. By the end of the decade, 90% of our global nameplates will offer electrified powertrains, including advanced hybrids, extended range electric vehicles and full EVs. Our financial health is driven by a leaner, more effective industrial system. We're on track to deliver another over $1 billion in material and warranty cost improvements this year, and we will never stop. Our focus on quality is paying off. J.D. Power has recently ranked Ford #4 in the 2026 U.S. Customer Service Index, our best performance in 30 years. Finally, we remain resilient in the face of global uncertainty regarding the conflict in the Middle East. Of course, our priority is our team and the safety of them. We're monitoring the situation and working to minimize risk and find opportunities in much the same way we have navigated the pandemic, the semiconductor shortage, tariff headwinds and others. We have the muscle memory to find cost offsets, adjust our product mix quickly and proactively manage our supply chain in times of stress and crisis. My main message today is this, Ford is a fundamentally stronger, more modern company. We have a foundation built on industrial fitness. We have the technology, and we now have the unified organization to not just deliver but to compete to win. Ford is focused on execution, quality and thrilling our customers. Over to you, Sherry. Sherry House: Thank you, Jim, and hello, everyone. Before I walk you through the details of our performance this quarter, let me start with a few items I know are top of mind for you. First, in Q1, we recognized a $1.3 billion benefit related to IEEPA tariffs. This onetime adjustment largely benefits Ford Blue and Ford Pro at about $700 million and $500 million, respectively. They are related to IEEPA tariffs paid between March 2025 and February 2026. Second, our Novelis recovery is progressing as expected. We still expect a $1 billion improvement in EBIT year-over-year weighted towards the second half. This is net of $1.5 billion to $2 billion of onetime incremental costs to secure alternatively sourced aluminum until the Novelis facility is operating at full throughput later this year. Third, relative to U.S. inventory, we expect to remain within our target of 55 to 65 retail days supply for the year. F-Series sales remain healthy as inventory recovers from the Novelis supply disruption. America's best-selling truck delivered year-over-year retail share improvement of 30 basis points in March, and we are carrying that momentum into Q2. Our team is effectively managing tight retail day supply by helping dealers fill inventory gaps while ensuring high demand trim levels are in ample supply. We are also producing a richer mix of product as we continue to ramp Novelis. And importantly, on average, we are spending less on incentives than our competitors. In fact, for the quarter, F-150 had the highest retail share, highest average transaction price and the lowest incentive spend per unit versus our key competition. Now turning to the quarter. We delivered adjusted EBIT of $3.5 billion or $2.2 billion, excluding the impact of the IEEPA. The strength in the quarter versus our original guidance was primarily supported by a change in calendarization of cost improvements and timing of investments, growth in software and physical services and higher net pricing. Our global revenue grew by over 6% despite a nearly 4% decline in volume, which was expected as we exited low-margin products like Escape in North America and Focus in Europe. In the U.S., we had our highest Q1 share of revenue in 5 years, led by large utilities and trucks. Adjusted free cash flow was a use of $1.9 billion in the quarter, more than explained by unfavorable timing differences, higher net spending and changes in working capital. On a full year basis, we expect timing differences and working capital to be favorable. Our balance sheet is strong with $22 billion in cash and over $43 billion in liquidity, and we remain committed to our investment-grade rating. We repaid our convertible debt without refinancing it and also relaunched our anti-dilutive share repurchase program, which we completed in the quarter. And earlier this month, we successfully renewed our $18 billion corporate credit facilities for another year. Our strong liquidity position provides us with the flexibility to manage in this dynamic environment and invest in higher return growth opportunities like Ford Energy. It also allows us to pay consistent shareholder distributions. In fact, yesterday, we announced the declaration of our second quarter regular dividend of $0.15 per share payable on June 1 to shareholders of record on May 12. Now turning to segment highlights. Ford Pro achieved EBIT of $1.7 billion against the backdrop of Novelis-related production disruptions. Ford Pro continues to deliver higher margins through a powerful ecosystem of vehicles, software and physical services. We are scaling rapidly and increasing recurring revenue, which bolsters resiliency. In fact, paid software subscriptions grew to 879,000, a 30% year-over-year increase. By integrating innovations like Ford Pro AI, we can help commercial fleet managers instantly identify maintenance needs, leverage large data models on fuel usage to lower costs and optimize routes amongst other features, all designed to provide better predictability, productivity and profitability, which our customers require. As we look ahead, the 2027 model year order books are just starting to open, and we are seeing positive early indicators. Ford Blue delivered $1.9 billion in EBIT, supported by the sustained sales performance of F-Series and go-to-market discipline, evidenced by Q1 incentive spend below industry average. Additionally, our off-road performance trims now account for nearly 1/4 of U.S. sales and Maverick and F-150 continue as the best-selling hybrids in their segments. Importantly, Ford Blue's Q1 performance highlights the strength of the underlying business and excluding IEEPA, is representative of its ongoing run rate. For Ford Model e, EBIT was a loss of $777 million as we now start to benefit from the portfolio changes announced in December. In addition to investing in a leaner, more profitable portfolio, we are actively matching supply with demand globally to optimize profitability. And in the quarter, we benefited from a nearly 35% improvement in our Gen 1 losses. We also continue to step up our incremental $1 billion investment in UEV platform and Ford Energy as we progress throughout the year ahead of their launches in 2027. As a result, we expect first quarter to be the strongest quarter for Model e this year. Ford Credit delivered a solid quarter with EBT of $783 million, up $200 million, reflecting improvements in financing margin and enabled by a high-quality book of business. Results also benefited from favorable performance on our derivatives. Our portfolio performance is strong, and we maintain a highly disciplined approach to capital reserve and risk management practices. So let me turn to our 2026 outlook. For the full year, we now expect company adjusted EBIT of $8.5 billion to $10.5 billion, adjusted free cash flow of $5 billion to $6 billion and capital expenditures of $9.5 billion to $10.5 billion, which reflects our shift toward higher return growth opportunities, including $1.5 billion for Ford Energy this year. Our guidance does not include the potential impacts of a sustained conflict in the Middle East or a significant downturn in the U.S. economy, which could have a material impact on industry demand. Our full year segment outlook stays steady with Ford Pro EBIT of $6.5 billion to $7.5 billion, Model e losses of $4 billion to $4.5 billion, Ford Credit EBT of about $2.5 billion. And for Ford Blue, we have increased our guidance by $500 million to $4.5 billion to $5 billion, driven by a stronger underlying business. Our guidance continues to assume a U.S. SAAR of 16 million to 16.5 million units and flat industry pricing. Now some context and important puts and takes for the year. We have the $1.3 billion one-time IEEPA tariff benefit, but we now expect commodity headwinds of just above $2 billion, about $1 billion higher than our previous estimate, largely due to higher aluminum pricing driven by global supply constraints. Note, though, this excludes Novelis-related aluminum costs. The impact of ongoing tariffs is unchanged at about $1 billion and is now a part of our run rate costs. This excludes the IEEPA benefit and Novelis temporary costs. As Jim mentioned, we're on track for $1 billion improvement in material costs and warranty reductions on top of the $1.5 billion of cost reductions we delivered in 2025. We continue to expect a net $1 billion improvement from the Novelis recovery. And as I mentioned earlier, about $1 billion of incremental investment in Model e to support the ramp of UEV platform and Ford Energy. Our Q1 performance highlights the benefits of our Ford+ priorities, rigorously optimizing revenue across every segment through leading products and high-growth services, improving operating leverage and exercising smart, accretive capital allocation decisions. The increase in our full year adjusted EBIT guidance underscores these benefits. Thank you. And I'll now turn it over to the operator so we can take your questions. Operator: [Operator Instructions] Your first question will come from Joseph Spak with UBS. Joseph Spak: Sherry, maybe just to pick up right up on the commodity increase. You mentioned about $1 billion. I'm just trying to contextualize what you're assuming here because I think in the past, you talked about, call it, an $8 billion steel aluminum buy, I think 40% of that is aluminum. There's been some hedging, and this is really only 9 months. So I know prices have really gone up, but it looks like a pretty big number. So I just want you to help understand what you're thinking for the balance of the year? And then how you would advise investors to sort of think about that rate heading into '27. Sherry House: Sure. Well, it's going to be a bit hard to be able to predict 2027 at this point given the volatility that we've seen in the commodities. But let me just tell you in the near term, what I'm seeing. So with respect to steel and aluminum, in particular, even before the Middle East situation started, we were already seeing global industry shortages, and that was first. Then you had the Middle East. And then you have to remember that Ford also has the aluminum supply shortage with respect to our primary aluminum supplier, which is Novelis. These costs are not related to Novelis. We package those separately. We talk about those separately. And when I talk about a $1 billion year-over-year improvement due to Novelis, that includes all the tariff costs. But this is related to the exposures that we have in aluminum and steel predominantly. Joseph Spak: Okay. And then I guess just a second question, maybe -- is there any update you could provide us on the Novelis timeline? I mean, I think there was some preliminary thought it could come online in the summer. Are we sort of on track there? And if that happens, how are you thinking about that headwind you mentioned? I'm just trying to sort of figure out the phasing timing because I guess my prior assumption was that most of that Novelis headwind would have been more in the first half if it was sort of expected to ramp through the year. But I'm not quite certain that, that's sort of still the case. So maybe you could just help us with some of that cost phasing timing. Kumar Galhotra: Yes. Joe, this is Kumar. Your assumption is correct. We are still expecting the hot mill to restart in May. There are two aspects to bringing any mill back online. There's the restart itself and then there's the ramp-up. So all the enablers for both of these aspects are on track. In the event the relaunch doesn't go according to plan, we do have contingency plans in place. That means we have additional aluminum supply to ensure our plant production schedules aren't interrupted. So the mill should be back online. And if we have any hiccups, we have contingency plans for the rest of the year. James Farley: And Joe, as you would expect -- it's Jim, we have by grade, we have several grades by step in the process. We track it every day. We know exactly the situation we have, the float we have. And we also have learned how to back up the aluminum supply, as Kumar said, in case the mill ramps slower or the actual start date is later. Operator: Your next question will come from Dan Levy with Barclays. Dan Levy: We know within the guidance that effectively the IEEPA refund is being offset by the raw mats. So really, the net of the guidance improvement coming from improved operations. Maybe you can just [Technical Difficulty] in the improved operations beyond the warranty material, which looks like that's consistent. And how much runway do you have on this? And can this offset any increases in raw mats that you might be seeing in '27 just given the staggering of costs that are going to be hitting? Sherry House: Yes. So as we look at kind of what's the -- basically the basis of our $1 billion raise versus guidance, it's going to be software and physical services is one of the biggest components there. The Ford Pro business continues to have very high paid subscribers. We now are up at 879,000, as I said in some of our prepared remarks, that's 30% on a year-over-year basis. The enterprise is also doing quite well across the physical services and the software. The other item that was really big for us in Q1 was the net pricing. As we said, the share of revenue, highest in 5 years. And this was really led, as we said, by full-size utilities and trucks. And then we did have some timing differences in cost. So some items hit in Q1 that we were expecting to hit in Q2, and that was very favorable for us. So we took all that underlying performance into consideration, we felt that $0.5 billion was the amount to be able to pull through for the full year, and that's why our guidance reflects that. Operator: Your next question will come from Andrew Percoco with Morgan Stanley. Andrew Percoco: I did want to come back to the guidance here, and maybe I'm missing some of the moving pieces. But if I just look at your first quarter performance, $3.5 billion of adjusted EBIT. I think you had been essentially signaling sequentially flat, which would have been like $1.1 billion for the first quarter. So you essentially beat by $2.5 billion in the first quarter, of which a little bit over $1 billion is from IEEPA. But that would imply like even though that's offset by some incremental cost headwinds on the commodity side, it would imply downside or some incremental costs elsewhere if your guide is only increasing by $500 million. So can you maybe just help us break down some of those moving pieces in case I'm kind of missing anything in that bridge? Sherry House: Yes, I don't think you're missing anything in the bridge. It's just as I said, we had the three components that were really driving this performance, and we're pulling through the amount of it that is sustainable. Some of it was timing differences. So we didn't want to put timing differences into a guidance raise. Andrew Percoco: Okay. Got it. And then, Jim, maybe one for you. There's been a lot of headlines recently around some potential partnerships between Ford and some of the Chinese OEMs. And even outside of Ford, there's just a lot of focus in the marketplace around some of these vehicles coming out of China eventually potentially making their way into the U.S. Can you just give us your updated thoughts on what that could look like and maybe any involvement that you might be interested in doing there? James Farley: Sure. I'm sure glad there is a lot of focus on it. As America's largest auto producer, we are totally dedicated to a thriving U.S. auto industry and, of course, safeguarding our country's industrial base. And that's just not economic vitality. It's also national security as a country. And when we see China and Japan and South Korea, they've really prioritized their domestic auto industry and manufacturing for the same reasons that I mentioned. I would say, to answer your question, we leverage global partnerships and even IP sharing, including with the Chinese OEs to grow our business around the world. And -- but we are really fully committed to a level playing field here in the U.S. and also safeguarding our home market because of the importance of the auto industry and our industrial base. So how I would think about it is Ford continues to be a global company. We want to have the rights to win around the globe. We need IP and partnerships outside the U.S. to do that. And when it comes to the U.S. industry itself, we are extremely protective as we should be like China, South Korea and Japan are. What that means in specific policies that will play out in our strategy as a company. But as America's #1 auto producer, you can understand our perspective. Operator: Your next question will come from Alex Perry with Bank of America. Alexander Perry: In the materials, I thought it was interesting. I think you said the off-road performance trims account for 25% of the overall sales mix. Can you give us a little bit more on the strategy here and a little more color on how this has trended historically? Is the strategy to prioritize some of these higher-margin trims while production remains constrained? And maybe just remind us on the profitability of some of these off-road trims versus company average. Andrew Frick: Yes. Thanks. This is Andrew. Thanks for the question. Yes, that is part of our strategy. It's a big piece of why our Blue business is doing well, overall. In fact, if you look at our wholesales this past quarter and the first quarter, they were relatively flat, but we had an improved mix of Explorer and Expedition. We phased out Escape. We're in the sell-down of that and our F-Series remains strong. And we actually -- we grew our share in the off-road space, 25% of our volume, but our share actually grew by 0.7 point, which was really important. So -- and that's because we're able to lean into across multiple vehicles now, series like Tremor and Raptor and really drive those mixes. So it is relatively more profitable, and it all plays back to our overall strategy of leaning into our profit pillars and winning with passion products. James Farley: No boring products. Alexander Perry: Perfect. Really helpful. And just a follow-up on commodities. Can you just remind us how you're sort of hedged across the various commodities? And with the $2 billion commodity headwind, does this assume that prices sort of stay where they are today? So if they were to come down, this would provide a little bit of cushion in the guide? Sherry House: Yes. The forward forecast that we gave you does -- the guidance we gave you assumes that they stay where they are, which, as you would know, the forward curves are up. We have a large number of contract types that we use. We have -- in some cases, we have fixed costs, other contracts, multiyear contracts. We have a lot of contracts that are based on indices and the impact is a quarter lagging. So you're going to have a range there. We also look at natural hedges that we have in our business as well. So when we look to hedge, we're taking the entire portfolio into consideration. And we feel that we've got a pretty good handle to be able to provide you what we did in terms of commodities for the balance of the year. If they go up substantially from here, we obviously will be back sharing that with you. But you're right, if they go down, that will be a net positive to the business. Operator: Your next question will come from Mark Delaney with Goldman Sachs. Mark Delaney: I was hoping to start on the comments the company -- spoke about in his prepared remarks on software and physical services. I think you said you expect the $15 billion of revenue coming from those areas to grow at a nearly 8% rate annually through the end of the decade, which is a pretty good outlook over several years. So can you help investors to better understand what's driving that degree of revenue growth over the coming years? And more importantly, what does that mean for EBIT? James Farley: Sure. This has been a critical part of our path to 8%. And we've been planning for many years. As you can imagine, before I answer your question directly, we've had to invest a lot in our advanced electric architectures, and our dealers have had to invest a lot in dealer capacity for the service. Really, our focus is on two key areas. We have a lot more focus than these two, but these are the ones driving our business. The first is our aftersales parts business. This is a really key focus for the Ford team. We see growth in Pro. Our dealers are massively investing in capacity for Pro, but we are also becoming a lot more successful in wholesaling parts from our dealers to third-party repair shops throughout the U.S. As I mentioned, we're going to expand our parts catalog in terms of price and diversity, and we're going to start to focus on not just Ford parts, but multi-make parts. And I think the other key distinguishing element for Ford is that we have started to really get good at remote service. Almost 20% of all Ford's repair now is done outside the dealership at our customers' location. And for our Pro customers, they're especially excited about this because they don't have to come in the dealership. And this has really expanded our revenue on aftersales. Inside the company, we're very focused on improving our repair order duration that gives our dealers more capacity, so to speak, without having to build any more capacity. I think you know our growth in ADAS, our growth in Pro Intelligence that Sherry mentioned are both signature parts of our integrated services that seem to be growing about 30% to 40% a quarter with very high margins. When you look at the margins of the part business and the software business, this $15 billion that will be growing at 8% a year is highly profitable for the company. It also has a different revenue risk than our vehicle business. It's more of an annuity and a lot of it tends to be anticyclical. That means that when the car business goes down, people tend to repair their vehicles. So this fitness we're developing on the parts side will help us on the anticyclical side. That gives you, I think, some window. And hopefully, we'll be giving you more and more insights as to our ADAS strategy and Pro Intelligence product rollout in the coming years. Mark Delaney: That's very helpful. My other question was on the pickup market. And Ford obviously has a very strong franchise in that segment with the F-Series, but you've also spoken to adding more product with the UEV-based pickup model coming in and then also the ICE truck you've talked about coming out of the Tennessee factory. We've also seen competitors lean into that segment more. So as you think about all the new models coming into the pickup space, maybe talk more on how much of the market you think pickups can make up in the future? And then as you think about more supply coming into pickups, what are implications for profit margins in that important category? Andrew Frick: Yes. Thank you for the question, Mark. This is Andrew. And I think it's important when you talk about the truck business, maybe to look at it through the lens of both retail and commercial because they're both really important parts of those -- of both customer groups. On the retail side, the truck business has historically been with the full-size pickup and medium pickup. But what we've been able to do is really expand that -- the pickup segments themselves. Maverick has created a whole new segment. And we've been able to really take advantage of that. In fact, we've -- if you look at the trends in the market, you've seen a lot of car buyers go into truck and even utilities go into truck. And we think that trend will continue, especially with the type of packaging that we're going to be able to provide. It worked on Maverick, and we are really excited about the UEV pickup and the packaging that, that has to really appeal to not just truck buyers, but to source from SUV buyers as well. So we see the pickup market growing, and it's really growing across segments and price points on the retail side. And Alicia, maybe on the commercial side. Alicia S. Davis: On the commercial side, I'll just ask -- I'll just comment similar to what Andrew said. we have commercial buyers that buy pickup trucks from Maverick size all the way up to our F-750, and we have products in those segments. And we also have diverse powertrains, and we see that continuing to grow. We continue to have strong orders for 2026 right now from fleet customers, and we continue to see -- we just opened our '27 model year order books, and we're starting -- we're seeing some early indicators. So we know the demand is there, is strong, and we want to make sure that we have offerings from the very beginning, Maverick all the way to the higher pickup trucks. James Farley: How we like to think about it is that we want to future-proof our truck business. To do that, we want to offer customers more choice on the powertrain side and tie the powertrains to other benefits that a truck customer would want like a hybrid for Pro power on board. And part of protecting is not just having an affordable electric pickup or hybrid throughout our lineup, but it's also having a flow of customers that move through our lineup over time. On the Pro side, it helps us with adjacency sales. But on the retail side, those Maverick, those UEV sales, they are a juggernaut for loading our whole pickup business and the strength over time because we haven't seen our competitors invest like we have. I think the other thing that gets maybe overlooked about Ford's pickup strategy is our global strategy. Ford is really #1 or #2 in most markets around the globe. There are large pickup markets in Thailand, Africa, the Middle East and South America. And Ranger is #1 or #2 in every one of those segments, and we are future-proofing those lineups now as we speak with different powertrains and even more affordable options. And this is critical because we're seeing new competition in those markets from the Chinese. And so our pickup strategy is a global strategy. We're trying to learn from the past where we're trying to future-proof it in a way from oil shocks or movement of powertrain to actually price points. Operator: Your next question will come from Emmanuel Rosner with Wolfe Research. Emmanuel Rosner: Could you give us a sense of expected cadence of earnings over the rest of the year? And in particular, maybe drivers of the much lower pace of earnings over the rest of it. With having done $3.5 billion in the first quarter, that means you're guiding at midpoint for $6 billion combined over the next 3, which is quite low, I guess, by historical standard. I understand that commodities is obviously going to get sequentially quite a bit worse, but then I would have thought the Novelis cost would also start going away in the second half. So maybe some of the puts and takes and the cadence, please? Sherry House: Yes. So as you move into the next half, Obviously, one of the big things is you're not going to have the repeat of IEEPA, it's $1.3 billion. Positive, as you said, with respect to Novelis as we start to gain more volume, but we are going to be hit more as we're more towards the end of the year on commodities, as I alluded to earlier. And also, the other thing is we are investing more in our launches right now, and that's going to be in BESS, our battery electric stationary storage business, the UEV platform and also Oakville in Canada. So we have those investments that are going in and ramping as we exit the year. And that's -- there's cash elements of that, too, not just CapEx. So that in commodities, non-repeat by IEEPA, but then the positive is Novelis. Emmanuel Rosner: Okay. And cadence-wise, sorry. And then I have another follow-up question, but any sense on -- is the degradation mostly in the second half? Or is the second quarter ex-IEEPA also quite a bit lower? Sherry House: Fairly consistent, I would say, it's Q2, Q3 and Q4. Emmanuel Rosner: Okay. And then my second question is on free cash flow. Can you give us a bit of color on why free cash flow was almost a burn of $2 billion when EBIT was quite robust even ex-IEEPA. But I think most importantly, in the guidance, you're not flowing through any of the improved EBIT to the full year free cash flow guidance, even though it seems to be driven by better underlying performance. Why is that? Sherry House: Yes. So let me hit your first question first. So with respect to the $1.9 billion usage in the quarter, it's very typical for us as you move from Q4 to Q1 to have a usage of cash. And that's because of the higher working capital that is needed. We're typically at that point, you are drawing down on inventory. You're not typically producing as much the last couple of weeks of the year. That was amplified for us with the Novelis disruption as well, and you're paying out your payables. So you're going to have that negative start. In addition, for us, this quarter, our net spending was up. And as I said, we're investing in our future. We've been really transparent about $9.5 billion to $10.5 billion this year, and you're spending on UEV, you're spending on BESS, we're spending on the future. And then also, there's timing differences in there, and we pay our compensation bonuses in Q1. You also have timing differences associated with marketing and incentive spends that are taking place as well. So those are the big components. We do expect this to reverse. We do expect our free cash flow guidance to stay at $5 billion to $6 billion. The big change, as you know, was the IEEPA tariff of the $1.3 billion, and that we don't have certainty as to when that is going to come in. So we did not put that in the guidance at this time. If we get certainty that, that's going to be sooner, then we will certainly update accordingly. And we thought it's a little bit early to be pulling through some of the other cash items given some of the volatility that we're working through. Operator: Our next question will come from Edison Yu with Deutsche Bank Research. Xin Yu: I wanted to come back to something that, as you mentioned earlier about the U.S. industrial base. How sensible or how realistic is it for Ford to play a bigger role in the kind of defense complex in terms of supplying the Pentagon? James Farley: Well, thank you for your question. As a most American company, Ford has always called the answer to duty to support our country. It was ventilators in COVID, and of course the arsenal of democracy. We work with -- as you know, we are very successful with our government sales and business in Pro. And so we have very close relationships through the vehicle side. What I'd be able to say at this point is two things. First of all, we are in early discussions with the U.S. government on some defense-related projects. We're not going to go into details of those today. In addition and I would say equally important is Ford's role as an anchor customer on onshoring critical minerals and many other supply chain vulnerabilities we have in our country. And I think you should expect Ford to play an outsized role in manufacture-grade semiconductors, critical minerals like batteries and rare earths. And our supply chain is heavily engaged not only with our government, but new companies that are starting to emerge in our country to onshore some of this capability. And I think maybe perhaps in the short term, that's the biggest role Ford can play in helping our country. Xin Yu: Understood. Understood. And then a separate topic, just coming back to autonomy. It seems in robotaxi, there's a lot more appetite now for some of these tech companies like Uber and NVIDIA sort of quasi-subsidize the OEMs. Has your kind of thinking about robotaxi maybe evolved over the last 3 or 4 months? James Farley: I would say, yes, not just over the last 3 or 4 months. It's something we've been, frankly, watching carefully as it evolves because we were involved in Argo and are very well aware of both managing the fleet and the SDS system itself and the progress. We kind of knew from Argo what to look for as robotaxis became -- the SDS itself became more proficient, and we're starting to see that now. I think how you should think about Ford's approach is that we are completely focused on having the most efficient EV and the lowest cost of ownership in North America, number one. And number two, because of our Pro business, we have the most fit, repair and fleet management capability for new fleets -- all fleets. And that capability can be applied to all sorts of different fleets. That's how we think about the market as it emerges. And I think that's all we're prepared to say at this point. Operator: Your next question will come from Ryan Brinkman with JPMorgan. Ryan Brinkman: Is there an update you might be able to provide on the relatively recently announced Ford Energy business? Has there been maybe proactive outreach to Ford from companies that you have existing B2B relationships with on the Pro side of the business? How would you characterize that interest? And maybe just remind on potential timing there. James Farley: Thank you, Ryan. Well, as you know, we are committed to over 20 gigawatt hours of capacity starting in the fourth quarter of next year. That will be mostly Kentucky 1 and a little bit of Marshall. Marshall will be really focused on UEV, but has some capacity for our energy business. So that's the timing starting fourth quarter next year. The plants are coming online. We are on track in the industrial manufacturing capability of doing DC block. It's not just the batteries themselves, it's the containers, it's the management of the battery. That's all coming together as we expected. We are very active in contracting customers as we speak. We've had a lot of inbounds and a lot of interest in Ford because they understand that we have the best tech. We have a lot of advantages financially, and we have a great service and sales capability. And of course, the company has deep relationships with a lot of these as vehicle customers. So they know us. They know through Pro that we're a reliable company. And all I would say, Ryan, is that the energy business is a key element of our bridge to 8% margin. Ryan Brinkman: Great. And then just as my follow-up, around the same time that Ford Energy was announced, you also broke news of the new strategic partnership with Renault. So I was just wondering if there might be any kind of update you can provide there, too, given that the first vehicles that were announced were electric vehicles, and I think that's an important piece of solving the puzzle in Europe, but I met with Hans Schep during the quarter. He is super energized about Renault on the commercial vehicle side in Europe. What do you think the broader potential for collaboration there might be? James Farley: Thank you, Ryan, for your question. It's very pertinent. At this point, all we would say is that we believe that on the passenger car side, Renault has fully cost competitive platforms. And we intend to take advantage of that as Europe continues to electrify amidst the Chinese competition on passenger cars. On commercial, we have a very successful relationship, as you know, with Volkswagen, both on the pickup and the van side. And we have nothing to announce today, but certainly, John, myself and the whole team are very focused on taking advantage of the Renault relationship across all of our businesses. And our commercial business at this point is still very profitable in Europe. We see it as the core of our profitability in the future on the vehicle side. And so we will do everything we need to, to maximize our scale and our cost advantage on commercial in Europe. Operator: Our next question will come from Colin Langan with Wells Fargo. Colin Langan: Just if I'm looking at Slide 10, there's a $900 million of other. It's kind of unusual to have such a large item. Any color on what that is? And then also looking on that slide, cost is only $700 million positive and includes the IEEPA. I think the target is that you're supposed to get $1 billion of cost benefit for the year, which would mean underlying cost is actually worse year-over-year in Q1. So what is driving the weaker Q1 cost? Sherry House: Well, first off, let me just hit on your question on other. That's really related to services, both physical and software. So that's where that's showing up. Colin Langan: So you had $900 million of software EBIT? Sherry House: So we also had compliance benefits, services, physical and software credit as well. Colin Langan: Okay. And then the cost piece, is that just the cost savings pick up in the second half of the year? Sherry House: This cost savings, if you're on Slide 10, was related to the -- you're talking about the Q1 bridge going from $1.3 billion in Ford Pro to the $1.7 billion? Colin Langan: Yes. Well, I was just saying in the bridge, it's $700 million positive, but that includes $1.3 billion of IEEPA -- for the year. Sherry House: That's right. Colin Langan: So that mean ex-IEEPA, it was negative. So I'm just wondering why it's negative if the target for the year is $1 billion positive. Sherry House: You have Novelis in there as well. Colin Langan: Okay. And then just lastly, if I go to Slide 18 and I add up all the items, it does seem like it's a little short of some good news. It seems like about $900 million short of all the items listed on that slide. What is that? Is that volume? You didn't mention regulatory savings, just other cost savings that we're kind of missing in the walk? Sherry House: I would say, yes, it's a variety of other savings throughout the company as well. So we thought that really, it's -- cost is fairly flat on a year-over-year basis. We're really presenting very close to what we presented in the past. The big changes as we've gone into this guide is we have the $1.3 billion resulting from the IEEPA Supreme Court ruling, then we had the increase in the commodities, which is offsetting. So when you look at all of that together, you're really looking at a pretty flat picture year-over-year because we already had a number of items that were offsetting. Operator: Your next question will come from James Picariello with BNP Paribas. We can hear you, please go ahead. James Picariello: So I first want to ask about what's the level of confidence behind the 150,000 Novelis recovery units based on what you've seen in your own production through the first quarter? Just where are we at on that? And then as we think about the raw materials, right, the $2 billion now in core commodities plus the $1.75 billion in alternative aluminum sourcing, what was captured in the first quarter on that combined bucket for raw mats? And just how should we think about the cadencing for the rest of the year? Kumar Galhotra: So on the Novelis recovery and the rebuild of the mill, I would say the confidence is high. As Jim and I stated earlier, the restart date is on track. All the enablers for the ramp-up are on track. And belt and suspenders, if anything does go off, we have contingency plans, which means we have additional aluminum supply to ensure production. So we feel good about the second half aluminum supply. James Farley: And not only our supply perspective, but also, as Andrew said in the speech, we have -- we're in a really good stock situation, too. So we're very confident we're going to need those units. Alicia S. Davis: And I can just comment as well from a Pro perspective, we still have very strong '26 model year orders. We just opened up '27. Those are we're seeing positive indicators. And when you think about the Novelis impacts, we really postponed fleet orders, and they're going to be required and needed in the second half, and we haven't lost a customer. So we are very confident in the demand in the second half of the year. Sherry House: Yes. And I guess I would just say that... James Picariello: Just on the cost side... Sherry House: Yes. We continue with respect to Novelis to expect a total cost of between $1.5 billion to $2 billion. We're tracking on target with respect to that. I think you had a specific question in Q1 related to temporary cost to source aluminum. It's about $300 million. So that would include tariffs, expedited freight and warehousing as well. These things aren't straight line, and there's just a lot of factors that are involved. James Picariello: Got it. That's helpful. And then just as we think about the $1 billion in the UEV platform and the Marshall plant, is that more second half weighted or pretty ratable through the year in terms of just the investment, and that's still tracking towards the $1 billion, right? Sherry House: So it's going to be -- the UEV investments, we're already making some of those. We're going to continue to make them through Q2, Q3 and Q4. They will go up a bit as you get to Q3 and Q4. And then we also -- as I said, we've got BESS in there as well, and we also have the Oakville launch during that period of time also. So three major items that are increasing in terms of investment. Operator: Your next question will come from Itay Michaeli with TD Cowen. Itay Michaeli: Just a couple of questions on the UEV platform. I'm just curious sort of what's left to do here as you prepare for next year's launch? And maybe thinking even out to 2029 towards your breakeven or profitability objective for Model e, how should we think about roughly the number of top hats that you're planning to launch on that platform? And maybe just lastly, if I can sneak it in. In the past, you've mentioned using some new suppliers for UEV. Any more updates you can share on how that's going? Kumar Galhotra: So Itay, this is Kumar. Answering your first question on the, let's say, the industrial launch of the product, there are four major pieces to it. There's the hardware of key new parts like mega castings UEV has its own software platform. So development and testing of that platform. Third is the readiness of our suppliers with all the parts that are coming from suppliers. And lastly, number four is equipment installation at our plant. We're in the middle of all four of these right now and all enablers and all indicators, early indicators of these four work streams are on track. So we feel good about it. Your second piece of question, number of top hats. As we've mentioned, it is a platform. We plan to have high volume at Louisville. But I think it's -- we don't want to give away our plan to competition by talking about how many top hats or which top hats. It would be too early to do that. James Farley: The launch is bigger than the industrial launch. So we want to give you a little bit of insight into the demand creation because that's critical for us. Andrew Frick: Yes. This is Andrew. We're confident on our launch plan. In fact, we're right on track to share our plans with dealers and take customer orders later this year. And what we're really excited about is some of the EV market trends that we're seeing and the EV volume really heading towards the affordable space, which really favors this affordable UEV platform, positioning us right in the heart of the market. So we're really pleased with that. James Farley: I think the market is already predisposed to this price point. But now it feels like in the U.S., the EV market is moving even closer to the UEV platform. And there's really not much choice on a fully specced, highly capable technological vehicle platform that's really affordable. There's not a lot of choice for customers. A lot of compliance vehicles, but this is a real legitimate fully capable product for customers. So we think the market is really moving, and we understand that. That's why we're working so hard on the demand creation. I think UEV is on -- as far as the new suppliers, do you want to mention anything about the new suppliers, Kumar? Kumar Galhotra: Yes. I would say that the UEV team took a very interesting approach. We did the toughest and the most complex commodities. We designed them in-house. This gives us a lot of control over those commodities, and it gives us the ability to source those commodities at the highest quality and the best cost price points from new suppliers. And these new suppliers have been great partners, and we are working towards using that capability, both the process as well as the new supply base in the rest of our portfolio. James Farley: What's exciting for me is to see the team's pollination of the UEV process, new suppliers, new way of developing a vehicle, new IT tools that the development team uses, it's really starting to spread across the company. And to me, that's very encouraging to see because the greatest gift for UEV will likely be what it gives our -- all of our other models and our team as a whole. Operator: This concludes the Ford Motor Company First Quarter 2026 Earnings Conference Call. Thank you for your participation. You may now disconnect.
Operator: Good morning, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the LXP Industrial Trust First Quarter 2026 Earnings Call and Webcast. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to Heather Gentry, Investor Relations. Please go ahead. Heather Gentry: Thank you, operator. Welcome to LXP Industrial Trust First Quarter 2026 Earnings Conference Call and Webcast. The earnings release was distributed this morning and both the release and quarterly supplemental are available on our website in the Investors Section and will be furnished to the SEC on a Form 8-K. Certain statements made during this conference call regarding future events and expected results may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. LXP believes that these statements are based on reasonable assumptions. However, certain factors and risks, including those included in today's earnings press release and those described in reports that LXP files with the SEC from time to time could cause LXP's actual results to differ materially from those expressed or implied by such statements. Except as required by law, LXP does not undertake a duty to update any forward-looking statements. In the earnings press release and quarterly supplemental disclosure package, LXP has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures. Any references in these documents to adjusted company FFO refer to adjusted company funds from operations available to all equity holders and unitholders on a fully diluted basis. Operating performance measures of an individual investment are not intended to be viewed as presenting a numerical measure of LXP's historical or future financial performance, financial position or cash flows. On today's call, Will Eglin, Chairman and CEO; and Nathan Brunner, CFO, will provide a recent business update and commentary on first quarter results. Brendan Mullinix, CIO; and James Dudley, Executive Vice President and Director of Asset Management, will be available for the Q&A portion of this call. I will now turn the call over to Will. T. Wilson Eglin: Thank you, Heather, and good morning, everyone. Following the successful execution of our key strategic initiatives in 2025, including strengthening our balance sheet, increasing occupancy and resolving our big box vacancy. This year, we are focused primarily on creating value in our land bank and addressing our near-term expirations and existing vacancy. We've executed 3.2 million square feet of new leases and lease renewals year-to-date, highlighted by the successful outcome at our 1.1 million square foot facility in the Greenville-Spartanburg market. Additionally, we leased over 300,000 square feet of vacancy and extended the lease on an 850,000 square foot facility in San Antonio for 10 years. Industrial fundamentals continue to trend in the right direction with first quarter U.S. net absorption of approximately 40 million square feet, representing the strongest first quarter in 3 years. Our target markets made up approximately 29 million square feet or 72% of U.S. net absorption, demonstrating continued strength in our markets, particularly in Phoenix, Indianapolis, Houston, Dallas-Fort Worth, Atlanta and Columbus. These positive trends are reflected in our strong leasing momentum year-to-date as well as our forward pipeline in which we are in active discussions on 7.4 million square feet of development and redevelopment leasing vacancy and expirations through 2027. Leasing activity continues to be the strongest for large-format facilities, especially for those of 1 million square feet or more. We are also seeing increased demand from data center-related tenancy and manufacturing suppliers and industries in our markets. Leasing volume of 1.8 million square feet during the quarter included the extension at our 1.1 million square foot facility in Greenville-Spartanburg, which added considerable value. We renewed this lease for an additional 4 years to 2031, following the initial 2-year lease signed in May 2025. This extension enhanced the 8% initial cash stabilized yield on the development project with the new cash rent representing a 5% increase over the prior rent and 3% annual rental bumps. On the remaining 700,000 square feet we leased during the quarter, we achieved base and cash-based rental increases of 34% and 24%, respectively. Construction is underway at our 1.2 million square foot Phoenix development project that we announced on our last quarterly call. Since then, the remaining 2 million square feet in the West Valley has been leased, leaving no million square foot buildings currently available in the market. We are in discussions with a prospective tenant, and we are well positioned if they proceed with a lease in the West Valley market given the limited supply of million square foot buildings. We are evaluating other development opportunities in our land bank, including in Columbus, where we have 69 acres at our Aetna land sites, which can support 3 facilities totaling roughly 1.25 million square feet. In the last 12 months, net absorption in the Columbus market was 10 million square feet, resulting in a decline in vacancy of over 300 basis points. Columbus continues to be a strong distribution market with increasing demand across product sizes, particularly in the large format space and has seen an influx of tenant activity that supports data center and advanced manufacturing facilities. To the extent we move forward with future development projects, we intend to fund them through opportunistic asset sales in our nontarget markets. As we have noted previously, acquisition activity will be selective and will be funded via 1031 exchange transactions to defer gains on dispositions. I'll now turn the call over to Nathan, who will provide a more detailed overview of our financials, leasing activity and balance sheet. Nathan Brunner: Thanks, Will. Our adjusted company FFO in the first quarter was approximately $47 million or $0.80 per diluted common share, representing 2.6% growth over the first quarter 2025. Same-store NOI growth was 2% for the quarter, which was in line with our expectations. Our stabilized portfolio was 96.6% leased at quarter end and 97.1% leased proforma for new leases signed in April, in line with year-end 2025. We are maintaining both our 2026 adjusted company FFO guidance range of $3.22 to $3.37 per common share and 2026 same-store NOI growth guidance range of 1.5% to 2.5% with regard to the cadence of same-store growth for the remainder of the year, we anticipate that second quarter same-store NOI growth will be lower than the first quarter, reflecting the impact of first quarter move-outs and timing of lease commencement for new leases signed year-to-date. These new leases are expected to contribute to higher same-store NOI growth in the second half of the year. G&A in the first quarter was approximately $10.3 million, with full year 2026 G&A expected to be within a range of $39 million to $41 million. Turning to leasing. We continue to make good progress on 2026 expirations and have addressed approximately 3.7 million square feet or 57% of our total 2026 lease roll with an average cash rental increase of approximately 25%, excluding 2 fixed rate renewals. Will highlighted some of the larger leases that we executed year-to-date, and I'll touch on a handful of other notable leasing outcomes. During the quarter, we renewed 352,000 square feet at our 640,000 square foot facility in Charlotte, North Carolina for a 3-year term with 3.5% annual escalators, representing a 42% cash rental increase. We are actively marketing the remaining 288,000 square feet of the property, which expires in October 2026. Subsequent to quarter end, we extended the lease with the tenant that occupies 270,000 square feet at our multi-tenant facility in the Savannah market, which was a July 30 expiration. The 10-year lease extension with 3% annual escalators represents a cash rental increase of 19% over the prior rent. With respect to 2027 expiration, post quarter, we extended the lease at our 850,000 square foot facility in San Antonio for a 10-year lease term with 2.75% annual escalators. The lease extension commences in May 2027 with a 25% cash rental increase. We're encouraged by the active discussions underway on 4.6 million square feet of the 2026 and 2027 lease roll, including several of our larger facilities. We've leased 330,000 square feet of vacancy year-to-date. During the quarter, we leased 85,000 square feet in Indianapolis to a tenant involved in data center development, achieving a 34% cash rental increase. Post quarter, we leased our 250,000 square foot facility in the Houston market for a 7-year term with 3.75% annual escalators. The new Houston lease commences in June and represents a 25% cash rental increase. LXP's balance sheet remains in great shape with net debt to annualized adjusted EBITDA of 5.1x at quarter end. We had $1.3 billion of cash on the balance sheet at quarter end, and our $600 million revolving credit facility was undrawn and fully available. As we highlighted on our last call, the recast of our $600 million revolving credit facility and $250 million term loan in January extended the company's debt maturity profile and reduced interest costs, further strengthening the balance sheet and providing financial flexibility. Finally, we repurchased 325,000 shares in the quarter at an average price of $48.70 per share. With that, I'll turn the call back over to Will. T. Wilson Eglin: Thanks, Nathan. In summary, we're pleased with first quarter results and our strong leasing outcomes year-to-date. As we move through the year, we will remain focused on executing our strategic priorities, including disciplined capital deployment, pursuing value-enhancing growth opportunities, leasing our Phoenix spec project and remaining vacancies and driving mark-to-market rent growth. As the leasing market continues to improve, we're confident that our forward leasing pipeline of over 7 million square feet will result in numerous attractive leasing outcomes that produce strong mark-to-market results. With that, I'll turn the call back over to the operator. Operator: [Operator Instructions] Our first question comes from the line of Todd Thomas with KeyBanc Capital Markets. Todd Thomas: A couple of questions. One, on the -- you talked Will, about the lack of big box space in some of your major markets, including Phoenix, where you broke ground. Can you talk about how that's impacting the market? Are you seeing that translate into pricing power, better discussions around prospective rent growth or urgency from tenants? And then would you look to sort of derisk and pre-lease that development project? Or do you think it probably affords better return opportunities to hold off until it's closer to completion and delivery? T. Wilson Eglin: Yes, sure. Thanks, Todd. I think as we expected in Phoenix since our last call, the last 2 million-foot competitive buildings have leased. So we're essentially in a great position on that facility that we've started. We do have a prospect that we're working fairly closely with, but nothing to report today. I think we would prefer to pre-lease and derisk the investment and lock in a profit and then move on because there are other good opportunities in the land bank. You mentioned Columbus, that's another one that we think sets up pretty well for us. The big box demand is doing very well. And at the moment, we're quite optimistic about the outcome on Phoenix for sure. Todd Thomas: Okay. And then, Nathan, you indicated 57% of the 26 expirations have been addressed. I think that included some of the activity that occurred in April. Can you just provide an update on the remaining 26 expirations in terms of your expectations there, if there's any known move-outs? James Dudley: Todd, this is James. I'll take it. We've got really good activity on the remaining 2026 and the majority of which we're expecting to renew. We do have a few small known move-outs that are remaining. We've got a 97,000 square foot space in our multi-tenant building in Columbus, where we're expecting the tenant to move out. We're marking that to lease. We've got good activity on that one. And then I guess touching on a couple of the new vacancies that we had, too. We had the Tampa move out, the 230 that we've got some decent activity on recently and also the 120 that just moved out in the first quarter as well in Greenville-Spartanburg that we've got really good activity on. And then we've also got a very small lease in Greenville-Spartanburg of 70,000 square feet that we expect the tenant to potentially move out of and another one for 163,000 square feet in Greenville-Spartanburg that move out. So small move-outs, good activity in a strong market and the Greenville-Spartanburg stuff is concentrated mostly around the park that we own. So we've got a lot of different things we can do there from a size perspective and moving tenants around, we're talking to the tenants that are in or around in that space in the park currently trying to figure out if some want to expand. So again, good activity on that upcoming vacancy and the vacancy that we had in the first quarter. Todd Thomas: Okay. That's helpful. And just lastly, I guess, the 1.8 million square feet of vacancy, that opportunity in the portfolio, you estimate it to be about $0.32 a share. Is there anything embedded in guidance related to the lease-up of that vacant space that would hit or that's included in the guidance this year? Brendan Mullinix: Yes. Todd, maybe the way I'd frame that is back to kind of the underlying drivers of the guidance. And they're pretty much unchanged versus our Q4 earnings call. That is average occupancy for the portfolio at the midpoint is about 96.5% which is essentially in line with where we finished Q1 or a little above that with some of the activity we had in April. At the high end of guidance, average occupancy be 97% and at the low end, average occupancy would be 96%. Operator: Our next question comes from the line of Anthony Paolone with JPMorgan. Anthony Paolone: Given the comments on Columbus, what's the likelihood that you start a project or two this year? Brendan Mullinix: It's Brendan. Nothing to announce today, but as has been noted, the fundamentals in Columbus are very positive today. We've been seeing a lot of demand from both data center-related uses and manufacturing as well as the demand drivers that have existed in that [indiscernible] market for some time. At the moment, we can -- we're -- in order to position ourselves with the most flexibility, we're doing predevelopment work, including design work on 3 different sized buildings there. We can build a total of 1.25 million. And that will just allow us the maximum flexibility to respond to where we see the most favorable supply and demand. Anthony Paolone: Okay. And is the pipeline outside of what you have on your balance sheet right now for things like build-to-suits and development? Has that changed much? Is there much activity there with any other developers that you might be working with right now? Brendan Mullinix: Well, I should have also added too, just with respect to the existing land bank, we are additionally responding to build-to-suit interest at both our Columbus sites and our Phoenix sites. So there's that build-to-suit opportunity in the land bank as well as considering speculative development if the fundamentals are there and remain there. With respect to other opportunities, yes, we do have conversations with the merchant builder relationships that we have from time to time about build-to-suit opportunities outside of our land bank as well. But nothing imminent to report on today on that front. Anthony Paolone: Okay. And then just last one, the stock buyback, just you've done a little bit there. What's the appetite at current levels? And just how does it fit into the capital allocation right now? T. Wilson Eglin: Development is a better investment from our standpoint with respect to creating shareholder value. So we have some liquidity that we can use for buyback opportunistically. But what's happening in the development there, especially in Phoenix is a much larger driver of value creation. Operator: Our next question comes from the line of Vince Tibone with Green Street. Vince Tibone: A question for Nathan. I'm curious within guidance, how much new leasing is kind of baked into the low end, high end? Because it sounds like you have a pretty good pulse on known move-outs and retention rates. So just trying to get a sense of do you need to lease another 300,000 square feet of existing vacancies or move-outs to hit the midpoint? Or is it lower? Just trying to get a sense of the kind of different outcomes besides just move-outs on the new leasing side that could move the numbers within guidance, whether it be same-store or FFO. Brendan Mullinix: Yes, Vince. So going back to James' answer a little earlier in the Q&A here. We have 3 known move-outs essentially in the second half, which is roughly 550,000 square feet. So in the context of our earnings guidance at the midpoint, we're essentially saying that on average during the year, including Q1, occupancy will be 96.5%, which is in line with Q1. So the guidance at the midpoint essentially assumes that we have new leasing activity with regard to all of that move-out activity. And then so if you look to the high end of guidance where average occupancy is 97%, there's obviously incremental new leasing beyond the 550 of move-outs. Vince Tibone: No, that's helpful. And just a follow-up. It looks like just some quick math. It looks like the retention rate is going to be higher than we previously projected. Is that fair? I think on the last call, you indicated it would be about 70% and it looks like just given the first quarter move-outs and the 500 you mentioned there, it looks like retention will be yes, closer to 90%, if my math is right, in the 80s. Is that -- is my logic correct there? Brendan Mullinix: We're building in some buffer for unknown situations that they come up. There's always something that comes up in the back half of the year that you're expecting. So there's some buffer. Our guidance is still based on 70% to 80% retention. Vince Tibone: Got it. And then just last one from me. Just on the -- you mentioned if you're going to proceed with any new developments, you would likely fund it with dispositions -- is there any chance you look to sell out of the cold JV or the remaining net lease office JVs? Or kind of what's the strategic rationale to hold on to those joint venture assets that are now very different from the rest of the portfolio? T. Wilson Eglin: Well, yes, there's not much left in the office JV, Vince, and we have been sort of liquidating that as quickly as the market will bear. In the other industrial joint venture, we're a 20% partner there. So it's -- with the majority partners entirely up to us. We do have some opportunities to make some good sales in that portfolio. So we do expect that it will shrink modestly over time. But it's an investment that produces a pretty high return on equity for us, and it keeps us with a modest exposure to the manufacturing business, which gives us some insights into the logistics demand in some of those manufacturing hubs that we're invested in. Operator: Our next question comes from the line of Jim Kammert with Evercore. James Kammert: I think, Nathan, you mentioned 4.6 million square feet or so of lease renegotiations for new lease expirations. How much or does any of that encompass you guys two big Nissan deals in early '27 and then 1 million square footer in Jackson, Tennessee. Any color or updates on those would be appreciated. I didn't know if that was in your 4.6 million square feet. James Dudley: Jim, it's James again. I guess I'll touch on the 2027. Yes, we've got a number of chunky leases in 2027, and we're in advanced negotiations in some cases and definitely talking to all the tenants for these large boxes and expect a very high rate, if not 100% renewal on the big boxes that we have that includes Nissan. Operator: Our next question is from the line of Mitch Germain with Citizens Bank. Mitch Germain: I think, Will, you mentioned any new development would be matched with -- or new potential development would be matched with asset sales. Is that -- are you going to sell ahead of the project commencement and kind of sit on those proceeds like you've done at the end of 4Q with Phoenix? Or how should we think about the cadence regarding how that process could play out? T. Wilson Eglin: No, I think it's preferable to match fund sales with stabilized outcomes for development. So we had some disposition activity last year that left us in a very strong cash position to fund the project in Phoenix. But I think we would prefer to hold on to the income from the assets that we might sell to fund development and try to match things better. Mitch Germain: Got you. And then last one for me. Obviously, a significant amount of demand acceleration happening in the industrial sector. You mentioned a 7-plus million square foot pipeline. Any sort of themes, industries that you're seeing that are driving more demand versus others? James Dudley: Brendan touched on it a little bit. We've seen a big uptick in data center adjacent demand in a number of our markets, and we're fortunate to be placed well for those potential tenants as well. You've seen a couple of big leases get done for Meta and for AWS in Phoenix that took down a couple of the big boxes there. There's been a lot of new activity in Columbus that's data center related as well. And then we've got our Richmond redevelopment where there's a big Google data center campus going in next door. So I think that's one of the things I would point out. There's also continue to be growth in supplier demand for advanced manufacturers that we're seeing continue to grow and develop their different opportunities. I'll bring Phoenix up again with TSMC moving along and some of the ancillary demand that's popped up there. So we're starting to see a pickup there. So manufacturing and data center adjacent, I think, has definitely been the recent theme and a big pickup in the demand. Operator: [Operator Instructions] Our next question comes from the line of Jon Petersen with Jefferies. Jonathan Petersen: Just one quick question for me. The senior notes that are due in '28, the $160 million with a 6.75% interest rate. Can you remind us, are those callable early? Like should we think about you taking those all the way to maturity? Or should we assume you're able to refinance those early? Brendan Mullinix: They have a make call structure. So they're technically callable, but it requires the payment of premium. Operator: Thank you. And at this time, we have no further questions. I will now turn the call back over to Will Eglin for closing remarks. T. Wilson Eglin: We appreciate everyone joining our call this morning, and we look forward to updating you on our progress over the balance of the year. Thanks again for joining us today. Operator: This concludes today's conference call. You may now disconnect your lines. Have a pleasant day.
Operator: Thank you for standing by. My name is Rebecca, and I will be your conference operator today. At this time, I would like to welcome everyone to The Cheesecake Factory, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Etienne Marcus, Vice President of Finance and Investor Relations. Please go ahead. Etienne Marcus: Good afternoon, and welcome to our first quarter fiscal 2026 earnings call. On the call with me today are David Overton, our Chairman and Chief Executive Officer; David Gordon, our President; and Matt Clark, our Executive Vice President and Chief Financial Officer. Before we begin, let me quickly remind you that during this call, items will be discussed that are not based on historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could be materially different from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available on our website at investors.thecheesecakefactory.com and in our filings with the Securities and Exchange Commission. All forward-looking statements made on this call speak only as of today's date, and the company undertakes no duty to update any forward-looking statements. In addition, during this conference call, we will be presenting results on an adjusted basis, which exclude acquisition-related items, impairment of assets and lease termination expense and other items. Explanations of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our press release on our website as previously described. David Overton will begin today's call with some opening remarks, and David Gordon will provide an operational update. Matt will then review our first quarter financial results and provide commentary on our financial outlook before opening the call up to questions. With that, I'll turn the call over to David Overton. David Overton: Thank you, Etienne. We delivered strong results in the first quarter, exceeding expectations across revenue, margins and adjusted diluted earnings per share. This performance reflects disciplined execution across our restaurants and continued demand for our differentiated high-quality concepts. First quarter comparable sales at The Cheesecake Factory restaurants increased 1.6%, outperforming the industry and reflecting the strong affinity for our namesake concept. Culinary innovation continues to be a core strength of our business. Our recent menu additions, including new bites and expanded bowl options have been well received by guests and highlight the broad appeal of our menu and the value we deliver to our guests. Importantly, these offerings keep the concept fresh and competitively positioned without relying on discounting. To this point, Cheesecake Factory average weekly sales reached a new all-time high during the quarter, bringing our industry-leading annualized unit volumes to nearly $12.8 million. Strong sales and exceptional execution drove further improvement in The Cheesecake Factory's restaurant-level profit margins, and we delivered double-digit growth in adjusted diluted earnings per share year-over-year. Turning to development. During the first quarter, we opened 3 restaurants, including a North Italia, a Henry and a Flower Child. In addition, 1 Cheesecake Factory restaurant opened in the first quarter in Mexico under a licensing agreement, the only international opening we expect this year. Subsequent to quarter end, we opened in North Italia, marking our 50th location for the concept. With these openings, we remain on track to meet our objective of opening as many as 26 new restaurants this year. In summary, we delivered a strong quarter. And as we look ahead, we will remain focused on delivering exceptional food, service and hospitality, the hallmarks of our success while continuing to execute our long-term growth strategy. Before I turn the call over, I am pleased to share we were once again recognized by Fortune as one of the 100 Best Companies to work for, marking our 13th consecutive year on the list. This recognition based on direct feedback from our staff reflects the strength of our culture and the engagement of our people. We believe this continues to be an important advantage in attracting and retaining talent in a highly competitive labor environment. With that, I will now hand the call to David Gordon to provide an operational update. David Gordon: Thank you, David. Our performance this quarter reflects the strength of our operations teams and their ability to execute at a high level in our restaurants while leveraging sales growth to drive flow-through and profitability. Operators delivered improvements in labor productivity, food cost management and other controllable expenses while maintaining strong retention across both hourly staff and management teams and delivering strong guest satisfaction scores. As David mentioned, our recent menu additions at The Cheesecake Factory restaurants have been well received, which we believe has contributed to the sequential improvements in traffic and check mix. This has allowed us to moderate menu pricing without impacting restaurant level margins. Moving on to Cheesecake Rewards. The recent launch of our new mobile app has exceeded expectations with top-tier download rankings, including #3 overall and #1 in food and drink during the rollout week. And early guest feedback has been overwhelmingly positive, particularly around the app's ease of use for making reservations and browsing the menu to place orders, reordering favorites and accessing rewards all within the app. We are also seeing solid early traction with increasing adoption of the app for digital ordering, reflecting strong early engagement with the platform. At the same time, we continue to refine the program toward more targeted behavior-based personalized offers with an increased focus on life cycle management. So far this year, we've seen higher engagement, improved incrementality and greater offer efficiency. I'll now turn to additional concept performance details. The Cheesecake Factory's first quarter comparable sales outperformed the Black Box Casual Dining Index by 40 basis points and resulted in annualized AUVs of $12.8 million for the quarter. This performance was supported by an off-premise mix of 22%, in line with the prior quarter and prior year. Restaurant-level profit margins increased 10 basis points year-over-year to 17.5%. North Italia's first quarter annualized AUVs totaled $7.4 million with comparable sales declining 2%. Our focus remains on returning to positive sales growth, and we remain confident in the concept's competitive positioning and long-term opportunity. At the same time, we're seeing encouraging trends, including improved retention across both managers and hourly staff as well as strong early results at new restaurant openings with average weekly sales at recent openings meaningfully above the system average. In addition, we recently implemented at North Italia, the guest feedback platform used at The Cheesecake Factory, which we believe will provide valuable insights into execution and support ongoing improvement. Our new menu currently being rolled out introduces a dedicated lunch section featuring lighter options, including refreshed salads and additional protein offerings aligned with current guest preferences and thoughtfully priced. We believe this will increase awareness of our lunch offering and strengthen our value proposition in the lunch daypart. Restaurant level profit margin for the adjusted mature North Italia locations was 14.8% for the quarter versus 16.6% for the prior year. The decline primarily reflects sales deleverage along with higher building expenses, including repairs and maintenance and utilities. Flower Child delivered another standout quarter, meaningfully outpacing the fast casual segment, underscoring the strong affinity for the concept as it continues to take market share. First quarter comparable sales increased 10% for a 2-year comparable sales increase of 15%. This strong performance translated into annualized AUVs of $4.9 million, a new quarterly high for the concept. Restaurant-level profit margin for the adjusted mature. Flower Child locations was 19.6% in the first quarter, up 100 basis points from the prior year. This performance reflects the concept's highly differentiated positioning with a made-from-scratch menu that is both health-focused and craveable, delivering compelling value across a broad range of offerings, all within thoughtfully designed restaurants to provide a more elevated experiential dining experience. Combined with consistent strong execution by our restaurant teams, these strengths continue to drive momentum and strong sales trends. We remain focused on building strong teams to support the concept's continued growth, and we're increasingly confident in the opportunity ahead. And lastly, we expanded our FRC portfolio with the opening of a Henry in Phoenix, which opened to strong demand. Average weekly sales have exceeded $280,000 in the first 4 weeks for an annualized AUV of over $14 million. And with that, let me turn the call over to Matt for our financial review. Matthew Clark: Thank you, David. Let me first provide a high-level recap of our first quarter results versus our expectations I outlined last quarter. Total revenues were $978.8 million, meaningfully above the high end of the range we provided. Adjusted net income margin was 5.2% and adjusted diluted earnings per share was $1.05, both finishing above our expectations. And we returned $32.6 million to our shareholders in the form of dividends and stock repurchases. Now turning to some more specific details around the quarter. First quarter total sales at The Cheesecake Factory restaurants were $690.5 million, up 3% from the prior year. Total sales for North Italia were $89.5 million, up 7% from the prior year period. Other FRC sales totaled $104.5 million, up 20% from the prior year, and sales per operating week were $145,200. Flower Child sales totaled $52.6 million, up 21% from the prior year, and sales per operating week were $94,500. And external bakery sales were $13.9 million. Now moving to year-over-year expense variance commentary. Specifically, cost of sales decreased 10 basis points, primarily driven by favorable dairy costs, partially offset by higher beef and seafood costs. Labor as a percent of sales declined 20 basis points, primarily driven by labor productivity gains, partially offset by higher group medical. Other operating expenses increased 40 basis points, primarily driven by higher utility and bakery overhead costs. G&A remained relatively flat as a percent of sales and depreciation increased 10 basis points from the prior year. Preopening costs for the quarter, including some expenses related to early second quarter openings totaled $5.5 million compared to $8.1 million in the prior year period. We opened 3 restaurants during the first quarter versus 8 restaurants in the first quarter of 2025. And in the first quarter, we recorded a pretax net expense of $2 million, primarily related to impairment of assets and lease termination expenses and FRC acquisition-related items. First quarter GAAP diluted net income per share was $1.02. Adjusted diluted net income per share was $1.05. Now turning to our balance sheet and capital allocation. The company ended the quarter with total available liquidity of $601.6 million, including a cash balance of $235.1 million and $366.5 million available on our revolving credit facility. Total principal amount of debt outstanding was $644 million, including $69 million in principal amount of 0.375% convertible senior notes due 2026 and $575 million in principal amount of 2% convertible senior notes due 2030. CapEx totaled approximately $43 million during the first quarter for new unit development and maintenance. During the quarter, we completed approximately $18.4 million in share repurchases and returned $14.2 million to shareholders via our dividend. Now let me turn to our outlook. While we will not be providing specific comparable sales and earnings guidance, we will provide our updated thoughts on our underlying assumptions for Q2 and full year 2026. Our assumptions factor in everything we know as of today, including net restaurant counts, quarter-to-date trends, our expectations for the weeks ahead, anticipated impacts associated with holiday shifts and the recent softness in industry sales trends and the current consumer environment. Specifically for Q2, we anticipate total revenues to be between $990 million and $1 billion. Next, at this time, we expect effective commodity inflation of low to mid-single digits for Q2 as our broad market basket remains stable. We are modeling net total labor inflation of low to mid-single digits when factoring in the latest trends in wage rates and minimum wage increases as well as other components of labor. Other operating expenses are estimated to be approximately 20 basis points higher than prior year, reflecting higher marketing spend to support the launch of our rewards app. G&A is estimated to be approximately $63 million to $64 million. Depreciation is estimated to be approximately $28 million to $29. We are estimating preopening expenses to be approximately $7 million. Based on these assumptions, we would anticipate adjusted net income margin to be about 5.5% at the midpoint of the sales range provided. For modeling purposes, we are assuming a tax rate of approximately 13% and weighted average shares outstanding of approximately 48.5 million. Turning to fiscal 2026. Based on similar assumptions and no material operating or consumer disruptions, we anticipate total revenues for fiscal 2026 to be approximately $3.91 billion at the midpoint of our sensitivity modeling. For sensitivity purposes, we are using a range of plus or minus 1%. We currently estimate total inflation across our commodity basket, labor and other operating expenses to be in the low to mid-single-digit range and fairly consistent across the quarters. We are estimating G&A to be about 6.5% of sales, partially driven by our sales growth outlook impacted by the timing of restaurant openings and closures as well as periodic true-ups related to stock-based compensation. Depreciation is expected to be about $115 million for the year. And given our unit growth expectations, we are estimating preopening expenses to be approximately $35 million to $36 million. Based on these assumptions, we would expect full year net income margin to be approximately 5% of the sales estimate provided. For modeling purposes, we are assuming a tax rate of approximately 11% and weighted average shares outstanding relatively flat to 2025. With regard to development, we plan to continue accelerating unit growth this year. At this time, we expect to open as many as 26 new restaurants in 2026, with roughly 3/4 of those openings planned for the second half of the year. This includes as many as 6 Cheesecake Factories, 6 to 7 North Italias, 6 to 7 Flower Childs and 7 FRC restaurants. And we would anticipate approximately $210 million in cash CapEx to support unit development as well as required maintenance on our restaurants. Note, this CapEx range includes some new restaurant construction expenses, which may be classified as operating lease assets instead of additions to property and equipment in the statement of cash flows. In closing, our first quarter results reflect a healthy business, solid top line momentum, disciplined cost management and strong operational execution. Our financial position continues to provide the flexibility to support new unit growth while investing in the business and returning capital to shareholders. With a diversified portfolio of high-quality concepts, experienced operators and a strong balance sheet, we believe we are well positioned as we move through the year. Looking ahead, we remain focused on consistent execution, comparable sales growth, margin expansion and long-term shareholder value creation. With that said, we'll take your questions. Operator: [Operator Instructions] Your first question comes from the line of Andy Barish with Jefferies. Andrew Barish: Can you just kind of go through -- I know the Cheesecake business has been very consistent on the top line. Just anything quarter-to-date? I know it's been noisy with Easter and spring break shifts. But just anything you're seeing in your guests, any check management that you'd be willing to comment on would be helpful. Matthew Clark: Sure, Andrew. This is Matt. I mean, as you know, we're not going to give a specific number. But I think if you interpolate the revenue guidance for the second quarter, we're expecting to have consistent trends continue for the Cheesecake Factory. And I think we feel cautiously optimistic about the rollout of the app and the incrementality that we have potential to drive there. We rolled out incremental more new menu items in the first quarter, and we saw progressively improving incident rate trends on those. So generally, I would say we have a bullish outlook on our business at this time. Operator: Your next question comes from the line of Jeff Farmer with Gordon Haskett. Jeffrey Farmer: Matt, you mentioned that the Q1 revenue performance exceeded obviously, the guidance. But what was the primary driver of that outperformance relative to your guidance? Matthew Clark: Yes, Jeff, this is Matt. It was a couple of factors. I mean, obviously, Cheesecake Factory comps came in above the range that we had provided there. And I think they were very stable throughout the quarter. So I think that was a positive. And then certainly, Flower Child, that 10% was above our expectations that we had thought more in the mid-single digits. And each of those probably contributed about 50% of the beat. Jeffrey Farmer: Okay. And then one more. As it relates to intra-quarter same-store sales trends, when the conflict in Iran really kicked off in early March and gas prices jumped, did you see any impact on same-store sales for any of the businesses? Matthew Clark: We were pretty steady throughout the quarter. Honestly, we were looking at that as well and parsing it. And throughout the portfolio, we continue to be, I think, steady. There's a little bit of spring break movement, but even that was probably more muted than we thought. And so it was very balanced throughout the quarter, and we didn't see any trade down either. So I would say both the guest traffic and the mix were both steady throughout. Operator: Your next question comes from the line of Jim Salera with Stephens. James Salera: Maybe a 2-part question. One, just some housekeeping. Are you able to provide the breakout of Cheesecake Factory comps, the traffic, the pricing and then the mix components? And then as we look at the strong results in the quarter, I know historically, you've talked about kind of GDP and jobs numbers as having a big influence on guest traffic and engagement with the brand. I don't think we've had necessarily very good jobs numbers this year that haven't been horrible, but I think kind of continuing to slow growth in 2025. But then we see your results accelerating. And so I was hoping maybe you could just kind of bridge what's happening at your restaurants that's maybe leading you to outperform relative to kind of the macro backdrop as a whole. Matthew Clark: Sure, Jim, this is Matt. I'll start here on the specifics of the Cheesecake Factory. Pricing was at 3.3%. As we have noted previously, that's coming down. It will be 3% in the subsequent quarters, just given the timing of what was rolling off in the quarter, it was at 3.3%. And then the mix was a negative 0.3%. So we saw a pretty material stabilization there, really benefiting particularly from the bites being add-ons and not substitutions. And so we feel really positive about that. And the traffic was a negative 1.4%, which was a material improvement over the Q4 results. And just also note for everybody for the record, the total weather impact for the company was about 1.7% of sales. Of course, there was weather in the prior year. So the net really was about 70, 75 basis points, if you think about that. So pretty close to getting back to that flat traffic for Cheesecake Factory really on a like-for-like basis. So really positive movement there. And I think, Jim, there's a lot of factors at play regarding sort of the economy. Certainly, if you believe in or subscribe to the K economy component of it, many of our concepts in our portfolio benefit from higher income cohorts. And so I think that there's a piece of that. I think the flexibility of the menu, particularly at Cheesecake Factory and Flower Child will benefit us with a tail here and the whole GLP-1 thing. right? Like you can get anything you want to eat. And at Cheesecake Factory, you can get steamed salmon with broccoli, if that's what you want and heavy up on the proteins and certainly have Flower child as well. So I think the menu, ultimately, we believe in sort of the 3 primary tentpoles of restaurant touring, and that's the menu and the hospitality and the service. And so I think we're excelling in those. So probably taking some share for those reasons. I do think even though the jobs haven't been great, to your point, sort of breaking into the economist here, the news cycle around the layoffs is not also as bad as it sounds. I mean the big news, but it's been steady. The job market has been steady. discretionary income is up slightly, and it's up a bit more than we're taking price. So from a wallet perspective, I think there's that. I think also lastly, what we've ascribed to here, and I just read about this today in the journal where people's wallets are going is for experiences, not for just goods and we're experiential dining. And so it's not so much transactional. So I think for all of those reasons. David Gordon: Jim, this is David Gordon. I'll just add one more piece, and that would be the continued retention we see in the restaurants at the hourly staff and management level quarter after quarter after quarter, has allowed the operations teams to execute as well as they ever have. And we continue to see that type of execution. We see it in the results of our Net Promoter Scores continuing to be positive. And that just has a flywheel effect of guests wanting to come back and having those type of experiences that Matt just mentioned. So that can never be overlooked. Operator: Your next question comes from the line of Jeff Bernstein with Barclays. Pratik Patel: This is Pratik on for Jeff. Just a quick housekeeping question. Can we also have the components of the comp for North Italia, please? And then I have a real question. Matthew Clark: Yes. This is Matt. I'm happy to provide that for the components. So mix was positive 1% for the quarter. Price was about 3% that came down a little bit, and then traffic was negative 6%. Pratik Patel: I appreciate it. And then my bigger picture question was, I appreciate that your brands skewed to relatively higher income consumers. But with elevated gas prices, inflation north of 3%, the ongoing stock market volatility, it just seems like everyone is frustrated these days to some degree. So I was just wondering if you're seeing any trade down from fine dining and other higher-end casual dining customers into your brands. Do you currently think you're capitalizing on that? Or is there an opportunity to capitalize that on that frustration? And secondly, in terms of whatever read you have on your own customers, do you see any check management in terms of alcohol appetizers or add-ons? David Gordon: Sure. This is David Gordon. A couple of things. I think that the incident rates and the add-ons have remained incredibly consistent. As Matt touched on earlier, some of the early check management that maybe people were anticipating with the bites, really, we didn't see. We saw people attaching bites along with the rest of their meal at Cheesecake Factory. As far as the high-end consumer and white table cloth, I would say actually, if you look at Flower Child, I think maybe Flower Child is taking market share from QSR or maybe from some of the folks in fast casual that have had to take much more price to protect margins over time. And Flower Child has not had to do that and has an elevated experience. And so along with that elevated experience and the quality of the food and the menu innovation and the ongoing LTOs, I think we are taking market share maybe from that consumer that feels pinched, whether that's your typical fast casual or QSR. I think that's benefited Flower Child. Operator: Your next question comes from the line of [ Samantha Cheng ] with Goldman Sachs. Unknown Analyst: This is Samantha on for Christine Cho. Congrats on the strong results. With the new Cheesecake mobile app launched earlier this month, I know you mentioned that really guest feedback has been positive so far. Could you touch on any additional early observations that you have from the app rollout regarding member engagement and frequency? And how do you expect personalized marketing to evolve following this launch? David Gordon: Sure, Samantha. This is David again. We still haven't discussed any actual numbers around the rewards program. And I would anticipate -- you should anticipate we won't be doing that either when it comes to the amount of downloads or members that have joined since they've downloaded the app. What I will say is that we are very pleased with the amount of downloads that we've seen thus far. We're also very pleased with the amount of sign-ins that we've seen after downloading because downloading is one thing, but then engaging with the app is something else. And we're happy with the amount of folks that have enabled locations and allowed notifications because those are ways that we can engage with them on a one-on-one personalized relationship, get the best ROI out of them, try and drive the incrementality that we've talked about historically and continue to gather data to make sure that the marketing spend is getting us the best ROI in the long run. So we're super happy with the launch early on. I think as I stated in the opening prepared remarks around the amount of engagement in the App Store and the Google Play Store right in the beginning was very, very high, and that's very promising to see and continues week after week to be significant. Matthew Clark: Samantha, this is Matt. Just one thing qualitatively. I've been really pleased with the number of new guests that we're getting for the sign-up. So clearly, we're opening the funnel to attract incremental traffic, and it's not just about engaging with our current rewards members, but making sure we're actually growing the total base. Operator: Your next question comes from the line of John Ivankoe with JPMorgan. Unknown Analyst: This is [ Chris ] on for John. My first question is on Flower Child. So the 10% comp is really strong against the category that came in roughly at flat in the same quarter. And most of the discussion around unit growth, you said has been dependent on your management pipeline, whether let's say general manager and your executive chef. I was wondering where are you on that, especially as the category is growing really fast compared to other segments in the restaurant? David Gordon: Chris, this is David. Great question. And we have said that in the past that we still believe that being able to grow at the pace we want is going to require the right type of general manager and executive chef. We still believe that. We're pleased to see continued retention benefits at Flower Child because that's a key component of career growth and enabling people to be able to grow their careers within the concept to reach that general manager and executive chef level. And we feel confident in our current growth trajectory that we have the pipeline in place to meet those expectations. And that team is very, very focused. If we decided we wanted to ramp up just a little bit from where we are today, they remain focused in the most important areas to enable the growth in that talent level to have the general managers and executive chefs in place in time for that growth. Unknown Analyst: And second one is on North Italia. Looking at numbers, it looks like new unit volumes came down a little bit in the first quarter. I was just wondering how new units are opening up and if you could give a little bit more detail. David Gordon: Sure. We've opened up 2 new restaurants here recently. Actually, we just finished our first full week at our new Brea location in Southern California, the busiest opening week in the history of North Italia for any individual location. So very, very well received in an existing market. And then in the new market in Northern California, roughly about a month ago, that would have been our busiest opening if we hadn't just opened Embrea. So new markets have been very, very well received. We'll continue down the path this year of about 50% new to existing markets, and we're pleased with the early results. Operator: Your next question comes from the line of Jim Sanderson with Northcoast Research. James Sanderson: Congratulations on a great quarter. I wondered if you could talk a little bit more about store margin at North Italia. That was a bit lower than expected and what the unlocks or remedies are to get that back up to the double-digit teens. Matthew Clark: Sure, Jim. This is Matt. I think a couple of things. There's certainly a little bit of pressure there from the comp and some deleverage on more of the fixed cost piece. I think it's also about making sure that we're investing the right amounts in labor as well as having, as David talked about on the prepared remarks, the right menu offerings at thoughtful prices. There's also a little bit of the mix of mature. So right, every year, the different sort of group comes into the mature margin set, and this happened to have a couple of higher margin or higher cost market in that. So more on a comp basis, it didn't move quite as much. So that's a little bit of it's optics. I think the most important thing, though, is to continue to focus, as David said, on positive comp store sales, right? That's really the primary attribute to recapturing the margin piece. Overall, we feel very confident that the mature margins should be in that 16% to 18% range on an ongoing basis that we've talked about. And we're obviously very close to striking distance on that. So it's not a big movement from our range, and some of it is just the moving pieces that happened to be in Q1, but certainly a lot of focus on recovering that. James Sanderson: And just a follow-up to that. How would leaning into lunch impact the store margin just in general? Matthew Clark: It's really about aggregate traffic. I think from a lunch perspective, the incrementality and recapturing that traffic there. The flow-through, obviously, we have the teams there, right? There's a staffing level that's already set. And so you're able to recapture margins at a higher rate than what the average is. And I think that's the key, right? That's why, ultimately, we believe that's the biggest lever on the margin side of things is to bring in more people when we have capacity. James Sanderson: All right. And just last question for me. Just stepping back, how should we look at the ability for you to consistently expand consolidated store margin over time? I think it's pretty much flattish with prior years the trend that we're seeing right now on an annualized basis. So the formula to get back to modest expansion. Matthew Clark: Sure. Our full year guidance still calls for about 25 basis points of 4-wall margin expansion in totality. Certainly, every quarter is going to have a little bit of ups and downs depending on, as we noted, group medical or one of the things that we saw in the first quarter was that produce prices were higher just because of weather conditions, right? But our outlook for the year remains unchanged because a lot of that just is timing that was already anticipated by us and built into our expectations for the quarter. So we feel very confident that 25 basis points a year is still attainable across the portfolio, and that's our plan for this year. That would put us north of the 16% kind of range, and that is inclusive of the growth of adding 26 new restaurants. So I would say that's still our target and still very viable, and that's our plan so far. Speaker 0 Your next question comes from the line of Jon Tower with Citi. Karen Holthouse: This is Karen Holthouse on for Jon Tower this evening. Yes, Anecdotally, it seems that there's more social content coming out. It's, I think, showing up in at least within our team, we've talked about it our feeds more often than I think just content that's more engaging. Could you maybe comment on anything you're doing differently on your end, how you're measuring engagement in that channel and how meaningful that you think that could be as a part of a go-forward marketing strategy? David Gordon: Sure, Karen. This is David. We have a pretty strong social presence across Instagram. We just -- I'd say in the past 6 months, dipped our toe in the water on TikTok here and there, using influencers, paid and nonpaid. I'd say for Cheesecake Factory, one of the most beneficial aspects of the concept is all the PR that we get on a regular basis, whether that's through -- not through paid media, right, but just through culture and showing up on late-night TV, et cetera. But we have many different tactics across all social media platforms that we're using on a regular basis and try and take a real multichannel approach, and we'll continue to do that. Karen Holthouse: And then a quick second one. I think Cheesecake Factory is probably one of the really like primarily U.S.-based brands that has a pretty big brand recognition. As you move around the world, kind of this is the concept there is theory, just the Big Bang theory is a reason it's popular. Are you building anything explicit in your second quarter or annual outlook for a potential benefit around the World Cup and the associated tourism? Matthew Clark: Karen, this is Matt. No, I think that would be a nice upside. I do think you're right. We do have great worldwide recognition, and we do hear that. And you're also right about the big bang theory, which is kind of funny but true. But I think that the World Cup could be a benefit. I think we'll -- if that happens, then we'll all be pleasantly surprised to the upside. Operator: Your next question comes from [ Kelly Merrill ] with Morgan Stanley. Unknown Analyst: This is Kelly on for Brian. Just wanted to ask, do you have any plans to iterate on bowls and bites just as smaller portions become more popular among consumers? And can you remind us, is that menu going to be refreshed a few times a year like the core menu? David Gordon: Certainly, menu innovation is going to remain core to everything that we do. I think you can expect in our next menu change that we'll be refreshing some new bowls and bites, and there'll be some new opportunities for guests to enjoy some new flavor profiles and some new interesting innovative menu items, whether that's on the bowls and bites menu or on the main menu and in bowls and bites. So our plan is to continue to make sure we have as much variety on the menu as possible. That's across every type of cuisine and every type of price point that we can offer for guests to give them the most value in any way they choose to use Cheesecake Factory. Operator: Your last question comes from Sara Senatore with Bank of America. Sara Senatore: I just -- I guess I wanted -- one last question on North Italia, I apologize if you touched on this earlier. But I guess, AUVs are down a little bit year-over-year, perhaps more than the same-store sales. I think one of the things that you -- or maybe 2 things you've talked about in the past are cannibalization on the one hand and on the other hand, awareness. So maybe a longer ramp and awareness is low, but also last year, you had perhaps more of a cannibalation impact because of where you were building those restaurants. I guess, as I look out this year, is cannibalization still a factor for North Italia? And also, I guess, conversely, are you opening in more new markets? And is that part of why the AUV might come down? So just some insights into the development strategy. David Gordon: Sure. That's a great question. Thanks, Sara. I think the mix for this year is about 50-50 new and existing markets. We did call out cannibalization last year, and we still have some of that lingering in some of those markets as well. As far as the new markets, as I said earlier, we opened in Northern California, very strong opening there. But we would expect what traditionally does happen in North is that there's a much longer not expecting that we're going to open up at the volumes of the last 2, but that we will open up a little shy of what our targets are and grow into those over time. And that's our own internal expectation. If we exceed that expectation, we're pleasantly surprised and that creates a little bit of cannibalization in the short term, we're okay with that as well. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Sprouts Farmers Market First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand it over to our first speaker, Susannah Livingston. Please go ahead. Susannah Livingston: Thank you, and good afternoon, everyone. We are pleased you are joining Sprouts on our first quarter 2026 earnings call. Jack Sinclair, Chief Executive Officer; Curtis Valentine, Chief Financial Officer; Nick Konat, President and Chief Operating Officer, are with me today. The earnings release announcing our first quarter 2026 results, the webcast of this call and financial slides can be accessed through the Investor Relations section of our website at investors.sprouts.com. During this call, management may make certain forward-looking statements, including statements regarding our expectations for 2026 and beyond. These statements involve several risks and uncertainties that could cause results to differ materially from those described in the forward-looking statements. For more information, please refer to the risk factors discussed in our SEC filings, in the commentary on forward-looking statements at the end of our earnings release. Our remarks today include references to non-GAAP financial measures. Please see the tables in our earnings release for a reconciliation of our non-GAAP financial measures to the comparable GAAP figures. With that, let me hand it over to Jack. Jack Sinclair: Thanks, Susannah, and good afternoon, everyone. Before I dive in, I want to start by thanking our team for their disciplined execution and continued focus throughout the quarter. The first quarter played out largely as we expected. We continue to work through tough comparisons and a cautious consumer backdrop. Our recent new store openings are performing well and we continue to be trusted partners for innovative product launches. Progress in our self-distribution of meat has been encouraging and is nearly complete. In addition, we continue to strengthen our talent across the organization. Our purpose is clear. We help people live and eat better. Our immediate 2026 priorities are to strengthen differentiation through forging and innovation to reinforce our great in-store experience, to accelerate customer engagement through loyalty and personalization, to build an advantaged supply chain, to expand access to healthy food through new store growth, and to take targeted actions to strengthen value, all supported by our investment in our talent and technology. This quarter, we executed with discipline, balancing early loyalty investment and targeted value actions with cost control, while continuing to advance the capabilities we need to support our long-term growth. I want to thank our team for their focus across the organization. With strong execution and easing comparisons, we're expecting sequential improvement in our business as we move through 2026. For now, I'll hand it to Curtis to review our first quarter financial results as well as our updated 2026 outlook. Curtis? Curtis Valentine: Thanks, Jack, and good afternoon, everyone. In the first quarter, total sales were $2.3 billion, up $93 million or 4% compared to the same period last year. This growth was driven by strong new store performance, partially offset by a 1.7% decline in comparable store sales. Innovation is a differentiator for Sprouts and continues to drive our sales. E-commerce sales grew 10% and represented approximately 16% of total quarterly sales. Sprouts brand also continued to perform well, growing faster than the rest of the business and representing more than 26% of total sales. During the quarter, we maintained discipline around margins and returns. Our first quarter gross margin was 39.4%, a decrease of 20 basis points compared to the same period last year. This primarily reflects loyalty investment consistent with our plan and unfavorable shrink performance. These headwinds were partially offset by benefits from self-distribution, which is performing as expected. We've taken initial steps to improve affordability for our target customers. We have made select price -- selective price adjustments on the most relevant items to our customers' baskets alongside a more focused promotional plan. We believe our P&L and guidance provide flexibility to support these actions and our customers' needs. SG&A for the quarter totaled $659 million, an increase of $36 million and 42 basis points of deleverage compared to the same period last year. This was primarily driven by fixed cost deleverage from lower comparable store sales. We remain focused on cost discipline while funding key growth and customer initiatives for the near and longer term. Depreciation and amortization, excluding depreciation included in the cost of sales was $42 million. For the first quarter, our earnings before interest and taxes were $215 million. Interest income was approximately $129,000 and our effective tax rate was 24%. Net income was $164 million and diluted earnings per share were $1.71, a decrease of 6% compared to the same period last year. On unit growth, we opened 6 new stores, ending the quarter with 483 stores across 25 states, including our entry into New York. Our strong and healthy balance sheet continues to provide flexibility. For the first quarter, we generated $235 million in operating cash flow, which enabled self-funding of our investments in capital expenditures of $98 million, net of landlord reimbursement. We also returned $140 million to our shareholders by repurchasing 1.9 million shares and have $696 million remaining under our $1 billion share repurchase authorization. We ended the first quarter with $252 million in cash and cash equivalents and $22 million of outstanding letters of credit. Turning to our outlook. We continue to lap some exceptional numbers from last year. We expect year-on-year comparisons to improve in the back half as trends ease. We also believe our initiatives will build as the year progresses. As a reminder, 2026 will be a 53-week year with the extra week falling at the end of the fourth quarter. For the full year, on a 52-week basis, we are maintaining our outlook for total sales growth between 4.5% to 6.5% and comp sales between negative 1% to positive 1%. We still plan to open at least 40 new stores in 2026. Earnings before interest and taxes are expected to be between $675 million and $695 million. We expect our corporate tax rate to be approximately 25.5%, and we expect capital expenditures net of landlord reimbursements to be between $280 million and $310 million. We are increasing our earnings per share outlook to be between $5.32 and $5.48, assuming at least $300 million in share repurchases. For the second quarter, we expect comp sales to be in the range of negative 2% to 0% and earnings per share to be between $1.32 and $1.36. EBIT margin pressure is expected to be approximately 75 basis points due to fixed cost deleverage from lower comp sales, annualizing our loyalty points investment and the impact of higher fuel costs. We will continue to manage the business with a balanced approach, investing for the future where we see the best returns while remaining disciplined on execution and cost control for 2026 delivery. And with that, I'll turn it back to Jack. Jack Sinclair: Thanks, Curtis. As always, we are confident in our strategy and the long-term potential of Sprouts. Our focus is to stay true to our strategy and sharpen execution across our priorities, foraging and innovation, customer experience, supply chain and new store growth, supported by targeted investments in talent and technology. We strive to make healthy eating accessible and affordable. As health and wellness evolves, delivering differentiated attribute-driven products remains central to how we stand out and meet our customers' expectations. We're leaning into foraging, innovation and discovery to introduce new and distinctive items with clean ingredients. We've seen particular success with organics as they remain an important quality standard for our target customer and a meaningful growth driver for Sprouts. In the first quarter, more than 55% of produce sales were organic and over 34% of total sales came from organic products. We've already launched 1,500 new items this year, including brands like PRESS Coffee, Cold Brew Protein drink, Pendulum Probiotics for gut health and Proda, a protein soda. Innovation remains our strength, and we continue to attract a strong and healthy pipeline of emerging health and wellness brands that view Sprouts as the preferred launch partner. Sprouts brand continues to grow, expanding our differentiation across both fresh and nonperishable categories. Several of these innovations are resonating with customers, most notably our Regenerative Organic Certified Coffee, Seed Oil-free Hummus and Beef Tallow Kettle Chips. As we innovate, we remain focused on maintaining the right balance of everyday wellness essentials to curated premium wellness items, ensuring relevance, value and quality for our customers. As we go to market, you'll see us leaning more into our leadership in the health and wellness space. This is why customers seek us and continue to shop with us. As a result, we're sharpening our marketing to more clearly express what makes Sprouts unique, highlighting differentiated brands, founder stories and product innovation. The store experience remains another core differentiator, and our customers consistently cite it as a key driver for the love of Sprouts. That advantage starts with what we believe is the best store team in the industry. Our team members are essential to delivering our unique assortment and supporting customers with attribute-driven needs, combining expertise with authentic personal service. This year, stores are focused on simple genuine customer connections that make shopping easy and enjoyable while elevating daily execution, improving in-stocks, freshness and production efficiency. I want to thank our team for the work they do every day to make our customers feel welcome. Another theme core to the DNA of Sprouts is making healthy eating accessible and affordable. It always starts with our assortment. And we're working to bring healthy, delicious meal solutions such as wellness bowls under $10, $5 Sushi Wednesday and our $4.99 sandwiches. We will continue to innovate in the areas that highlight Sprouts' healthy attributes in everyday essentials, such as our recently launched 2 new yogurt parfaits with restaurant quality at a great value. We're also taking a targeted approach to price and promotion with a clear focus on returns. In the first quarter, we took initial price reductions on a small number of SKUs such as coffee and a handful of other essential items. As well, we continue to test additional pricing opportunities. We're reshaping our promotional plans to be more streamlined and targeted on driving greater value on the categories and items that matter most to our customers. We continue to invest in talent and technology to strengthen our operating model and build the capabilities needed to scale. This year, we're bringing new training and tools to our team to help them see opportunities in their business, to improve how we drive in-stocks and better manage shrink. We believe these investments support consistent execution in stores, enhance customer experience and position Sprouts for sustainable long-term growth. Our loyalty program continues to scale and is a strategic lever to deepen the customer engagement. We're seeing positive customer response to both broad-based and targeted offers, including loyalty multipliers. As participation grows, we're gaining richer insights into customer behavior and using these learnings to accelerate personalization. Building on first quarter insights, we're adding resources to increase the pace of testing and learning and investing in capabilities and tools needed to turn what works into scalable programs. Vendor participation and demand have been strong, reinforcing our ability to expand these programs over time. From a supply chain standpoint, our focus is on building an advantaged distribution channel that allows us to take more control of our fresh inventory. Our plan to open our new Northern California distribution center in the second quarter is on track and will complete our initial meat self-distribution journey. In addition to our structural changes, we're making targeted enhancements that improve service levels, inventory management and allow the organization to respond more quickly to shifts in demand. As I noted, new stores are off to a strong start, reinforcing our confidence in our long-term strategy. Already in 2026, we've opened stores in New York, Texas, Florida and Virginia to resounding success. We're seeing a great reaction as we enter new communities, and we're sharpening site selection as we scale, expanding access to healthy foods from sea to shining sea. Looking ahead, we have nearly 150 new stores approved and more than 105 executed leases in our pipeline. To wrap up, while the near-term backdrop remains challenging, we believe we are well positioned to navigate through it. We're encouraged by what we can already see in new stores, execution, supply chain and the team. With easing comparisons, discipline around cost management and the initiatives we have underway, we're confident in our strategy and our ability to drive long-term value. Thank you for joining us today. We look forward to sharing more of this journey with you in the quarters to come. And with that, I'd like to turn it over for questions. Operator? Operator: [Operator Instructions] Our first question will come from the line of Rupesh Parikh from Oppenheimer. Rupesh Parikh: Just given some of the macro concerns out there, just curious just overall what you're seeing in terms of the healthier consumer. And then as you look at different segments, low, middle, high, just curious if you're seeing any changes there. Jack Sinclair: So yes, clearly, there's a lot going on in the macro environment, and we're watching it pretty closely. We're focusing in on what we can do in terms of making life as good as we can for all of our customers. Certainly, the macro environment suggests that our loyal customers have stuck very much to us going forward. The less engaged customers are feeling a little bit more pressure, and it could well be to do with the income levels, but I think it's a kind of general pattern across our customer base. As we look at the marketplace, it's a little bit uncertain what's going to happen going forward. And we are focusing on doubling down and being good at what we do. And I'm kind of encouraged by certain categories in terms of when we've done some price investments and some response to that. And I'm encouraged in some of the work that we're doing in our deli departments and increasing the options for people to access healthy, cheaper food direct from Sprouts. Rupesh Parikh: Great. Then maybe just going deeper into just your -- some of the price reductions. Just as you look at all your value efforts, how do you say they're progressing versus your expectations and just confidence in gaining further traction from here? Jack Sinclair: Well, we're doing a number of different tests in different places and some are working better than others and some work very directly, and that's what we're learning. The testing process is both a geographic test, which we're doing in certain places and specific categories. Tariffs put quite a number of -- we referenced coffee in the script. Tariffs put some pressure on the top line prices of a number of categories. And that's kind of eased off a little bit, and we've certainly been investing a little bit in that coming back the other way. So we're being very selective by category, and we're doing some specific tests across different geographies. Operator: Our next question will come from the line of Thomas Palmer from JPMorgan. Thomas Palmer: Maybe I could start off a little bit of a follow-up to Rupesh's question on affordability. What behavior change are you seeing, I guess, as you run these tests in terms of are you driving more new customers into the store? Is it more about seeing existing customers buying more items? And how do you communicate the improved price points to customers? What have you found effective? Jack Sinclair: Go ahead, Nick. I'll let you take that. Nicholas Konat: Tom, it's Nick here. So a couple of things. As Jack mentioned, it starts with the assortment work we've done. There are two areas I'd call out, I think that have been most successful at driving basket. And I think we're also seeing traffic in these categories is the work we've done in the deli with our wellness bowls, our new parfaits, our $5 sandwich, $5 sushi. Those have been really good for us, and we're seeing both basket and traffic to those areas increase. Sprouts brand, the other area I'd call out on the assortment side. If you look at -- we've got tremendous organic offerings, and that's driving organic growth. And as we push and market those, we're seeing increased sales and basket in those Sprouts brand items. On the pricing side, for us, our focus is twofold. It's to try to put a few more items in the basket and also to get our core customer to come back more often because those everyday essentials are more within reach for them. So that's how we're looking at the pricing activity and how we measure it. Thomas Palmer: Okay. And then just a follow-up on the commentary about the expected EBIT margin pressure in the second quarter. Any help just on kind of the split between gross margin and SG&A that you foresee? And maybe any framing of kind of how much of this 75 basis points might be related to fuel? Curtis Valentine: Yes. This is Curtis. Yes, a little bit of extra pressure from fuel in the second quarter. That's kind of what we've embedded for now, and we'll see how that evolves through the quarter here. The shape of it will look pretty similar, I think, to Q1. So if you look at our Q1 results, some pressure in gross margin, maybe a touch higher. We've got our new NorCal DC rolling out. So there's some overlap costs there as well as the fuel you highlighted. And then maybe just a touch better on the SG&A than what we saw in the first quarter, but generally, a pretty similar shape to what we've experienced here in Q1. Operator: Our next question will come from the line of Seth Sigman from Barclays. Seth Sigman: I wanted to follow up on the point around affordability and you're making some price changes. I know that's not all you're doing. There's other efforts to improve affordability. But can you just remind us how you can manage that all from a margin perspective? Like what are the offsets we should be thinking about? And then a related question on the loyalty program and specifically the vendor support. Where are we from that perspective? I know it's still early, but I know that's a part of the equation through the year to start to see some stabilization in the margin. So help us think about sort of that opportunity. Curtis Valentine: Yes. This is Curtis. I think, yes, the opportunities we've talked about are inventory management and continuing to improve in that space, specifically within shrink, a little challenging in the first half. That challenge eases, and we get some easier comparisons in the second half just because of the sales volatility we've had year-over-year. We should continue to get better at shrink. We should continue to get better at markdowns and how we move product through the ecosystem. Those are the things that we've been working on that we can continue to get a little bit better at as we move forward. Certainly, the vendor funding is another piece, and that's really, as you noted, early days, but we'd expect that to ramp as the year evolves and build as we continue to build programs around now that we've got the loyalty data and how we go to personalize off of that. So that will be a piece that kicks in and helps as well. But those are the primary drivers. Over the longer term, we'll think about self-distribution and further opportunities there, and that should also be a helper down the line. Seth Sigman: Okay. Great. That's super helpful. And then just thinking about sales, you're guiding to sequential improvements through the year. Comparisons are obviously a factor. But can you talk more specifically about the signals that you're seeing in the business now that gives you confidence that perhaps trends have stabilized after the slowdown that you've seen over the last couple of quarters? And I guess in that context, how are you thinking about the Q2 sales guidance? Curtis Valentine: Yes. It's played out pretty much as expected. As you know, it's only been 60 days since last we chatted here. So it's -- not a lot has changed, but we're seeing some slight improvement in traffic, some slight improvement in units as we get into the second quarter here, and it's kind of playing out as we thought. Similarly, we talked -- we have better visibility into the customer and a perspective on what that would look like as it relates to the improvement quarter-to-quarter, and that's played out as expected. And so it's early. It's 60 days later, but so far, so good. We've seen things play out kind of how we were thinking they would. Beyond that, if I go back to why do we have confidence from a broader perspective, it's the 4-year run we had prior to the last couple of quarters where we built sequentially over time to that 3% to 4% comp in the algorithm and then a really strong, obviously, experience with some tailwinds in '24 and '25. So obviously, the lapping is a challenge, but we believe we get to the other side of that, that we'll get back into our algorithm later this year. Jack Sinclair: Yes. And as Curtis said, the lapping is clearly a part of this dynamic going forward in terms of why we're feeling better about what's going to happen in the second half. But there is still continued tailwinds in terms of this health and wellness and clean ingredients. The marketplace is trending towards that. And there's clearly some macroeconomic dynamics that play into it. But that underlying trend that's been with us for a number of years, we think we're really well placed to be taking advantage of that. And to Nick's point on assortment in terms of making sure the assortment we're bringing forward on both the Sprouts brand products and the new products we're bringing in, playing to that health and wellness in differentiated agenda. We're feeling really confident about the way that assortment is evolving and the team and the response we're getting from the entrepreneurial spirit that's so prevalent in this space. They're bringing a lot of products to us, and that's something that gives a lot of confidence going forward. Operator: Our next question will come from the line of Leah Jordan from Goldman Sachs. Leah Jordan: I just wanted to ask a little bit more on the comp trends in the quarter. Just color there, cadence by month, differences by geography. Also more specifically, how is Q2 to date tracking? And maybe just remind us of the onetime lapse that we still need to be thinking about going forward. I know on the whole, the comps get easier, but just the onetime kind of months we should be mindful of. Curtis Valentine: Leah, it's Curtis. So yes, Q1, we talked a lot about the strike at a competitor in P2 that -- or February that drove some business our way last year, and that kind of played out as we expected. So Feb was our worst month of the quarter. January and March looked pretty similar. As we've evolved into April here, we are just slightly ahead of the midpoint of the guidance for the comp for the quarter. And then from a year-over-year perspective within Q2, we just talked about May and June last year being a little bit favorable on the produce season, which does look good again for us here in 2026. And then the cyber incident that impacted the natural organic space last year being a little bit of a tailwind for us in June. And so those are the moving parts. But again, things have really played out through February, March, April as we had initially anticipated. Leah Jordan: Okay. That's really helpful. And then just for my follow-up, I wanted to go back to the broader affordability discussion. You made some targeted price adjustments around essentials. It sounds like you're doing some more tests. But maybe in areas like coffee or other things that you've done, maybe help give us some detail around where price gaps kind of were and maybe where they are today. Like what -- and are you seeing any response from peers in the marketplace after doing that? And then also, I guess, because some of this momentum is still on the come, I guess, what kind of volume response are you seeing in these categories after you make those price adjustments? I mean, I guess, how are you able to measure like, okay, yes, we've made enough of a price investment at this point, given it's still being tested and in progress? Jack Sinclair: Well, the context of that conversation is the same today as it's been all the way through this dialogue in terms of the products that we're trying to invest in or put better prices in. They're based on what's important in our customers' basket and they're not relevant to what's not necessarily relevant in what other people's basket is. So we're not really looking at direct pricing comparisons. We do in produce, as we've talked about. But in other categories, we're looking at specifically our attribute-based products and looking at elasticity. And we have in some of those investments that we've talked about, when we drop prices, we've seen volumes go up. And that I suppose -- I suppose that's intuitive. And the question is how far do we go? At the moment, we're doing tests in broader-based categories in certain locations, and we're doing specific category work. But it's all about elasticity, it's all about comparing ourselves to our customer and what they do as opposed to comparing our prices to other people. So we don't think about it like a gap you might do in a traditional way of thinking about this. We think about how can we drive volume through price. Nick, maybe you want to add to that? Nicholas Konat: No. I think the only thing I'd add, Leah, is I think it's a combination. I don't want to lose touch of. It's the affordability focuses on assortment and then it's our everyday pricing. And then it's also on some of our promotion activity. And the customers told us as we look at broader category level and subcategory level promotions and being really targeted there, we've seen really good uptake in lift -- unit lift and sales dollar lift that we've seen good response to. So it's -- as Jack said, it's targeted to our unique customer, what's most important to them. And then we're seeing unit lifts and those things we're moving, and we'll measure that over time and make sure that translates into bigger baskets and more traffic. Operator: Our next question will come from the line of Edward Kelly from Wells Fargo. Edward Kelly: I wanted to ask maybe first, Curtis, could we start with the back half gross margin outlook and sort of how you're thinking about things? And part of that, I'm kind of curious as to what you're assuming for fuel. Obviously, it's a little bit of a moving target. Our math has maybe fuel is a 20 basis point headwind quarterly if it were to continue at this rate for the rest of the year. I'm just kind of curious, is that ballpark? And what's in the guidance for that? And then how are you thinking about gross margin in the back half? Curtis Valentine: Ed, yes, it's probably just a touch high, but pretty close, I would say, on the estimate there. Although, again, it's been pretty bouncy. So it depends a lot about what the price is. Right now, we've just factored it into Q2, knowing that it's right in front of us, and that's where the price point is. And we'll see how that evolves in the second half of the year. And so don't have a lot of that factored into the second half. As we think about the second half, we expect margins to stabilize. Really think about that from an EBIT perspective. There will be a little bit of pressure as the comp continues to improve and get back into the algorithm. But once we're there, we'd expect that stable margin kind of posture that we talk about. And then on the growth side, specifically, we do get some of those things that are challenging in the first half that do ease in the second half. So the loyalty piece will be fully anniversaried as we get to the end of Q3. We do have an easier shrink comparison, particularly in the fourth quarter. And so some of those things go away. And then we've got our benefit from self-distribution in meat that will be a little bit more clear once we get past the opening of the NorCal DC. So expecting margins to improve and be kind of flat to maybe slightly positive in the second half. And I'd also add that we do have for what we're testing right now, assuming that, that were to go. As we're testing, we've got a little bit built in for some of the pricing adjustments from an affordability perspective. Edward Kelly: Okay. And just a follow-up. Taking a step back on comp to leverage and sort of where this is evolving for you guys. If you get back to sort of 3, 4 comp here, can you leverage on that moving forward? I'm just curious as to how that leverage point has sort of changed in your thinking, if at all? Curtis Valentine: Yes. We talked about feeling good from a 4s perspective, and I think that's coming down as we continue to -- we're working hard on the cost side of the business, leveraging our scale as we get bigger as a business to improve our cost base, working hard on how we can leverage technology. These are the things that we've been talking about and investing in, in the past couple of years that are starting to help on that front. And that's just work that we'll continue to do over and over again as we continue to get bigger. So it should be less than 4%. And then it comes down a little bit to just how much we plan to invest in the business and where we need to make investments in the business. And so there'll be a bit of an ebb and flow on the investment front. We've been at that for a couple of years now at a pretty steady clip. If we find a reason in a high-return opportunity, we'll invest a little more. So that will be the other factor in that, but certainly should be less than the 4% we've talked about historically, and we feel pretty good late this year if we get back to that algorithm range to bring SG&A pressure in line and kind of have that moderate as well. Operator: Our next question will come from the line of Mark Carden from UBS. Mark Carden: So to start on loyalty, how have loyalty program sign-ups trended relative to your expectations? Have you guys seen any shifts in sign-up trajectories or consumer behavior as you've settled on the new earned model? And has it had any more or less of an impact on margin than you originally expected? Nicholas Konat: Mark, it's Nick. When we made the updates and improvements to the program in early '26, we did a lot of work studying the customer and their response. And the customer surveys and sentiment we had actually showed really well. We didn't see any decline, in fact, a slight uptick in support for the program as we were adjusting it to provide more tangible value through the point multipliers and other efforts as well as more personalization. So we feel pretty good about the customer sentiment with the program changes we made in early '26. And from a behavior standpoint, I think as Jack mentioned, our core customer, our core loyalty customer, we're seeing be really steady, good spend and increased spend and happy with what we're seeing there. And then much like we noted last quarter, new members in the program are joining the program and continuing to spend and spend more. So we feel good about that. But we have a lot of work to do in the first half to continue to invest to demonstrate and show how we can drive behavior in this environment and continue to test, learn and scale. We're making smart investments in accelerating that capability to help propel us in the back half and beyond. Mark Carden: That's great. And then just given some of the pressures on cost of living, including rising fuel prices, are you guys seeing much of a shift in purchasing behavior in categories like meat or seafood? And are you still seeing similar reductions in items per basket? Just any color there would be helpful. Curtis Valentine: Yes. In reverse order there, Mark, on the items per basket, not a material change, still just pressure like we talked about on the last call, that last item in the basket is always when there's a little bit of inflation or maybe fuel prices are up and the customer is thinking about just basket size and how much they can spend. We always see it in that last item in the basket, and that's been pretty consistent in the last couple of months since last we talked. Nicholas Konat: And I mean, Mark, on the mix or the categories, what I'm pleased with is our health attributes where we really lean in, as we talked about organic, grass-fed, protein and so on. We're seeing really good growth in those attributes. We kind of look at the business through that lens first, and we're seeing solid growth there. Where things a little bit more commoditized, as we mentioned, that's where you might see the item out of the basket, a little bit of pressure in the value channels, but we feel strong about where we lean in and where we want to win, which is that health customer. We feel good about the categories that are winning in that space. Jack Sinclair: And we take the responsibility for affordability really seriously. There's a real opportunity for us to help people live and eat better if we focus in on those areas where we can make things just a little bit better for our customers. Operator: Our next question will come from the line of Michael Montani from Evercore ISI. Michael Montani: I just wanted to ask on the top line side, if you could talk about the traffic and ticket that you experienced in the quarter? Should we think about food at home inflation kind of low 2s as like a rough proxy? And then like really, what's your outlook there? Because we were looking at like 150 to 200 bps step-up potentially through the course of the year due to oil and fertilizers kind of filtering through. So any color you have on that? As well as on the traffic side, could you just talk about the loyalty program, personalization, potentially some of the work in media and marketing you're doing? What gives you conviction that you can basically turn the traffic side to be positive again? Curtis Valentine: Mike, I'll start -- this is Curtis, on the kind of shape of the comp. And so yes, from an inflation perspective, similar to where we've been the last couple of times, we're typically on a like-for-like SKU basis at or maybe a touch higher than CPI based on our mix. We've leaned a little bit premium in the assortment and the things we brought in, and that adds a little bit. And we're mixing to organics and things like that. So from a mix perspective, we see a little bit higher kind of AUR and inflation. So those things are still the same as they were, and we're seeing a pretty steady basket, when you put all things together. So a positive basket, negative traffic kind of gets us to the Q1 comp. The sequential improvement should really come from the traffic side. We're not counting on a lot of additional inflation at this point. We'll see how we manage that and handle that if and when it comes. But for now, we're expecting the inflation piece to be fairly steady from what we've seen, and we're expecting a sequential improvement to come in the traffic as the compares ease year-over-year. Jack Sinclair: Yes. I'll let Nick talk a little bit about the marketing side of things. In terms of the cost and inflation and how it's playing out, fuel is a little bit uncertain. As Curt just said a minute ago, it's up and down. What exactly is going to happen with that, we'll have to wait and see. Fertilizer, we haven't really seen that come flowing through into our cost base yet. What that's -- and the good thing is when you sell a lot of organics, you don't need as much fertilizer. So there's a lot of opportunity for us to maybe double down on organics in the world where the fertilizer costs are flowing through into food prices. But I'll let Nick talk about the marketing side of things. Nicholas Konat: Yes. Mike, real quickly, I think a couple of thoughts on the marketing. One, I'm really happy with what's going on with new stores and how the marketing is working to bring new customers into those stores. It's a proof point one of the power of the brand, of our positioning in health and wellness and power of the marketing and the work the team is doing there. So that's been really strong. In addition, I think we continue to do a great job of launching new products and new items with a lot of our vendor partners and the marketing work there has been very solid. I think the good -- as I look at traffic in the back half, we've got a lot more data than we've ever had in how to drive customer behavior, what to learn from our customer. And our customer and marketing team is using that to help us think about how do we adjust our brand message and media to be more relevant to the customer right now, where they're at in the space. We've got some early tests and efforts in place that have shown an ability for us to move the customer to drive awareness and to move traffic. So I'm very happy with the early work the team is doing, and I think you'll see that impact us in the back half. Operator: Our next question will come from the line of Scott Marks from Jefferies. Scott Marks: First thing I wanted to ask about, maybe you already touched on this, but can you help us understand how comps, how performance is trending just across geographies, maybe across more recent vintage stores versus more mature stores, expansion versus existing markets? Just any color you can provide on that would be great. Curtis Valentine: Sure. Scott, it's Curtis. On the -- it's been pretty consistent from a geography perspective. As we've talked about before, we're not seeing materials. It's gone up and moderated here. It's all across all geographies. Maybe just a little bit of additional pressure in the Southwest than in the Southeast than the other category or geographies, but not material in that respect. On the vintages, I'll say it's -- we're pleased with the new stores, as we've highlighted in the script, and that's another good proof point there is -- there's still positive comps in the new vintages or the more recent 3 or 4 vintages. And so that's just another encouraging piece that even though there's an underlying lapping pressure, we're seeing some good results in those most recent vintages. And again, just gives us some confidence in the overall strategy and where we're headed and things bouncing back as the compares ease. I think that's really -- those are the kind of little bits that are a bit different as you break it down across either geography or store type. Scott Marks: Appreciate the thoughts there. And then maybe a second one for me. It sounds like you guys had another strong quarter for e-commerce. Wondering if you can share any updates on e-commerce, how you may be adapting your e-com strategy given some of the other changes you're making on affordability and everything else. So any comments you can share on that would be helpful. Nicholas Konat: Scott, it's Nick. As we mentioned, we saw double-digit sales growth in e-com, and we're now roughly about 16% penetrated. I think it starts with -- it speaks to the power of our assortment that people want the unique innovative items that we have, and it lends itself well as a secondary shop to e-commerce. And so it starts with, I think, a proof point of people are looking for the unique things that we have and make them part of their daily life. Two, I've been really happy with our -- the way our partners have worked with us, Instacart and DoorDash in particular, on helping us break into new markets, find new customers on their platforms and drive growth. And that's growth through targeted marketing opportunities, through targeted sponsored price investment and continue to grow the business and basket there. And the last thing I'd say -- the good news about e-comm for us is it's an omnichannel customer. And so when we grow that business and grow that customer base, most of those customers are shopping in store, and those are most valuable customers. And so it's really healthy for us to see that growth on the e-com side. Operator: And our next question will come from the line of Krisztina Katai from Equity Research Analyst. Krisztina Katai: So Jack or Nick, you talked about leaning into foraging and the launch of 100 new items so far this year. Just curious, what is the team targeting as a percentage of newness for the balance of the year? And just how that breaks down across opening price points versus more premium price points? And are you seeing competitors move faster on similar attribute-based products, just thinking around trending areas like protein forward offerings. Jack Sinclair: Well, I think everyone is seeing the trends, Krisztina. I think one of the advantages, and I think we talked about it in the script a little bit is that I think we're being seen as a place to launch these products going forward. We've got -- when you walk around the Expo West and there's the -- the whole place is buzzing around can we get into Sprouts or not. And we get -- I think we got 65,000 applications to -- SKUs to bring products to our business last year. We're only able to manage 7,500 of them into the space. But we don't have a specific target in terms of our percentage. What we've got to do is use these innovative and entrepreneurial new brands to continue to excite our customers. The innovation center that we have is working really well and continues to get better. And that's been one of the features that we brought into the stores over the last couple of few years, and it's getting better in terms of how we manage that. So I think we've got a great reputation with the vendor base. We don't have specific targets, and we've got to continue to reinvent ourselves. And that's kind of the role that we have in terms of this space. And I think a lot of people would view Sprouts as the right place to launch these products. Nicholas Konat: Yes. No, the only thing I would add to Jack's comments, Krisztina, on yours, this is Nick. We don't necessarily have targets, but I think we are going to expect to be able to launch as many new items this year as we have in the past. We've developed a really great capability and capacity between our foraging teams and our category management teams to take that massive influx of interest, work with partners and identify the best items to launch. So we are going to continue to do that as we be the -- hopefully serve the customers the most innovative and health forward retailer in the market. And then you asked about balance. The good news, I think that's a focus for us as part of affordability is how do we innovate across all categories and all price points, so everybody can experience the right healthy options for them and based on their preference. And because of the depth of innovation available to us, I think we've got a lot of great options that are good for our customer and also remain distinctive from what else is out in the market that buffers us from competition and price. Krisztina Katai: That's great color. And if I can just follow up, you're sharpening your marketing to highlight what makes Sprouts unique. Are you at all planning to change the percentage that you're allocating to marketing spend in 2026 or any of the key channels, just thinking digital, social that has worked really well for you? And just you're tying that in with the messaging around affordability. Just sort of how should we think about what has been achieved on that front versus what is still to do for the balance of the year? Nicholas Konat: Thanks, Krisztina. I appreciate you noticing. We're working hard at bringing what makes Sprouts to market and talk about the unique differentiated items and our store experience that sets us apart. So you'll see us continue to lean into that positioning. And I would tell you, I think you'll expect to see that even stronger in how we go to market and position ourselves against who we are, which is the best place to help you live and eat better. From an investment standpoint, no, we're not planning on making any incremental investments in marketing. I don't think we need to because we have a lot of opportunity to be more efficient in how we market. And I think we've got the tools in place as we build on the brand capabilities to do that. And to your point, certainly, we'll continue to look at where in the media funnel we invest and in which geographies that drive new customers, that drive the right customer into the store and that balance that awareness and traffic. So we'll continue to do that. And I think there's more opportunity in the back half of the year for us to get even smarter with our media. Operator: Our next question will come from the line of Robby Ohmes from Bank of America Securities. Robert Ohmes: The first one, just I think I might have missed it, but did you guys give the exact traffic and ticket comps for the quarter? Curtis Valentine: Robby, not specifically. But yes, traffic -- basket was positive, low single digits and traffic was negative and the offset there. Robert Ohmes: And then the Long Island store, any color you can give us on how that has come out of the box relative to expectations? Jack Sinclair: Well, I was lucky enough to be in there a couple of weeks ago. We've got a great team in there, and we're definitely going into new markets where we're establishing ourselves in a place where people don't know us. So the marketing team, as Nick alluded to earlier, on new stores have been doing a terrific job on it. It started well for us. I'm really pleased with the team. It will take a little bit of time. We're ahead of where we thought we would be. This thing could -- we've got a lot more stores coming. One of the things about stores on islands on their own, not just Long Island, but on islands on their own is how do you bring critical mass by having a few more stores. And over the course of the next 18 months, we've got a number of stores coming in Long Island, which will strengthen our marketing and strengthen our communication on our brand. But it's kind of -- it's been really exciting to go to a new market, and we've got more of them coming as we look through the next 18 months. It will be a similar challenge for us when we go to Chicago, similar challenge when we go to Boston. And we're learning a lot from what's happening in Centereach, which is a store in Long Island. Robert Ohmes: That's really helpful. And maybe my last question, just, Jack, the foraging team. We obviously, I don't expect you to give specifics, but are they seeing anything on the horizon that could reignite some momentum for Sprouts? Jack Sinclair: Well, I think the trends that are at play, and I'll let Nick comment on it as well, the trends that we're chasing after, just like everyone else is the protein trend is a big one, the fiber trends is a big thing. And there are some other things coming down the track is in terms of health and wellness, particularly in the supplements business and in the vitamins business, in terms of brain health and those kind of things. So there's a lot of trends happening. And our team -- we think we've invested in a really strong team over the last couple of years, and we'll continue to invest more so that we're ahead of the trends. And it will link a little bit. Certainly when celebrities launch products and make a big deal of it, that's something that can stimulate demand pretty quickly. So we're kind of working pretty closely with a number of kind of interesting people that come to see us. And so there's personalities and there's lots of trends within that. I don't know... Nicholas Konat: No, I think that's well said. I think, Robby, the only color I just would add is I think the part of this is how do we work with a lot of these new brands to help bring their brand to life and make them even stronger than they are on their own. And the other piece of it, as I say, we will also miss. We really push hard in finding brands that nobody else has seen, and there'll be times where they don't hit, but that's part of our DNA. And I think we've got -- because we're the best place to launch brands, our odds of getting those that really go big and viral are as best as anybody in the industry because of the way we launch brands and how early we are to do so. Operator: Our next question will come from the line of Kelly Bania from BMO Capital Markets. Kelly Bania: I wanted to go back and ask just another one on the price adjustments and the more focused promotions. Are you able to quantify the gross impact of what's the planned investment for 2026? And I'm just trying to understand if there's a shift of any dollars or how much is incremental. And then can you also help us understand the parameters for these tests? Meaning, is the goal to just get back to a specific level of traffic and then you would back off of these investments? Or is this more of something that we should think about evolving in years to come? Because without a specific price gap or level of pricing that you're targeting, where do you find completion with this initiative? Curtis Valentine: Kelly, it's Curtis. There's a lot in that. So I think -- no, I probably won't quantify too specifically other than to say kind of what we said earlier, which is we do -- we've been investing in the business and a lot of those things have shown up in gross margin favorability, and we still have tailwinds from those investments. And so we're thinking about it much more as a shift, so to speak, if you can use that term that you used, from those things that would have provided a little bit of favorability to now funding some of the affordability actions and helping out the customer. So that's definitely how we see it. As we think about the different things we're testing, again, it's a test. So I don't want to get too specific about what that impact may or may not be. But assuming that the majority of that rolls out, that's kind of how we're thinking about the back half of the year. And we want to see the response from the customer at item and category and all the different things we're trying, and we'll put some things into action in the second half. But we feel like we've got the funding to do that within the guidance based on some of the things that are coming in. And we talked earlier about things ramping up like participation in the loyalty program and some of the offsets that come from that data and from working with the vendors in that space to drive the business together. So we've got a few levers there to help support that effort, and that's kind of what's baked into the plan for the last part of the year. I think -- and then to your longer-term question, that's how we think about it in the longer term, too, right, continue to make the business better to continue to mature our processes and how we go to market and watch elasticities, follow our pricing strategy in order to deliver great value and affordability for the customer. So that's how we'll continue to think about it beyond 2026. Kelly Bania: Okay. And can I just also follow up on the SG&A growth, just the 5.6% there. Can you help us understand what is kind of happening at a same-store operating expense level? And if you kind of lap this next year, would you need to reinvest any more back into SG&A this year or next year, sorry? Curtis Valentine: Yes. I think the trends have been good. Like we've started to see some real progress in the cost work that we do that impacts all the stores. And so we talked a little bit earlier about bringing down that leverage point from the 4% we talked about historically. And then it just comes down to investment. And if we see great things to invest in the business, typically, there's an upfront there in resource or technology to build the capability, but we would only do it if we were going to see benefit on the back end. And so it's a little bit TBD as the year evolves for 2027 and what we might be thinking about from an investment perspective. But certainly, we feel like we can get SG&A kind of back to close to stable as we get to the latter part of the year and we start to get back into our algorithm. And then we'll start to think about next year and where we need to make investments to continue to drive the business for the long term. Jack Sinclair: And on a store-by-store basis, we're getting much more efficient in running each individual store, if that was the question you were asking. We made a lot of progress in being more efficient in operating the stores, and that's something that will flow through both in the new stores and the existing stores going forward. Operator: Our next question come from the line of Jacob Aiken-Phillips from Melius Research. Jacob Aiken-Phillips: I wanted to ask an inflation question just because there's growing concern that like increased fuel costs will flow through to petroleum and fertilizer markets are disrupted, some drought conditions. I know you're not seeing that yet, but can you talk us through like how the business would perform under different inflation scenarios, like low inflation, like normal and an elevated level? Curtis Valentine: Yes. Jacob, this is Curtis. I mean, again, every -- I think every version of that is a little bit different. I can point back to when the last round of significant inflation in '22, '23, where we saw our business continue to accelerate. And we had a lot of things going on that were moving the business as we reshaped our strategy. I think it's a lot of -- nobody quite knows exactly how that's going to play out, and we'll manage it when it comes, if and when it comes. And I'll talk to Nick a little bit about how we would manage it if it came through, but it's -- we've seen different versions of that over the years, and the business has been solid throughout. Jack Sinclair: I think the important thing in an inflationary environment is that we do what we do well. We've got to be serving our customers really well in terms of the health and wellness agenda. But I do think is relevant irrespective of inflation, deflation. People that want to eat healthy, want to eat healthy. And one of the dynamics that I think is a little bit of a moat for us is that we're not as prone to being affected by big inflation or no inflation. Whether that's going to happen or not, who knows. I think the fuel things and the fertilizer things are all a little bit uncertain how it's going to play out. But we'll certainly be very conscious of taking care of our customers and making sure we're giving people access to affordable health and wellness products within the assortment that Nick has been talking about in the call today. And it's something that we'll pay a lot of attention to. We take our responsibility of helping people live and eat better seriously, and that applies whether there's inflation or deflation. Jacob Aiken-Phillips: Great. And then my second one is you highlighted strong growth in attribute-driven categories and some pressure on the more commoditized ones. Can you walk us through how we should think about the mix implications of that for costs and margins over time? And then just as a follow-up, are vitamins and supplements attribute driven or more commoditized? Jack Sinclair: You've asked a lot of questions there and there's a lot of good ones as well. Let me just start off with vitamins and supplements is such an important category for us because we've got great people who can give you great advice. And I invite any of you to go and ask our people in the stores about how they can advise you on that. And it's less commoditized because of that. You maybe talk about the other stuff. Nicholas Konat: Yes. I mean I think overall, the core of what we do is stay differentiated and focused on core attributes. And that's what we'll always do and focus on. And if things do start to become more commoditized, that's when we then pivot and find different brands, different offerings to stay differentiated. From a margin profile standpoint -- the margin mix of our business is pretty consistent. There's not a massive gap between category or attribute that would have a real meaningful impact, Jacob, on our mix with those shifts. Again, small things here or there, but nothing consequential that you would see mix significantly flow through. Jack Sinclair: And we're unusual for a grocery store, if that's what we're described as, we're unusual in the sense that our margins are pretty consistent across the different categories. We don't have really low-margin, high-volume branded goods. So the mix is more consistent. And that makes one of the uniquenesses of our business is that margin mix profile. Operator: Our next question will come from the line of John Heinbockel from Guggenheim. John Heinbockel: Sort of an all-encompassing question here. But I think last quarter, we talked about emerging health enthusiasts as a cohort. How important are they, right, to the business, to the growth? How are they behaving, right? And then what are they reacting best to in terms of your desire to help them out affordability-wise? Nicholas Konat: John, it's Nick. I think let me start with -- we still feel really strongly about the overall market, right? We've talked about our $200 billion health enthusiast market. Whether you're new in the space or been there, I think that provides a lot of opportunity for growth for us overall. From an emerging standpoint, I think we've been pretty happy. In the past, we've seen good acquisition from younger or, call it, newer cohorts that you speak to. And we're seeing things like protein. One of the things we're seeing is non-alc is a big driver in that space. And we leaned into non-alc early about 3 years ago, and that continues to drive and grow our business, a lot of the supplement space. And so the good news is because of the emerging brands we have and how we work with them on social, I think we're well positioned to capture that customer. And between that customer and the existing health enthusiasts, I think the market is in a really good place for us. Jack Sinclair: And just building on what Nick said earlier on the marketing, how we can get more sharp at communicating with these people as they come into that space. There are more -- if the market today is 380, whatever we think, it's going to be bigger in the future. Our challenge is how we can really hone our message around that particular group of customers as they come into this space. Operator: And with that, this concludes the question-and-answer session. I would now like to turn it back over to Jack Sinclair, CEO, for closing remarks. Jack Sinclair: Thanks, everyone, for your attention and your interest in our company. We're excited about the future going forward and look forward to updating you over the next few quarters. Thanks so much, and take care. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Welcome to Impinj's First Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Andy Cobb, Vice President, Corporate Finance and Investor Relations. Please go ahead. Andy Cobb: Thank you, Nick. Good afternoon, and thank you all for joining us to discuss Impinj's first quarter 2026 results. On today's call, Chris Diorio, Impinj's Co-Founder and CEO, will provide a brief overview of our market opportunity and performance. Cary Baker, Impinj's CFO, will follow with a detailed review of our first quarter financial results and second quarter outlook. We will then open the call for questions. You can find management's prepared remarks plus trended financial data on the company's Investor Relations website. We will make statements in this call about financial performance and future expectations that are based on our outlook as of today. Any such statements are forward-looking under the Private Securities Litigation Reform Act of 1995, whereas we believe we have a reasonable basis for making these forward-looking statements, our actual results could differ materially because any such statements are subject to risks and uncertainties. We describe these risks and uncertainties in the annual and quarterly reports we file with the SEC. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, except as required by law. On today's call, all financial metrics, except for revenue or where we explicitly state otherwise, are non-GAAP. All balance sheet and cash flow metrics, except for free cash flow are GAAP. Please refer to our earnings release for a reconciliation of non-GAAP financial metrics to the most comparable GAAP metrics. Before turning to our results and outlook, note that we will participate in the 2026 Evercore TMT Global Conference on June 2 in San Francisco. We look forward to connecting with many of you this quarter. I will now turn the call over to Chris. Chris Diorio: Thank you, Andy, and thank you all for joining the call. Our first quarter results were solid with revenue and adjusted EBITDA exceeding the top end of our guide range. Endpoint IC bookings hit an all-time record, driven by the custom ASIC ramp at our second large North American supply chain and logistics end user, our market-leading share position, retailer rebuys and customers booking beyond our standard lead times amid lengthening competitor lead times. Looking further out, we're approaching second half 2026 prudently, hedging against multiple possible macro scenarios. Starting with endpoint ICs, the RAIN Alliance has now released the 2025 industry volumes and our market share grew 1,700 basis points over 2024. That share gain is a springboard for strong second quarter demand. We believe we can meet that demand in the multiple scenarios we are modeling. Looking forward, we are focused on using Gen2X and enterprise solutions to spur preference for our endpoint ICs and grow our share further. First quarter inlay partner inventory declined sequentially as expected. So we entered the second quarter with healthy channel inventory and clear air to execute our strategy. Turning to our opportunities. In supply chain and logistics, we shipped meaningful volumes of the custom ASIC in the first quarter and expect those volumes to more than double in the second with the end user on track to fully convert to that ASIC before year-end. That ASIC opens the door for us to migrate upstream to our customers' customers, delivering ICs and solutions software that improve item visibility and traceability at a double-digit number of accounts. In retail apparel, we expect endpoint IC demand to increase in the second quarter. Multiple new end users are speaking openly about RAIN adoption, including a large European brand with whom we are closely engaged. And we are proving the benefits of Gen2X in retail, for example, by using it to dramatically improve item readability at a large Asia-based lifestyle brand and unlock a significant share shift opportunity. In general merchandise, we're focused on cosmetics, personal care and health with the goal of unlocking significant incremental endpoint IC opportunities and again, demonstrating the benefits of Gen2X. Food volumes are growing modestly as expected with the bakery rollout on track to double the number of deployed stores this year. Also in food, we and our partners beat the self-checkout readability targets set by the European grocer to progress to a store pilot. Although still early, full store grocery self-checkout enabled by our endpoint ICs and software is a massive opportunity. Overall, we are making strong progress advancing supply chain and logistics, general merchandise and food to fill in behind retail apparel, which is now in mainstream adoption. On the development front, we're growing our software and solutions teams to help solve end-to-end enterprise systems problems. We upgraded the processor and memory in our flagship reader to better support machine learning at the edge, helping us address those enterprise systems problems. And because the solutions almost invariably need Gen2X, we drive preference for our endpoint ICs at the same time. We also continue advancing Gen2X, for example, with a forthcoming update to our reader ICs and readers that improve M800 tag read range by up to 25%. In closing, we have an enviable market position, endless opportunities in front of us, good product supply and a strong wind at our backs. As we continue driving our bold vision, I remain confident in our market position and energized by the opportunities ahead. But faced with today's unpredictable macro, we're approaching the second half prudently even as we pursue market share, solutions successes and growth. As always, before I turn the call over to Cary for our financial review and second quarter outlook, I'd like to again thank every member of the Impinj team for your tireless effort. I feel honored by my incredible good fortune to work with you. Cary? Cary Baker: Thank you, Chris, and good afternoon, everyone. First quarter revenue was $74.3 million, down 20% sequentially from $92.8 million in fourth quarter 2025 and flat year-over-year from $74.3 million in first quarter 2025. First quarter endpoint IC revenue was $63.2 million, down 16% sequentially from $75.2 million in fourth quarter 2025 and up 3% year-over-year from $61.2 million in first quarter 2025. Endpoint IC revenue exceeded our expectations, driven by turns orders. Looking forward, we expect second quarter endpoint IC product revenue to increase sequentially on the favorable side of normal seasonality. First quarter systems revenue was $11 million, down 37% sequentially from $17.7 million in fourth quarter 2025 and down 15% year-over-year from $13.1 million in first quarter 2025. Systems revenue fell short of our expectations due primarily to the timing of Lighthouse enterprise CapEx spend. Looking forward, we expect second quarter systems revenue to increase sequentially. First quarter gross margin was 52.4% compared with 54.5% in fourth quarter 2025, and 52.7% in first quarter 2025. The sequential decline was driven primarily by higher indirect costs, annual endpoint IC price declines and revenue mix. The year-over-year decline was driven primarily by higher indirect costs and revenue mix, partially offset by the continued M800 ramp. Looking forward, we expect second quarter product gross margin to increase sequentially. Total first quarter operating expense was $35.5 million compared with $34.2 million in fourth quarter 2025 and $32.6 million in first quarter 2025. Operating expense was below our expectations, driven primarily by good fiscal discipline and timing of spend. Research and development expense was $20.4 million. Sales and marketing expense was $7.3 million. General and administrative expense was $7.8 million. Looking to second quarter, we expect similar operating expense to first quarter. First quarter adjusted EBITDA was $3.4 million compared with $16.4 million in fourth quarter 2025 and $6.5 million in first quarter 2025. First quarter adjusted EBITDA margin was 4.5%. First quarter GAAP net loss was $25.3 million. First quarter non-GAAP net income was $4.4 million or $0.14 per share on a fully diluted basis. Turning to the balance sheet. We ended the first quarter with cash, cash equivalents and investments of $235.2 million compared with $279.1 million in fourth quarter 2025 and $232.5 million in first quarter 2025. Inventory totaled $86.3 million, up $1.3 million from the prior quarter. First quarter capital expenditures totaled $1.7 million. Free cash flow was $2.2 million. Before turning to our guidance, I want to highlight a few items specific to our results and outlook. First, in March, we opportunistically repurchased $40.2 million aggregate principal of our 1.125% convertible notes due May 2027 using cash on hand. This repurchase highlights our commitment to minimize dilution, in this case, by roughly 400,000 shares as we manage our convertible debt. Second, our indirect cost of goods sold increased in the first quarter, driven by a short-term endpoint IC production issue that reduced our back-end capacity utilization. That issue is fixed and behind us. Third, as Chris highlighted, our inlay partners exited first quarter with healthy endpoint IC channel inventory. In second quarter, we anticipate strong sequential endpoint IC product revenue growth, driven primarily by underlying demand and to a lesser extent, by no channel inventory burn down. Turning to our outlook. We expect second quarter revenue between $103 million and $106 million compared with revenue of $97.9 million in second quarter 2025, a year-over-year increase of 7% at the midpoint. We expect adjusted EBITDA between $27.8 million and $29.3 million. On the bottom line, we expect non-GAAP net income between $24.6 million and $26.1 million, reflecting non-GAAP fully diluted earnings per share between $0.77 and $0.82. In closing, I want to thank the Impinj team, our customers, our suppliers and you, our investors, for your ongoing support. I will now turn the call to the operator to open the question-and-answer session. Nick? Operator: [Operator Instructions] And the first question will come from Timothy Arcuri with UBS. Natalia Winkler: This is Natalia Winkler for Timothy here. So first one was on the record bookings. Congratulations on that. Just wanted to understand if that kind of offers you guys incrementally more visibility into September quarter. And I think specifically, you're calling out having a little bit more of a conservative stance in the second half. So how should we kind of think about the visibility that you guys have? Cary Baker: Yes. Natalia, this is Cary. Thanks for the question. I'll take it first. There are a variety of factors that drove our strong Q1 bookings. First, our ecosystem is aggressively ramping, the custom ASIC to support our North American supply chain and logistics customer. And second, we're beginning to see retail rebuys after a prolonged period of destocking. Within those 2 trends, we did see inlay partner request times move from the lower end of our standard to the higher end of our standard lead times. And then finally, to a lesser extent, we saw some customers book beyond our standard lead times, likely in response to lengthening lead times from our competitor. At this point, we believe that the orders match the demand. And in fact, our 2Q bookings are off to a good start, and they're right within our standard lead times. Natalia Winkler: And I guess a follow-up, Cary, probably to you as well on the gross margin. It sounds like in March quarter, there were a few factors affecting -- there's the onetime back-end capacity issue and mix. And then I think usually, you go through the annual kind of pricing negotiations in this quarter as well. Can you kind of help us maybe decipher how these factors are -- how they have transpired in the first quarter and how we should think about them in the second quarter? Cary Baker: Yes. I'll start first with the annual price negotiations. Those were largely complete entering the first quarter. There were a little bit -- a couple of laggards, but mostly complete entering the quarter. We didn't exactly size it other than to say it was within our normal expectations. Maybe a little bit on the aggressive side as we were driving pricing to support the food ramp that we expect to begin this year. On the capacity utilization issue, we had an issue with one of our production tools that drove that capacity underutilization. As I mentioned, that issue is now behind us, and we expect to have full production in Q2. If I were to size it, I would say that the underutilization charge was roughly 100 basis point impact to Q1. And we expect in the second quarter on a product basis, our gross margin to increase sequentially. Of course, in second quarter, recall, we had the $17 million license revenue. So that will drive an outsized gross margin increase. But if I strip that out and look at just the product, we expect a sequential increase in product gross margin. Operator: The next question will come from James Ricchiuti with Needham & Company. James Ricchiuti: Cary, just a follow-up to that, is the improvement that you're anticipating in Q2 product gross margin, is that mainly that 100 basis points? Or are there some other factors that will drive additional improvement to product gross margins in Q2? Cary Baker: Yes. The 100 basis points is obviously sizable. So yes, that's driving a lot of it. But in addition, the M800 continues to ramp. That drives gross margin accretion. We're getting our lots of revenue scale back in Q2, which will drive leverage against our fixed operating costs. And we also expect higher systems revenue in the second quarter. All of those factors will contribute to the sequential increase in product gross margin. James Ricchiuti: And the 3 factors that you cited beyond the production issue, would you say that the total combined would be a bigger tailwind than just recapturing that 100 basis points? Cary Baker: Probably not, Jim. I think the 100 basis points will be the largest even when comparing the rest as a collective. James Ricchiuti: Okay. And just a quick follow-up just on OpEx. I'm wondering if -- how we might be thinking about OpEx in the second half, just given some of the puts and takes around demand and also some of the conservatism that you talked about just in light of the macro. Cary Baker: Yes. We expect our OpEx to follow normal seasonal patterns. So we'll see similar OpEx in the second quarter and then the back half steps up. That is a combination of us continuing to invest in our business, primarily in the engineering line and offset by the seasonal pressure -- upward pressure on OpEx that we see in the first half of the year. Operator: The next question will come from Troy Jensen with Cantor Fitzgerald. Troy Jensen: Congrats on just another great quarter and great results here. So Chris, I guess for you, I thought coming into the quarter, retail might have been at risk a little bit given the high gas prices, but you seem more bullish than ever on retail. So can you just talk a little bit? Is this -- obviously, it seems like it's expanding SKUs and new customers, but any more detail would be great. Chris Diorio: Yes. So Troy, we do see some retail strength. We see retail rebuys, especially helped by the tariff clarity and essentially the tariff whipsaws are gone and there's more certainty in the markets associated with tariffs. We see new program growth at many accounts, Abercrombie & Fitch, Aritzia, Fabletics, Old Navy, just many others. And so when you combine those factors together, we feel good about the retail situation in the market. And on top of that retail growth, we feel good about what's falling in behind, which is supply chain and logistics, retail general merchandise and food. So I think those factors are contributing to our -- some of the strength we saw in the first quarter and the very strong bookings we saw in the first quarter leading into the second quarter. Obviously, macro uncertainties are staring us in the face behind that. And so we're being prudent and cautious as we look forward. But we feel good about 2026, absent that macro uncertainty and there's a big if associated with it. But if consumer demand holds up through that macro, we feel good about 2026 overall. Troy Jensen: Yes. Clearly. All right. Maybe one quick follow-up too. Can we just dive into a little bit on the NXP royalty, just the longevity of that. Do you guys feel like their new chip has no longer violates your guys' IP? And if so, how long would it take them to try to like design out? And if designing out, is that an opportunity for you guys to get more share here? But any insight would be great. Chris Diorio: So yes, Troy, there's a limited amount of information that we have right now because NXP's new IC is, of course, new. I'll just say that we don't know yet if they have designed out or not designed out our intellectual property. We do know, of course, that the older ICs, which are still in market, use our intellectual property because there were court rulings and juries decided that they did use our intellectual property. So NXP needs to either sunset those existing ICs or redesign them as well. We don't know the time frame for them doing so. We obviously got the payment this year. I can't speak to next year, but we're guardedly optimistic that we'll get another payment next year, and then we'll see what happens after that. Obviously, time will tell. And as we learn more and are able to report things out, we will. Cary Baker: And Troy, just to be clear, the payment that we received this year was $17 million, up from $16 million last year. Operator: The next question will come from Blayne Curtis with Jefferies. Ezra Weener: Ezra Weener on for Blayne. Just wanted to follow up on the European grocery opportunity. I know the current food opportunity, bakery moving into protein. This seems like it would be a little bit more all-encompassing. Can you talk about kind of the sizing of that opportunity and the time line? And then I have a follow-up after. Chris Diorio: So yes, Ezra. So it is a very large opportunity. It is really for us, the first meaningful opportunity that is a full store, every item tagging and consumer self-checkout opportunity. To date, the testing has been all lab testing. European grocers set certain readability targets for them to make an internal decision to transition to a live store pilot. And not only did we and our partners meet those readability targets, but we exceeded them, and we're waiting for the decision for them to go forward with a store pilot. So we're excited about that opportunity. We continue to be -- we have a very close relationship with that grocer and looking forward to being able to continue to report positive results there. But to answer your question, very large, all items. They do control a lot of their own supply. So they're one of the grocers that would be an -- that are an ideal candidate for tagging all items because they can get the tags on because they have significant control over their own supply chain. Ezra Weener: Got it. And then a follow-up question. You talked about with the ASIC opportunity moving upstream at a double-digit number of accounts. Can you talk a little bit about that process and what that looks like? Chris Diorio: Yes. So our second large North American supply chain and logistics end user has done an amazing -- just an amazing job driving operational efficiencies across their organization using RAIN RFID. The custom IC is a further step down that path for them and also for us. Both, they and we see opportunities for them to use their prowess and their learnings, basically what they've done, what they've learned to help their customers in the same way. It's not just about package shipping. It's about driving operational efficiencies at their customers and leveraging their learnings to improve their customers' operations. So it's a big opportunity for them. It's also a big opportunity for us. And I guess the way I think you really should think about it is that end user that we've been working with for these many years is actually a partner for us. It is a replication partner that is now starting to pull us into other accounts. And they're a fantastic partner for us. Operator: The next question will come from Christopher Rolland with Susquehanna. Christopher Rolland: My question is also on the competitive landscape and your competitors' new offering. They kind of described their situation in RFID as having channel issues in 2025 with their partners, but coming in 2026, clean in terms of that perspective and then great prospects for their new product with greater capabilities. I guess, would you describe their situation as similar to your own? And then if you could talk about the competitive prospects for their new product and where you think market share might move between you and them moving forward on these new capabilities? Chris Diorio: Okay. Chris, that's quite a question. I think I could talk for maybe an hour on that one, but I'll do my best here. First, starting with our competitor's IC. I'm going to start in a slightly different spot. You probably noticed as have others that the RAIN Alliance endpoint IC numbers in 2025 were down. Part of that reason, of course, was due to retailer destocking and the impact of tariffs and other whipsaws that happened in the market. But we believe another part of it was due to excess channel inventory of our competitor ICs. So competitor ICs in the channel that needed to get burned down. So we believe that to be the case. I think your comments that there was some -- you didn't use the word burn down, but that there was some improvement in our overall channel position would tend to buoy our belief that that's what happened and was part of the reason for the decline. As we look forward, we had record first quarter endpoint IC bookings. Some of that strength undoubtedly spilled over to our competitor as well. The market is strong. We're doing well. We had strong bookings. They probably did too. As we look forward, they've got a new IC. It's early in the market. We haven't seen it out there much at all. Our competition for it is our existing M800, which is performing very well in the market. We also continue to improve that M800 with time and Gen2X. And Gen2X is kind of unique in that it doesn't just improve the endpoint IC, it improves the reader as well. On the last earnings call, I talked about improvements to reader sensitivity that extended a reader's hearing range by more than 40%. On this call, I talked about changes that improve a tag's ability to be powered and extend its range by up to 25%. And we've got further improvements in Gen2X in the wings. I truly -- and Gen2X is really optimized for enterprise solutions. So I truly believe that our product portfolio, our solutions emphasis, what we're doing in Enterprise Solutions and Gen2X will allow us to solve enterprise problems in a way that mix and match components just can't. So look for us to continue to drive into the market, focus on enterprise solutions and drive successes for us as a company. Christopher Rolland: Fantastic. And maybe coupled with that success, where are you planning to invest or reinvest? Do you just see many more inorganic or organic opportunities? Or do you think there could be some inorganic opportunities here to -- whether they're bolt-ons or adjacencies, something else to do in this market? Chris Diorio: Yes. So I'll take that one also. So invest, we continue investing in our existing product lines and expect us to continue doing so. We've got a lot of improvements and changes and overall positive things we can make. Equally importantly, perhaps more important is the effort we're putting into enterprise solutions, making our products and the enterprise benefit from those products be seamless for the enterprise and driving partner replication of those solutions so we can expand the pace or both expand adoption and increase the pace of adoption. So in response to the last question, I talked about our second large North American supply chain and logistics end user as a partner. And we truly see them as a partner because with their prowess and know-how and our technology underpinning, I believe we can drive solutions out into the market broadly. In terms of other opportunities for us, inorganic opportunities, obviously, we keep our eyes open. And if an opportunity arises, we'll be looking. Operator: The next question will come from Guy Hardwick with Barclays. Guy Drummond Hardwick: Just a quick fairly easy one for you, Chris. I mean you said you feel good about 2026. If I ask you to order, rank in order the factors which make you feel good about '26. What would you start with? And what are the other ones? Chris Diorio: Well, I'm going to have to think about that one for a second, Guy. So I'm excited about a lot of things. Number one, I'd start with our opportunities around enterprise solutions. Us bringing ML to bear at the edge on the reader to confine read zones, to identify items that are transitioning, whether it's to a dock door, store exit, front store, back store, any of these transitions. ML is providing us some very significant benefits, and I believe will transform the industry and our ability to drive those solutions in the market and provide enterprise benefits, so that would be number one. Number two, after that would be Gen2X and what we're doing in Gen2X to enable those ML solutions, again, to spur enterprise adoption. We're going to see those -- that adoption happening in the areas that I mentioned already, supply chain and logistics. And I'll put that one first because that's where -- we believe we can first and best apply our ML techniques in Gen2X. And obviously, there's a lot of transitions and readability needs to be incredibly high for those use cases. You don't want to miss any package. So supply chain and logistics and us falling in behind our key end user there and helping them and us and their customers in the market. So I probably put that one number one. And then, of course, we have general merchandise and food, which are the other 2 that I mentioned. We are waiting on some of the key end users to choose what categories they'll be going forward with in the latter part of 2026 across general merchandise. We mentioned some categories, of course, health, cosmetics, beauty, and then there's obviously food there, food ramp and proteins and bakery. So all of those are out there. We're being a little bit prudent in terms of us picking and choosing simply because we're going to wait to see what the customer announces. But we do expect a growth in general merchandise and food this year, and we'll be pushing on both of them. So that's how I order them. I order them in basically the order in which I spoke to them rather than calling 1, 2 and 3, but that's how I'd see things. Secular growth in retail, of course, supply chain and logistics, enterprise solutions, huge opportunity and then food and general merchandise coming up behind. Guy Drummond Hardwick: And just as a follow-up, just after 5 consecutive months of double-digit declines in U.S. apparel imports, just wondering how you feel about the status of apparel inventories amongst your largest customers here in the U.S.? Chris Diorio: We see apparel inventories picking up, both because they're incredibly lean right now. And you can listen to some of the retailers are actively talking about growing some inventories. So we see inventories picking up. And it's also the tariff side. Tariff certainty has contributed to increased orders. Operator: The next question will come from Scott Searle with ROTH Capital. Scott Searle: Great job on the quarter and the outlook. Chris, you've referenced a couple of times concern from a macro standpoint. I wonder if you could flesh that out a little bit. Are you seeing any of that in terms of order patterns from your customer base? And then as we look into the second half of this year, and you kind of answered this indirectly in a couple of earlier questions. But should we be expecting normal seasonality, all things equal? And what are you baking in, in terms of your expectations for a large general merchandise customer moving into the next phase of development and food? Given yesterday's comments from Avery Dennison, it sounds like they're expecting those to move pretty aggressively in the second half. I'm wondering if you could kind of gauge the range of outcomes of what you guys are building into your baseline expectations. Chris Diorio: Okay. I'm going to try and take those questions. There's a lot of questions in there, and I'm going to try and take them, but I'm going to tag team with Cary, and you'll catch me on the parts that I miss. So to start with, no, we are not seeing anything currently from the macro perspective. However, we look at the clouds on the horizon, and we want to be prudent. Our hope and expectation is that consumer demand will hold. And if it does, as I said, we expect 2026 to be a good year. But I can't predict the future and the things that are going on right now are way out of our control. And so that's where our prudence comes in. So we're just being careful, and we're modeling a bunch of different scenarios. But as of right now, do we see anything, any pullbacks or any impact right now? Nothing of consequence. Second, in the categories, let me speak to food a little bit because, yes, Avery Dennison did make those comments the other day and -- or yesterday. And we obviously know of those -- or know of that account and specifically the accounts that they're talking about and are in there and trying to drive the use case in those accounts. Our preference here is to wait for the enterprise end user to make a statement in terms of what they're going to do. And that's just a preference, just as the way they are. And I'm not saying anything negative there, just we're going to wait and see until they make an announcement and then we'll speak a bit more about it. So don't view our reticence to speak a lot as anything negative on the opportunity there. It is a real opportunity, and we're excited about it. We only guide one quarter at a time. Customer hasn't made an announcement yet. So when they make an announcement, we'll speak more about it. And that also covers the general merchandise categories. I alluded to some of the general merchandise categories, as I spoke just a minute ago about. We see significant opportunities in those categories, health, beauty, cosmetics, personal care, and we're putting effort into those categories to make them go. When the customer makes an announcement, we'll be as excited as you are. Or maybe the other -- we'll be more excited than you are. I'll put it that way. So what did I miss? Cary, what did I miss? Cary Baker: You did great. Scott Searle: No, that was perfect, Chris. And I'll hopefully make this the follow-up quick. But in terms of the European food opportunity, given the magnitude of the items there, you have to push down across the entire supply chain and vendor supply chain. Is that something that requires DPP? And maybe just some quick updated thoughts on that and timing? Chris Diorio: The first answer -- the answer to the first question is it is not -- it doesn't really require DPP. DPP is rolling out. The category that impacts us in terms of the DPP rollout is textiles, and this is a grocery opportunity. The other stuff is batteries and tires and stuff, which is kind of not really relevant. The difference between this grocer and many others is that they control the significant majority of their own supply chain. So if they want to get tagging, they can do it themselves. Of course, they sell some categories as well, but they're in a very good position in order to drive the tagging when they say go. So that's why we see a significant opportunity there. In terms of the DPP overall, the delegated act for textiles will come into force in 2027. There'll be a grace period currently estimated to be about 18 months. We'll have to wait and see how that goes. To my best estimate, I'd say DPP will be meaningful near the end of this decade. We are participating in many of those DPP efforts. RAIN RFID is now approved as a data carrier for DPP. We are doing some work on the endpoint IC side on the beta side on our ICs to support DPP. And so expect us to be a key part of it, but at a measured pace because the actual implementation is still several years away. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Chris Diorio, Co-Founder and CEO, for any closing remarks. Chris Diorio: Thank you, Nick, and I'd like to thank you all for joining the call today. Thank you very much for your ongoing support. Bye-bye. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to Smith Douglas Homes First Quarter 2026 Earnings Call and Webcast. [Operator Instructions] I will now hand the conference over to Joe Thomas, SVP of Accounting and Finance. Joe, please go ahead. Joe Thomas: Good morning, and welcome to the earnings conference call for Smith Douglas Homes. We issued a press release this morning outlining our results for the first quarter of 2026, which we will discuss on today's call and which can be found on our website at investors.smithdouglas.com or by selecting the Investor Relations link at the bottom of our home page. Please note, this call will be simultaneously webcast on the Investor Relations section of our website. Before the call begins, I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating goals and performance are forward-looking statements. Actual results could differ materially from such statements due to known and unknown risks, uncertainties and other important factors as detailed in the company's SEC filings. Except as required by law, the company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be found in our press release located on our website and our SEC filings. Hosting the call this morning are Greg Bennett, the company's CEO and Vice Chairman; and Russ Devendorf, our Executive Vice President and CFO. I'd now like to turn the call over to Greg. Greg Bennett: Good morning, and thank you for joining us today to review our results for first quarter of 2026 and provide an update on our operations. Smith Douglas Homes generated $4.3 million in pretax income for the quarter, net income of $0.06 per share. We delivered 624 homes, which came in at the high end of our guidance range, while home closing gross margin exceeded expectations at 19.6% on a GAAP basis. For the quarter, we generated 981 net new orders, up 28% from a year ago and a new quarterly record for the company. While order activity remained choppy throughout the quarter, we experienced a sequential improvement in our sales pace each month of the quarter, culminating in a sales pace of 4 homes per community in the month of March. Financing incentives continue to be a key selling tool as buyers remain motivated to own a home, provided they can secure a monthly mortgage payment that fits their budget. We are encouraged by the price elasticity we experienced during the quarter as incremental adjustments in pricing led to an uptick in demand. We view this as an indicator that underlying demand remains intact across our markets despite broader macroeconomic uncertainty. From an operational standpoint, we remain focused on pace over price philosophy, which means maintaining a consistent cadence of starts, driving efficient inventory turns and driving towards a more presale oriented backlog. Our average build time was 57 days during the quarter, consistent with prior period, and we continue to view our ability to deliver homes quickly and reliably with an offering of home choice and personalization as a key competitive advantage. Our land-light strategy also remains central to how we operate. By relying on third-party lot developers, we're able to allocate capital efficiently and maintain flexibility through varying market conditions. We believe this approach positions us well to manage risk while continuing to scale the business. We also made progress on our growth initiatives during the quarter. Community count expanded to 108 active communities across our markets, up 24% from a year ago, and we continue to ramp operations in our new markets such as Dallas, Chattanooga, Greenville and Alabama Gulf Coast. Our experience in Houston continues to demonstrate that our operating model translates well beyond our legacy footprint, and we remain focused on executing a disciplined and opportunistic expansion strategy over time. As we move through the spring selling season, we are encouraged by sales orders generated during the quarter, which helps rebuild backlog and provide momentum heading into the second quarter. We have continued to see encouraging traffic and order activity early in the second quarter, although demand remains variable week-to-week. We will continue to evaluate pricing and incentives at the community level and adjust as needed to maintain the pace required to support our operating model. While macro conditions remain dynamic, employment trends have been relatively resilient, and we continue to see motivated and engaged buyers in our markets. We believe our focus on attainable pricing, personalization and value put us in a good position to compete for these buyers and drive market share gains over time. Finally, I'd like to thank all of our team members for the hard work during this quarter. We challenged everyone to focus on getting off to a strong start this year, and our results this quarter showed they were up to the challenge. With that, I'd like to turn the call over to Russ, who will provide more color on our financial results this quarter and give an update on our outlook. Russ Devendorf: Thanks, Greg, and good morning. I'll highlight our results for the first quarter and then conclude my remarks with an update on what we are seeing so far this year and our outlook for the second quarter. We finished the first quarter with $206.4 million in revenue on 624 closings at the high end of our guidance range with an average sales price of $331,000. Our home closings gross margin was 19.6% on a GAAP basis and adjusted home closing gross margin was 20.3%, which adds back impairments, interest and cost of sales and purchase accounting adjustments. During the quarter, gross margin benefited by 170 basis points from the reduction of land development accruals on the closeout of several communities. Our margins continue to reflect the use of incentives and targeted pricing adjustments to support affordability and maintain sales pace. During the quarter, closing costs, price discounts and the cost of forward commitments totaled 730 basis points, which compared to 430 basis points in the year ago period and 680 basis points sequentially from the fourth quarter of 2025. Selling, general and administrative expenses for the quarter were $35.9 million or approximately 17.4% of revenue, up $2.9 million compared to the same period last year, reflecting continued investment on our growth markets as well as the impact of lower average sales price. Pretax income for the quarter was $4.3 million, resulting in net income of $0.06 per share. Given the nature of our Up-C organizational structure, our reported net income reflects the allocation of earnings between Smith Douglas Homes Corp. and the noncontrolling interest of Smith Douglas Holdings LLC. Because a significant portion of our earnings is attributable to LLC members and not taxed at the corporate level, the income tax impact reflected in our financial statements can differ from more traditional C corporations. For that reason, we also present adjusted net income, which assumes a blended federal and state effective tax rate of 26.6% as if we operated as a fully public C corporation, which we believe provides a more meaningful comparison to peers. For the quarter, adjusted net income was $3.2 million compared to $14.7 million in the same period last year. Turning to orders. We generated 981 net new home orders during the quarter, an increase of 28% versus the year ago period. We ended the quarter with 869 homes in backlog with an average sales price of $332,000. In addition to backlog, we also had 42 home reservations at the end of the quarter. These reservations allow our buyers to take advantage of buying a built-to-order home while also benefiting from a guaranteed mortgage rate when they close. We expect most of these reservations to convert to new home orders in the second quarter. Turning to the balance sheet. We remain in a strong financial position. We ended the quarter with $28 million of cash and $68.5 million of total debt with approximately $195 million available under our revolving credit facility. Our debt-to-book capitalization was 13.6% and net debt to net book capitalization was 8.5%, reflecting our continued conservative approach to leverage. Our land-light strategy remains a core component of our operating model with the majority of our lots controlled through option agreements, allowing us to maintain flexibility and deploy capital efficiently. As Greg previously mentioned and I explained on our fourth quarter call, I want to reiterate that our pace over price philosophy continues to guide how we manage the business. In the current environment, our focus remains on maintaining absorption and inventory turns even if that requires some pressure on margins in the short term. We believe maintaining sales pace allows us to preserve market share, generate cash flow and continue investing in our community pipeline, which ultimately drives scale and stronger returns over the full housing cycle. From a broader macro perspective, the housing market continues to operate in a challenging environment, driven primarily by affordability pressures and elevated mortgage rates. Recent economic data has been mixed and geopolitical developments continue to contribute to uncertainty. We are also monitoring labor market trends closely as employment remains a key driver of housing demand. Our capital allocation priorities remain unchanged. We will continue to prioritize investing in our land pipeline and community growth while maintaining a conservative balance sheet, and we will also remain opportunistic with share repurchases. During the first quarter, we began executing on our share repurchase authorization and continue to repurchase shares into the second quarter. Including repurchases completed in April, we have repurchased approximately $10 million of stock at an average price of $13.28 per share. We believe these repurchases represent an attractive and disciplined use of capital without limiting the financial flexibility to support our long-term growth strategy. For the second quarter, we currently expect closings between 725 and 800 homes, average sales price between $325,000 and $330,000 and gross margin between 17% and 17.5%. Given the continued variability in demand conditions, we are not providing full year guidance at this time. We believe the primary risk to our outlook remain tied to macroeconomic conditions, including mortgage rates, consumer confidence and employment trends. That said, we believe our affordable product offering, land-light strategy and disciplined operating model position us well to continue gaining market share over time. With that, I'll turn the call over to the operator for instructions on Q&A. Operator: [Operator Instructions] Your first question comes from the line of Michael Rehaut with JPMorgan. Nisarg Kalra: It's Nick Kalra on for Michael. I wanted to start by asking on the gross margin piece, you called out some moving pieces, but would really appreciate any extra color that you have either on the incentive environment and pricing considering like ASPs for the first quarter toward the lower end of your guide as well as on the cost side would be really helpful. Any color you can provide on construction costs, labor, et cetera. Russ Devendorf: Guidance on a GAAP basis -- came in at the high end of guidance on a GAAP basis and we had 170 basis points, as I mentioned, that -- and it's the way land development works. So when we close out communities, we typically have a reserve in land development for anything that over the next 3 to 6 months may come in from a cost perspective. We had closed out some communities in the fourth quarter towards the end of last year. And so those accruals that we had got reversed in the quarter. So that contributed to 170 basis point positive impact to margin. So if you back that out, we would have been right around, I think, 18.1% was -- which I think still was right in line with guidance or in the high end of our guidance range. And then from just some additional costs, as we mentioned, there's 730 basis points that were impacted by, like I said, impairment -- not impairments, excuse me, closing costs, the incentives for forward commitments, so the cost there and price discounts. And just to remind everybody, the price discounts and the forward incentives, that's a reduction to revenue. So ASP, that kind of drives ASP down a little bit and then closing costs run through our cost of goods. So that was up sequentially, as I mentioned, and up year-over-year. And then just from a cost perspective, we're actually getting some benefit on the direct cost side. So that's coming in a little bit better year-over-year. But the big driver still for us in kind of margin degradation is the lot cost. So lot costs were as a percentage of revenue, it's up about 300 basis points versus last year. So that's just the impact of the higher basis for land deals that we entered into in the last couple of years. Nisarg Kalra: Got it. Helpful. And then on anything you could provide? I think you mentioned in your prepared remarks that demand is still looking a little choppy week-to-week. Any color you can provide on that, either on a sequential basis, just a couple of weeks in, but relative to March? Or anything you could provide on April to date, that would be helpful from a demand perspective. Greg Bennett: Yes. Thanks for the question. We're seeing seasonal traffic. We had good strong traffic through March. April has been a slight decline, but still seasonally good as we've gone through all the spring break and all the disruptions there, it's held pretty steady, maybe down of 6% to 8% over what we were seeing earlier. Operator: Your next question comes from the line of Mike Dahl with RBC Capital. Stephen Mea: You've actually got Stephen Mea on for Mike Dahl today. I was hoping we could talk a little bit on the SG&A side of things. I totally understand you all are in a kind of growth phase and there's life cycle charges in there as you're opening up your new divisions and kind of getting all heads in place in there. I was just kind of wondering if you could give us a little more of an overview on where you are in that -- are in those life cycles? Is that good to keep ramping? Or is that something that might start to moderate a little bit in the coming quarters, just kind of a qualitative overview there. Russ Devendorf: Sure. Yes, I think as a percentage of revenue, it should definitely start to moderate because when you look at the gross dollars, we were only up $2 million, $3 million in that range. So it's more a reflection of our ASP is coming down. And again, part of that is increased incentives, like I mentioned, forwards and price discounts are pushing that ASP down, and so it's pushing that top line revenue. So some of that percentage increase is because of the top line revenue. But it is -- the gross dollars, the increase is actually not that bad in my -- from our perspective because we did open, as you recall, so Dallas was a new division last year. We divisionalized Chattanooga. We're opening up the Gulf Coast, which we hope to have some sales here in the next few months. And so we've got a lot of new fresh G&A that's hitting the books without any volume. And so that, again, just reflects our continued growth and scale. And so when you start to see some of that revenue come through, I think it will moderate, right? And again, even if you go back a couple of years, Greenville is a fairly new division. We centralized -- we divisionalized Central Georgia. And so we have expanded the footprint, again, in the drive for additional scale. So it's just -- it's kind of a timing thing. Stephen Mea: No, totally makes sense. I appreciate the response. And secondly, understanding that you're not providing full year guidance, but if there's anything you all could share with us on areas where you may have a little more visibility like your thoughts on your perhaps pace or cadence of community counts and how you're looking at kind of hopping on the previous question, incentives kind of within the guide and just kind of more broadly going forward would be helpful. Russ Devendorf: Sure. Yes, we don't like to give full year now. I mean maybe as we wrap up the second quarter and we're kind of halfway through the year, we will give some more clarity in this. Not like we don't have our internal targets. It's just given the environment, we just don't think it's prudent to provide any full year guidance. I mean, again, especially when it comes to margin or income, I mean, that's -- it's such a wildcard. We're going to continue to push pace. We feel pretty good, especially coming off of March and the quarter. I mean we had a really good beat, exceeded our internal expectations on sales. That's a reflection of us doing some additional price discovery in our communities, really driving our sales folks, credit to them in the field for really pushing on pace. And so it turned out to be a good quarter in sales, which obviously, the increase in backlog, it's going to set us up for -- hopefully, it starts to set us up for a good back half of the year in terms of closings. I think I mentioned on the last call, we were expecting anywhere from 10% to 20% in community count growth for the year. And so you can kind of translate that into what you might expect or as you run your model, what you might expect for closings. But clearly, we're focused on growing closings year-over-year. So we've got some pretty good internal targets, but you can kind of back into the numbers based on what I just told you. Operator: Your next question comes from the line of Trevor Allinson with Wolfe Research. Trevor Allinson: First one is on your expectation for vertical costs going forward. Obviously, oil prices up, quite a bit of fuel prices up, some building products materials have seen price increase announcements. So what are you expecting for vertical costs going forward? And then in terms of some of these price increase announcements from the manufacturers, are you currently taking on any of those price increases? Or have you been able to successfully push back against those? Greg Bennett: Yes. Thanks for the question. We've been pretty successful in pushing a lot of those increases off. We're -- our costs are down year-over-year. We know that if this fuel situation stays higher for longer, we're going to get hit with fuel surcharges and some of those things. But we show up diligent every day to work on our cost and our efficiency. So we'll continue to do that. And the market is not allowing us price, and that message is going through to our trade and our suppliers to say, look, we don't have ability to take price, and so we can't pass that through. So we're holding a pretty tough line on that. Trevor Allinson: Okay. Makes sense. I appreciate that color. And then on your lot portfolio, I mean, clearly, the majority of your lots are held off balance sheet. Can you talk about what portion of those lots are held by land banks and then shed any light on the structure of your land bank agreements perhaps in terms of deposit rates, option maintenance fees as well as your ability to potentially walk away from deals that no longer pencil? Russ Devendorf: Sure. So of the total portfolio, we have about 30% of our lots under option are with land bankers. Then there's about 40% of our lots under option are with developers. And so they're 70%. And then the balance, the other 30% are still deals that are with the underlying land seller. So where we have a contract that we may be in various stages of due diligence, but we control it with varying deposits. And usually, those are pretty small. But just from a land bank perspective and a structure perspective, so we are pretty much on average, it's about a 10% deposit that we have with the land bankers. And then there's typically like a walkaway fee that if you bust out of the option, then you pay another 10% walkaway fee, and that -- we disclosed that in our financials. But we don't -- on all of our new land bank deals, we do not cross-collateralize. We have some finished lot bank where we'll stick some lots when we have some bulky takedowns on active communities that we will put into a finished lot bank, and we may, within a division, cross-collateralize. But honestly, it's -- that's -- we don't view that as any real issue. So it's pretty simple the way we think about it. Operator: Your next question comes from the line of Ryan Gilbert with BTIG. Ryan Gilbert: On the 2Q '26 margin guidance, can you talk about how much of the step down is from higher incentives in the quarter versus higher lot costs or if there's anything else that we should call out? Russ Devendorf: It's -- we're assuming the incentives are probably about flat sequentially, maybe up or down 10, 20 basis points. We're still seeing the same -- and it's been pretty consistent. We're seeing the same percentage of forwards, the use of forwards. So that's probably pretty consistent. But then it's really -- I think there's a little step down in ASP. That again is probably coming from the forwards. But it's lot costs. Again, I think lot costs, you're going to continue to see that trend year-over-year where that's about 300 basis points up. So it's -- lot cost is driving it. And then part of the variable in there is how much -- to the earlier question, what Greg said, how much are we able to hold on vertical costs. Right now, we've done a pretty good job year-over-year. The average sticks and bricks costs are down a bit, but there's some variability there. Ryan Gilbert: Okay. Got it. And can you update us on what you're seeing in terms of, I guess, spot land prices for the deals that you're signing up today? And then if you're getting any relief on pricing, how long that would take to flow through into your income statement? Russ Devendorf: Yes. We're -- it's starting to turn. I think we've been mentioning this for the last couple of quarters. We're definitely seeing land prices start to moderate. We're starting to feel like we have more negotiating power, right, starting to flip from a seller's market to a buyer's market. And that obviously, any new deals that we put under contract in the typical fashion, excluding where we can pick up some finished lots from others that have walked, but it takes 18 months to flow through typically, right, because you've got development for a year and then you've got several months of vertical construction. So it takes some time. So we don't expect the increase in lot cost to moderate for at least a couple of years, right, at any material level. And we -- when we went public, we knew we were guiding everybody. I mean, lot costs were going up just because we knew what we were doing deals at. But now you're starting to see that reverse a little bit. But that's also as we talked about on our call and our pace over price philosophy, that's why it's really important for us to continue to move inventory through the pipeline so that we don't get gummed up with these lots. We can continue to move it through the pipeline so we can start taking advantage of a reset in land basis, land prices. And so that's kind of how we're thinking about it. Ryan Gilbert: Got it. Makes sense. Just one more... Russ Devendorf: One last thing there, and Joe just pointed it out, and he's right, like this is part of the reason why we think it's a reasonable opportunity to enter some of these new markets. Because we're able to start fresh and take advantage of some of these reset bases. So... Ryan Gilbert: Got it. Yes, that makes sense. Yes, just one more for me. It seems like you and the other publics and I guess the industry overall based on the starts number earlier this morning, it seems like there's a reacceleration in starts. I'm just wondering how inventory looks in your markets and if you're seeing any impact from, I guess, the recent increase in starts volume? Russ Devendorf: There hasn't been anything that we've seen materially different that we're hearing from our divisions. I know some of the builders, I mean, I think when you look year-over-year, a lot of the publics spec counts are down. They may be starting, and that could just be relative to maybe some better -- slightly better sales. I mean we had better sales than expected in this first quarter. We were up pretty good. So obviously, our starts are going to be up. But no, from an overall pure inventory standpoint, not seeing any real impact there. Operator: Your next question comes from the line of Natalie Kulasekere from Zelman & Associate. Natalie Kulasekere: So could you talk a little bit about how your incentives trended as the quarter progressed? I know you said it was 730 basis points for the whole quarter on average, but I'm just wondering if March was higher than January and February and if you had to kind of push incentives to achieve that pace of for sales per community? Russ Devendorf: Yes. And I don't have the exact numbers in front of me. And keep in mind, the 730 basis points, that's incentives and discounts that would have mostly come through in Q3, Q4 of last year that are hitting the books. And then from incentives on sales through the quarter, yes, I would just generally say that as we ramped up our pace and pushed for a little bit more price discovery, we probably saw it up a little bit. But honestly, we were -- I think we were pleasantly surprised that it didn't -- it wasn't a huge hit. But it does show that there is some price elasticity. It does -- you can see it ties into increase in volume. So... Natalie Kulasekere: All right. And what share of your closings this quarter were driven by spec sales? And where are you in terms of getting to a more presale heavy business? Russ Devendorf: Yes. I mean that -- presales is a huge driver or a huge focus of ours because traditionally, you're going to make more money on presales. And because of our business model, we really focus on personalization and choice for our buyer, and we have a quick turn from a cycle time perspective. So really for us, we're trying to drive that message to the divisions -- and because we do think that ultimately, that's going to help drive higher margins, but it also gives our buyers a different buying experience than when you go to some other entry-level builders that are more, "hey, you get a vanilla, chocolate, strawberry" type of choice. But we've been averaging -- it's probably still 40, 60 presale versus spec every week. But more importantly, we're getting the contract. We saw an uptick in getting a sale on a spec home before it hits what we call line in the sand, so kind of before it hits drywall stage. So that's really, today, very important because we're still using forward commitments, incentives. And to put an interest rate lock out there for more than 60 days is almost cost prohibitive. So the incentives are still a big driver for some of these buyers in figuring out payment. So even if we have those starts, as long as we're within kind of 60 days and they can get some choice before we hit drywall stage, getting that sale before drywall stage is important. So we're doing a pretty good job there. I'd say we're probably 70%, 80% before drywall stage has got a sale and our spec inventory has been coming down. So it's still a battle, but that's our focus is driving more presale going forward. Operator: Your next question comes from the line of Rafe Jadrosich from Bank of America. Rafe Jadrosich: Just can you -- I know you walked through it a little bit, just the gross margin, it's good to see the backlog sort of stabilize and step up here. The gross margin sequentially flat quarter-over-quarter in 1Q, like just can you help me just understand the accrual call out that you had there and bridge like maybe on a like-for-like basis, 1Q to 2Q? Russ Devendorf: Yes. So if you -- so we had 170 basis points roughly of a benefit because we reversed some land development accruals on closeout communities. So these were several communities that closed out in kind of Q3, Q4. And so our internal policy is we keep -- we start to ratchet down accruals over 3 to 6 months just in case there's any stragglers or any costs out there once we close a community. And so that was 170 basis points to margin. So basically, if you just look operationally, take our margin for the quarter, back out 170 basis points, and that's kind of where you would start with your gross margin, to take out the noise. We had a little bit of impairment in there. So strip that out. I think that was 30 -- I don't know how many basis points that accounted for... Joe Thomas: 70. Russ Devendorf: 70 basis points. So there was 70 basis points of impairment that was a negative impact to margin. Again, you want to strip that out. So when you see our filing, you'll be able -- and I think it's in the notes, it's in the back half of the press release. But when you look at the adjusted margins, you'll be able to see some of that stuff. So that's why when you strip out all the noise, I think sequentially, we're basically calling for about a 50 basis point decline in margin from Q1 to Q2. And again, there was a lot there, but we can walk through any detail if it's -- once you see the numbers, it's -- you have any confusion? Rafe Jadrosich: Okay. That actually -- that's very helpful and makes sense. And that's the sequential from 1Q to 2Q, that you still have land inflation, but incentives sort of flattish and that's getting to it. Russ Devendorf: That's right. Yes. Rafe Jadrosich: Okay. And then on the SG&A side, you said it was really interesting. And obviously, the dollars have stepped up here and continue to grow, but you're expanding communities. You're also moving into new markets. Of the markets that you operate in today, what would you consider to be like at scale versus what you're still trying to get the scale up and are sort of below where you'd expect it to be longer term? Greg Bennett: Yes. Thanks, Rob. I'll take that. We're in still infancy, I would say, in Greenville. -- the same in Dallas, Fort Worth, Gulf Coast. And we're kind of over that hump in Chattanooga, made a lot of growth strides there in the last year. And then Central Georgia would be another that we're still building scale in. It's just kind of a spin-off of Atlanta, but without any real community count as we spun that off. So those are, again, not the scale would be Central Georgia, Greenville, Dallas, Fort Worth and Gulf Coast. Russ Devendorf: Yes. And the only -- what I'd add to that as well is while we have -- we always are targeting a minimum of 2, what we call R-teams, and that's roughly 208 starts per our team. We want to have a minimum 2 R-teams in every division. And so we're not quite there in a couple of our legacy divisions like Charlotte, it's Nashville, we're not there yet. So at a minimum, we want to get there. And then that's just the minimum, but we really feel like in some of those legacy divisions, we should be closer to 3 R-teams, 600 closings specifically Raleigh. I do think Charlotte can get there, 600 plus. We're not there yet. Nashville should be 400 plus. And then obviously, Atlanta and Houston right now are too big from a permit count, right, 2 of the largest markets that we're in. Atlanta, because we peeled out Chattanooga, which was really kind of North, Georgia, pulled back a little bit. But again, Atlanta proper should be close to 1,000 units on a run rate. And then Houston for us, we entered that. We're making a lot of good strides in getting them what I would say is like Smith Douglas-ized from a turns and they've been great. But we're only doing 400 plus or minus closings there. I mean that should be double, right? Within 5 years, we need to -- I mean, that's such a big market. We've had some headwinds, but that should be double. And then what's really shining for us is our Alabama division. They're at pretty good scale between Birmingham and Huntsville, kind of plus or minus 600. So we've got some work to do in scaling up some of the legacy divisions. But like Greg said, a lot of these new ones are just getting going. But that's why you see the G&A, right? When you look at the G&A relative to the community count increase, right, our community count was up 24% and our G&A was only up $2.9 million on a gross dollar basis. So to me, that's pretty efficient. Operator: Your next question comes from the line of Jay McCanless from Citizens Bank. Jay McCanless: First question I had, we've seen some articles in the mainstream press about affordability being even worse than some of the larger cities now, which is forcing some migration out. So I guess my question is, are you guys seeing better demand in your smaller markets, whether it's absorption, traffic, however you want to measure it versus maybe some of the larger markets like Raleigh and Atlanta? Russ Devendorf: Yes. Look, Alabama has done really well. And I would consider that relative, obviously, Birmingham, Huntsville relative to Houston, for instance, yes, we've seen some better demand trends. And again, Texas is its own animal. So yes, I think it's also just -- we're so used to in the Alabama markets. They didn't have the kind of spike up post-COVID. I mean it was good, but it wasn't like you had some of these other markets. So it's -- I almost feel like we're just used to hand-to-hand combat there, and it's just the way we operate. So yes, we saw some better demand there. But it's -- outside of that, like there's nothing that I would say really sticks out with our footprint. I think we're in some pretty good markets kind of in the Southeast and Central U.S., which is -- that's by design. But nothing really that I can say sticks out. I don't know, Greg, if you... Greg Bennett: The only thing, Jay, I'll add to that is the in-migration in some of the bigger metro locations we're in is down. I mean that's been a lot. And so you feel that a little more and some of those smaller markets are not as sensitive to that. Jay McCanless: Got it. Okay. And then the second question I had, ARMs, are you guys still trying to push on those? Is that still having good success with customers? And maybe what your ARM percentage was this quarter? Russ Devendorf: Yes. We shifted really towards the end of the quarter and into April, we moved from a 4.99% incentive that we're kind of marketing across the footprint, a 30-year fixed. We moved to -- just to change it up a little bit and the costs were kind of almost in line. We moved to a 3.99%, 5/1 ARM towards the end of the quarter and really into April. And if you go to our website, I think that's what you'll see at the top of the page. So we're offering -- we're really -- we're still offering both. We're marketing the 3.99% and a lot of that is -- a lot of it really is -- it's more a traffic driver, but it's also designed to give our salespeople as much flexibility, right, when -- because with a 3.99%, 5/1 ARM, the buyers can qualify off of that payment that calculates off the 3.99%. So for our buyer, that's definitely helpful. So we kind of give them some optionality there. But it's -- we're just trying -- seeing what the market is doing, trying to at least compete at that level and give buyers as much affordable options as possible. Joe Thomas: And we're seeing more usage of the 4.99%. Russ Devendorf: Yes. 4.99%, the 30-year fixed 4.99% is probably taken the most of the incentive. Operator: We have reached the end of the Q&A session. I will now turn the call back to Greg Bennett for closing remarks. Greg Bennett: Thank you for joining us on our Q1 results call. I hope everyone has a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning, and welcome to the BrightSpire Capital First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to David Palame, General Counsel. Please go ahead. David Palamé: Good morning, and welcome to BrightSpire Capital's first quarter 2026 earnings conference call. We will refer to BrightSpire Capital as BrightSpire, BRSP or the company throughout this call. Speaking on the call today are the company's Chief Executive Officer, Mike Mazzei; President and Chief Operating Officer, Andy Witt; and Chief Financial Officer, Frank Saracino. Before I hand the call over, please note that on this call, certain information presented contains forward-looking statements. These statements, which are based on management's current expectations, are subject to risks, uncertainties and assumptions. Potential risks and uncertainties could cause the company's business and financial results to differ materially. For a discussion of risks that could affect results, please see the Risk Factors section of our most recent 10-K and other risk factors and forward-looking statements in the company's current and periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, April 29, 2026, and the company does not intend and undertakes no duty to update for future events or circumstances. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release and supplemental presentation, which was released yesterday afternoon and is available on the company's website, presents reconciliations to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measures are useful to investors. Before I turn the call over to Mike, I will provide a brief recap on our results. The company reported first quarter GAAP net income attributable to common stockholders of $4.8 million or $0.03 per share, distributable earnings of $15.6 million or $0.12 per share and adjusted distributable earnings of $18.2 million or $0.14 per share. Current liquidity stands at $206 million, of which $58 million is unrestricted cash. The company also reported GAAP net book value of $7.05 per share and undepreciated book value of $8.24 per share as of March 31, 2026. Finally, during this call, management may refer to distributable earnings as DE. With that, I would now like to turn the call over to Mike. Michael Mazzei: Thanks, David, and welcome to our first quarter 2026 earnings call. I will keep my prepared remarks brief. And as always, Andy will walk through the quarter's loan originations and portfolio activity. Since reinitiating new loan production, we have closed 37 loans totaling $1.1 billion with an additional 9 loans in execution for $283 million for a combined total of just over $1.4 billion. While the process has been gradual, we have steadily increased our loan book each quarter, and it now stands at $2.7 billion. Our strategy remains focused on middle market lending with an average loan size of approximately $27 million. We have been focused on increasing diversification and avoiding loan size and investment concentrations that we deem too large for our equity capital base. This, in turn, will also allow us to maintain slightly lower cash balances. Thus far, the overwhelming majority of new loans have been multifamily, contributing to a more favorable property type exposure. During the quarter, our portfolio also benefited from payoffs and resolutions of office loans. We expect a further reduction in our office loan exposure to occur this next quarter. As an aside, we also closed loans on hotel and industrial properties during the first quarter. However, overall, we expect multifamily loans to continue to comprise the majority of our activity in the medium term, with bridge loan demand being driven by valuation resets and increasing levels of sales transactions. This reflects lenders incentivizing borrowers with greater frequency to sell or refinance 2021 and 2022 vintage bridge or construction loans. It is worth noting that in particular, the Sunbelt markets are seeing very high demand for multifamily bridge lending as that region works to absorb vacancies and rent concessions over the next 12 to 18 months. As we look ahead, our priorities remain straightforward, and those are to redeploy capital from the watchlist and REO resolutions into new loans, to grow the loan book to $3.5 billion by year-end and to execute a fifth CLO in the second half of the year. This plan positions us to cover the dividend by year-end. Achieving that goal will provide greater financial clarity, while the continued reduction in REO should remove credit uncertainties that may be overhanging the stock. Taken together, we are confident these actions will position BrightSpire to drive long-term shareholder value. With that, I will turn the call over to our President, Andy Witt. Andrew? Andrew Witt: Thank you, Mike. Starting with our originations activity, it has been a busy start to the year despite the geopolitical issues in the Middle East. Equity markets have largely taken the events in stride. And with the exception of a couple of weeks when decision-making slowed, the commercial real estate credit markets have been similarly resilient. In the first quarter and subsequently, we closed on 8 loans totaling $311 million in commitments. Currently, we have 9 additional loans in execution, totaling an incremental $283 million in commitments. In total, this year, we have closed or in execution on 17 loans for total commitments of $594 million, 14 of which were multifamily. Transaction volume picked up in the first quarter. We saw over $29 billion at the top end of the funnel, which represents an increase of over 50% versus the same period last year. It is worth noting that we are focused on the middle market opportunity, mostly between $20 million and $70 million, highlighting the breadth of transaction volume we're seeing at the top end of the funnel. Repayments during the quarter consisted of $169 million across 6 positions, including 2 risk rank 5 loans. Three of the repayments were office loans, further reducing our office exposure to just over 20% of the loan portfolio. We expect to continue reducing office exposure, both nominally and as a percentage of our loan portfolio throughout the remainder of 2026. Currently, the property underlying the Phoenix office loan, our largest office loan is being marketed for sale. Our loan book at quarter end was approximately $2.7 billion across 100 loans, a modest increase quarter-over-quarter. Our average loan balance is $27 million and our risk ranking is 3.1, consistent with the previous quarter. Given the recent momentum, we expect to cross $3 billion in loans by approximately halfway through the year. Further, we anticipate our loan book will continue to grow in the back half of the year, targeting at least $3.5 billion loan portfolio by year-end. As it relates to portfolio management, during the first quarter and subsequently, exposure to watch list loans continues to move in the right direction. During the first quarter, we resolved 3 loans, including 1 property we took ownership of through foreclosure, bringing watch list exposure down to $166 million or 6% of the loan portfolio. We also downgraded and simultaneously resolved one multifamily mezzanine loan for $32 million. As of today, we have 4 loans on our watch list for an aggregate value of $134 million. Multifamily properties underlying 2 of the remaining 4 watch list loans are under purchase and sale agreements, both of which are expected to close during the second quarter. Following the sale of these 2 properties, our watch list will consist of 2 positions, a Dallas office loan and an Austin multifamily loan with an aggregate gross book value of $67 million. The reduction in watch list exposure, both completed and underway in combination with new loan originations are foundational to our loan portfolio growth plan. While we continue to make progress on the portfolio, we recognize there are headwinds still ahead, particularly in overbuilt Sunbelt markets that are both challenged from a market fundamentals and policy perspective, particularly as it relates to immigration, which is pronounced in border states such as Texas and Arizona. As a result, these markets are experiencing rental rate and concession challenges. As Mike mentioned, it is in these same markets where we are seeing lenders lean on borrowers to sell underlying assets, resulting in a wave of sales, particularly in Texas. As for the REO portion of the portfolio, there are 6 positions totaling $336 million of gross carrying value. Two of the 4 multifamily properties are currently in the market for sale following the completion of value-add business plans we've executed over the past 12 months. The remaining 2 multifamily properties are currently undergoing value-add business plans, and we expect to be in a position to take them to market in late 2026 or early 2027. The final 2 REO properties consist of the San Jose Hotel and the Santa Clara multifamily predevelopment property. We continue to make progress on the San Jose hotel property, driving operational performance while making physical improvements and upgrades to the property. The loan represents 43% of our current REO exposure with a carrying value of $143 million. Lastly, as it relates to our Santa Clara multifamily predevelopment property, market conditions continue to evolve favorably as the Bay Area is achieving some of the strongest rental rate growth in the country, fueled by the AI boom. We anticipate taking this property to market later this year or very early in 2027. In closing, we made significant progress during the quarter and subsequently in all phases of the business. And results were consistent with the expectations we set for the quarter. Looking ahead, our focus remains on growing the portfolio and increasing earnings over the course of the year. With that, I will turn the call over to Frank Saracino, our Chief Financial Officer. Frank Saracino: Thank you, Andy, and good morning, everyone. For the first quarter, we generated adjusted DE of $18.2 million or $0.14 per share. First quarter DE was $15.6 million or $0.12 per share. DE includes a specific reserve of approximately $2.6 million. Additionally, we reported total company GAAP net income of $4.8 million or $0.03 per share. Quarter-over-quarter, total company GAAP net book value decreased to $7.05 per share from $7.30 in the fourth quarter. Undepreciated book value decreased to $8.24 per share from $8.44. The change is mainly attributable to equity granted as part of our stock compensation program and consistent with past practice. Additionally, the first vesting of our performance stock unit awards also contributed to this decrease. Going forward, PSU vesting will be an annual first quarter occurrence. Looking at reserves. During the first quarter, we recorded a specific CECL reserve of approximately $2.6 million. As Andy mentioned earlier, we downgraded and simultaneously resolved one mezzanine loan and as a result, charged off the associated reserves. Our general CECL provision decreased slightly to $87 million or 306 basis points on total loan commitments versus $88 million or 315 basis points reported in the fourth quarter. Our debt-to-assets ratio is 68%, and our debt-to-equity ratio is 2.4x. Lastly, our liquidity as of today stands at approximately $206 million. This includes $58 million of cash, $120 million available under our credit facility and approximately $28 million of approved but undrawn borrowings available on our warehouse lines. This concludes our prepared remarks. And with that, let's open it up for questions. Operator. Operator: [Operator Instructions] Our first question today is from Timothy D'Agostino with B. Riley Securities. Timothy D'Agostino: I guess for me, it'd be interesting to hear how the investment landscape and the market is in the second quarter compared to the first quarter. Obviously, 10-year treasury was heightened kind of in May. And it'd just be good to hear the opportunity out there. Is your pipeline growing in the second quarter? Michael Mazzei: Thank you. It's Mike. Thank you for the question. As Andy alluded to in his opening remarks, we did see a little bit of a pause given what was going on in private credit, given what's going on geopolitically, but that was pretty brief. It got pretty much right back on track after about 2 or 3 weeks. Overall, the market is doing pretty well. You're seeing spreads remain tight. We did not see a gap out in spreads that we saw in pricing in certain sectors in private credit. Real estate spreads continue to stay resilient. We kind of hit a wall on how tight we've gone. Everything is getting done pretty much for multifamily around the mid-200s, plus or minus 10 basis points. We are seeing some good response in the capital markets. We're seeing CRE CLO transactions with price talk on the AAAs at 135. I think that's 10 tighter than where we printed in January before the Iran affair started. So market is pretty much on track. Pipeline looks good. As Andy mentioned, subsequent to quarter end. We've got a lot of stuff in execution, over $300 million in loans in execution now for closing. So we're expecting to hit the $3 billion mark midyear. And right now, things are pretty calm. Pipeline looks good. The flow looks good. We also mentioned that we're seeing a lot of lenders leaning on incentivizing maybe I should say, borrowers to get to the market either vis-a-vis short sales, foreclosures or that's happening tremendously in Texas. Right now, we're seeing a lot of activity there, a lot of price resets. And in that, we're seeing opportunities for new loans. Timothy D'Agostino: Okay. Great. And then I guess just as a second question, you had mentioned on the call that the San Francisco area is performing better from the AI boom. And is that true across multifamily, office and industrial? I guess it'd just be interesting to get a little bit more color on per asset class in that area because I have heard that before that San Francisco is doing better with the AI boom. Michael Mazzei: Yes. I would say San Francisco and the Bay Area, even there was a commentary by Green Street, I think, last night that even Oakland is starting to see some positive tailwinds. So on the resi side, absolutely. If you look at rent increases around the country, I think San Francisco is leading the way even above New York City with positive rent growth. And we also see the same thing in office. You're seeing a lot of activity in AI where start-up companies are starting off with a small amount of square footage year one and they get a second round of financing if they get traction on their strategy and they're coming back for 20,000, 25,000 square feet. So I think you're seeing office leasing in San Francisco doing better than it was pre-2019. We also think that the same effect is going to be in the lodging sector. That sector has been dormant for quite a while. San Francisco was kind of like on a no-fly list for a few years now. But given what's going on with the new mayor of San Francisco, who's done a miraculous job in turning that city around and what's going on AI, I think generally, people are more bullish on San Francisco, yes. Timothy D'Agostino: And then sorry, if I could just ask a follow-up question there. Is there any tailwinds being drawn to the San Jose hotel from that or not as much? Michael Mazzei: Not as much right now. We're still very largely dependent upon group business. We're still going through our CapEx program and upgrading the hotel. We had some very serious events occur with the Super Bowl and March Madness NCAAs. The hotel handled those very well. We did very well with those. We have FIFA coming as well as another event in July, the CrossFit National Championship. So that should also be a tailwind for us. But we're not yet seeing that transient business traveler yet. We're seeing a lot better resorts in hotels because of the amount of money that the baby boomers have in terms of discretionary income. But we need a pickup in transient overnight stays to really get us to the NOI level that we want. But as we said, we intend to hold that asset through the balance of the year and market it at the end of this year or beginning of next year. Operator: The next question is from Chris Muller with Citizens. Christopher Muller: So it's great to see the expected REO sales and also the 5-rated loan repayment and expected underlying property sales there. And it looks like that's going to clean up the rest of the 5-rated loans. So I guess, first off, am I reading into that correctly? And then will there be any realized losses associated with those subsequent activity that will hit second quarter earnings? Michael Mazzei: Well, on the properties that we have up for sale now in REO, those bids are coming in now. And so the answer is we'll find out. We think we're pretty close to the pin. But as Andy alluded to, there's a lot of supply coming in those markets. And one thing that I want to highlight is as we get -- as we wind down and we're getting -- making magnificent headway on the watch list. There are still areas of the country, particularly in the Southwest, as Andy mentioned on his prepared remarks, that are experiencing a lot of softness. The Dallas-Fort Worth market seems to be tightening. It seems to be coming out of a trough. We could see a potential tightening of rent concessions over the next 6 months. However, you move to markets like Arizona and Vegas and particularly Arizona, we're seeing very few asset sales. So we have an asset in Mesa that we're selling right now in the REO. The bids are due next week, but there have been very, very few. I think maybe 5% of asset sales relative to the peak of asset transactions in like 2022. I think asset sales in Arizona are kind of like the 2009 levels. So that market has been more slow to recover. We've got a lot of vacancy and a lot of absorption that needs to be dealt with, and that's probably going to take another 12 to 18 months. So we have eyes. We've made some new loans in Arizona at reset basis that we really like. But with regard to our portfolio, we have some exposure in Arizona, and we're watching it very closely. That market has been chronically difficult with rent concessions, vacancies. As Andy mentioned, we're seeing kind of a reversal of the immigration that we've had over the past few years. That's going backwards now. A lot of the in-migration to the state because of the work from home during COVID has pretty much completely unwound, but there's a lot of supply that's still hitting the market this year. So all eyes and ears on Arizona, and we'll know more about our REO sales this week. As I said, we're expecting bids this week and next week. Christopher Muller: Got it. And it looks like the remaining 4 rated loans are in Dallas and Austin. Anything you can share on the potential path of those? Michael Mazzei: On the multifamily one, that will be pretty straightforward. We'll time the market on that. There's liquidity there. It's all a matter of pricing. On the Dallas office, we have some activity going on with existing tenants that we think will be positive. We're waiting for the outcome there. That property is holding its own. We're also -- there are 2 buildings on the property. The smaller building is up for sale. If we get a bid on that, that will help reduce the loan amount. But it's a nice building, good location. It's been holding its own. The occupancy is about 70%. If we get some of this leasing done and re-leasing done, there's a pretty good chance that we may ask that owner to put that building on the market. Operator: The next question is from John Nickodemus with BTIG. John Nickodemus: I know in the prepared remarks, you mentioned that you had originated an industrial and a hotel loan during the quarter. Are those areas that you're looking to incrementally add to at all? Or are these more just one-off opportunities given that those are your only loans in the portfolio in either of those sectors? Michael Mazzei: Andy, would you like to take a swing at that? Andrew Witt: Sure, Mike. So we did do a couple of loans away from multifamily. We're certainly looking to do more. We like the industrial sector. We're going to be selective in the hotel space, and there are other asset classes that we're looking at. However, I would say, going forward, look for us to be predominantly investing in multifamily. Michael Mazzei: We've looked at some industrial. The issue there is it's all about back leverage as well. We're seeing opportunities where there is a lot of binary lease-up risk that really doesn't lend itself for -- well for CLO or for back leverage. Really -- that's really more of a private credit fund type of investment. So we're seeing a lot of that. We're looking in industrial for more granular rent rolls while there is lease-up needed and the reason why they're coming to a nonbank is for that reason, we're looking for the ones that have a little less binary risk than some of the deals that we've been seeing. In hotel, listen, RevPAR for the year 2025 was down a little bit in the U.S. The shiny spots were resorts. As I said earlier, there's a vast amount of wealth in a certain demographic that's looking to spend money on wellness and experiences and things like that. So the resorts are doing better. It's really the more full-service economy side of the hotel sector that has been struggling a little bit. So we're very selective there. The hotel loan we did is a very unique transaction. And it wasn't just the asset and the metrics on the loan, the capital structure in the transaction was also very appealing to us. So that was almost a very unique set of circumstances that transcended the fact that it was just a hotel loan. So it's very -- we're seeing opportunities in those sectors still, as Andy said, very selective. John Nickodemus: Great. Other one for me, just regarding dividend coverage. I believe last quarter, you mentioned you were looking for full coverage by midyear and then positive coverage by year-end. Now it kind of sounds like it's more full coverage by year-end. Just curious if there's anything that's changed there on your path back to dividend coverage. Michael Mazzei: Yes. It's just the timing of asset resolutions and putting out money that you could see over a longer period, 6-month period, you get there. But just over the short term, things happen, things get delayed. For instance, we delayed on the Arizona sale. We delayed taking indications on pricing by about 2 weeks. So things like that. are occurring where it ebbs and flows. We're still hovering very close to the dividend, just shy by $0.02 this quarter, but we are very confident that we'll get there by year-end. And when you look at the pipeline and look how much progress we've made, I think we're pretty comfortable that midyear, we'll get to the [ $300 million ]. And it looks like really based on the payoff projections that we're looking at, it looks like the $3.5 million (sic) [ $3.5 billion ] is really a stone throw away. So I think we're pretty optimistic about getting there by year-end. I'm sorry, but during the course of the year, we get the ebbs and flows of things that get delayed and it causes a little bit of a blip. But we're confident we'll get there by year-end. Operator: The next question is from Jason Weaver with JonesTrading. Jason Weaver: First, I appreciate your comments on the pricing environment out there. But when I look at it, it looks like the originations out of 1Q were quite a bit tighter inside of the existing book at 2.59%. So with your stated ROE target of around 12% on new originations, what's the all-in financing spread you're underwriting to these loans? And at what point does spread compression force you to either widen the credit screen or reduce origination pace rather than compress ROE? Matthew Heslin: Yes. This is Matt Heslin. I'll take that one. So as spreads have marched in on the whole loans, we've seen similar on the back leverage side. So we've generally tried to maintain about 100 basis point spread between our loans and our financing source. That's been pretty consistent to date. And as Mike mentioned, we priced our CLO in the early part of the first quarter this year, and we've seen spreads despite the noise, continue to march in there as well, which is great news, right? A lot of demand for that paper. So we've been able to maintain our ROEs despite the tightening. Jason Weaver: Got it. [indiscernible] helped out with that. Michael Mazzei: And Jason, overall, listen, the banks, and I'm sure some of the line lenders are listening to the call, I don't want to speak on their behalf. But the banks are flushed with capital, a lot of because of the changes in Basel III that were anticipated. This has been a sector that may be one of the best performing sectors at the banks because we know that we don't see any losses on any bank lines for any of our competitors or funds in the back leverage warehouse sector and the risk-based capital treatment for these assets is favorable versus making whole loans. So the banks very much have an appetite for warehouse lending. So they have been slowly playing ball with spreads tightening. Jason Weaver: That's good color. I appreciate it. And then on that same subject almost with the pricing environment as it is right here versus where the stock is trading at a discount to undepreciated book value. Talk to me about the trade-off of repurchase versus deployment into new originations and how you're looking at that today? Michael Mazzei: Well, listen, the buybacks are something we've done. You've seen us do it in the course of 2025. We did a couple to several times. We'll look to do it again. When we did it before, the price was more in the mid-5s. When we looked at the yield on -- the dividend yield on the stock at that level versus where we could put out money, there was a crossover there where it looked very attractive versus making new loans. And so we did that. But as long as the stock is trading where it is now and hopefully higher into the 6s, making loans is what we do, and that's what we want to preserve the capital. We do realize that there is a halo effect, positive halo effect in buying back stock that typically is not long-lived. We're not buying back enough stock to really affect the overall book value. We can drive it by a few cents a quarter, but not really material enough as much as we see the effect of making new loans and what that will do to the stock price. So the bias is make new loans. And at this level, we think making new loans at the levels we discussed is more attractive to us with our capital. Operator: The next question is from Gaurav Mehta with Alliance Global Partners. Gaurav Mehta: I wanted to ask you on your -- the $3 billion and $3.5 billion expectations for midyear and end of the year and some of your commentary around Sunbelt in the Bay Area. So as you look to deploy that capital, do you have any regional preference as to where you're seeing demand and where you want to put that new capital in? Matthew Heslin: Sure. This is Matt Heslin. I'll start on this, and Mike can jump in. I mean I think we're generally looking at all those places. Basis is obviously very important, as Mike said, despite the headwinds in some of the Sunbelt markets, we are still lending there at reset basis. So acquisition, new capital coming in, debt yields that work on a going-in basis are obviously very attractive. And then, yes, we're also looking and have done stuff and we'll continue to do stuff in the Bay Area. So we're seeing great rent growth there. So even some older vintage properties are getting the benefit of that. Mike, anything you want to add? Michael Mazzei: I think if you also look at -- thank you for the question. I think also if you look at and something that we've been studying recently, when you look at the transaction volume that's occurred in 2020, '21 and '22, when interest rates were close to 0, and we had, in some cases, double-digit rent growth in these markets and an influx of immigration where people were living somewhere, and we're sure a lot of that was in workforce housing. You had -- the number of transactions that have occurred were higher than anywhere else in history in some of these markets. We are expecting -- I mean, you see what we're doing with our watch list, with our REO. We are expecting other lenders, and we're seeing this in deals we quote where existing lenders are behind the scenes, encouraging borrowers to get out to the market and reset values. There is a disgorgement that's going to have to happen. And while we think real estate is in very late innings, certainly relative to private credit with CECL reserves that we've taken across the board with our brethren in the market, we still see that the transactions need to occur. You may have taken a CECL against the loan, but now that loan has to go out into the market and get restructured and recapitalize. So we still think there's going to be a big opportunity on the back end of the 2020 to 2022 cycle, we're going to see a lot of transactions coming out in '26, '27 and '28. The issue with some markets are they're lagging. And as I highlighted, some of the states in the Southwest are still very much lagging. Texas is doing better. We're seeing a lot of activity in Texas. We do think that there's going to be a dam that breaks in Arizona and Nevada. And there'll be a lot of opportunity to lend there at reset basis. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Michael Mazzei for any closing remarks. Michael Mazzei: Thank you. Thank you, as always, for joining us today. And if we're not scheduled to have a one-on-one with you, please call on us, and we'll be glad to do that. If not, we'll see you all on the second quarter earnings call in July. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the Chefs' Warehouse First Quarter 2026 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alex Aldous, General Counsel, Corporate Secretary, and Chief Government Relations Officer. Please go ahead, sir. Alexandros Aldous: Thank you, operator. Good morning, everyone. With me on today's call are Chris Pappas, Founder, Chairman, and CEO; and Jim Leddy, our CFO. By now, you should have access to our first quarter 2026 earnings press release. It can also be found at www.chefswarehouse.com under the Investor Relations section. Throughout this conference call, we will be presenting non-GAAP financial measures, including, among others, historical and estimated EBITDA and adjusted EBITDA as well as historical adjusted net income, adjusted earnings per share, adjusted operating expenses, adjusted operating expenses as a percentage of net sales and as a percentage of gross profit, net debt, net debt leverage and free cash flow. These measures are not calculated in accordance with GAAP and may be calculated differently in similarly titled non-GAAP financial measures used by other companies. Quantitative reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release and first quarter 2026 earnings presentation. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements, including statements regarding our estimated financial performance. Such forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of these risks are mentioned in today's release. Others are discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the SEC website. Today, we are going to provide a business update and go over our first quarter results in detail. For a portion of our discussion this morning, we will refer to a few slides posted on the Chefs' Warehouse website under the Investor Relations section titled First Quarter 2026 Earnings Presentation. Please note that these slides are disclosed at this time for illustration purposes only. Then we will open up the call for questions. With that, I will turn the call over to Chris Pappas. Chris? Christopher Pappas: Thank you, Alex, and thank you all for joining our first quarter 2026 earnings call. First quarter 2026 business activity displayed typical seasonal cadence as revenue trends coming out of January increased steadily into February and March. Despite some volatility in business due to extreme weather events and the start of the conflict in the Middle East later in the quarter -- our team's exceptional execution and the strength of our North American business allowed us to continue to grow market share, delivering strong year-over-year growth in volume, product penetration, unique customer growth, revenue growth and profitability growth. Momentum continued into April, and we currently expect double-digit top line growth to start the second quarter. Regarding the current situation in the Middle East, our teams and operations in the region, the immediate focus has been the safety and security of our people. We have followed safety protocols instituted by governing bodies and are effectively navigating volatility in supply chains and customer demand. Our leadership and team members have done an amazing job managing both personally and professionally through the volatility and uncertainty and we hope for a resolution to the conflict soon. Jim will provide more color on the financial impact in a few moments. I would like to thank all of the Chefs' Warehouse from sales and operations to all the supporting functions for delivering a great start to 2026. Our regional leadership and their teams continue to execute our strategy to leverage our investments and train the next generation of sales and operational talent. They are accelerating our long-term plan as they grow deeper understanding of our customer base and become the ultimate specialty ingredient professionals, marrying technology with industry know-how to become trusted advisers to the best chefs in the world. With that, please refer to Slide 3 of the presentation. A few highlights from the first quarter include organic net sales grew 10.4%. Organic specialty sales were up 6.8% over the prior year, which was driven primarily by unique placement growth of 6.2%, specialty case growth of 5.7% and price inflation. Unique customers grew 1.9% year-over-year. Reported unique customer growth was impacted by the attrition related to our transition out of noncore customer business in Texas. We fully lapped this impact starting in the second quarter this year. Excluding this impact, first quarter year-over-year unique customer growth was approximately 4.3%. Pounds in center-of-the-plate were approximately 6.2% higher than the prior year first quarter. Gross profit margins increased approximately 53 basis points. Gross margin in the specialty category increased approximately 43 basis points as compared to the first quarter of 2025, while gross margin in the center-of-the-plate category increased approximately 110 basis points year-over-year. Jim will provide more detail on gross profit and margins in a few moments. For an update on certain of our operating metrics, including continued improvement in year-over-year gross profit per route and adjusted EBITDA per employee, please refer to the slide provided in the appendix of our first quarter 2026 earnings presentation. With that, I'll turn it over to Jim to discuss more detailed financial information for the quarter and an update on our liquidity. Jim? James Leddy: Thank you, Chris, and good morning, everyone. I'll now provide a comparison of our current quarter operating results versus the prior year quarter and provide an update on our balance sheet and liquidity. Please refer to Slide 4. Our net sales for the quarter ended March 27, 2026, increased approximately 11.4% to $1.059 billion from $950.7 million in the first quarter of 2025. The growth in net sales was a result of an increase in organic sales of approximately 10.4% as well as the contribution of sales from acquisitions, which added approximately 1% to sales growth for the quarter. Given the start of the conflict in Iran occurred in the last month of the first quarter, the impact to our first quarter aggregate year-over-year revenue growth was not material. We estimate it reduced overall organic growth by approximately 50 basis points. Prior to the start of the conflict, our Middle East business grew approximately 11% in January and February versus the prior year. While there remains variability in demand and customer buying patterns week-to-week, these past few weeks, our business located in the region has been operating at approximately 75% of prior year. The primary impact has come from low occupancy in hotels and resorts. Our operations in Qatar and Oman are performing much closer to plan than prior year as they are less reliant on tourism than Dubai and Abu Dhabi. As I just discussed, our North American operations, which represent over 90% of the Chefs' Warehouse continues to grow well above our guidance while generating operating leverage and compelling year-over-year adjusted EBITDA growth. As the situation in the Middle East currently remains uncertain, we have run multiple scenarios of performance and factored in a range of possibilities as it relates to our forward guidance. At this time, we are keeping our full year guidance unchanged with the potential for upward revision should the situation in the region normalize. Net inflation was 4.1% in the first quarter, consisting of 1.5% inflation in our specialty category and 8.2% inflation in our center-of-the-plate category versus the prior year quarter. Center-of-the-plate inflation when adjusted for the impact of the Texas attrition was approximately 4.5% versus the prior year quarter. Gross profit increased 13.9% to $257.4 million for the first quarter of 2026 versus $226 million for the first quarter of 2025. Gross profit margins increased approximately 53 basis points to 24.3%. Selling, general and administrative expenses increased approximately 10.5% to $224.1 million for the first quarter of 2026 from $202.8 million for the first quarter of 2025. The increase was primarily due to higher costs associated with compensation and benefits to support sales growth, higher depreciation driven by facility and fleet investments and higher self-insurance-related costs. Adjusted operating expenses increased 10.5% versus the prior year first quarter. And as a percentage of net sales, adjusted operating expenses were 18.6% for the first quarter of 2026. Operating income for the first quarter of 2026 was $33.1 million compared to $22.7 million for the first quarter of 2025. The increase in operating income was driven primarily by higher gross profit, partially offset by higher selling, general and administrative expenses. Our GAAP net income was $17.4 million or $0.40 per diluted share for the first quarter of 2026 compared to net income of $10.3 million or $0.25 per diluted share for the first quarter of 2025. On a non-GAAP basis, we had adjusted EBITDA of $60.1 million for the first quarter of 2026 compared to $47.5 million for the prior year first quarter. Adjusted net income was $17.2 million or $0.40 per diluted share for the first quarter of 2026 compared to $10.2 million or $0.25 per diluted share for the prior year first quarter. Turning to the balance sheet and an update on our liquidity. Please refer to Slide 5. At the end of the first quarter, we had total liquidity of $278.3 million, comprised of $122.7 million in cash and $155.6 million of availability under our ABL facility. During the first quarter, we made prepayments of $5 million on our term loan maturing in 2029 and purchased $10 million equivalent shares under our share repurchase program. As of March 27, 2026, total net debt was approximately $522 million, inclusive of all cash and cash equivalents, and net debt to adjusted EBITDA was approximately 1.9x. As noted earlier, we maintain our previously provided full year guidance for 2026 as follows: we estimate that net sales for the full year 2026 will be in the range of $4.35 billion to $4.45 billion, gross profit to be between $1.053 billion and $1.076 billion and adjusted EBITDA to be between $276 million and $286 million. Please note, for the full year 2026, we expect the convertible notes maturing in 2028 to be dilutive, and therefore, we expect the fully diluted share count to be between approximately 46 million and 46.7 million shares. Thank you. And at this point, we'll open it up to questions. Operator? Operator: [Operator Instructions] The first question is from Alex Slagle from Jefferies. Alexander Slagle: Yes. I know, like, the Middle East is always -- it's hard for us to figure out everything that's going on. So I appreciate everything you provided. I guess, kind of, curious on -- you gave some color on the top line. What else can you tell us about sort of the profitability implications for the Middle East business specifically and kind of what's baked into the outlook, I guess, sizing it up, also, I guess, it sounds like the top line is less than 10%. And I'm not sure on the EBITDA side, if you could provide some color. James Leddy: Yes. We don't necessarily disclose the percent of EBITDA that they contribute. But just to go back to what we said, it's less than 10% of our overall business. It's a very profitable company. We've made some pretty significant investments, and we feel really good about the medium- to long-term prospects of the market and our business there. Obviously, there's a little bit of a short-term bump in the road right now. But as I mentioned in our prepared remarks, we haven't adjusted our top line or our adjusted EBITDA guidance as a result. So like I said, we've modeled in a bunch of different scenarios. We generally don't change guidance after the first quarter, but the first quarter was so strong and the trends are continuing that, obviously, if the Middle East thing wasn't happening, I believe we would have adjusted our guidance this quarter. But I think given the uncertainty, we're just going to wait a little longer and see how things play out. Alexander Slagle: Okay. In terms of the scenario, it sort of assume recent trends continue through the rest of the year or several months? Or what's the kind of rough time frame? James Leddy: I'm sorry. Basically, we would adjust guidance as things materialize. But I think the key point that we made in our prepared remarks was that over 90% of our business is more than making up for the minimal impact that we're seeing so far from the Middle East. Alexander Slagle: Okay. And just a second question on expectations for the summer and maybe potential for more domestic travel. I don't know maybe that will be a positive tailwind for Chefs' and sort of how you're looking at that important time period as we get up to the -- some of the celebration holidays and then the travel. Christopher Pappas: I mean, Alex, I mean, it looks really strong. Again, I mean, we didn't really see the war coming, but things start settling down in the Middle East. I mean, the -- I think all our investments for the last 15 years are starting to bear fruit, and we're getting that acceleration of sales and leverage with the massive investments we've made to build this thing and a little up or down with travel or more people going out, but we just see a very, very strong field ahead of us. And I think we're taking market share, and we're just continuing to mature as obviously the small public company in foodservice, dominating, really, the good, better, best part of it. So we don't see a slowdown. Operator: The next question is from Mark Carden from UBS. Mark Carden: To start, just another follow-up on the Middle East. Glad to hear your team is holding up okay out there. For the 75% number, it sounds like that's stabilized over the course of the past few weeks. Is that correct? And then just as you think about the course of March, that build in a meaningful acceleration post-ceasefire? James Leddy: Yes. I think the best way to put it, Mark, is, yes, we mentioned that the last few weeks, our business has been trending at about 75% of prior year. We've factored that into multiple scenarios going forward, different levels of percentage should the bombing start to re-escalate and they're sending drones into Dubai. We understand that there might be a downward impact. There could be an upward impact if things settle down. So I think we've modeled that in and decided to leave the guidance unchanged. That's probably the best way to think about it. Mark Carden: Got it. That's helpful. And then any shifts to how you're thinking about inflation over the course of the next few quarters just on the back of some of the recent commodity price fluctuations and then, of course, changes in the price of oil? James Leddy: No. I think our teams have done an incredible job really the last couple of years, but especially with our team maturing and the collaboration between our sales and operations, procurement and pricing, the work that we've done with our diverse portfolio of suppliers. And as Chris mentioned, a lot of that is just that maturity and training and experience is all coming to fruition. And they've become very good at managing through inflationary and deflationary environments. And I'll just go back to the diversity of our product portfolio. When you have 90,000 products flowing through your distribution centers for a company our size and our customer base that demands quality and diversity of product sourced from all around the world, you've become very good at managing through dairy is deflationary year-over-year. But sequentially, the prices in dairy and eggs and other dairy products have been within a range that's very manageable that you can provide your customer with high-quality products at a good value and still manage the gross profit dollars to what we need to meet our targets. So I think it's just -- I'll go back to what Chris said, the investments that we've made in talent, systems, technology and infrastructure are all continuing to pay off and allowing us to manage through those type of price environments. Operator: The next question is from Kelly Bania from BMO Capital Markets. Kelly Bania: Just to follow up a little bit on the CME business, if I'm just doing the math right here, you said it was a 50 basis point drag on top line for Q1. And if I'm doing the math right, I think it's around a 200 to 300 basis point drag into April so far. But for your sales to be tracking at double digit, I'm not sure if they've accelerated or stayed kind of steady in total. Obviously, your North American businesses is kind of more than offsetting that. Just can you just clarify that math for us? Just trying to make sure we're thinking about that right so far. James Leddy: Thanks, Kelly. Yes, look, I think we're growing well above our guidance and actually double digits with the impact of -- in the first quarter, both the 2 storm events as well as the 1-month impact of the Middle East. Those 3 things combined cost us about 150 basis points on the quarter. So if you look at our organic growth at 10.5%, you have the 1% ramp of mainly Italco. You could add 150 basis points to that if we didn't have those 3 events in the quarter. So I don't know where you got to 200 or 300 basis points that's not what is happening right now. I think about it, if they continue to operate at 75% as we mentioned in April, we're still growing double digits with the impact of the Middle East. Obviously, we didn't have any storms that hit us in April. But so I think you can just get from that, that our North American business is so strong. The team is executing at a very high level. I think you look at the Amex data that comes out, the high-end consumer is still spending. So what's happening in the Middle East, we're overcoming. But obviously, we're hoping that the conflict is resolved soon and they can get back to some sort of normality. Kelly Bania: Okay. Very helpful, Jim. Can you also just elaborate a little bit more color on kind of your different markets, your more mature markets and then some of the earlier stage growth markets? And if anything is changing on how they're contributing to the really strong North America top line, whether it be Florida or Texas or New York or California? Just any color on kind of how that split is contributing to the strong North America growth? Christopher Pappas: Yes. I think, Kelly, we've been kind of consistent with our observations that all our markets are growing. And I think the obvious are growing even faster, new markets like Florida, which, still, we're pretty -- we're not new here, but we built our new facility. I think it's 3 years ago, and that has been over 20-plus percent growth, and we expect that to continue for many years to come as we continue to add salespeople and expand throughout all of Florida and become more of a specialty broadliner. It will start to mimic our classic business, which is New York. And the West Coast continues to mature towards that New York model. We still think that it's going to double even though we're getting to a pretty good size out there. Texas, we think, is going to be a top 3 that's starting to have great growth and becoming more of a Chef Warehouse, the same in New England. So the smaller markets, even though they can grow 20%, 30%, 40% a year, they're still smaller markets. And the big markets are still going to drive our march towards our next goal is $10 billion. And we see a lot of that coming from the major, major markets, Texas, California, all of New York, New England, Florida, where the density of, obviously, the populations are. Kelly Bania: Very helpful. And can I just add one more on just the gross margin. You touched on it a little bit, but I guess, the center of plate margin seemed quite strong in light of the magnitude of inflation. Maybe you can just help us understand what drove that, how you're thinking about that going forward? And just inflation overall, how your customers are handling that? It sounds like the sales force is managing that very well, but just any color that you're getting from your customers? James Leddy: Yes. Look, I don't think -- I'll just go back to what I said to an earlier question that the diversity of our product portfolio, the expertise of -- and maturity of our teams that are collaborating to manage through that. They've done an amazing job. I mean center-of-the plate year-over-year had some inflationary. But during the first quarter, the sequential changes in prices are actually deflationary coming out of December into January, February and March. It's just a seasonal impact that happens every year. So that played out and is actually a little more pronounced. So I think the improvement in margin was really our teams really managing very effectively through that environment, through that sequential pricing environment. And it's just a testament to how they've been managing their business. Christopher Pappas: Yes. And Kelly, it's a little confusing just to look at margin. You get some deflation. We expect margin to go up just because of the volatility. Usually when prices really shoot up, we're managing towards gross profit dollars versus margin because really, our basic overhead is kind of fixed. So it's really the gross profit dollars we take to the bank. And the mix starts to change. And this is why the way the protein team manages again, is towards figuring out how they can hit the gross profit dollars they need to run their businesses and the profitability that we need. So it gets a little fuzzy because the mix starts to change a lot when you have a lot of inflation. We always say people start to eat more premium hamburgers than steaks, maybe at the non-steakhouse kind of dining out, you sell more chicken, you sell more sausage. So it's a big mix of products. But again, the demand for the premium products that we sell, even to -- I don't want to say to my surprise, but it kind of plays into what we're seeing with the higher-end consumers are not going to not order a great steak because it's $5 more. So I've always thought that, that consumer base, I think it's my 41st year. I have not seen that trend change, right? So gas prices going up $0.30, $0.40, $0.50 a gallon doesn't change a lot of that behavior. And I think we're just consistently seeing that. Operator: The next question is from Peter Saleh from BTIG. Peter Saleh: Great. Congrats on a great quarter. I did want to come back to the conversation around margin. Your EBITDA margin this quarter was exceptionally high and much higher than what we were modeling, highest on record. Just I know you guys have talked about maybe 20 basis points or so of EBITDA margin expansion every year. But if you flow through these numbers to the year, you kind of get there without any more expansion. Just can you help us out a little bit in terms of -- do you think that 20 basis point number is kind of still the good number going forward? Or have we hit kind of an inflection point where we should start to see a little bit more EBITDA margin flow through to the bottom line? James Leddy: Yes. Thanks for the question, Peter. Yes, look, I'll go back to what I said. If we didn't have the uncertainty in the Middle East right now, I think we would -- we usually don't this early in the year, update our guidance, but I think we would have. If we had some sort of certainty around what's going to happen in the Middle East. Once again, it's less than 10% of our business, but we don't know how it could play out the rest of the year. If it stays where it is or gets better, I would imagine we would be adjusting up. And '25 over '24, we delivered more than 20 or 25 basis points of EBITDA margin improvement. And I think to what Chris mentioned earlier, we're really starting to see the operating leverage from all the investments that we've made. So there's certainly a really strong possibility that we will -- we can deliver more. It's just early in the year and the uncertainty around the Middle East is preventing us from adjusting that up right now. Peter Saleh: Yes. And then can I just ask on the capital structure and share repurchase? You guys repurchased $10 million in the first quarter. Your leverage is just naturally delevering. Should we expect more share repurchase as we go through the year? I mean, how do we think about that for the balance of '26? James Leddy: Yes. I think we haven't really changed our outlook. We want to remain with some dry powder to take advantage of some potential acquired growth that may present itself that could be strategic and accretive important for our growth plan. We want to continue to repurchase some shares opportunistically. And we may continue to very gradually pay down some debt. So I think we're going to continue kind of the way that we've been operating in the last year or two. I don't see a major change, but we certainly could allocate more towards share repurchase should the opportunity present itself. Operator: The next question is from Brian Harbour from Morgan Stanley. Hilary Lee: This is Hilary Lee on for Brian Harbour. Congrats on the quarter, guys. Just wondering, outside of the Middle East improving, do you guys see any other potential tailwinds for the consumer? Christopher Pappas: We're really happy with what we're seeing at this point. I think a real possibility uptick right now is what we're hearing with the World Cup, right, being in the United States and a lot of our major markets. So we don't build these things in, but I think with -- I forget how many millions of people coming in for the cup in our major cities, I think it's going to be really good for our customers. So we think the consumer of our -- the restaurants and hotels that we supply, the spending, what we see is strong, and we have not heard of anything really changing. We think bookings are strong and our customers are optimistic. So we like the way the year is -- besides the Middle East, we are really enjoying what we have set up to supply for the next X amount of years really lining up in our favor. Hilary Lee: Got it. And kind of just a follow-up on that. Like have you guys ever seen or are you able to quantify any impact that you've seen from any other major events like the Olympics a couple of years ago? James Leddy: We don't really quantify it. Obviously, when there are events, whether it's F1 or something like the World Cup or the Olympics or other types of events, we do see a temporary bump, but it's not something we model in for the long term. Operator: The next question is from Todd Brooks from Benchmark Company. Todd Brooks: Obviously, strong results in Q1 in the U.S. And Chris, you talked to the typical seasonal acceleration. Jim, you pointed to kind of normalizing maybe kind of 12% organic growth if you take out weather and CME. You talked about double digits in April. I know we're also going into a strong period here with graduations, Mother's Day, return of outdoor dining and then you just pointed out the World Cup. Are we still accelerating as we go into Q2? And Chris, when you're talking to clients, just what's their outlook on kind of the -- how the table is being set for them for the next couple of quarters here? Christopher Pappas: Cautiously very cautiously optimistic, Todd. I mean the Middle East, obviously, was not in our plans because, I mean, the business is really strong. Nobody has a crystal ball, but we don't really see a change in behavior. I think that we've invested for more -- to take more market share and be the premier high-end partner for the world's greatest chefs. And there's been a shift, and it's I don't see that shift of consumers willing to give other things up, except for they're extremely affluent that nothing really is going to change their behavior as far as dining out and travel. I just think it's -- the acceleration is, I think, more consumers are choosing to -- for the experience for the travel, for the dining out for those sports experiences versus other things in the past, maybe things they would have bought or spent more money on. So I don't see that changing. And I think our customers are benefiting for it. We see a consistent investment in more restaurants, more hotels opening, more parties, lots of catering and more people visiting the United States on the high end, obviously plays in our favor. Todd Brooks: That's great. And then, Jim, just a question for you. And Peter was asking the question about the EBITDA margin expansion and the profitability of the business. How much of this now is kind of related to the existing facilities that you've stood up just putting more volume through those facilities versus how much is due to the investments that you've made around technology and process and people that you guys highlighted at the Investor Day. If you were attributing the gains that we're seeing in EBITDA margin, how would you kind of parse it between the 2? Christopher Pappas: Goldilocks. James Leddy: Todd, we don't necessarily put a dollar amount or percent of our accretion of either adjusted EBITDA dollars or margin to a particular bucket. But what I would just go back to kind of what Chris has talked about in his prepared remarks and also what we talked about earlier in the call, and that is all of these things coming together. I think the investment in training in our salespeople, especially in the nascent high-growth markets that we've put infrastructure in to give them capacity and folded in acquisitions. And then you start off with a young maturing sales force and as they grow with the leadership team that we have regionally, very experienced leaders that have run distribution businesses, food distribution businesses themselves before joining us and know every area of the business from sales, operations to procurement to pricing, they benefit from that. And as Chris mentioned, just marrying technology with knowing our customers better, that together with the infrastructure investments and just the experience and growth of our teams that are managing pricing and procurement and operations, it's all coming together. It's all -- there's not one thing that we would point out that says this is driving our EBITDA margin higher. So I would say that, and I'd ask Chris to add anything that he might want to add. Christopher Pappas: Yes. I think, Todd, when I look back, I think it's what we -- it's a 15th year being public. I thought it would be easier at that point. But I think lessons learned is that to build something like Chefs' Warehouse, it just doesn't get built overnight. You got to have all the technology in the world. And of course, it really helps, but it's just so much more complicated. Like as you just said, it takes the buildings. It takes the maturity. It takes years to develop a team to win the Super Bowl. It's not put up overnight, even though you might have the talent, it just takes that long. So I think it's really Goldilocks. If I wrote a book, it just takes -- it takes a lot longer every time we go on a new path to build a new territory, it always takes a lot longer to master a new category, it takes a lot longer. So I think what we're seeing, obviously, the consumer is -- our customer is able to spend for the better things in life, we sell good, better, best, right? So I think people are really appreciating the mastery of these great restaurants and their talented chefs that are putting the food together. And I think it's like an orchestra, right? It has to learn how to play together and just get better and better. And I think the Chefs' Warehouse complete business, whether it's produce, whether it's groceries, whether it's dairy, protein, I think it's just getting better and better, and I think we're seeing the results. Todd Brooks: Congrats to you and the whole team. Operator: [Operator Instructions] The next question is from Margaret-May Binshtok from Wolfe Research. Margaret-May Binshtok: I just wanted to ask on the placement growth, the 6.2% you guys saw seems to be accelerating. I guess which lever is doing the most work here from your sales force and new hires or digital penetration? Christopher Pappas: I think, again, it's all the levers that are contributing. So I think it's a little bit of everything, getting leverage on the new facilities, right? The more volume, more profitable volume we pump in, you get a bigger bottom line. The technology adding placements is giving us an uptick, growing into facilities in new territories. we're getting leverage. So it's a little bit from a lot of different parts of the business that is giving us that bigger bottom line at the end of the day. Margaret-May Binshtok: Super helpful. And then I just wanted to ask on the M&A environment. Given what we were seeing with the macro and some volatility, has that changed valuations that you guys are seeing out there at all or the pipeline or sellers more motivated? Christopher Pappas: The pipeline is frothy, but again, years ago, we had to do more M&A to get into the markets faster to build a national business and now an international business. So we're just -- we're not in need of a lot of M&A. So we're just very patient. And we've seen some multiples come down in some deals that have hit our table. But we think that at a certain point, we'll have some good M&A to add to what we're building, but we're just very, very patient at this point. Operator: There are no further questions at this time. I would like to turn the floor back over to Chris Pappas for closing comments. Christopher Pappas: We'd like to thank everybody who joined the call today and take time to learn a little bit more about Chefs' Warehouse, and we're really proud of the last quarter and what the team was able to accomplish. And we remain very optimistic about the future. And, hopefully, this conflict in the Middle East settles down. And we look forward to everybody joining our next earnings call. Thank you. Operator: This concludes today's teleconference. You may disconnect your lines at this time.
Operator: Good morning, and welcome to Quad's First Quarter 2026 Conference Call. [Operator Instructions] Please note this event is being recorded. I will now turn the conference over to Julie Fraundorf, Quad's Executive Director of Corporate Development and Investor Relations. Julie, please go ahead. Julie Fraundorf: Thank you, operator, and good morning, everyone. With me today are Joel Quadracci, Quad's Chairman and Chief Executive Officer; and Tony Staniak, Quad's Chief Financial Officer and Treasurer. Joel will lead today's call with a business update, and Tony will follow with a summary of Quad's first quarter financial results, followed by Q&A. I would like to remind everyone that this call is being webcast, and forward-looking statements are subject to safe harbor provisions as outlined in our quarterly news release and in today's slide presentation on Slide 2. Quad's financial results are prepared in accordance with generally accepted accounting principles. However, this presentation also contains non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted diluted earnings per share, free cash flow, net debt and net debt leverage ratio. We have included in the slide presentation reconciliations of these non-GAAP financial measures to GAAP financial measures. Finally, a replay of the call will be available on the Investors section of quad.com shortly after our call concludes today. I will now hand over the call to Joel. J. Joel Quadracci: Thank you, Julie, and good morning, everyone. I'll begin with key highlights shown on Slide 3. Our first quarter results were in line with our expectations, and we are on track to achieve our full year 2026 guidance. During the quarter, we maintained steady profitability and expanded margins compared to Q1 2025. Our strong balance sheet enabled us to return $7 million to shareholders, including $6 million in regular cash dividends and $1 million in share repurchases. We continue to make strategic investments in our expanded marketing solutions and are seeing strong momentum in our audience strategy services, which are powered by Quad's proprietary household-based data stack. Quad's MX offering shown on Slide 4 includes a suite of integrated solutions across creative, production and media supported by intelligence and technology and spanning both digital and physical channels. As we invest in our growing solutions portfolio, we are maintaining cost discipline while navigating dynamic macroeconomic challenges, including continued postage rate increases and cost pressures in our supply chain stemming from the ongoing conflict in the Middle East. In late Q1, oil and gas prices increased sharply, driving up distribution costs and raising input costs tied to petrochemicals used in certain manufacturing processes, most notably ink. In response, Quad implemented a temporary surcharge on ink. We are continuing to proactively manage the situation should volatility persist, including diversifying suppliers, optimizing inventory planning and taking targeted pricing actions where appropriate. Postage remains a significant macroeconomic challenge for many of our clients, representing the single largest marketing expense for our mailers and a key factor shaping marketing spend decisions. The USPS continues to rely on price increases as one of its primary levers to address its financial challenges. Earlier this month, the Postal Service announced the details of its next rate increase expected to take effect on July 12. We estimate this will result in an average postage increase of up to 10% for many of our Co-mail clients. In March, Postmaster General, David Steiner, testified before Congress stating that absent federal intervention, the USPS is expected to run out of cash in 2027. The Postmaster General attributes this in large part to the USPS' universal service obligation, which requires it to deliver mail 6 days a week to every address, a number that grows by more than 1 million delivery points each year. The Postmaster General emphasized that to continue executing its universal service obligation, the USPS must either be federally compensated for the public service or provided the pricing and operational flexibility necessary to sustain it. It should be noted that since the Postmaster General's testimony before Congress, the USPS has been granted additional financial flexibility that will now provide it with liquidity beyond 2027. As this situation evolves, Quad's Postal Affairs team remains actively engaged with policymakers in Washington as well as the Postal Service, advocating on behalf of our clients and the broader mailing ecosystem. To help mitigate ongoing rate increases, we continue to deploy the same 2-pronged approaches we have had for decades, focused on maximizing postal cost savings while improving response rates. Small reductions in the cost of postage can translate into substantial savings when applied across millions of pieces, and this is where Quad continues to deliver measurable value for our clients. As shown on Slide 5, our postal optimization solutions work together to reduce clients' mailing costs. This example demonstrates how a layered optimization approach led to significant savings for our client across 1 week of mailings. To start, the client reduced its overall postage cost by 20% by participating in Quad's main optimization program of Co-mail. The client realized an additional 3% savings per piece in high-density delivery areas by utilizing advanced Co-mail sortation capabilities. We help the client capture further savings through our Household Fusion program, which combines multiple publications or catalogs into a single mail piece where eligible. In parallel, our postal experts help the client qualify for USPS promotions, lowering its cost even further. Taken together, these solutions cut the client's postage costs by 27%. This is a notable savings considering postage accounts for up to 70% of the cost to manufacture and deliver print mail pieces. It is also important to note that savings generally increase as the size of our weekly Co-mail pool grows. Today, there is still a fair amount of clients who do not optimize their mailings in our programs. As more clients adopt our postal optimization programs, we expect to generate higher savings for all participants. We also continue to invest in innovation -- innovative solutions that improve the efficiency and effectiveness of direct mail, including At-Home Direct, our self-service direct mail automation platform. Launched last year, the platform enables personalized mail with timely, scalable delivery, greater speed and operational simplicity. It also enables trigger-based mail informed by online consumer interactions or special life events to drive consumers further along the purchasing journeys. On Slide 6, we show an example of how Fidium, a rapidly growing fiber Internet provider, is using the platform to streamline workflows and get into market faster, consolidating multiple segmented direct mailings into a single weekly execution. With At-Home Connect, Fidium reduced its mail cycle from 2 weeks to just 5 days, eliminating approximately 45 labor hours per month and reduced direct mail production costs by 33%. As one Fidium executive said, switching to At-Home Connect has been a game changer for our direct mail program. It saves us time and reduces print and postage costs without sacrificing volume. Overall, it's been a seamless and highly effective solution. Beyond driving operational efficiencies, we are always working to identify and invest in solutions that improve marketing effectiveness and generate stronger response rates for our clients. Slide 7 highlights our work with Monogram, a Boston-based financial services firm as it scaled its new private student loan product, Abe. Monogram needed a partner to help increase booked loans while establishing credibility in a competitive, mature market. Quad partnered with the client from strategy through execution, leveraging our team's industry insights and experience to develop the brand's first-ever direct mail effort. The program launched during the peak lending season, running 6 campaigns from late April through September 2025. The strategy used Quad's proprietary household-based data stack to identify high potential borrowers and cosigners. Campaigns incorporated premarket testing, audience modeling, creative optimization and response analysis with insights continuously applied to improve performance over time. The program delivered strong results. Abe achieved its 2025 growth objectives with booked loans increasing sixfold year-over-year while maintaining its target cost per application. This example reflects the value of our integrated approach, which combines data, strategy, creative and execution. The program also earned industry recognition with Quad receiving a Financial Services Strategy award in the personal finance category from the Gramercy Institute, the world's largest network for senior marketers from leading financial institutions. As an industry thought leader, Quad partners with some of the nation's most respected researchers to better understand emerging market trends. As shown on Slide 8, we have continued our partnership with the Harris Poll, one of the longest-running survey firms in the U.S., releasing findings from a new national study that examined how AI is shaping the consumer shopping experience. The studies show shoppers are primarily turning to AI for practical reasons. When we ask why AI appeals to them, 2 in 3 shoppers said they like how the technology can spot pricing inconsistencies and 3 in 5 said it helps them stay on budget and narrow choices more quickly. Findings also underscore that AI complements physical shopping experiences versus replacing them with a majority of Gen Z and millennials saying they use AI in store for real-time help. As AI continues to influence how consumers discover, evaluate, engage with brands, Quad is helping clients adapt. For example, AI-based search has significantly disrupted traditional paid search and search engine optimization marketing strategies. In response, Rise has developed a proprietary AI referral agent reporting system that enables clients to track, measure and optimize performance across large language models. By monitoring metrics like AI citation rate, depth and engagement quality, the system helps clients understand if AI LLMs are surfacing their brand content, whether those appearances are driving site traffic and which platforms are delivering the strongest results, allowing them to continuously refine their strategy and improve market effectiveness. Before I turn the call over to Tony, I would like to recognize our employees and thank them. Their hard work and commitment to urgently innovate is helping solve our clients' most complex marketing problems, drive Quad's diversified business and advance our long-term strategic goals. With that, I'll turn the call over to Tony. Anthony Staniak: Thanks, Joel, and good morning, everyone. On Slide 9, we show our diverse revenue mix. During the first quarter of 2026, net sales were $581 million, a decrease of 4.3% compared to the first quarter of 2025 when excluding the February 28, 2025, divestiture of our European operations. The decline in net sales was primarily due to lower print volumes and lower agency solutions sales. Our agency solutions sales were impacted by a pullback in spend from certain existing clients and our ongoing evolution from project-based work toward agency of record engagements. Comparing our net sales breakdown between first quarter 2025 and 2026, our revenue mix as a percentage of total net sales increased in our targeted print offerings of direct mail, packaging and in-store and also in our logistics business due to increased volume and additional list services provided through our enhanced Co-mail operations. These increases were offset by declines in the print product lines of magazines and catalogs and also agency solutions. Slide 10 provides a snapshot of our first quarter 2026 financial results. Adjusted EBITDA was $45 million in the first quarter of 2026 as compared to $46 million in the first quarter of 2025, and adjusted EBITDA margin increased from 7.2% to 7.7%. The increase in adjusted EBITDA margin was primarily due to cost realignment actions taken due to print volume declines and benefits from improved manufacturing productivity. Adjusted diluted earnings per share was $0.25 in the first quarter of 2026 as compared to $0.20 in the first quarter of 2025, an increase of 25%. The increase was primarily due to higher net earnings, including lower interest expense due to reduced debt and lower depreciation and amortization as well as the beneficial impact of a lower share count. Beginning in 2022, we have repurchased 7.6 million Quad shares at an average price of $4.16 per share, representing approximately 13.6% of our total outstanding common stock as of that time. This includes 167,000 shares repurchased year-to-date for approximately $1 million. Quad's Board of Directors authorized a share repurchase program of up to $100 million of our outstanding Class A common stock in 2018. As of March 31, 2026, there were $68.4 million of authorized repurchases remaining under the program. Free cash flow was negative $107 million in the first quarter of 2026 as compared to negative $100 million in the first quarter of 2025. The $7 million decline in free cash flow was primarily due to a $5 million increase in net cash used in operating activities, mainly from higher inventories and a $2 million increase in capital expenditures. We show the seasonality of our free cash flow and debt leverage on Slide 11. We typically generate negative free cash flow in the first 9 months of the year, followed by large positive free cash flow in the fourth quarter with higher collections after our production peak. In 2026, we anticipate a similar pattern for our free cash flow and debt leverage. When removing the impact of seasonality, our net debt has reduced by $36 million from March 31, 2025, to March 31, 2026. As previously reported, we completed the divestiture of our European operations to Capmont in February 2025. The total sales price included a 3-year note receivable. As of March 31, 2026, we did not receive payment of principal and interest for the first annual installment of the note receivable totaling $6 million, which was due to be paid to us on February 28, 2026. As a result, our net debt balance as of March 31, 2026, was $6 million higher than we expected. We are working with Capmont on this past-due payment. Slide 12 presents our balanced capital allocation strategy, which is fueled by our free cash flow in addition to our ability to generate proceeds from asset sales. We expect to generate future cash proceeds from buildings we currently have for sale in Waukee, Iowa, and Thomaston, Georgia. With this strong cash generation, we intend to continue to increase our growth investments as a marketing experience company, maintain low debt balances and return capital to shareholders through our quarterly dividend and share repurchases. In the first quarter of this year, we increased our quarterly dividend by 33% to $0.10 per share or $0.40 per share on an annual basis. We are pleased to return capital to shareholders through the quarterly dividend and opportunistic share repurchases. Slide 13 includes a summary of our debt capital structure. At the end of the first quarter, our debt had a blended interest rate of 6.6% and our total available liquidity, including cash on hand under our most restrictive debt covenant was $177 million. Our next significant debt maturity of $205 million is not due until October of 2029. Given uncertainty regarding interest rates, we hold 4 interest rate swaps with notional value of $130 million and one interest rate collar agreement with notional value of $75 million. Including all interest rate derivatives, we have 49% of our interest rate exposure capped if interest rates rise. And with the interest rate collar, we would pay lower interest expense on approximately 68% of our debt if interest rates decline. We reaffirm our 2026 guidance as shown on Slide 14 and are pleased that our guidance represents another step on our way to our 2028 outlook for revenue growth. We continue to expect 2026 net sales to decline 1% to 5% compared to 2025, excluding $23 million of 2025 net sales from the divestiture of our European operations. The 3% sales decline at the midpoint of the guidance range reflects the continued ongoing improvement trend from a 5% net sales decrease from 2024 to 2025 and a 10% decrease from 2023 to 2024, excluding the European divestiture. Consistent with the seasonal pattern from last year, net sales in the second quarter are expected to be the lowest of the year, followed by sequentially increasing net sales in the third and fourth quarters during our seasonal production peak. Full year 2026 adjusted EBITDA is expected to be between $175 million and $215 million, with $195 million at the midpoint of that range being essentially equal with the 2025 adjusted EBITDA of $196 million. We anticipate lower adjusted EBITDA in the second quarter of 2026 compared to the first quarter, and then we expect sequentially higher adjusted EBITDA in the third and fourth quarters, consistent with the projected net sales seasonality. Our adjusted EBITDA margin is expected to increase by 30 basis points from 8.1% in 2025 to 8.4% in 2026 due to continued disciplined cost management and margin-enhancing changes in our revenue mix. We expect 2026 free cash flow to be in the range of $40 million to $60 million, with $50 million at the midpoint of that range, also essentially equal with the 2025 free cash flow of $51 million. We expect increased net cash from operating activities due to higher cash earnings and the timing of working capital despite an additional week of payroll payments for 53 Thursday paydays falling in the 2026 calendar year. We will have a year-over-year cash flow benefit as we return to 52 weekly payrolls in 2027 and the next time we will pay 53 payrolls in a calendar year will not occur until 2032. The projected higher net cash from operating activities is expected to be offset by higher capital expenditures, which are expected to be in the range of $55 million to $65 million. Over many years, we have invested in robotics and automation on the plant floor and across our postal optimization solutions to have what we believe is the most technology-advanced platform in the industry. We intend to continue investing in growth and automation, both in our print platform, such as digital presses and direct mail as well as in our service lines, including In-Store Connect by Quad. And finally, our net debt leverage ratio is expected to decrease to approximately 1.5x by the end of 2026, achieving the low end of our long-term targeted net debt leverage range of 1.5x to 2.0x. As a reminder, we may operate above this range at certain times of the year due to the seasonality of our business, investments or acquisitions. We are closely monitoring the current business climate, which continues to present uncertainty, driven by factors, including persistent inflationary pressures, evolving global trade dynamics, geopolitical tensions and cautious business spending. These factors, in addition to postal rate increases, could affect print and marketing spend. We will remain agile and adapt to the shifting environment. Slide 15 includes a summary of our 2028 financial outlook and long-term financial goals as we continue to build on our momentum as a marketing experience company. We continue to expect the rate of net sales decline to improve as it has since 2024 and then reach an inflection point of net sales growth in 2028. In addition, by 2028, we expect to improve adjusted EBITDA margin to 9.4% and are planning to achieve progress towards that goal in 2026 by improving the adjusted EBITDA margin by 30 basis points. Regarding free cash flow, we expect to improve our free cash flow conversion as a percentage of adjusted EBITDA from approximately 26% based on our 2026 guidance to 35% by 2028, primarily due to lower interest payments on decreasing debt balances and lower restructuring payments. Finally, we expect to maintain our current long-term targeted net debt leverage ratio in the range of 1.5x to 2.0x as part of our balanced capital allocation strategy. We believe that Quad is a compelling long-term investment, and we remain focused on achieving our financial goals and providing strong shareholder returns. With that, I'd like to turn the call back to our operator for questions. Operator: [Operator Instructions] The first question comes from Barton Crockett with Rosenblatt Securities. Barton Crockett: Let me see. One of the things, I guess, just to look a little bit kind of big picture for the moment. Could you talk a little bit about the degree to which you're seeing all of the macro pressures, including the war pressures and the inflation pressures that prompted you to put in the surcharge, and the return of kind of postage rate hikes. To what degree is that dampening demand from your marketing clients? Or to what degree are people kind of looking past that and continuing the pace? J. Joel Quadracci: Yes, I'd say so on the sort of the disruption of the supply chain, there's a lot of petroleum-based products that go into some of the things that we do, but primarily impacting ink, whether it's pigments or some of the underlying other components. And so that's why we put a surcharge on. It's a meaningful number in our pricing, but nothing close to like what postage does to our customers. And so we have a surcharge on that, that we will monitor the situation and ebb and flow as it goes forward. I will say that one of the other challenges in this is those components we compete with other industries on as well. So it's like they have choices on where to put those components. And so ink is just one of the areas that those components go in from a global perspective. Postage, as you know, has been sort of a cumulative effect of multiple years of double inflationary increases. And I would say that with this postal increase, and it depends who you are. It's anywhere from 3% to 10% increase for clients in July. I'd say that they generally expected in their budgeting process an increase somewhere in that range. And so I'd tell you that I don't expect like a big pullback through the end of the year. The question will be is how does that cumulative impact adjust their planning for 2027, and that's what we focus on now. So I think in general, we don't see people kind of adjusting plans significantly at this point because of postage. And like I said, we added this sort of waterfall slide for you all to kind of understand the impact of the different layers of Co-mail and optimization that we've built. One example I could tell you is we just had our postal conference a couple of weeks ago where all our clients come together, one very large customer really kind of didn't do a lot of optimization out of their own volume because they had significant volume. They were going to get hit by about a 10% increase, which was a bit of a surprise to them. But they ended up within days saying that they're going to join our optimization program to a bigger degree than they were, which is allowing them to suddenly come back down to more of the expected return that they're going to have or rate increase that they're going to have. So all in all, I'd say that it's -- as we said, we sort of are as expected for the year, don't see volumes at this point changing significantly from what we're expecting, but it's also a crazy world. Barton Crockett: Okay. All right. Now one of the things also is in your long-term outlook, aspiring to growth in 2028, when you guys at your Investor Day had talked about the road there, you talked about some growth areas bracketed largely within services becoming big enough to tip the kind of top line into positive and outweighing kind of the pressure in the products that are more secularly challenged. To what degree do the results that you're seeing in the first quarter and year-to-date, are they consistent with that kind of long-term aspiration you have to return to growth? Anthony Staniak: Yes, Barton, this is Tony. So yes, I would say in our services offerings, we still think that those are growth areas for us. We saw a decline in agency in the first quarter compared to last year. We view that more due to our change from project-based to agency of record engagements. So we expect growth in 2027 and beyond in agency. I also would remind that targeted print, direct mail, packaging, in-store, those are also expected for growth in our model. And we've seen that as a percentage of our revenue mix in Q1 and even dating back to last year, we've seen those areas continue to grow. So we believe we remain on track for the 2028 inflection point. J. Joel Quadracci: Yes, just to add to that, again, I always talk about the print tangible projects -- products as being really big invoices, really big engagements, whereas as you're up in the services side, smaller invoices more profitable. And they sort of impact each other by flowing revenue back and forth. But In-store, packaging, direct mail are all places we're going to grow that have those girthy things. The catalogs and publications is where we see a lot of the -- I'm sorry, in retail are where we see the bigger declines that we have to offset. Catalogs probably would have been a lot less so over the years if they're probably the most sensitive to these postal increases. So if we can kind of -- if the Postmaster General can kind of get control of this thing, I feel better about it. But again, we still have good girthy product lines here that we expect to grow and In-store was significantly up in the first quarter as an example. Barton Crockett: Okay. And one of the things that you had mentioned was the delayed payment from Capmont. Can you give us more detail of what's going on? Was there some inability on their part to pay? Or was there some performance benchmark that was not hit by the business you sold? I mean, can you give us some sense of what's going on there? Anthony Staniak: I'll start by, Barton, saying that we expect to be paid in full on the note receivable. We're actively working with Capmont to achieve that. There is no performance benchmark as it relates to the note receivable. It's very clear on being due at certain periods. And so we are fully anticipating to receive those payments. I wouldn't want to speculate beyond that. Barton Crockett: Okay. And then just the final thing here, just to step back again on the Postal Service. With Steiner beginning to -- his regime, we're beginning to see what they do, how they flex kind of the business versus DeJoy. Does this -- Joel, do you still have hopes that under Steiner, we're going to see a less aggressive rate hike regime over multiple years than we saw with DeJoy? Or is the jury still out on that? J. Joel Quadracci: Well, look, I think he's -- if you watch his testimony, it's a good hint. And I'd say that he's doing a very good job of simplifying the problem for Congress and trying to simplify it and get people more on the same page in general. What people forget is when you talk about the Post Office, it's a big organization. But if you talk about the postal system, which is the economy around the Post Office, it's a $2 trillion economy that uses the Post Office. And so there is significant impact to the economy about what happens with the Post Office and people forget that. And so what he's clarifying is, look, we have this mandate that started in 1971 that we have to deliver to every household 6 days a week. Every time it's been pushed to kind of pull back from some of those mandates, politically, it hasn't been able to happen. Now in 1971, as a little history, when they did this, Congress anticipated that there had to be some public sharing of cost to be able to create that ongoing delivery. And so they subsidized the Post Office by the tune of about $460 million a year that ultimately kind of went down into the '80s because they saw that the Post Office through its postage could start sustaining itself without that. They didn't anticipate the Internet. They didn't anticipate all this, but they did anticipate that there may be funding from time to time. So he's reminding them of that. And today, that equivalent would be somewhere in the neighborhood of about $10 billion to help support it. And I have always believed that at some point, the taxpayer has to step in because there's no business that can have their hands handcuffed to be able to do what they have to do and the infrastructure cost to do it in and pay it through your other users. And so I think he's got a lot of attention, and I think there is some momentum there to kind of look at it from the standpoint of what's good for America, what's good for the consumer. And again and again, the consumer has weighed in on wanting to have a Post Office. And you think about the things in that economy, the $2 trillion economy, things like getting your prescription drugs when you're in a rural area, that goes through the Post Office. And so I actually have a renewed optimism that if there's a time where maybe a Postmaster General like David Steiner as opposed to DeJoy, who is very good to work with, works well with Congress, can crystallize the problem and try and bring a realistic solution to it once and for all. And so I actually have a little bit of optimism, but that's also enhanced by the fact that our additional investments we've done in Co-mail with Enru and getting to high density, that waterfall of different opportunities we've created for the clients to offset these costs will help bridge until we figure out what way the Post Office is going to go. I don't think it's politically viable to let the Post Office fail. Operator: The next question comes from Mark Zgutowicz with Benchmark. Mark Zgutowicz: Just looking at your agency business, down 18% year-over-year and the underlying growth that we're seeing coming from Rise generally in that business. Just curious how you anticipate or when you anticipate a visible acceleration there. You've obviously got macro pressures, but curious, as you look at Rise and the initiatives that you talked a bit about there, how that may offset some of those pressures. And if we're looking at next year, first half versus second half in terms of realizing some of those growth benefits from Rise? J. Joel Quadracci: Yes. And I'd say in the quarter, we saw -- we did see some pullback from existing customers just with some of the macroeconomic types of things that are going on. We certainly are spending a lot of time continuing to enhance what Rise does. As a reminder to people, we really came from performance media to now full stack media. And one is a little bit more transactional, whereas the other has a longer sales cycle. And so part of this is the transition to that, that I feel good about ramping up as we get into -- towards the end of the year, but it's certainly into '27. Our expectations are to continue to ramp that part of the agency solutions side, but as well as ramping up the other parts of agency solutions, which is Betty creative, et cetera. But the question is a good question because, again, you're sort of switching from a little more transactional to more holistic and those cycles are longer. So that combined with some of the macroeconomic stuff and your regular -- some you win, some you lose, kind of explains where we are. Mark Zgutowicz: And then Tony, just one last one for me. Tony, in terms of the free cash flow range, obviously, you're reiterating that guidance. But just as we look at that range, $40 million to $60 million, it's obviously a wide one. Just if you could maybe talk about some of the puts and takes on that range, including perhaps CapEx trajectory there, which is up a couple of million dollars this quarter. But just some of the puts and takes there as you look at potentially coming in at that low end versus high end of that range. Anthony Staniak: Great. Mark, first I want to say welcome to the call and excited to have you covering the stock. So thanks for picking us up. And on the CapEx side, I mean, we've guided for the year to $55 million to $65 million, midpoint of $60 million. I mean we will spend that amount if we think there's opportunities that further enhance our growth and automation possibilities. But last year, as an example, we didn't spend the full CapEx range that we had as we looked at timing of investments and where we wanted to put our money. So it's possible that in puts and takes, that CapEx could be an area that causes that -- within that range to go towards either a higher or a lower end. The other 2 components that kind of walk us from adjusted EBITDA down to free cash flow, interest expense, we can predict that pretty well and restructuring. We think we've got a good hold on that for the year. I would say, consistent kind of from a cash payment standpoint from where it was last year. So CapEx and then ultimately where the adjusted EBITDA lands are the 2 biggest drivers that will flex us within the range. Operator: The next question comes from Kevin Steinke with Barrington Research Associates. Kevin Steinke: Just to maybe wrap up on the discussion about the Postal Service. You mentioned that the Postal Service had been granted additional flexibility that will keep it solvent. I know there had been some discussion about raising, I think, the debt limit for the Postal Service and also giving it the ability to actually be able to raise prices more. Just any more insight into the flexibility that they now have... J. Joel Quadracci: Yes. I mean, part of this, my belief is he's purposely trying to create a crisis because none of this is really that new. I mean everyone knows that the Post Office has been sliding and struggling. They're getting relief on some of the pension to create that liquidity. Their debt limit hasn't been raised in years. And so to most of us, it's like a logical ask to be able to raise it to something that's more realistic from where it is. So there's -- it's always been the problem that there's structural challenges with how the Post Office is set up. They do have a regulatory oversight group with the PRC that regulates how they can do pricing. His belief is he wants more flexibility in how to do pricing. Like he would probably tell you that a first-class stamp, are you really not going to use a first class -- buy a first-class stamp if it's $0.95 versus $0.85. And if you look at relative to the rest of the world, our stamp price is significantly lower. And if you look at Europe, most of the time, they're delivering these letters a couple of hundred miles for a significantly lower stamp price, you're delivering across an entire continent. So these are not new things, but it's how do you fix the structure so that it has a fighting chance. And the big one is the mandate. Look, it's like if everybody wants a gas line at their house in the United States, the United States government is going to make sure that we put the gas lines in, almost like a utility, right, it is a utility. For the Post Office, people believe that they deserve to have the Post Office coming every day. I think that there's been debate in the industry, could we do with less dates -- days of a week. I think most of the industry would say, yes. But every time you try and do that, the political nature of this where everybody in their own constituents start complaining that you're going to close my post office, it doesn't happen. And so his very frank comment to Congress is we can do this. We can deliver 6 days a week. We can increase the number of addresses we have to go to by $1 million. But if that's the case -- 1 million addresses, but if that's the case, you have to pay for it because the rest of the infrastructure, the rest of the users of the Post Office can't make it work. The only way that it will make the Post Office work is a short-term thing of raising the rates by more than inflation, which is what's been happening. That's a death spiral because it kills the hand that feeds you while not solving the problem of giving the taxpayer what they want. And so that's really the simplistic approach I think he's taking, and I'm supportive of it. Kevin Steinke: Great. That's helpful color. Just also following up on the temporary surcharge. It doesn't sound like it's that meaningful, but just can you give us a sense of just how much of your cost base that applies to? And is there any meaningful benefit to just your reported revenue from that temporary surcharge flowing through? Anthony Staniak: Yes. I don't think you should think of this as a material or significant benefit to revenue. From a bottom line standpoint, it is just an offset of the increase in costs. So it doesn't make us better or worse off. And as far as a percentage of our cost after the print and paper itself, the ink is a relatively lower component of the cost structure. So this is not a highly significant item. J. Joel Quadracci: The place where -- which we did talk about, I'll just mention is with diesel fuel being up significantly, obviously, our freight side is impacted by the significant increases in rates. But for years now, we've had a weekly surcharge that bounces around with diesel. And so we're not impacted from that from a freight standpoint, which is really important. So we almost -- it's like we already have that surcharge structure in place on a weekly basis on the diesel side, which would have been more impactful. Kevin Steinke: Okay. Understood. So just again, to circle back on the agency solutions, you mentioned a pullback from some existing clients. Do you expect that to pick back up again? Or have you had discussions with those clients about why they pulled back and again, when it might come back? Just any more color on, I guess, on that side. J. Joel Quadracci: I think, it kind of say it depends who you talk to and reasons for pullback are kind of in all various different places. But as I talk to people, I think one of the things that people believe will be one of those good things is just the tax returns that people are expecting refunds at a different level this year. So some of the industry will talk about that, that's a positive coming. But again, I think that you're just living in this time where you wake up and suddenly we're in a war, you're having this disruption in supply chain. These surcharges are coming across the board to pretty much all our customers from their products. And so I think it's just a matter of people trying to figure it out, and you're early in the season here, and that's when people kind of are sort of ebbing and flowing. What comes, again, I think that -- I don't feel that it's significantly disrupted to the point where we're going to see in our product lines a huge disruption. So there may have been some pullback in the agency side. But that didn't necessarily reflect a pullback in the higher revenue side of print. We didn't see people pulling back because of those issues. Kevin Steinke: Okay. Understood. That's helpful. You highlighted some momentum in audience strategy services and tying that to the data stack. Just, I guess, any more comment on that? And one of your best assets is that household-based data stack and maybe more commentary on how that continues to benefit you? J. Joel Quadracci: Yes. I'd say that it benefits us through other product lines mostly, which is like if you talk about direct mail, DM and the concept of the DM agency we have, what the DM agency heavily does is, yes, we set up direct mail for them. But more importantly, it's what's the audience you're going to. That's what the agency does. It's helped them at the beginning of how do you find a really good audience. And that's one of the biggest challenges in marketing today is getting audience, new audience, people who are confirmed recent transactors who fit your profile of the product you're selling. And so the data stack helps us with that to really sift through and find out who is the right audience for you in combination with other data sets. We think ours brings another level to it because of the nature of the household personalities we can see. And that's where it really starts and then it equates into, okay, if we use that audience and we do a direct mail piece for you, did it work better or not. And what we're seeing is we're enhancing the effectiveness of the print piece, and that's allowing us to win more of the big invoice products and allowing us to gain trust to be the adviser as its agency to people who are using some of our other product lines. Operator, anymore questions? Operator: No. This concludes the question-and-answer session. I would like to turn the conference back over to Joel Quadracci for any closing remarks. J. Joel Quadracci: Okay. Thanks, operator. Thank you, everyone, for joining today's call. I just want to close by reiterating that Quad remains committed to our strategic vision, leveraging our integrated marketing platform to drive diversified growth, improve print and marketing efficiencies and create meaningful value for all of our stakeholders. With that, thank you, and we'll see you next quarter. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2026 Agios Financial Results and Business Highlights. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand it over to our first speaker, Morgan Sanford, Head of Investor Relations at Agios. Please go ahead. Morgan Sanford: Thank you, operator. Good morning, everyone. Thank you for joining us to discuss Agios Pharmaceuticals First Quarter 2026 Financial Results and Business Highlights. You can access the slides for today's call by going to the Investors section of our website, agios.com. Please note, we'll be making certain forward-looking statements today. Actual events and results could differ materially from those expressed or implied by any forward-looking statements because of various risks, uncertainties and other factors, including those set forth in our most recent filings with the SEC and any other future filings that we may make with the SEC. On the call with me today from Agios are Brian Goff, Chief Executive Officer; Cecilia Jones, Chief Financial Officer; Tsveta Milanova, Chief Commercial Officer; and Dr. Sarah Gheuens, Chief Medical Officer and Head of Research and Development. Following prepared remarks, we will open the call for questions. With that, I am pleased to turn the call over to Brian. Brian Goff: Thanks, Morgan. Good morning, everyone, and thank you for joining us. Next slide, please. At the start of the year, we outlined our 2026 strategic priorities, which are designed to drive both near-term execution and long-term value creation. We are off to a strong start entering another catalyst-rich year with clear momentum across these priorities. Turning to first quarter highlights on the next slide. We delivered $20.7 million in net revenues, representing 138% growth year-over-year. The first quarter marks the U.S. commercial launch of AQVESME in thalassemia with the REMS fully operational as of the end of January. And already, we have shown strong initial demand. We continue to expect 2026 operating expenses to be approximately flat versus 2025, and we ended the quarter with a strong balance sheet, including over $1 billion in cash, cash equivalents and marketable securities. Importantly, we've advanced two priorities that are key to our growth inflection. First, the U.S. commercial launch of AQVESME in thalassemia is off to a strong start with 242 prescriptions written as of March 31st by REMS-certified physicians, building significantly on the 44 prescriptions we reported as of the end of January. This early progress reflects solid execution as the launch continues to broaden. Tsveta will provide additional details shortly, but the early momentum highlights the strong work and rare disease capabilities of the Agios commercial team. Second, following our pre-sNDA meeting with the FDA in the first quarter, we now plan to submit an sNDA for mitapivat in sickle cell disease in the second quarter under the U.S. accelerated approval pathway, marking an important step toward expanding our PK activation franchise into a significantly larger indication. I also want to underscore the caliber of our team whose ability to respond rapidly and rigorously to FDA feedback reflects the deep regulatory and scientific expertise we've built at Agios. Next slide, please. Stepping back, our strategy is to build a sustainable rare disease company, anchored by a foundation in rare hematology. In the near term, our focus is on executing the AQVESME U.S. commercial launch in thalassemia and advancing the mitapivat sNDA filing in sickle cell disease. In parallel, we are preparing for important mid-term catalysts, including Phase II top line data for tebapivat, our next-generation more potent PK activator in both lower-risk MDS and sickle cell disease this year. And over the longer term, we continue to advance our early-stage clinical programs and selectively evaluate expansion into other rare hematology diseases rather to support our sustained growth. With that, please advance to the next slide, and I'll turn the call over to Cecilia to discuss financials. Cecilia? Cecilia Jones: Thank you, Brian. The next slide summarizes our first quarter financial results. As we have previously shared, we will report mitapivat net revenues with U.S. and ex-U.S. components. In the first quarter, we delivered $20.7 million in worldwide mitapivat net revenues with $18.8 million from sales generated in the U.S., driven by the recent launch of AQVESME in thalassemia. Outside of the U.S., we reported $1.9 million in sales, reflecting expected quarterly fluctuations. We reported $81 million in R&D expense in the first quarter, an increase of roughly $8 million from prior year due to workforce-related expenses supporting pipeline advancement efforts as well as increased mitapivat process development expenses. We also reported $48 million in SG&A spend, up approximately $7 million from the prior year due to an increase in activities to support the U.S. commercial launch of AQVESME in thalassemia as well as an increase in stock compensation expense. We ended the quarter with over $1 billion in cash, cash equivalents and marketable securities, positioning us well to remain disciplined as we invest to maximize portfolio value and build a pipeline for long-term growth. Turning to our approach to capital allocation on the next slide, our priorities remain clear. First, we will continue to maximize the U.S. commercial launch of AQVESME in thalassemia. Second, we are managing operating expenses in a way that is aligned with our long-term value creation. Based on our current plans and accounting for the mitapivat confirmatory clinical trial in sickle cell disease, we anticipate 2026 operating expenses to be approximately flat compared to 2025. Finally, we will continue to diversify our pipeline, leveraging both internal capabilities and external innovation as we continue to execute our 2026 priorities with a disciplined approach to long-term growth. Please advance to the next slide, and I'll turn it over to Tsveta to cover commercial highlights and early AQVESME's use thalassemia launch dynamics. Tsveta Milanova: Thank you, Cecilia. Next slide, please. Our commercial performance in the first quarter reflects exceptional execution as we transitioned the focus of our field force from PK deficiency to thalassemia. In the U.S., net revenues were $18.8 million, driven by strong early AQVESME launch demand. Outside the U.S., we reported $1.9 million in net revenue, driven mainly by thalassemia utilization in the GCC. This is in line with our expectations given early market access dynamics ahead of securing government procurement. As in prior quarters, we expect to see continued variability quarter-to-quarter, driven by ordering patterns, inventory dynamics and gross to net. Please move to the next slide. I'm very encouraged by what we are seeing from the AQVESME U.S. launch so far, and I want to start by acknowledging the tremendous work of our commercial, medical and patient support teams. Launch execution in rare diseases is complex and the early progress we are seeing reflects both strong preparation and the depth of rare disease commercialization expertise we have built at Agios, supported by close coordination across the organization. 242 prescriptions were written in the first quarter by REMS-certified physicians, serving as an important early indicator of strong demand, keeping in mind the REMS became operational in late January. Here are a few points that are worth highlighting to help frame how we're thinking about these early signals. As we exited the first quarter, early adoption was concentrated among highly engaged patients, including transfusion-dependent and motivated non-transfusion-dependent patients. This is consistent with expected early launch dynamics. In the first quarter, time from prescription to initiation was shorter than expected. This was due to early engagement by patients with stronger motivation to initiate treatment, physician readiness to prescribe as well as effective REMS coordination. However, we continue to expect average initiation time lines of approximately 10 to 12 weeks in the coming quarters as we advance deeper into patient segments with less frequent clinical engagement. We are encouraged by the geographic breadth of early prescriber adoption, which has been driven by community-based hematologist oncologists. What we're seeing so far gives us confidence in our launch readiness and the quality of demand in the early days of launch. That being said, we do not view early prescription volumes as translating into a steady run rate at this early stage of launch, particularly as demand moves more towards non-transfusion-dependent patients and adoption progresses beyond the most motivated, highly engaged patients. The next slide captures both, the strong early reception of AQVESME and how we're building towards sustainable growth. Feedback from the field has been very encouraging. Physicians and patients recognize AQVESME's meaningful clinical profile. REMS onboarding is running smoothly, and our patient support services are helping patients initiate therapy. As we look ahead, our focus is on three things: first, expanding prescriber engagement across both academic and community settings; second, broadening adoption into non-transfusion-dependent patients who represent most adult diagnoses; and third, advancing payer access to support timely treatment initiation. Taken together, we are encouraged with how AQVESME is being received in the early days of launch, and we are focused on executing against the key levers that will drive durable adoption over time. I'm very proud of the team's execution to date. The performance in the first quarter reinforces the team's launch readiness and deep understanding of this market. We believe this strong foundation positions us to deliver on both the launch of AQVESME in the U.S. as well as potential future launches as we look to expand our rare disease portfolio. Please move to the next slide. And with that, I will hand the call over to Sarah to cover key R&D highlights from the quarter. Sarah Gheuens: Thank you, Tsveta. Next slide, please. We continue to advance a robust pipeline anchored by our PK activation franchise and complemented by differentiated early-stage clinical programs. In the first quarter, we announced plans to initiate two pediatric mitapivat trials in thalassemia, ENERGIZE-KidsT in transfusion-dependent patients and ENERGIZE-Kids in non-transfusion-dependent patients. We look forward to the potential to expand access to this transformative medicine into pediatric populations. Finally, we are looking ahead to upcoming second quarter readouts, including Phase IIb top line data for tebapivat, our next-generation PK activator in low-risk MDS. This study evaluates 10-, 15- and 20-milligram dose levels across a broad patient population with eight consecutive weeks of transfusion independence as the primary endpoint. While this represents a higher risk opportunity, we see meaningful potential for an oral therapy in this setting. Please move to the next slide. In the first quarter, we completed a pre-sNDA meeting with the FDA and aligned on a path towards U.S. accelerated approval for mitapivat in sickle cell disease. Since that meeting, we've had a series of informal and formal engagements to gain official alignment on the confirmatory clinical trial required under this pathway. We are pleased with the progression of these discussions and now expect we will file an sNDA in the second quarter. We look forward to sharing additional data from the RISE UP Phase III trial at an upcoming medical congress, including analyses that informed our selection of the confirmatory clinical trial's primary endpoint. Taking a step back, as we consider development of the confirmatory trial design, we emphasized operational feasibility, including enrollment time lines and time to completion while looking to maximize probability of success and the potential to further enhance the mitapivat label should U.S. full approval be granted upon results of confirmatory trial. Next slide, please. In parallel, we are advancing tebapivat, our next-generation PK activator in Phase II studies across low-risk MDS and sickle cell disease. Tebapivat was intentionally designed to go beyond first-generation PK activators. It is structurally differentiated with potent dual activation of PKR and PKM2 and PK and PD properties that support once-daily dosing without the need for a taper. Importantly, the early clinical data reflect these design features. In sickle cell disease, tebapivat demonstrated a long half-life of approximately 87 to 93 hours, dose-dependent reductions in 2,3-DPG and increases in ATP and pharmacodynamic effects that remain durable for up to four weeks after the last dose. We also observed a mean hemoglobin increase of 1.9 grams per deciliter at the 5-milligram once daily dose. Beyond red blood cell metabolism, tebapivat shows broader biological activity driven by PKM2 activation. In preclinical models, this translated into antifibrotic effects, including reduced glomerular injury and myofibroblast signaling, supporting the potential for disease-relevant activity beyond mature red blood cells. In low-risk MDS, we observed early clinical signals, including transfusion independence in the low transfusion burden cohort. However, we observed 60% lower drug exposure relative to healthy volunteers, which prompted investigation at higher doses. The ongoing Phase IIb study, which is evaluating higher doses in a broader lower-risk MDS population will test the hypothesis that deeper PKR and PKM2 activation may extend biological activity into erythroid maturation in the bone marrow. In sickle cell disease, our Phase II study is designed to rapidly assess hemoglobin response and key markers of hemolysis to confirm whether this deeper biology translates into broader clinical benefit. We look forward to reporting top line Phase IIb data in low-risk MDS in the first half of this year, followed by top line Phase II data in sickle cell disease in the second half of 2026. With that, please move to the next slide, and I will hand the call back to Brian for closing remarks. Brian Goff: Thank you, Sarah. Next slide, please. As you've heard today, 2026 is shaping up to be a growth inflection and catalyst-rich year for Agios, with meaningful progress across our commercial business and our pipeline. In the first half of the year, we advanced the regulatory path for mitapivat in sickle cell disease, and we expect Phase IIb top line data for tebapivat in lower-risk MDS, along with Phase I healthy volunteer top line data for AG-236. In the second half of the year, we anticipate Phase II top line data for tebapivat in sickle cell disease as well as Phase Ib proof of mechanism data for AG-181 in phenylketonuria. And throughout the year, we remain focused on executing the U.S. commercial launch of AQVESME in thalassemia with the goal of building a strong and sustainable commercial foundation. Next slide, please. Stepping back, we believe Agios is differentiated by the combination of a growing commercial base and a pipeline increasingly weighted towards later-stage high-value opportunities. As shown here, our current pipeline represents greater than $10 billion in potential market opportunity in 2030. Most importantly, everything you've heard today is grounded in our commitment to the patients we serve, patients living with serious and often underserved rare diseases who are still waiting for better treatment options. I also want to recognize and thank our employees. Their focus, expertise and dedication are what make this progress possible from advancing critical clinical and regulatory milestones to executing a complex commercial launch with care and discipline. With that, we appreciate your continued interest in Agios. And I'd now like to open the call for questions. Operator, please open the line. Operator: [Operator Instructions] Our first question comes from the line of Samantha Semenkow from Citi. Samantha Lynn Semenkow: Congratulations on the early launch progress for AQVESME. And just sticking with that theme, first question then is just a little bit about the demand of AQVESME you're seeing thus far in the second quarter. I'm wondering if there is a bit of a bolus component in the first quarter from those highly motivated patients. But as you look into the second quarter prescription performance, are you seeing a similar cadence in those prescriptions coming in as well as an increase in REMS-certified health care professionals? And I have a follow-up. Brian Goff: Sure. Thanks, Sam. I'm going to let Tsveta comment. And of course, we're going to stick to the first quarter dynamics, but there's obviously good momentum that we were proud to report today. So Tsveta, you want to take over? Tsveta Milanova: Absolutely. So as I said, we are very excited with the early launch and the progress we've made. We said we had 242 prescriptions from REMS-certified physicians as of March 31st. The early uptake is really driven by the highly engaged and motivated patients, which included both the transfusion-dependent patients and the motivated non-transfusion-dependent patients. I wouldn't take Q1 to be the run rate for upcoming quarters. But what I can tell you is that we still expect very strong demand and uptake as the team continues to execute very strongly and the reception from both patients and physicians on the AQVESME profile has been very, very positive. Brian Goff: And Sam, you had a follow-up? Samantha Lynn Semenkow: I did. Yes. That was helpful. A couple of follow-ups on tebapivat. Just first on the timing of the MDS data. I'm wondering if there's any additional clarity you could share there on when that data will come this quarter? And then just secondly, on sickle cell disease, I'm wondering how you're thinking about the market opportunity for mitapivat given some recent competitor's data? And then just how do you think about developing mitapivat? And obviously, you're moving towards accelerated approval filing, but you have tebapivat in the second half, that could have potential best-in-class efficacy based on those early data signals you walked through in the prepared remarks. Just how are you thinking about that market developing as we go forward? Brian Goff: So we'll go in sequence. Sarah can comment on tebapivat for MDS and basically, given the timing that we're expecting. Sarah Gheuens: Exactly. So Sam, the timing that we've highlighted is the first half of this year. And so that is what we're sticking to. And then for sickle cell disease, the timing is the second half of the year and the teams are making great progress towards those deliverables. Brian Goff: And then I'll turn it back to Tsveta to comment on -- we're clearly, Sam, in a position of strength, having mitapivat and all the progress that we talked about this morning for our accelerated pathway for sickle cell disease and then the benefit of having tebapivat, the next-generation more potent PK activator that we're looking for to Phase II data. But Tsveta, perhaps you can talk about the overall franchise goal that we have. Tsveta Milanova: Yes, absolutely. We see a very significant commercial opportunity in sickle cell disease, including both mitapivat and tebapivat. When we think about mitapivat, we see sickle cell disease as a disease that can support multiple treatment options, and we will be looking to maximize the commercial opportunity, assuming that we have a label. And that's driven by the fact that we've seen a very strong response and positive response from the KOL community on the strength of our hemoglobin responder data. They are communicating about the need of antihemolytic agent, especially an agent that can -- with hemoglobin responders can demonstrate a potential benefit in other meaningful endpoints such as quality of life and potential reduction in pain crisis. So we haven't seen the HIBISCUS data yet to be able to comment more on but we're starting from a position of strength when you think that this is our third indication in the market. There is a strong familiarity of that community with the product. We have over 1000-patient years of data and a strong market experience, and we will see that as a good anchor for our franchise building. When it comes for tebapivat, of course, we'll need to see the Phase II data. We'll need to see how the competitive environment moves forward, but we'll be looking to have a best-in-class positioning with that product, and we'll provide more information as we get the data. Operator: Our next question will come from the line of Alec Stranahan from Bank of America. Alec Stranahan: Congrats on all the early launch progress this quarter. Two questions from me, one on sickle cell and one on the launch in thal. I guess, first on thal, in patients transitioning from the clinical study to commercial drug, is covering costs of therapy part of ensuring continuity of treatment? Just trying to think through how many of the 242 scripts for patients moving from the clinical trial and how they might translate to revenue this quarter and going forward? And then on the sNDA for sickle, curious when you expect to get feedback from the regulator on the proposed design of the confirmatory study and whether that's an update you'll share or if the next we'll hear on the program is just that the sNDA has been submitted. Brian Goff: Yes. And I think Sarah can -- we'll take them in sequence, starting with thalassemia and maybe just comment on the open-label extension and the studies. Sarah Gheuens: Exactly. So Alec, so patients are in open-label extensions on the thal clinical program. So those are still ongoing and of course, help us to continue to highlight the maintenance of effect in this patient population. And in addition, the proportion of U.S. patients in those studies is small because it's a big global study. In regards to sickle cell disease, we are very pleased with the progression of the engagements we've had and the pace of the engagements we've had with the FDA, which, of course, allows us to further fine-tune the time line for submission. So we've updated to say that we would file in Q2. More details on the clinical trial, we will highlight before it goes on clinicaltrials.gov. And then, of course, we've stated that we will also present data at or around EHA and that data did inform us in this trial. I do want to take a step back here and just highlight that, as I stated in my prepared remarks that the trial, of course, is also designed in such a way that we prioritize operational feasibility and probability of success here. And so that is going to be our focus with this. Alec Stranahan: Okay. Maybe I could just follow up just on the continuity of treatment piece. I guess of the 242 scripts, I guess, how many of those were booked as revenues in the quarter? And I guess, how do you see that evolving sort of as payer access comes online over the coming quarters? Brian Goff: Cecilia, do you want to comment on the metrics? Cecilia Jones: Yes. So as we stated, we split U.S. and ex-U.S. revenues. So it's probably U.S. revenues, the way to think about it is we guided PKD to be about $45 million to $50 million for a year, and the quarter has been in line with that with the rest coming in from thalassemia. There is a lag on the prescriptions to when patients get on therapy, and that's what Tsveta was saying. We've seen it be a little faster than what we thought, but we think it's going to eventually be in that 10- to 12-week range. Operator: Our next question comes from the line of Emily Bodnar from H.C. Wainwright. Emily Bodnar: First one, with your conversations with the FDA about the sNDA for sickle cell disease, are you also expecting a REMS for sickle cell disease? Or is that only for thalassemia? And then a follow-up question. With the Phase II sickle cell data for tebapivat expected later this year, can you maybe give us some expectations about what you'd like to see relative to Phase II data from mitapivat and etavopivat to kind of get confident in that best-in-class profile? Brian Goff: So Sarah, we'll start with continued encouraging interactions with the FDA and the question on REMS. Sarah Gheuens: Yes, of course. And as you know, we now have optionality because we have PYRUKYND and AQVESME. Both of these are options, each having different pros and cons. Either way, our teams would be able to execute on any of those options. And as it relates to the Phase II data, it's a dose-finding study. So of course, we're looking for a dose in Phase II to bring forward, but we're also looking for depth and breadth of hemoglobin response. Operator: Our next question comes from the line of Eric Schmidt from Cantor. Eric Schmidt: Congrats on a terrific launch. Maybe on this 242 prescription number in the first quarter, that's obviously an enormous number. I think, Tsveta, you told us back in February that through January 31, you had 44 prescriptions. So it looks like there's been a pretty meaningful acceleration in February and March. Maybe you could just confirm whether my math there is correct. And maybe square the circle relative to the comments you made about not extrapolating forward the current run rate because if anything, it seems like you're on an accelerating path. Tsveta Milanova: Yes, we are very excited about the progress, Eric. And the 242 prescriptions from REMS-certified physicians of January 31st reflect the totality of the first quarter. As a reminder, we started actually actively promoting the drug as we got label. So the demand was generated throughout the whole quarter. The REMS became operational at the end of January, but the demand was generated throughout January as well. So I'll look at the quarter as a totality. And that's what I mentioned, I wouldn't take these two numbers and kind of extrapolate from there in the future quarters and wouldn't take that run rate. But we are still expecting to see a strong demand moving forward as the team is executing and the patients and physicians are very positive on the profile and looking to engage further. Brian Goff: And Eric, maybe I'll just take this opportunity to reinforce adding to your comments that what's so special about the AQVESME launch is we have 3 key ingredients. First is AQVESME addresses a significant unmet need with thalassemia. Secondly, the community, i.e., physicians as well as patients are already reflecting enthusiasm for the profile. And as you just said, third, Tsveta and the Agios team are very well prepared, and they know how to execute, and we're very proud of their early progress. Eric Schmidt: Terrific progress indeed. Do we have a sense of what percent of the initial REMS-prescribing patients are likely to convert or what the conversion ratio is? Tsveta Milanova: So in the initial quarter, as I mentioned, we really kind of captured some of the most motivated and engaged patients and our conversion from prescription to treatment initiation was actually faster than expected. As the quarters progress over time, we still expect the initiations to be 10 to 12 weeks always. We'll try to shorten it. But the primary driver for that is that we'll be moving into patient segments that have less frequent interactions with the health care system as we go deeper into the NTDT segment as we've spoken in the past. Eric Schmidt: Maybe asking in a different way, have you lost any of the 242 patients that you now no longer think are likely to convert? Brian Goff: So far, I think we could characterize, Eric, that the REMS has been well embraced by both the physician community as well as, as Tsveta says, the motivated patients. And we feel very confident with the high conversion, I'll call it, of those early patients that have started on or were prescribed AQVESME and then converted on to therapy. Tsveta Milanova: Yes. Sorry, Eric, maybe I didn't get exactly your question, but the REMS is not a hurdle to treatment initiation at all. What we see in terms of a conversion rate and it's very typical for rare disease launches. So we're not out of the extraordinary because of the REMS. Operator: Our next question comes from the line of Marc Frahm from TD Cowen. Marc Frahm: Congrats on the progress with AQVESME. Maybe just following up on some of the answers to Eric's questions. It sounds like at least some of these -- the extra kind of 200 prescriptions that you're kind of talking about now versus the end of January, I guess, maybe were even written before January. Is that right? They just weren't by a REMS-certified physician and kind of what's changed is the REMS certification status. Is that the right way to kind of square the commentary? And then some of this kind of caution around that trajectory of TRx maybe slowing or the fill time pushing out a little bit. Have you actually seen that yet? Or you're just cautious that, that may happen as we move into future quarters? Brian Goff: So thanks, Marc. Maybe what will help here is so that I can just like take a step back to the launch timing and what occurred in the first quarter because there was an initiation of demand and then there was the operationalization of the REMS. Do you just want to talk through that and then reflect on the source of the 242 prescriptions. Tsveta Milanova: Yes, absolutely. So the 242 prescriptions are reflective of all of the work that we've done in excellent launch preparation. We had a lot of clarity of where likely the prescriptions are going to come first, and we initiated these interactions and promotional activities as soon as we got the label. So they're a reflection of the work that we've done for the whole quarter. In the first month, we didn't have the REMS operational, and the team still did an excellent job to get prescriptions from REMS-certified physicians in that phase of the launch. And we continued on that journey once the REMS was operational. Obviously, more physicians who are waiting for that operational date to start prescribing, they did start prescribing. We are very pleased with what we are seeing right now because the prescriptions are coming from a very healthy geographic breadth. They are coming from the community prescribers, where the majority of the patients are managed right now. And we see this kind of highly motivated and engaged patients starting therapy, which is fantastic for us because we know that the thalassemia community is actually very well connected and that early launch experience with the patients will actually support the kind of the positive feedback and the profile of the product as well. So what I can tell you is that moving forward, I wouldn't take the two data points in Q1 and extrapolate from there, but I'm very confident that we'll have a strong uptake and penetration moving forward as we continue to the launch, typical with non-life-threatening rare disease conditions. Brian Goff: And Marc, on the second part of your question about the 10 to 12 weeks that Tsveta had commented on in her prepared comments, we have been encouraged that these motivated patients have translated to therapy faster than that in some cases. But again, this is relative to the motivation of both the physician and the patient. And the reason to guide on average, that's an expectation going forward is as we penetrate further into the non-transfusion-dependent patient population, we expect there will be perhaps a mitigating factor on the enthusiasm aspect, and it might take a little bit longer for those patients to convert to therapy. Marc Frahm: Okay. I completely understand that, but maybe just to push on it a little bit, presumably also as you get further into the launch, you also have a dynamic of more payers kind of having regular processes and things that tends to kind of shorten the time lines within a given payer, but I guess, it sounds like you expect it to be more than counteracted by that kind of difference in enthusiasm from the patient itself. Tsveta Milanova: Yes. We'll definitely -- the team is doing an excellent job right now, and we haven't had any payer hurdles so far. Of course, we'll continue to look for ways to shorten the time from prescriptions to treatment initiation. We'll look to advance. It takes about six months on average to get the payer policies in place. But as of now, similar to patients and physicians, payers have been very receptive of the profile and market access has not been a hurdle. Operator: And our next question comes from the line of Salveen Richter from Goldman Sachs. Lydia Erdman: This is Lydia on for Salveen. Congrats on the launch updates here. Maybe just another question on the launch. Could you maybe just speak to the treating physicians and treatment settings that you're seeing here? And are you still seeing a majority of prescriptions coming from the community hem-oncs? And is the team starting to engage with physicians beyond those who were targeted ahead of the launch? Tsveta Milanova: Yes, absolutely. So we see a very healthy start of the launch when we think from a prescriber base. We've seen prescriptions coming both from the academic and community setting, but the majority of the prescriptions are coming from the community setting, which is exactly as we expected it. And that's driven by the fact that patients with thalassemia are actually managed mainly in the community setting. We see prescriptions coming from across the country, which is fantastic. And as we move forward, the patients will continue to increase the breadth of prescribing. And of course, we'll focus on that as well, but the majority of the business is going to continue to grow breadth. Operator: And our next question comes from the line of Tessa Romero from JPMorgan. Tessa Romero: I just wanted to double-click back here to one of the initial questions on the call here. Ultimately, what do you see as the implications of Novo's recent results to next steps at Agios? And how does this change your view of what you need to see to drive tebapivat forward in sickle cell disease as well? Brian Goff: Maybe Sarah can start with our focus on mitapivat and then we can comment on tebapivat as well. Sarah Gheuens: Sure. So we haven't seen the full HIBISCUS results yet. So as Tsveta highlighted, I mean, we see a clear commercial opportunity in sickle cell disease with mitapivat. And as she highlighted as well, there are multiple players given the prevalence and the disastrous nature of this disease. And of course, we'll look to maximize commercial opportunity with mitapivat. That is possible with our data sets in RISE UP. We have, again, a very strong antihemolytic profile in our data set. The strength of the hemoglobin responder data is definitely there because as we've highlighted, we have seen impact on VOCs, but sickle cell disease is more than VOCs. We've seen impact on hospitalizations, fatigue, quality of life. So there is really a lot of excitement for our drug in the community, both by patients and physicians. And of course, we are also -- as we highlighted in our prepared remarks, very pleased with the progression of the engagements we've had with the FDA so that we're now able to update our expected filing into Q2. So we are very pleased with where we are. Tessa Romero: Okay. Great. And Sarah, if I can just follow up quickly on that point. Is there anything that you would like to better understand in the fuller HIBISCUS data set when we do see it? Sarah Gheuens: Well, yes, obviously, like the data is very limited right now that we have to our availability. So anything as it relates to standard study metrics, I would love to see. Operator: And our last question comes from the line of Greg Renza with Truist. Unknown Analyst: This is [indiscernible] on for Greg. Congrats to the launch, Tsveta. One question on AQVESME. So with the momentum continuing to build, you have 242 prescriptions in the first quarter. Are you starting to see any early signals of patient persistence, patients staying on therapy, given that this is a chronic setting? And any differences in the patterns between transfusion-dependent versus non-transfusion dependent? And I have a follow-up. Tsveta Milanova: Absolutely. As we said, we are very early in the launch, and there is a time lag between a prescription and treatment initiation and then the patients need to go from a month of therapy to start seeing what the continuation rate. But we've seen PYRUKYND in PK deficiency performing extremely well in the real world. We expect to see the same strong performance in thalassemia as well. Sometimes we talk about the REMS as kind of paperwork and work, but actually, it helps with the frequent interactions between patients and physicians and actually can support continuation of therapy as well. So we'll wait and see. That's one very important factor we'll continue to monitor. Unknown Analyst: Got it. And a second question on mitapivat in sickle cell disease. So assuming accelerated approval, how do you think about the opportunity for early uptake based on hemoglobin as a surrogate endpoint and potentially on the label while additional outcomes data are being generated in the confirmatory study and especially in light of etavopivat hitting the VOC endpoint? Brian Goff: Yes. This is a little bit reflective of what Sarah had commented on as well that sickle cell disease has very high unmet need. And as Sarah said, it's a multi-dimensional disease. There are many things to address clinically within sickle cell disease. And we stand proud and tall with the RISE UP data that we've seen, particularly as well the responder analysis. And Tsveta and her team are, of course, already preparing commercially for that potential opportunity ahead with the accelerated approval pathway. Sarah Gheuens: And just if I may add, the data from RISE UP that we've highlighted to physicians and patient communities has been very well received. Unknown Analyst: And if I may, could you maybe expand a little bit on the confirmatory study? What are you thinking in terms of the confirmatory endpoint? And how might that compare to the potential VOC data that we might see in HIBISCUS just when it comes to treatment selection? Sarah Gheuens: Yes. So thanks. So the endpoint, as highlighted, is informed by the RISE UP data set in which we've collected data systematically prospectively. So we've had also great engagements with the FDA, and that has progressed very nicely. So again, we are now able to speak to our intent to file in the second quarter. We've also highlighted before that we will be presenting data at or around EHA around all of the data, so including the data that informs this confirmatory trial and that we will also share more ahead of our posting on clinicaltrials.gov. The last thing I wanted to stress, and this is really important, this is a confirmatory trial. So we really have prioritized the operational feasibility as well with probability of success to be able to deliver meaningful data that then, of course, would allow us at that time to hopefully be able to put that data into label at the time of full approval when the results allow. So we are very excited about where we currently are. We have really great confidence in our data and the path that we are on. Operator: And this concludes the question-and-answer session. I would now like to turn it back over to Brian Goff for any closing remarks. Brian Goff: Well, thanks a lot, Victor. Thanks, everyone, for joining. The first quarter clearly reflected solid execution across our strategic priorities from the early progress with the U.S. commercial launch of AQVESME in thalassemia, as we've discussed, to continued advancement toward mitapivat sNDA filing in sickle cell disease and to maintaining a disciplined financial approach with multiple meaningful catalysts ahead this year, we believe Agios is well positioned as we move through 2026, and we look forward to continuing to update you on our progress, including at our planned investor event during the 2026 EHA Congress. So thank you very much, everyone. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Good afternoon, ladies and gentlemen, and welcome to C.H. Robinson Worldwide, Inc.'s First Quarter 2026 Conference Call. At this time, participants are in a listen-only mode. Following the company's prepared remarks, we will open the line for a live question and answer session. As a reminder, this conference is being recorded Wednesday, April 29, 2026. I would now like to turn the conference over to Charles S. Ives, Senior Director of Investor Relations. Charles S. Ives: Thank you, operator, and good afternoon, everyone. On the call with me today is David P. Bozeman, our President and Chief Executive Officer, Michael D. Castagnetto, our President of North American Surface Transportation, Arun D. Rajan, our Chief Strategy and Innovation Officer, and Damon J. Lee, our Chief Financial Officer. I would like to remind you that our remarks today contain forward-looking statements. Slide two in today's presentation lists factors that could cause our actual results to differ from management's expectations. Earnings presentation slides are supplemental to our earnings release and can be found in the Investors section of our website at investor.chrobinson.com. Today's remarks also contain certain non-GAAP measures, and reconciliations of those measures to GAAP measures are included in the presentation. With that, I will turn the call over to David. David P. Bozeman: Thank you, Charles. Good afternoon, everyone, and thank you for joining us today. As has been widely discussed in recent months, the North American trucking market has entered a period of supply-driven tightening. If that has occurred, we have heard old tapes being replaced regarding which transportation providers benefit most during certain parts of the truckload cycle. But those storylines do not fully appreciate the secular earnings growth that has consistently been generated at the new C.H. Robinson Worldwide, Inc., regardless of market conditions. 2026 was another example of this. Our adjusted earnings per share increased 15% year over year despite a significant increase in truckload spot market costs. We continue to outperform by opportunistically capturing transactional volumes at higher margins as the industry's tender rejection rates increase, by continuing to exercise our disciplined revenue management practices, by repricing some of our contractual business in a very targeted fashion, and by continuing to widen our cost-of-hire advantage, all of which have improved as we implemented our new lean operating model. This enabled us to optimize our adjusted gross profit per truckload shipment and maintain our NAST gross margin percentage despite having to absorb the elevated cost of capacity. Additionally, we gained market share in our NAS business for the twelfth consecutive quarter, and we continue to deliver evergreen productivity improvements across our business. Over the past year, we have consistently said we are not immune to macroeconomic conditions or an inflection in spot cost, but that we are managing those conditions better than we have in the past and better than our competitors. Our first quarter performance puts another check mark on our say-do scorecard. Our ability to consistently outperform over the last two-plus years is a result of focusing on controlling what we can control and the strength of our Lean AI strategy. Lean AI is our unique, disciplined approach to AI innovation that is transforming supply chains. It combines the principles of our Robinson operating model rooted in lean methodology, the power of custom-built AI, and the expertise of our people to maximize value, minimize waste, and drive better outcomes for customers and carriers. As we continue to purposely engineer our work to drive higher automation and industry-leading cost to serve and improve customer outcomes, all of this is aimed at building the best model for demonstrable outgrowth while continuing to have industry-leading operating margins. I am proud of our employees for navigating ever-changing market conditions with discipline and ingenuity and for embracing the culture shift that has fundamentally changed this company. Our Global Forwarding team continues to help our customers navigate disruptions such as conflict-driven rerouting and reduced flexibility across global shipping networks. The international freight market has been tumultuous and impacted by global trade policies, geopolitical conflicts, and route restrictions. Similar to 2025, excess vessel capacity has caused ocean rates to decline versus the elevated rates from a year ago. As the team helped customers comply with changing customs regulations and continued to implement the same revenue management disciplines that have been deployed in NAST, the team expanded gross margins in Q1 by 60 basis points year over year. We also continue to evolve our Global Forwarding business to a more cohesive centralized model with standardized and Lean AI-enabled processes. We will continue to focus on providing differentiated service and solutions to our customers and carriers, executing with discipline, and improving our business model and our cost to serve. We are highly confident in our ability to continue executing on all of our strategic initiatives, and the strategies that our team is executing are built to be effective in any market condition. We are excited about the prospects for a possible return to a healthier demand environment, but with our strong balance sheet and cash flow generation, we are also comfortable if the freight market ends up being lower for longer. In either scenario, we are ready to serve our two-sided marketplace and to deliver higher highs and higher lows across the market cycle. Our model, with an industry-leading cost to serve, is highly scalable, and we expect it will continue to improve further as we continue to harness the evolving power of AI to drive automation across the quote-to-cash life cycle of a load. As the pacesetter for innovation in our industry, we will continue to fail fast and use our domain expertise to build technology that delivers on our customer promise and drives higher value for all of our stakeholders. We are the trusted provider customers look to for cutting-edge innovation, differentiated solutions, and best-in-class service. And while we are pleased with the results we have delivered in the last two years, we are still in the early stages of our transformation. Significant runway exists as we continue to deepen the lean mindset and scale custom-built AI agents across the enterprise. I will turn it over to Michael now to provide more details on our NAST results. Michael D. Castagnetto: Thank you, David, and good afternoon, everyone. I am extremely proud of the team's disciplined execution in Q1 that showcased the secular earnings growth underway in NAST and our improved ability to offset pressure on our contractual truckload margin as the cost of capacity increased significantly. As a result of standing by our customers in Q1 with an industry-leading tender acceptance rate, our contractual truckload volume grew year over year. It also increased due to a win rate that has improved over the past year with a particular focus on growth in certain verticals that we have targeted with improved horizontal capabilities and solutions. As a result, our mix of contractual truckload volume increased from approximately 65% in Q1 last year to approximately 70% this year. At the same time, Q1 truckload spot market costs, excluding fuel, increased approximately 19% year over year according to DAT. This was a result of several supply-driven constraints, including CDL and other enforcement actions and multiple winter storms that disrupted the typical seasonal rate softening across several impacted regions and prevented spot rates from following their normal downward trajectory in Q1. As a result, tender rejection rates rose across the industry. Contractual route guides began to fail and route guide depth increased throughout Q1. This created opportunities for transactional volumes at higher margins, and armed with better disciplines and tools than in the past, our team of freight experts did a great job of capturing the right transactional volume. Combined with targeted repricing of some of our contractual business, widening our cost-of-hire advantage, and strong performance within our LTL business, we were able to offset the pressure of our contractual margins and maintain our NASS gross margin at 14.6% in Q1. This also included absorbing the higher cost of fuel. While it has very minimal impact on our gross profit dollars due to being a pass-through cost in our brokerage model, a rising fuel surcharge reduces our gross margin percentage. For example, the increase in fuel surcharges from February to March reduced our truckload gross margin in March by over 50 basis points sequentially. Again, there is no impact on gross profit dollars, but it does impact the margin percentage, and this could continue into Q2 given the still elevated fuel costs. The team also outgrew the CAS Freight Shipment Index while maintaining our overall NASS gross margin in Q1 for the twelfth consecutive quarter. Our Q1 total NASS volume was flat year over year, compared to a 6.2% decline in the index. Our LTL volume increased approximately 2% year over year while our truckload volume declined approximately 3.5% year over year, reflecting market share gains in both modes. It is important to understand that we could have grown our truckload volume by considerably more, but our focus on optimizing our gross profit and earnings outweighed further market share gains in Q1. As a result, our year-over-year and sequential growth in adjusted gross profit outperformed the market again in Q1. We will continue to appropriately exercise our optionality on a monthly, weekly, and daily basis to pivot toward volume or margins as market dynamics evolve, making disciplined, data-driven adjustments to optimize for the most effective combination that drives earnings growth and long-term value creation. One of the keys to our consistent market share gains has been volume growth in some key verticals that we have specifically targeted. During Q1, we continued to deliver year-over-year truckload volume growth in both the retail and automotive verticals. These results reflect the execution of our strategic focus and our expanded capabilities that directly support these segments and evolving customer needs, such as our leading drop trailer, cross-border, and short-haul capabilities. In our greater-than-$3 billion LTL business, where we move more LTL freight than any other 3PL in North America, we delivered year-over-year volume growth for the ninth consecutive quarter, reflecting consistent outperformance versus the broader LTL market. Our deep, long-standing relationships with LTL carriers and our proven ability to manage service variability across the carriers enable us to consistently deliver a high level of service to our customers. They continue to turn to us to simplify the complexities of LTL freight and to reduce their costs. Across our NAST business, we are also making smarter use of our proprietary digital capabilities and getting actionable data and AI-powered tools into the hands of our freight experts faster, enabling them to make better decisions and to capture the optimal freight for us. These digital capabilities also enabled us to continue delivering double-digit productivity increases in NASS in Q1. Since 2022, we have delivered a more than 50% increase in shipments per person per day, and this is measured across the entirety of our NAST organization. This enhanced efficiency is not only lowering our industry-leading cost to serve, but it is also elevating the customer experience by enabling faster, more reliable service. Beginning with produce season and continuing with stronger food and beverage demand, looking ahead to Q2, it is typically a seasonally stronger quarter compared to Q1 as the weather gets warmer across the country. Due to these seasonal trends, the ten-year average of the CAS Freight Shipment Index, excluding the pandemic-impacted year of 2020, reflects a 4.5% sequential volume increase in Q2. Truckload spot rates are expected to remain elevated, and we are now expecting a 17% year-over-year increase in dry van spot rates for the full year, up from 8% only three months ago. There is less elasticity in the supply of capacity and carriers' operating costs continue to rise, and this is leading to higher spot and contract rates. None of this changes our expectation to continue outperforming in any market condition, and we are excited about our strong results from ongoing contractual bids and further opportunities to win in the spot or transactional market. As David said in his opening comments, we remain focused on what we can control regardless of market conditions, and we will continue to deliver industry-leading solutions and flexibility that only a scaled broker can provide to customers and carriers. Our people and their unmatched expertise enable us to deliver exceptional service and greater value, and they are relentlessly driving improved results. With much more runway for improvement in front of us, we are still in the early innings of our transformation journey. With that, I will turn it over to Arun to provide an update on the durable advantages of our technology scale and expertise. Arun D. Rajan: Thanks, Michael, and good afternoon, everyone. As David and Michael described, we continue to execute our disciplined strategy, delivering for our customers and carriers while scaling several innovations that better serve our customers and widen our competitive moat. At the center of these efforts is our Lean AI strategy, which combines our lean operating model with deep industry expertise and our proprietary custom-built AI agents embedded directly into the workflows within our quote-to-cash life cycle. This strategy enables us to automate, scale, and execute in a sustainable and repeatable way without letting external narratives blur the difference between perception and reality. We take a highly focused and disciplined approach to AI deployment, and there is no hobby AI at C.H. Robinson Worldwide, Inc. We deploy AI where it delivers real-world results and measurable outcomes that show up in our P&L. We prioritize our efforts based on ROI, leveraging extensive instrumentation to identify the most manual and high-friction work and then scale our AI capabilities with our existing technology spend. Access to AI itself is not a differentiator. Anyone can say they are using AI. But what matters is how AI is engineered, operationalized, and scaled. And AI is only as effective as the data and context that powers it. Part of our competitive advantage comes from the scale, scope, depth, and proprietary nature of our data and context, which I will explain shortly. We combine that with a disciplined operating model that allows our tech to be continuously operationalized and improved. Before going deeper, it is worth grounding in how AI works at a high level. In the AI ecosystem, there are broadly three layers. At the foundation is infrastructure, which provides compute and storage. Above that are AI models, which are increasingly accessible to everyone. Neither of these layers provide the durable competitive moat. The real differentiation and advantage exists at the third layer, which is the application layer. At C.H. Robinson Worldwide, Inc., we own our application layer. It is where the benefits of AI come to life when deployed correctly, and how we deploy AI agents is another source of our competitive advantage. C.H. Robinson Worldwide, Inc.'s builder culture produced our proprietary transportation management system and an extensive application stack, including advanced AI and machine learning capabilities that sit on top of that. That same culture now enables us to design, build, and deploy fit-for-purpose AI agents that drive value for the customer, carrier, and C.H. Robinson Worldwide, Inc. With more than 450 in-house engineers and data scientists who have domain expertise and deeply understand our business, we are able to deploy agents faster and with greater control than a buy-and-integrate model that relies on stitching together third-party solutions that are generic and lack the dataset and context that represent the scale, complexity, and nuance of our business and the industry. Our unmatched scale, proprietary systems, and deep logistics expertise provide the data, context, and human-in-the-loop oversight that makes our AI agents more effective, more reliable, and more difficult to replicate. Our data and context advantage spans multiple modes such as dry van, flatbed, temp control, ocean, and air. They also span multiple services such as short haul, drop trailer, cross-border, expedited, and customs as well as multiple geographies, customers, and lanes. This level of granular, disaggregated data cannot be purchased. And this depth of data, such as data on individual warehouses, enables us to understand price and cost dynamics better than anyone in the industry. Scale, scope, and depth of the context that we provide to our custom-built AI agents is also part of our moat and competitive advantage. Through our human review process and extensive instrumentation, we collect institutional knowledge from workflows and tribal knowledge from our freight experts into a context layer that enables our AI agents to execute and continuously improve alongside our expert logisticians. In effect, our people teach our AI agents in the same way they would train a new operations employee. Routine work can then be executed autonomously, allowing our teams to handle non-routine surges in volume and higher-value, more strategic activities for our customers. For example, think about appointment automation—the breadth of customers, freight dimensions, and dock management systems we deal with. Every one of these customers' dimensions and locations has policies and nuances that are known to the appointment agent by way of an engineered context layer. Economically, this model scales efficiently. After the initial build and implementation, our marginal costs are very low. The ongoing costs are primarily tied to AI token usage, rather than having to pay by transaction to a software-as-a-service provider. So owning the technology and engineering it in such a way that we have a scalable model is a critical component to widening our competitive moat. Our build model is also important for speed of implementation. If a company is using multiple third-party providers to create and implement AI agents, they are beholden to that external provider who does not know the business as well. With our builder culture, we are leveraging the vast domain expertise of our in-house team. Since we are building our own AI agents, we have more control over the implementation process and the speed of integrating those AI agents. That faster speed to ideate, build, operationalize, and scale our AI agents is a differentiator, and it is showing up in our outperformance. Our fleet of AI agents is growing quickly as we continue to pioneer new ways to automate manual tasks and supercharge our industry-leading freight experts to solve for complexity and deliver high-quality service and outcomes to our customers and carriers. We continue to leverage and scale the use of generative AI-powered new capabilities that are backed by our unmatched data, scale, and context, and we are continuing to disrupt from within. Agentic AI operates with a degree of autonomy and unpredictability, making its progress nonlinear and requiring ongoing human-in-the-loop oversight as it advances through cycles of progress and retrenchment. Our Lean AI process of discovering, learning, and building—where missteps and resulting learnings are milestones—is not only necessary, it is the best path to uncover what truly works. Continued improvements of our service-to-cost-efficient AI task agents that listen, learn, and act all day every day enable us to deliver fast, accurate, and personalized service at scale and in any market. We have a clear view of both what has been built and what remains ahead, and we are still in the early innings of our transformation. There is significant runway across our business to continue scaling AI agents, and we have automated only a fraction of the hundreds of processes and subprocesses that exist across the quote-to-cash life cycle of an order. As David said, our strategy is focused on building the best model for demonstrable outgrowth while continuing to have industry-leading operating margins. Our technology is unmatched, and we will continue to disrupt ourselves to stay at the forefront of the AI revolution and to further widen our competitive moats. With that, I will turn the call over to Damon for a review of our first quarter results. Damon J. Lee: Thanks, Arun, and good afternoon, everyone. Through another quarter of disciplined execution, we delivered secular earnings growth and continued to advance our strategic priorities aimed at market share growth, gross profit optimization, and increasing our operating leverage, all supported by our Lean AI strategy. With the CAS Index down 6.2% year over year, the macro environment continued to provide pressure in Q1 against easier comps. While we outperformed the index, our Q1 total revenue and AGP declined approximately 12% year over year, respectively. The AGP decline was primarily driven by a 12% year-over-year decline in Global Forwarding due to lower adjusted gross profit per transaction and lower volume in our ocean services. For the total company on a monthly basis, our AGP per business day compared to the prior year was down 4% in January, down 2% in February, and flat in March. Turning to expenses, Q1 personnel expenses were $352.7 million, including $18.8 million of restructuring charges related to workforce reductions. Excluding restructuring charges, our Q1 personnel expenses were $334 million, down $13.4 million, or 3.9%, primarily due to our continued productivity improvements and cost optimization efforts. Our average headcount was down 12.3% year over year in Q1 and was down 3.1% sequentially, illustrating how we continue to decouple headcount growth from volume growth and optimize our organizational structure. We continue to expect that our 2026 personnel expenses will be in the range of $1.25 billion to $1.35 billion. This includes an expectation that we will generate double-digit productivity improvements in both NAST and Global Forwarding in 2026 as we continue to implement agentic AI solutions across the quote-to-cash life cycle of an order. As we have stated previously, we expect these productivity improvements to be over-indexed to 2026, and the same can be said of the sequential declines that are expected in our personnel expenses. Our Q1 SG&A expenses totaled $132.1 million. Excluding $1.5 million of restructuring charges, SG&A expenses were down $9.6 million, or 6.9%, year over year due to cost optimization efforts. We still expect our 2026 SG&A expenses to be in the range of $540 million to $590 million, including depreciation and amortization of $95 million to $105 million for the year. Although most of our SG&A expenses are subject to inflation, we expect continued cost improvements to partially offset the inflationary impact. As a result of our efforts to grow market share, improve gross margins, and increase our productivity and operating leverage, we expanded our operating margin, excluding restructuring costs, by 210 basis points year over year, and despite the significant increase to spot market cost in the truckload market, NAST expanded its operating margin, excluding restructuring costs, by 310 basis points year over year. This is the Lean AI strategy at work, and we reaffirm our 2026 operating income target that we raised in October. Shifting to below operating income, our effective tax rate for the quarter was 11.7%. Historically, our tax rate has been lower in the first quarter of the year due to incremental tax benefits from stock-based compensation deliveries that occur in Q1. For the year, we continue to expect the full-year tax rate to be in the range of 18% to 20%. Our capital expenditures were $15 million for the quarter, and we still expect our 2026 capital expenditures to be $75 million to $85 million. Turning to cash and our balance sheet, we generated $68.6 million in cash from operations in Q1, and we ended Q1 with approximately $1.24 billion of liquidity. Our financial strength continues to be a key differentiator in our industry, giving us the ability to invest throughout the freight cycle to further enhance our capabilities and to return capital to our shareholders. Our net debt to EBITDA ratio at the end of Q1 was 1.32 times, up from 1.03 times at the end of Q4, as we opportunistically deployed capital for a higher amount of share repurchases. While our capital allocation strategy remains grounded in maintaining an investment-grade credit rating, our balance sheet strength enabled us to return approximately $360 million of cash to shareholders in Q1. This represents a more than twofold increase compared to Q1 of last year and includes $280.7 million of share repurchases and $79 million of dividends. We have strong conviction in the strategy we are executing and in the intrinsic value of the business. Our share repurchase activity reflects that conviction and our confidence in the long-term fundamentals of the company. There is tremendous runway for improvement ahead, and our operating model, our technology, and our people continue to differentiate C.H. Robinson Worldwide, Inc. and widen our competitive moats. With that, I will turn the call back to David for his final comments. David P. Bozeman: Thanks, Damon. As you have heard in our prepared remarks today, we have continued to deliver secular earnings growth from the disciplined execution of our strategy. I am proud of the progress we have made collectively to transform C.H. Robinson Worldwide, Inc. into the global leader in Lean AI supply chains. With our lean operating model, our commitment to continuous improvement, and our AI innovations at the core of our transformation, I continue to be even more excited about what we believe we can deliver in the coming years. Our differentiating Lean AI gives us a unique opportunity to create new ways to solve complex challenges at scale, helping our customers build supply chains that are smarter, faster, and more resilient in a world where disruption is constant and agility is essential. We will never stop with our push to discover, learn, innovate, and solve problems with speed, and that is where the lean operating model is so important to our success. As lean disciplines continue to be deployed more broadly across our organization, our teams are becoming increasingly equipped to identify root causes of problems, implement countermeasures, and drive meaningful improvements. That is how we deliver and how we have consistently delivered outperformance and further earnings growth in Q1 for the last two-plus years. It is also why we are positioned to continue doing so regardless of market conditions or cycle. The strength of our strategies, our technology, our people, and our operating model disciplines are differentiating and sustainable in any market environment, including an inflecting spot rate environment like we have seen recently or eventually an inflecting demand environment. And as we lead our industry and stay on offense with our Lean AI strategy, I want to thank our people for their relentless efforts to provide exceptional service to our customers and carriers, for embracing the Robinson operating model, and continuing to execute with discipline. We have been a leader in this industry for more than a century, and we will continue to be. Our scale, our technology, our people, and the Robinson Way enable the operational excellence that has defined us for decades. The Robinson Way means being authentic, persistent, accountable, curious, and united, and those values along with our long-standing commitment to safety guide how we operate every day. Anything suggesting otherwise is misinformed. We will continue to lead with purpose and move with urgency to disrupt ourselves and the industry, and we expect to drive sustainable outperformance, profitable growth, and long-term value for all our stakeholders. That concludes our prepared remarks. I will turn it back to the operator now for the Q&A portion of the call. Operator: Thank you. We will now open the call for questions. We ask that you please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 to remove yourself from the queue. One moment while we poll for questions. Our first question comes from the line of Thomas Richard Wadewitz with UBS. Please proceed with your question. Thomas Richard Wadewitz: Yes, great. Thank you, and it is good to see the strong results against a kind of evolving freight backdrop. I wanted to ask you how you would think about the impact to your business from the cycle improvement. I generally think stronger contract rates are good. The brokers can get squeezed for a bit—obviously you have managed that well—but is that potentially, if contract rates are up quite a bit—we are hearing kind of 10% to 15% contract increases for brokers and truckload—potentially a driver of upside to your $6 number for the year? Maybe that helps you in the second half. And then the other question is along the lines of the Montgomery case. I think that we are expecting a decision May or June. It seems like probably some, you know, over 50% chance, let us say, that you win. But how would you respond if you end up losing in the Montgomery case, just in terms of other things you can do on the safety side to do more? Or would you say you are fine because it hurts others more than it hurts you because you have scale and financial strength? Thank you. David P. Bozeman: Hey, Tom. This is David. Thanks for the question. I will start with the back half of your question on Montgomery and then Michael will address the first part. Let me be really clear about this. The Montgomery case is a case that we expect to win. We have argued a really good case going to the Supreme Court. It is important that you know the context here. This case is really not about immunity for brokers. This is about safety, and this is why we support this case. Not having 50 different state rules—and when it comes down to the ruling of it, which we are anxiously awaiting—if it comes in our favor or not, we obviously have a playbook for either. But this is really about driving safety for the industry. We think that if it is not in our favor, that certainly brings some headwinds to the industry because you will have to start dealing with various brokers, and this should be the FMCSA really being the ones driving safety of carriers. But we are expecting—because we won in the Seventh Circuit and we won in the Southern District of Illinois—we expect that we will win this in the Supreme Court as well. Either way, C.H. Robinson Worldwide, Inc. will be prepared to go, and we have a playbook for either. Michael D. Castagnetto: Yes, Tom. This is Michael. I will tackle the first part of your question around the overall rate environment and how that will move forward. First of all, I would say I am really proud of the team and how they managed what was a difficult Q1, which was really an extension of the back half of Q4 through the holiday and then into the multiple storm periods, as well as the impact of regulatory on the overall supply of capacity in the marketplace. The team did an incredible job of being very active in terms of our repricing efforts in the quarter—very rifled in our approach. We have talked about that, that we expected ourselves to be faster than we have in the past, but to do it with more accuracy, more specificity, and to really work with our customers to reprice the places where the market requires it to keep supply chains healthy—but to do it with them—and I think they have appreciated that through Q1. We saw that in our results and really have had some success with repricing. From our prepared comments, we are really pleased with our recent bid activity. Q4 and Q1 are large RFP periods for the industry as a whole. We feel really good about how we came out of those periods and feel good that we are going to be in a position to manage the ongoing higher-cost marketplace that we are in right now, but also feel good that our process to manage repricing with our customers that we did well in Q1 would continue into Q2 if needed. Operator: Our next question comes from the line of Ken Hoexter with Bank of America. Please proceed with your question. Ken Hoexter: Hey, great. Good afternoon. David, congrats on really impressive moves on the technology adoption. In dropping the 12% of employees, or a little bit less year over year, maybe walk through that process and where we are seeing that change—where it is coming out of. Is it adjusting sales at all? Maybe talk about that and how you can continue to accelerate that from this point forward. And then, Michael, is it normal for contract as a percent of the total book to go up this soon in the turn? Do you not want to play the spot and take advantage of that fluctuating rate to offset the negative impact of the contract? Or do you feel like you are catching up on the book of business fast enough? Thanks. David P. Bozeman: Yes, Ken. Thanks a lot. Let me start with a little bit of context. The way we look at this, and we have said this pretty consistently, is we look at workflows at C.H. Robinson Worldwide, Inc., and for us, it has been the order-to-cash process, which has been a very manual process, and it has worked. That is where we have really gone at it with our technology. Also in this industry, and with us, you have low double-digit turnover that happens, and that has really allowed us to drive efficiencies while not, in some cases, backfilling some of those roles that we have had in that entry-level order-to-cash process. We have also shifted—as we have said consistently—our focus on being more customer-focused, and that is where we have actually invested in some roles in our small and medium business, as well as customer-facing roles for solution solving with customers. But there was just a lot to go after when we started looking at that order-to-cash process. That is the context that we really have when it came to headcount. And as Damon and I have always said, we really do not have a KPI at C.H. Robinson Worldwide, Inc. when it comes to headcount because we have shifted to an input focus versus output focus. We really reengineer the work, and the output is the output. That is how we look at it here. Damon J. Lee: And, Ken, I will put a bow on what David said. This year, we have committed to double-digit productivity across the enterprise—both NAST and our Global Forwarding businesses. We have also commented that that will be over-indexed to the second half of the year. The way we think about productivity going forward, just to remind the audience, is we have committed to single-digit productivity every year regardless of circumstances. Our operating model will generate productivity in the single digits—mid-single digits—every single year. Then in years like 2025 and 2026, where we have waves of innovation—whether that be GenAI adoption, agentic AI adoption—then we are committing to double-digit productivity when you compound those waves of innovation with baseline continuous improvement. We are in the early innings of our productivity journey—early innings of lean adoption and early innings of our technology adoption—so there is a long runway to go as it relates to productivity at C.H. Robinson Worldwide, Inc. Michael D. Castagnetto: And, Ken, on your second question about the mix of business, I think you are right that in a longer time frame our goal, as the market shifts, would be to move that percentage to more equalization. But really in Q1, most of the activity in the marketplace was supply-event-driven—either storms or regulatory impacts on capacity. While we are optimistic that there is some life in the market, it was still dominated by supply-driven events. It was really important for us, as we come out of our RFP business, to make sure that we take care of our customers, that we select the right transactional business to win—which I think we did based on the combination of mix of business and our margin performance. Early in the quarter, a lot of the transactional pricing was not matching where the market was—or maybe I would say the transactional market did not match where the pricing and capacity market was—and we saw that improve throughout the quarter. I feel really good about how the team balanced that. It is important that we also make sure that we take care of the customers who have awarded us business through what was a successful RFP season. But we do look for that to equalize over time, especially if demand improves throughout the rest of the year. Damon J. Lee: And, Ken, just to put a bow on what Michael said, this has been a strong bid season. We expect to gain share through this bid season and price. As Michael said, just to summarize that, really strong bid season for C.H. Robinson Worldwide, Inc. Ken Hoexter: Damon, just a quick follow-up for Arun. How is Global Forwarding in terms of the AI deployment? Or is it still all brokerage? Is that balanced and catching up, or still mainly brokerage? Arun D. Rajan: Yes. We are actively deploying the same playbook that we use in NAST over in Global Forwarding. You will start to see more of that kick in the second half of this year. And just like NAST, as you have seen the journey the past few years, we have a lot of runway to move forward. Thanks for the time. Operator: Our next question comes from the line of Christian F. Wetherbee with Wells Fargo. Please proceed with your question. Christian F. Wetherbee: Hey. Thanks. Good afternoon, guys. I want to ask about your view on spot activity and demand as we went through the quarter. Obviously, AGP improved as we went month to month, but can you talk about spot activity and maybe in the context of the contract comments that you are talking about? What level of contract rate increases are we seeing so far through the bid season? Michael D. Castagnetto: Thank you for the question. Early in January there was still a bit of a decision process of whether the storm impact of early January flowing into early February were events or whether they were indicative of a continuous and ongoing cost-increasing market. What you saw from a lot of customers was pushing or rolling the loads beyond the storm without necessarily pushing the loads into the transactional marketplace. As it became clear throughout the rest of the quarter that the cost side of the marketplace was going to hold, the transactional marketplace started to pick up some steam. But in many cases, the overall demand ecosystem was loads being moved from the contract side of the business to the transactional side without a total increase in loads available. We are really pleased with how the team mixed the service to our customers and also took advantage of the transactional freight that delivered the margins that we required in that marketplace. To your second part, we look at repricing as an ongoing event in terms of how the market is performing, and so we do not have a preset goal of percentages. We know we are going to have to continue to manage the health of our customers’ supply chains. For some customers, that might mean little to no repricing; for others, it might be significant. It depends on the mix. Geography is a large component right now. There are areas that are impacted more than others by the regulatory changes. We feel really good about our process, about our revenue management process, and the tools we are putting into our people's hands, and we are very confident that we can continue to take share from an RFP perspective and then manage that business appropriately. Christian F. Wetherbee: Great. That is helpful. A quick follow-up for David. If there is an adverse outcome on Montgomery, how do you think about market share? It strikes us that a whole bunch of this industry is making essentially no money right now, and theoretically there should be some cost pressures from insurance coverage or other factors. What is the opportunity for C.H. Robinson Worldwide, Inc. in that scenario from a share standpoint? David P. Bozeman: Thanks, Chris. Let me address it this way. It is really important that we put on a strong argument and that we win this case. The Supreme Court has an opportunity to resolve the disagreement of the lower courts. We have to ensure consistency in the application of preemption on these claims, and it will reduce uncertainty for brokers, shippers, and carriers alike. The opposite is 50 different state rules, and we support one national safety standard. That is super important. When it comes to the impact to C.H. Robinson Worldwide, Inc., we do not look at it that way. This is a long-tail issue for a lot of brokers. We have to plan for both sides of it. You are right to call out that there are going to be some insurance implications if you are going to be in this business, and that is going to impact different people in different ways depending on their health and their size. We are prepared either way, but we really put up a strong case. It is important for the industry that we bring clarity to this, not just the positive or negative impact to C.H. Robinson Worldwide, Inc. Operator: Our next question comes from the line of Jonathan B. Chappell with Evercore ISI. Please proceed with your question. Jonathan B. Chappell: Thank you. Good evening. You gave a good example of the very active and rifled repricing approach to the spot rate backdrop. I think what people really want to understand more is the sustainability of what you have managed to do in the first two quarters of the upturn. In addition to the repricing approach and collaboration with your customers, can you give more tangible evidence of how you have managed these first two quarters differently than prior upcycles and how that translates into 2Q or 3Q if rates stabilize from here and stop the parabolic move higher? Michael D. Castagnetto: Thanks, Jonathan. I would start with our revenue management capabilities and getting tools into our people's hands faster. If you compare to the past, it would have taken us most of Q1 to figure out where our problems were and most of the quarter to understand what level of repricing we needed, where, and how. With our Lean AI disciplines now, our tech being in our people's hands faster, they are able to see where our customers’ supply chains are having breaking points—where the health of that supply chain is impacted. Then we are able to have conversations with customers where we can make disciplined decisions together, either in a one-time event if needed based on the change or as an ongoing event based on the volatility of that part of their supply chain. We have talked in the past about whether we would have noticed it weeks or months after; now we are noticing it that day. We are recognizing the trend, and we are able to talk to our people about how we are going to fix this and what time frames we think this adjusts to. I see our process continuing. Whether the market goes up or down, we are going to continue to have those conversations with our people and our customers. I feel really good that we have the tools available to handle a continued upswing in the manner it has for the last four months, the market stabilizing, or it potentially going back down depending on the overall conditions of the marketplace. I feel really confident that we are getting the team what they need to service customers regardless of market conditions. Damon J. Lee: And, Jonathan, I would add that with the frequency in which we are interrogating the market from a price and a volume perspective, we do not have to set a strategy and hope that strategy materializes within the quarter. We are changing strategies multiple times a day—hundreds of times a month. To Michael's point, we are working within the conditions the market has given us, we are outgrowing that market, and we are taking price at the same time, with our operating margin expansion. Whatever the market conditions bear, the frequency and the surgical nature of our revenue management gives us capability that we think few have in this marketplace. Operator: Our next question comes from the line of Jizong Chan with Stifel. Please proceed with your question. Jizong Chan: Thanks, and good afternoon, everyone. I wanted to get your thoughts on forwarding in terms of volume development and margin shaping. There is a lot going on with the Middle East and capacity and the fact that we are lapping the trade disruption this quarter. Any color there would be really helpful for our models. Michael D. Castagnetto: Thanks for the question, Bruce. What I would say is this: another solid quarter in a very difficult macro environment for our Global Forwarding team. There has been tremendous disruption in the Middle East. Our direct exposure to the Middle East is quite immaterial to our book, but the knock-on effect to global rates and global capacity has been the challenge that our team has helped our customers work through in the quarter. They did an exceptional job with that challenge. You can imagine capacity being staged in one area that is being relocated to another area for demand patterns and repositioning. The team has done a really good job there. In a quarter where disruption could have been impactful to our business due to the knock-on effect of the global impact of capacity and rates, the team managed that impact to a very immaterial number for C.H. Robinson Worldwide, Inc. Global Forwarding in the quarter. Your opening comment is right—there is a lot of disruption and global displacement because of the conflict in the Middle East—but as far as the impact to our business, we have been able to manage it quite well. The impact has been relatively immaterial to our results, and we continue to help our customers solve ongoing global conflicts and challenges in the forwarding space. Operator: Our next question comes from an Analyst with Barclays. Please proceed with your question. Analyst: Hi. Good evening, and thanks for taking the question. I think implied in your 2026 earnings outlook, you embedded quite a bit of expected efficiency gains, especially in the back half of the year. Given commentary around fundamentals mid-season maybe going a little bit better, how should we think about earnings progression into the back half of 2026? Thank you. Damon J. Lee: Thanks for the question. We feel very good about our Investor Day update—the $6 EPS with no market growth. As usual, the year starts out differently than you planned. There have been market headwinds in terms of spot rates being substantially higher than we—or anybody—forecasted for 2026, but the team has managed that exceptionally well. We continue to perform exceptionally well on our self-help initiatives around outgrowing the markets, revenue management capability, and productivity. We have a very high degree of confidence in our $6 EPS target. I would not say we are in a position to change that target or the profile of that target at this point in time. As we mentioned, the productivity improvements that we referenced in those commitments are over-indexed to the second half of the year. We think that profile still aligns to our deliverables. We feel very confident in delivering our $6 with no market growth assumed in 2026. Operator: Our next question comes from the line of Richa Harnane with Deutsche Bank. Please proceed with your question. Richa Harnane: Hey. Thanks. Good evening, gentlemen. Obviously very solid results in NAST. I want to better understand the flat volumes and down 3.5% TL volumes. Michael, I know you discussed this about a deliberate decision you were making about being disciplined around growth opportunities, but maybe dive deeper into that and what you are seeing in the market that prohibited you from profitably participating in more volume opportunities. Maybe it was just PT, but I want to better understand and see if volume growth could start to be more significant as we go through the year. Michael D. Castagnetto: Hey, Richa. Thanks for the question. I will speak to what we saw in the quarter. The impact on volume was, first of all, that we made very deliberate choices about the volume we wanted to win in the transactional space at the margins we thought the market required, as well as making sure we serviced our customers in the contractual space. It is also important to realize there were major storm events that impacted very large shipping areas and volumes. While much of that volume does end up getting shipped, you do not get all of it back, so there was a volume impact due to the events that we went through in the quarter. Looking at the balance of what freight was available to us and how our customers were impacted, we feel really good about the volume we produced in the quarter. As Damon mentioned, the market did not grow in the quarter—as you saw with CAS down 6.2%—so we saw market outgrowth in both modes, year-over-year growth in LTL. We continue to believe we are taking the right share at the right time. We expect ourselves to continue to do that whether the market starts to improve or not. We will continue to hold ourselves to that high bar, but we are going to continue to do it based on the right return for customers, carriers, employees, and shareholders. David P. Bozeman: And, Richa, I would just add that we have been pretty adamant about this for almost two years now. We take the volume we want in a given quarter. In Q1, we took the volume that we felt met our criteria. Make no mistake, Michael and team could have outgrown the market substantially more than what we did, but based on our own financial expectations and quality of earnings, we focused on the volume that mattered most to us. The bookends are important here. We had one competitor that had pretty high growth in the quarter—double-digit growth—but negative gross profit dollars and a significant contraction in rate. Another competitor had a significant volume reduction—almost 20% in the quarter—but maintained rates. We believe our model is superior. We had strong outgrowth in the quarter while maintaining our AGP margins in a quarter where spot rates were up 18% to 20%. As Michael said, we feel like we have the strategy that works. We take the share we want and deliver the margin we need. We believe we have the best cost-to-serve model in the industry, and Q1 was a perfect example of that. Operator: Thank you. This does conclude our question and answer session. I would now like to turn the floor back to Charles S. Ives for closing comments. Charles S. Ives: Thank you, everyone, for joining us today, and thank you for your questions. We look forward to talking to you throughout the quarter. Have a good evening. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful rest of your day.
Operator: Good day, everyone. My name is Megan, and I will be your conference operator today. At this time, I would like to welcome you to the eBay Inc. First Quarter 2026 Earnings 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. If you would like to ask a question during this time and have joined via the webinar, please use the raise hand icon, which can be found at the bottom of your webinar application. At this time, I would like to turn the call over to John Egbert, Vice President of Investor Relations. John Egbert: Good afternoon. Thank you all for joining us for eBay Inc.’s first quarter 2026 earnings conference call. Joining me today on the call are Jamie Iannone, our chief executive officer, and Peggy Alford, our chief financial officer. We are providing a slide presentation to accompany our commentary during the call, which is available through the Investor Relations section of the eBay Inc. website at investors.ebayinc.com. Before we begin, I will remind you that during this conference call, we will discuss certain non-GAAP measures related to our performance. You can find a reconciliation of these measures to the nearest comparable GAAP measures in our accompanying slide presentation. Additionally, all growth rates noted in our prepared remarks will reflect organic, FX-neutral year-over-year comparisons. All earnings per share amounts reflect earnings per diluted share unless indicated otherwise. All year-over-year growth rates versus 2025 are also based on recast financials, reflecting our adoption of the new internally developed software accounting guidance in 2026. During this conference call, management will make forward-looking statements, including, without limitation, statements regarding our future performance and expected financial results. These forward-looking statements involve known and unknown risks and uncertainties. Actual results may differ materially from our forecast for a variety of reasons. You can find more information about risks, uncertainties, and other factors that could affect our operating results in our most recent periodic reports on Form 10-K, Form 10-Q, and our earnings release from earlier today. You should not rely on any forward-looking statements. All information in this presentation is as of 04/29/2026. We do not intend and undertake no duty to update that information. With that, I will turn the call over to Jamie. Jamie Iannone: Thanks, John. Good afternoon, and thank you all for joining us today. I am pleased to report we are off to a very strong start in 2026. Our first quarter results exceeded our guidance and consensus estimates across the board, despite ongoing macroeconomic and geopolitical uncertainty across many of our major markets. During Q1, gross merchandise volume rose by 14% to over $22 billion, while revenue grew 17% to more than $3 billion. Strong flow-through of this top-line momentum led to 18% year-over-year growth in non-GAAP operating income, which reached over $900 million. And our non-GAAP earnings per share increased by 21% year over year to $1.66. These strong top- and bottom-line results were driven by a broad-based GMV acceleration across all of our major categories, alongside improved year-over-year trends across most of our key geographies. Our most established strategic priorities now make up approximately 70% of our total GMV. This includes focus categories, our consumer-to-consumer, or C2C, business, and recommerce, which is made up of pre-owned and refurbished items. These priority areas each individually grew faster than overall GMV in Q1, and collectively they grew in the high teens year over year, reflecting the impact of our strategic investments over the last several years. Our focus categories continue to build momentum in Q1, with GMV growth accelerating to 24%, reflecting the benefits of our continued investments in trust, product experience improvements, and full-funnel marketing. The collectibles category was the largest contributor to GMV growth in Q1, reflecting broad-based momentum across the category. The 30th anniversary of Pokémon in late February fueled significant enthusiasm that translated into strong demand on our platform, which we supported with coordinated activations across our core marketplace, eBay Live, TCGplayer, and Goldin. Sports trading card GMV growth accelerated notably in Q1 and was a larger contributor to GMV growth than Pokémon, as we benefited from strong late-season demand for the NFL and NBA, as well as 2026 releases for Major League Baseball. Outside of trading cards, we observed strong GMV growth across much of our broader collectibles offering, including in right-to-win areas like collectible coins, toys, action figures, and comic books. We also saw a transitory benefit to GMV growth from gold and silver bullion in response to precious metal prices, but this demand began to normalize in late Q1 as expected and should revert to historical levels in Q2. Our off-platform marketplaces, TCGplayer growth remains strong, and Goldin growth accelerated as it reached a new quarterly GMV record in Q1. Goldin facilitated several landmark sales during the quarter, including a Pokémon Pikachu Illustrator card that sold for over $16 million, officially becoming the most valuable trading card ever sold at auction. To further support our trading card enthusiasts, we continue to enhance our AI-powered card scanning feature, which recently surpassed 30 million cumulative scans. This tool allows users to scan a single photo and instantly identify a card, surfacing historical prices and population data to help enthusiasts trade with confidence. In Q1, we expanded the card scanning feature beyond sports to cover our top five collectible card game genres, including Pokémon, Magic: The Gathering, and One Piece. Overall, our continued investments in both on- and off-platform experiences are deepening engagement with collectibles enthusiasts. Through our innovation across multiple sports, genres, buying formats, and price points, we are further solidifying eBay Inc. as a premier global shopping destination for the hobbyist community. Importantly, the momentum we observed in Q1 extended well beyond collectibles, as the remainder of our U.S. business also delivered double-digit GMV growth and outpaced broader e-commerce benchmarks. Our Motors Parts & Accessories business, or P&A, delivered its strongest quarter of year-over-year GMV growth since 2021, contributing approximately two points of growth to our overall marketplace in Q1. Our Guaranteed Fit program has meaningfully increased conversion on fitment-enabled listings in the U.S., U.K., and German markets, helping fuel the strongest quarter of P&A GMV growth we have seen in several years. Given the success we have seen in our initial markets, we recently expanded Guaranteed Fit to Australia, helping further solidify our online P&A leadership in this market by giving motors enthusiasts confidence to tackle their most complex projects, knowing they will have the right part for the job every time or their money back. We also recently strengthened our P&A value proposition with the acquisition of Aladine Systems, a U.K.-based software provider for salvage yards. We expect this acquisition to bring more P&A inventory onto the eBay Inc. platform, which provides value for cost-conscious consumers and supports the circular economy. Our acquisition of Caramel a little over a year ago is helping us bring a more comprehensive eBay Inc. Motors offering by combining the strength of our scaled P&A business with our nascent but fast-growing vehicles business. We see meaningful opportunities for synergies between these businesses as they are highly complementary. Vehicles sold on eBay Inc. create a natural opportunity for future engagement in P&A as buyers return to the marketplace to maintain, repair, and personalize their vehicles. In vehicles, our secure fully digital transaction capabilities are driving improvements across the purchase, and we are seeing encouraging traction as we expand from our initial focus on C2C transactions and begin serving small dealerships as well. While it is far earlier in its journey than P&A, vehicles continue to scale month over month and exited Q1 at an annualized GMV run rate in the hundreds of millions of dollars. In fashion, we are building on the momentum we initially created by enhancing trust across high-ASP categories like watches, handbags, jewelry, sneakers, and streetwear through Authenticity Guarantee. More recently, we have expanded Authenticity Guarantee eligibility to a wider selection of pre-loved and luxury apparel, shoes, and accessories for a more complete head-to-toe value proposition for fashion enthusiasts. After diversifying our brand and inventory coverage in the U.K. and Germany last year, we followed suit in the U.S. during Q1 by expanding Authenticity Guarantee to more than 70 shoe and fashion accessory brands. We have also improved our value proposition for fashion recommerce by streamlining and calibrating garment sizing across global standards. These changes have simplified the listing process for sellers, removed a major point of friction for buyers, and contributed to measurable increases in quality views, bought items, and conversion velocity in fashion. Our breadth and depth of selection in branded pre-loved fashion inventory is also key to our relevance in the category. Our AI tools, like the latest generation of Magical Listing experience, are making it dramatically simple for sellers to list pre-loved fashion items on eBay Inc., helping drive a mid-teens year-over-year increase in casual fashion listers in Q1. At the same time, we are strengthening our position in fashion by using community to drive greater awareness and consideration with enthusiasts. eBay Live is becoming a meaningful driver of GMV in certain fashion categories, and in March, we held our first direct-from-brand live shopping event with Marks & Spencer in the U.K. Our second annual Vogue Vintage market events in the U.S. and U.K. were another strong example of how curated events elevate eBay Inc.’s relevance in pre-loved fashion, consistently showing up at the cultural moments that matter most to fashion enthusiasts, including the Grammys, the Oscars, and Berlin Fashion Week during Q1. We have also driven engagement through our sponsorships of the new Saturday Night Live and Love Island All Stars programming in the U.K. Taken together, these efforts are making eBay Inc. a more compelling destination for enthusiasts and helped accelerate overall fashion GMV growth in Q1, including healthy double-digit growth across our fashion-focused categories in aggregate. Our C2C business remains one of the most important strategic priorities. C2C sellers bring the unique, hard-to-find inventory that differentiates eBay Inc. and strengthens our position in recommerce. Multiple years of investment have reduced friction and helped reinvigorate growth in a segment that makes up more than one quarter of our total GMV. We saw that momentum continue in Q1, as C2C delivered double-digit GMV growth across the U.S., U.K., and Germany, meaningfully outpacing B2C growth in those markets. We believe this momentum reflects the enhanced value proposition for consumer sellers in these markets, with reduced transactional friction driving a healthier sell-to-buy flywheel. In May, we plan to revamp our consumer selling experience in Australia, our fourth-largest market by demand. We will remove selling fees for consumer sellers in Australia and introduce a buyer-facing fee on C2C transactions, while also tailoring our seller segmentation and managed shipping service to cater to local market dynamics. Similar to our C2C initiatives in the U.K. and Germany, our goal is to reduce friction for casual sellers, increase our supply of differentiated inventory, and ultimately unlock a larger addressable market opportunity. Another area where we are seeing strong momentum is eBay Live. In categories where trust, storytelling, and community are central to the purchase experience, eBay Live gives sellers a powerful way to showcase unique inventory and engage buyers in real time, helping us bring more customers into high-value enthusiast experiences. Now operating in seven markets globally, eBay Live continues to scale rapidly, with an annual GMV run rate more than 8x higher year over year in recent weeks. We supported that momentum in Q1 through strong growth in programming across a diverse mix of categories and improved event discovery throughout the eBay Inc. mobile app, including the recent addition of an eBay Live button on the bottom navigation for U.S. users on iOS. In Q1, we hosted our first livestream shopping event outside of the holidays, as our 48 Hours of Drops event in the U.S. set a new daily record for eBay Live GMV, with each day outpacing our previous record on Black Friday by 60%. We also saw impressive results internationally, where local 24-hour events in the U.K. and Germany each reached seven-figure daily GMV milestones, proving that our live playbook is effectively capturing enthusiast demand across geographies. We continue to leverage our AI capabilities to reimagine core experiences across the marketplace. For sellers, the latest generation of our Magical Listing experience uses our proprietary models, product knowledge graph, and 30 years of marketplace data to do much of the hard work of creating a listing, from guiding sellers on which photos to take to generating key details like titles, categories, item specifics, and pricing. The U.S. rollout of this experience has been one of the most impactful launches we have had in years, as it has driven a greater than 50% increase in new listing creation rate, double-digit percentage increases in sold items and GMV per lister, stronger retention, and a material increase in estimated customer lifetime value for these sellers. Based on these compelling results in the U.S. market, we began expanding this experience to new and reactivated listers in Germany in April, where early A/B tests are showing directionally similar uplift on key seller KPIs as the U.S. launch, which gives us confidence to extend this experience to more countries and seller segments in the coming months. For buyers, our Authentic Search beta is creating a more intuitive and conversational way to shop by allowing customers to refine results in natural language and a multi-turn dialogue, much like working with a personal shopper that understands sizes, styles, and brand preferences. While still early, we have observed some encouraging learnings from this beta, as we are seeing approximately 50% more search engagement in sessions utilizing AI-powered refinements, which is ultimately translating into double-digit percentage increases in purchase behavior. These innovations are just two examples of our transition to an AI-native marketplace. By embedding these capabilities into the core of our platform, we are fundamentally changing the pace at which we can remove friction, unlock supply, and drive long-term value for our enthusiasts. We are also extending the reach of our marketplace through partnerships. Following a successful pilot of eBay Inc. inventory in Facebook Marketplace search results last quarter, this integration has transitioned to general availability. eBay Inc. inventory is now enabled in the search box for the majority of Facebook Marketplace users in the U.S., Germany, and France. This integration further enhances the visibility of our differentiated inventory to Facebook’s scaled audience, which could drive qualified incremental traffic to our sellers’ eBay Inc. listings. Our search integration complements our existing presence in the Marketplace feed for a subset of users, and we continue to iterate on the experience and gather valuable learnings. Now turning to shipping. Shipping solutions are a major focus for us this year as we leverage our scale and expertise to help sellers tap into demand across borders amid an increasingly complex trade policy landscape. In Q1, we continued to scale eBay International Shipping in Canada following its Q4 launch, and we expanded access to SpeedPAK for sellers in Germany and six other markets. Our SpeedPAK partnership continues to perform well in Greater China and Japan, as these capabilities are becoming increasingly important as cross-border trade grows more complex. Before concluding my prepared remarks, I am proud to share that eBay Inc. was once again recognized as one of Fortune’s Most Innovative Companies. In January, we also released eBay Inc.’s inaugural Climate Transition Plan, a company-wide roadmap to reach net zero greenhouse gas emissions by 2045. This plan reflects how we are well-positioned to drive sustainable commerce at scale, and as a result, create enduring value for our customers, communities, and the planet. In closing, we delivered a very strong start to 2026 with results that exceeded our expectations and reflected broad-based momentum across the marketplace. A few key themes stand out from the quarter. First, our strategic priorities are driving the majority of our GMV growth. Focus categories, C2C, and recommerce now represent approximately 70% of our total GMV and continue to gain share through our disciplined execution, which enhances our long-term resilience and strengthens the structural growth profile of our marketplace. Second, our GMV growth is broad-based and extends well beyond any single category. While collectibles continues to outperform, we saw improved trends across all of our major categories, including accelerating GMV growth across eBay Inc. Motors, electronics, and fashion. eBay Live continues to scale rapidly across a diverse group of categories, and we are in the early stages of realizing valuable synergies between P&A and vehicles. Third, we are progressing from AI-powered optimizations to building fully AI-native experiences on eBay Inc. We are increasingly embedding AI into foundational elements of our marketplace to remove friction and unlock supply at scale, and deliver more personalized and relevant products to our customers. While the macro environment remains dynamic, as I look toward the balance of 2026, I am confident in the sustainability of our underlying business trends and the durable foundation we have established to support long-term growth. With that, I will turn the call over to Peggy to provide more details on our financial performance. Peggy, over to you. Peggy Alford: Thank you, Jamie. I will begin with our financial highlights for the first quarter. GMV grew by 14% to $22.2 billion. Revenue grew 17% to $3.09 billion. Our non-GAAP operating income grew 18% year over year to $907 million. Non-GAAP earnings per share grew 21% year over year to $1.66, and we returned $639 million to shareholders through repurchases and cash dividends. Let us take a closer look at the key drivers of our strong Q1 performance. GMV grew over 14% to $22.2 billion on an organic FX-neutral basis. Foreign exchange provided a tailwind of approximately 400 basis points to spot GMV growth. We saw broad-based strength this quarter, with year-over-year growth improving sequentially across all our major categories, with most contributing positively to GMV growth, led by collectibles, eBay Inc. Motors, electronics, and fashion. Focus category GMV grew 24% in the quarter and outpaced the remainder of our marketplace by 15 percentage points. Shifting to our major geographies, U.S. GMV growth was particularly strong in Q1, up nearly 27%, driven by a broad-based acceleration across categories. Strength extended beyond collectibles, while the remainder of our U.S. business also delivered double-digit GMV growth and outpaced broader e-commerce benchmarks. Several of our strategic initiatives contributed more meaningfully to growth than prior quarters. eBay Live and C2C were each larger contributors, and exports from the U.S. to our international markets also accelerated, supported by improvements to our eBay International Shipping program and a weaker U.S. dollar. International GMV grew over 2% on an organic, FX-neutral basis, and growth also accelerated in Q1, with foreign exchange providing a tailwind of 770 basis points to spot GMV growth. While macroeconomic conditions remain challenging in our largest international markets, we are investing effectively in areas where we have a right to win. Focus categories, C2C, and eBay Live each contributed to improved trends in the U.K. and Germany. We also saw cross-border growth recover across key regions like Greater China and Japan, reinforcing the benefits of our investments in shipping solutions, which are making it easier for buyers and sellers to transact globally amid a more complex trade environment. Next, let us look at our buyer metrics. Our trailing twelve-month active buyers grew 1% to nearly 136 million in Q1, including buyers from recently acquired entities. On an organic basis, active buyers were over 135 million, also up 1% year over year. Buyer growth was especially strong in the U.S., accelerating to nearly 6% in the quarter. Enthusiast buyers remained at roughly 16 million but grew by nearly 2% year over year, and spend per enthusiast buyer exceeded $3,400 on a trailing twelve-month basis. In the U.S. market, enthusiast buyers grew even faster at 8% year over year. Now turning to our income statement. We generated revenue of $3.09 billion, up 17% on an organic FX-neutral basis, with foreign exchange providing a tailwind of 260 basis points to spot growth. Our take rate was 13.9% in Q1, up modestly year over year. Tailwinds from advertising, shipping initiatives, and lapping of our U.K. C2C buyer fee rollout in the prior year were partially offset by rapid growth in eBay Live and ongoing category and ASP mix changes. Additionally, foreign exchange was a headwind of approximately 20 basis points to our reported take rate year over year. Total advertising revenue was $581 million, representing GMV penetration of over 2.6%. First-party ads grew 28% to $555 million. Promoted Listings comprised over 1.2 billion of the over 2 billion total listings on eBay Inc., and 5.2 million sellers adopted at least one Promoted Listings product during the quarter. In addition, off-platform ads grew 29%, while third-party display ads declined as expected due to our continued deprecation of these legacy ad units. Revenue from our shipping programs grew in the double digits during Q1 and is becoming a more significant contributor to our take rate. Our shipping solutions are also strategically important as they leverage eBay Inc.’s scale and expertise to reduce cost and complexity, improve trust, and increase conversion and overall sales velocity. We intend to further scale our shipping initiatives, including managed shipping solutions for domestic C2C sales and cross-border solutions through EIS and our partnership with SpeedPAK. Moving to our profitability and earnings. Non-GAAP gross margin was 74.6% in the first quarter, up one point year over year, driven primarily by lower cost of payments and operational efficiencies. In addition, gross margin benefited from our U.K. managed shipping program switching from gross to net revenue recognition on January 1, as discussed last quarter. Our non-GAAP operating income grew 18% to $907 million in Q1, reflecting our ability to balance continued investment in our strategic priorities with strong flow-through to earnings. Sales and marketing expense increased in the quarter, primarily reflecting higher marketing investment behind strategic priorities like C2C and eBay Live, as well as incremental spending to capitalize on favorable returns in lower-funnel marketing. Transaction losses increased as expected in Q1, reflecting newer shipping programs and customer experience enhancements. We were encouraged to see loss trends improve toward the end of the quarter, and we continue to expect these shipping programs to follow a typical curve with higher losses initially that moderate over time as we learn and optimize. Non-GAAP earnings per share was $1.66, up 21%, and GAAP earnings per share was $1.12. Shifting to our balance sheet and capital allocation. We generated free cash flow of $898 million in the first quarter, and ended the period with cash and fixed income investments of $5.1 billion and gross debt of $6.7 billion on our balance sheet. Our equity investments and warrants were valued at roughly $770 million. In March, we received approximately $190 million from Adevinta’s shareholder distribution. This return of capital reduced the carrying value of our Adevinta investment to approximately $470 million at the end of Q1. We repurchased $500 million of eBay Inc. shares in Q1 at an average price of approximately $90 and paid a quarterly cash dividend of $139 million in March, or $0.31 per share. Our pending acquisition of Depop is now expected to close by the end of 2026. We have received regulatory clearances for the transaction in the U.S. and Germany, and reviews are in progress and on track in other markets, including the U.K. and Australia. Now turning to our outlook starting with the second quarter. We expect GMV between $21.3 billion and $21.7 billion, representing total FX-neutral growth between 8% and 10% year over year. Based on current exchange rates, we estimate FX would represent a roughly 100 basis point tailwind to spot GMV growth. Our Q2 guidance reflects continued broad-based GMV growth within our strategic priorities and incremental contributions from Live and vehicles. Our guidance also contemplates lapping dynamics from lower-funnel marketing efficiencies and our U.S. Klarna partnership, which became noticeable growth drivers during Q2 of last year. These factors, combined with gold and silver bullion volume reverting to historical levels in Q2, account for the majority of the implied year-over-year growth deceleration from Q1 to Q2. We forecast revenue to be between $2.97 billion and $3.03 billion in Q2, implying total FX-neutral growth of 8% to 10% year over year. Based on current exchange rates, we estimate FX would represent a 120 basis point tailwind to spot revenue growth. We expect non-GAAP operating income growth between 6% and 10% year over year in Q2, implying non-GAAP operating margin between 27.6% and 28.1%. Our guidance contemplates a healthy balance between investments in strategic priorities with strong flow-through of operating leverage to the bottom line. We forecast non-GAAP earnings per share between $1.46 and $1.51, representing year-over-year growth between 7% and 11%. Next, I will share some updated thoughts on the full year, excluding the impact of the pending Depop acquisition, which I will discuss separately. For 2026, we are now planning our business around year-over-year GMV growth between 7% and 7.5% on an FX-neutral basis. This updated view reflects the strong momentum we are seeing across our business balanced against more challenging comparisons as we move through the year, including lapping considerations from the prior year and a moderation of some of the category-specific tailwinds we have discussed on this call. We continue to expect revenue growth to be in line to slightly ahead of GMV for the full year on an FX-neutral basis, as healthy growth in advertising and shipping revenue is expected to be partially offset by mix shifts in our business, including higher growth contributions from Live and vehicles. We are now anticipating non-GAAP operating income growth of between 9% and 11% for the full year, reflecting our stronger GMV and revenue expectations. As we have noted previously, when our business outperforms, we will continue to evaluate opportunities to reinvest a portion of that upside into our strategic priorities to further strengthen our marketplace and drive future growth. We continue to expect non-GAAP earnings growth to be relatively in line with non-GAAP operating income in 2026. We anticipate our lower cash balance and higher interest expense would pressure the net interest and other line item year over year, partially offsetting the tailwind from our share repurchases. We continue to expect a non-GAAP tax rate of 17.5% for the full year, which is one percentage point higher than our tax rate in 2025. Our capital allocation outlook remains unchanged. We forecast capital expenditures to be between 4% and 5% of revenue for 2026. We are targeting roughly $2 billion of share repurchases for the full year. In addition, our board declared a quarterly cash dividend of $0.31 per share for the second quarter to be paid in June. As I noted earlier, we expect our pending acquisition of Depop to close by the end of Q3 2026. Given the updated timeline, we expect Depop to contribute approximately one percentage point to total FX-neutral GMV growth year over year in 2026. From a profitability perspective, we expect the acquisition would represent a low single-digit headwind to the 9% to 11% operating income growth we anticipate for the core eBay Inc. marketplace, which includes planned investments in Depop and integration costs. We would also expect the Depop acquisition to dilute our non-GAAP earnings per share growth by low single digits, with the EPS impact modestly higher than operating income due to foregone interest income from the cash used for this transaction. In closing, we are encouraged by our strong start to the year and the broad-based momentum across the business. Our results reflect continued execution within our established strategic priorities and strong returns on our investments in emerging growth vectors like eBay Live and vehicles. As we look ahead, we remain committed to balancing disciplined investments in areas that can strengthen our business over time with continued earnings growth and thoughtful capital allocation. Overall, we feel very good about the path ahead and our ability to create long-term value for our shareholders. With that, Jamie and I will now take your questions. We will now open the call for questions. Operator: Today’s session will be utilizing the raise hand feature. If you would like to ask a question, simply click on the raise hand button at the bottom of your screen. If you have dialed in, please press star 9 to raise your hand and star 6 to unmute. Once you have been called on, please unmute yourself and begin your question. Thank you. We will now pause a moment to let the queue assemble. Our first question will come from Nikhil Devnani with Bernstein. Please unmute and ask your question. Nikhil Devnani: Hey there. Thank you for taking my question. Jamie, I was hoping you could help bridge the gap between that 6% U.S. buyer growth number and GMV number, which was much higher than that. What have you seen on order frequency trends relative to ASP growth? And I guess bigger picture, is the funnel for new buyers that are coming to eBay Inc. expanding again? Jamie Iannone: Yes. We are encouraged by what we are seeing with our buyers, and we see even more positive signals when you look at the underlying trend. So, while global active buyers increased by 1% year over year and enthusiasts grew by 2% year over year, that really does not tell the whole story. Our U.S. growth has been much stronger at 6% year over year, and U.S. enthusiast buyers grew even faster at 8%. We have also talked about our mid-value buyers, Nikhil, and what we have seen is they have also grown year over year every quarter since the beginning of 2024, consistently outpacing our total active buyer growth, which really suggests strong trends beneath the surface. That is somewhat counterbalanced by some of the trends that we are seeing internationally, mitigated by the macro pressure. So overall, what I would say is I am very pleased with the strength we are seeing across the board: the improvements in buyer count, the cohort mix, the engagement, and the spend. And it is really balanced. When you look at U.S. GMV, Nikhil, it is balanced between active buyers, sold items, and ASP, which I think is a healthy place to be. Nikhil Devnani: And maybe if I could follow up with a question around gross margin and COGS for Peggy. As we think about initiatives like Live and all the AI product investment you are making now, how do we think about the puts and takes on COGS over the long term for the business? And any offsets that you might have elsewhere—productivity gains or otherwise—to counter that? Thank you. Peggy Alford: Thanks for the question. When we look at our Q1 gross margin, we saw it was driven primarily by cost of payments and operational efficiencies. We said it was up one point year over year. It benefited from the U.K. managed shipping program switching from gross to net accounting at the beginning of the year. And as we look further into the year, we do see that there are going to be some similar puts and takes to the gross margin drivers. But what we are really excited about is that we are continuing to see a lot of strength on the top line. And because of the diverse nature of our growth areas—if you look at Live and some of the AI efficiencies that we are seeing—you are going to see different drivers to gross margin, but all of this is going to benefit both the top line as well as our operating profit dollars as we scale. Operator: Our next question will come from Nathan Feather with Morgan Stanley. Please unmute your line and ask your question. Nathan Feather: Hey, everyone. Thanks for taking the question. Broadly, consumer sentiment has weakened a bit over the past two months, although spending seems like it has held strong. How do you think about balancing those inputs as you put together guidance for the remainder of the year? And then more generally, what have you been seeing in consumer health over the past few months as gas prices move? Jamie Iannone: Look, we continue to see a dynamic global macro environment with a divergence between the U.S. and international. In the U.S., for our business, consumer demand continues to be resilient so far, despite the volatility in trade policy and geopolitics. Strength was really broad-based across the board in Q1, including collectibles, motors, and fashion. I would say it is a different story in Europe where it is more challenging, as reflected in the consumer confidence and some of the data, but the investments we have been making in the region have really helped offset that, and our international year-over-year growth improved from Q4 to Q1, as did CBT and our other solutions. We have maintained a status quo approach in our assumptions. Our ability to incrementally guide Q2 and raise the year is really based on the confidence in the resilience we are seeing in our marketplace. Remember, Nathan, we are a bit more resilient because even in more challenging times, people turn to eBay Inc. to find value and used or refurbished items. From that perspective, we feel well positioned. Nathan Feather: Great. That is helpful. And then, given the really strong GMV performance over the past twelve months, on a go-forward basis—if we look at maybe a two-year stack to exclude the impact of softer comps—any limitation that would prevent the GMV momentum you are seeing in Q2 from persisting into the back half? Jamie Iannone: We feel really good about the momentum that we are seeing overall. Peggy talked about the real divergence that you see between Q2 and Q1 as just due to the number of factors she called out, whether that be bullion or some of the lapping dynamics. But what we continue to see is a strong consumer, and more importantly, we see a great return on the investments that we are making in the business. So when you look this quarter at the focus category growth of 24%, the areas that we have invested in are really resonating with consumers. We feel good about the back half and the strong two-year stack. We feel great about what we are seeing in the consumer right now and the underlying growth in the business. Operator: Your next question will come from Wells Fargo. Please go ahead. Zach Morrissey: Thanks, guys. This is Zach Morrissey on for Ken. I just wanted to double-click on the C2C strength specifically in the U.S. It has obviously been a source of strength—you said double-digit GMV growth there. Just curious what you are seeing from a competitive dynamic. Vinted appears to be scaling and investing more aggressively in the U.S. Curious if you are seeing that reflected in parts of your business, or is this contributing to broader industry secular growth? And then on marketing investments, specifically in C2C, is that something we should expect to continue to be an area of focus throughout the course of the year? Thanks. Jamie Iannone: We continue to have a very strong C2C business around the globe. The U.S. is among our strongest businesses in C2C, and we saw really healthy growth there. We have been operating in a very competitive global landscape for fashion recommerce for years, and it has really raised the bar for the customer experience and helped unlock the total addressable market that is locked up in closets, attics, basements, and garages. What we are seeing as we roll out things like Magical Listing—using AI for listings, which is now up to 500 million listings created with AI—is more listings per lister and great seller metrics because of our ability to unlock all that inventory. That has had a meaningful impact on our performance. If you look at total GMV growth in fashion, it accelerated sequentially in Q1. Our fashion-focused categories contributed roughly a point of growth to our overall marketplace, with luxury growing at healthy double digits. Our improved C2C value proposition has been impactful in fashion and, frankly, across the board, and we have seen double-digit growth in each of our top three markets by demand—the U.S., U.K., and Germany. Overall, we feel really great about the momentum that we are seeing in fashion. And our pending acquisition of Depop indicates that we are leveraging our build, buy, and partner playbook—just like we did in collectibles—to enhance the fashion experience for enthusiasts. Peggy, do you want to talk about the full-funnel marketing that we are doing? Peggy Alford: Sure. In Q1, we leaned into full-funnel investments in support of our strategic priorities, notably in focus categories, C2C, and Live. Full-funnel marketing remains a really important way for us to support our strategic priorities. It drives awareness and consideration of eBay Inc. We did a number of events and activations during the quarter. Going forward, we continue to see it as a strong lever. We also take the opportunity, when we have strong GMV performance and strong profitability in the quarter, to invest—including in sales and marketing—in order to continue that growth ahead. That is the important balance we will continue to look at: balancing strong flow-through to the bottom line with investing in continued growth from quarter to quarter, with sales and marketing being one of those levers. Operator: Our next question will come from Eric Sheridan with Goldman Sachs. Your line is open. Please ask your question. Eric Sheridan: Thanks so much for taking the question. Maybe building on the last answer and asking a two-parter. When you look out over the next six to twelve months, what do you see as the critical investments to maintain and build momentum around the enthusiast-buyer part of your business, so that continues to move in a very positive direction? That would be one. And then against the dynamic of what you laid out with respect to marketing, how do you think about marketing changes that you are seeing out there across the social media and the search landscape, referencing back to what kind of ROI you might be able to get as marketing ramps for you relative to innovations that are happening across performance marketing more broadly? Thanks so much. Jamie Iannone: We are going to continue to invest in the areas that are really driving healthy growth across the business. We will continue to invest in focus categories; you are seeing the nice return from the investments that we have made there. We are leveraging AI throughout the entire product experience, really taking friction out of the experience, and you are seeing more and more of that with the agentic search beta that we have going on and the incremental improvements in the new Magical Listing. We have been investing in Live and seeing really nice returns from that—growing in the last few weeks 8x year on year in that format—and it is really engaging buyers and sellers in a new and different way. And while a little bit earlier, vehicles is also going to be another area for us to continue investing over the course of this year. We are really pleased with the ROI that we are seeing from those investments. On our marketing plan, our full-funnel approach has been working. You have seen more mid- and lower-funnel supported by the upper-funnel that we are doing. We have been driving really interesting activations across social media—we were at all the popular events from the Grammys to the Oscars. We are sponsoring Saturday Night Live and Berlin Fashion Week, driving all the way down to putting products that are most relevant inside of people’s social feeds. Facebook is a good example. We have new tests with them going on, in addition to putting items inside of Facebook Marketplace in the search experience. We are going to continue to push forward. AI is giving us a ton of new capabilities there—the ability to create creative at incredibly low cost and build a lot more of a test-and-learn infrastructure is really compelling, and we are seeing strong ROI on that. It is also helping in our own marketing and CRM. As one example, AI-generated subject lines and creatives are driving around 40% more engagement in some tests. I feel really good about how our marketing team is embracing those new AI technologies to speak to the long tail of inventory and opportunities that we have on eBay Inc. Operator: Your next question will come from Needham. Your line is open. Please ask your question. Analyst: Great. Thanks for taking the questions. I wanted to ask on strategic priorities. GMV from strategic priorities grew and accelerated in Q1. Is this mostly C2C, or is the strength more broad-based? Within C2C, is this primarily being driven by Magical Listings or any other product you would call out? Thank you. Jamie Iannone: It is really broad-based across the board in our year-over-year growth across all of our major categories sequentially, with the strongest growth in focus categories like collectibles, motors, and fashion. And while U.S. GMV was particularly strong at 27%, we also saw improvements in our international trends. When you look at our specific strategic areas—you asked about C2C, but focus categories, C2C, and recommerce now make up about 70% of total GMV—and individually they each saw double-digit growth. That gives you a sense of how broad-based the growth is. The strength we are seeing in C2C is coming from significant and helpful marketing about Magical Listing and the value proposition we have there, and we are finding that the KPIs are fantastic. It has a customer satisfaction of 95%. We are seeing 50% more listings per lister and more engagement. It is driving a higher customer lifetime value for the sellers that are using it. This is why we are expanding it to new geographies, and we will expand it to additional seller segments over time. But it is really helping us drive that part of the business. Overall, it is across all of those priorities that we are seeing really nice double-digit growth. Operator: Your next question will come from Andrew Boone with Citizens. Your line is open. Please ask your question. Andrew Boone: Thanks so much for taking the questions. I wanted to ask about advertising strength in the quarter. It surprised us in terms of the strength you saw. And then can you connect that into just expectations for 2026? And then you called out the benefits of AI search. Where are we in the process of making search more performant? What are the benefits today, and what should we expect going forward? Thank you. Jamie Iannone: First on advertising—strong quarter. Ads grew 27%. That was a combination of strong volume growth and the continued monetization of our ads products. That was mainly driven by our 1P business, which grew 28%. Across the board, our CPA and CPC products on eBay Inc. and our off-site ads all contributed to Q1. Looking forward, we continue to expect ads revenue growth for 2026 to be healthy, driven by multiple levers, including seller adoption, listings penetration, ad rate optimization, and scaling new products. We are now leveraging AI in our advertising products to increase the yield on the same types of placements while continuing to give sellers a strong ROAS. We continue to see advertising revenue outpacing GMV for the foreseeable future, and I am really pleased by the innovations happening there. Operator: Your next question will come from Shweta R. Khajuria with Wolfe. Please unmute your line and ask your question. Andrew Ruff: Hi, this is Andrew Ruff for Shweta. Thanks for taking the question. I want to ask about agentic commerce. Starting off more broadly, what are your updated thoughts on agentic commerce and eBay Inc.’s role in that, particularly as it relates to third-party partnerships? And if we think about the terminal state of agentic commerce as more agent-to-agent based, would that impact the ad revenue potential? Is eBay Inc. okay with making a trade-off of ad revenue for volume growth? Your thoughts on that would be great. Thanks. Jamie Iannone: We see agentic AI as a real structural tailwind for eBay Inc., and it plays right into our core strengths. First, our innovations leveraging AI are already having a meaningful benefit for our business today. Take Magical Listing—we have talked about the compelling stats. Sellers have created roughly 500 million listings using our AI tools. And our agentic search beta—where we are seeing higher engagement and increased purchase behavior—shows encouraging early proof points. We will continue to bring the latest agentic technologies to eBay Inc. to make it easier for sellers to list and for buyers to find the things they love. Second, eBay Inc. offers unmatched breadth and depth of unique and differentiated inventory—90% of our 2.5 billion listings are non–new in season—where items are more likely to be one-of-a-kind. In our strategic priority areas, we have optimized the end-to-end experience to make it more seamless and enjoyable. Third, and most importantly, what differentiates eBay Inc. is the trust and enablement layer we have built over decades. Capabilities like our global network of authentication centers, our suite of proprietary global shipping solutions, regulatory compliance, Guaranteed Fit—these provide a trusted experience for everything from a trading card to a designer dress to a vintage car sold across state lines. All three of these areas are enhanced by our 30 years of proprietary data, which gives us powerful insights that no one else has. Overall, we see AI as a powerful force multiplier for our business, and it is already supporting the accelerated GMV we are seeing today. On agentic search specifically, it is early innings, but there are encouraging proof points about the quality of that traffic. Even though it is still very small, new buyers who find us via AI the majority of the time come back directly and organically to eBay Inc. We will continue to test and learn. You see us doing the OpenAI ads pilot, and we have expanded more of our inventory to Facebook Marketplace as the space evolves. Operator: Your next question will come from Tom Champion with Piper Sandler. Your line is open. Please ask your question. Tom Champion: Hi, good afternoon. Jamie, you have made a tremendous amount of progress over the last several years around authenticity and shipping cost for sellers. I am curious what you think of as the remaining frictions for sellers today. What are you looking to improve from here on out for the seller experience? And then, Peggy, could you talk a little bit about headcount growth and how you are thinking about that through the year as you incorporate efficiencies from AI? Thank you. Jamie Iannone: It is more than just Authenticity Guarantee. It is really trust across the board that we are focused on. That includes Authenticity Guarantee, Guaranteed Fit in Motors, eBay Money Back Guarantee, warranties against refurbished, secure checkout that we are building in vehicles, and more. Having that trust layer at eBay Inc. is incredibly important to us and to our consumers, and we will continue to invest in it. You just saw us roll out more authentication—expanding to 70 clothes, shoes, and accessory brands in the U.S.—to drive that program further and build trust in fashion. Beyond shipping, it is all of the selling services we provide, whether that is eBay International Shipping, which we expanded into Canada last quarter, SpeedPAK—which we expanded from China and Japan to now Germany and six more markets—or our forward deployment centers. Handling those end-to-end pieces makes it really easy for sellers. We will continue investing in our payments technology to make it easier, and we continue to invest in areas like seller financing and other elements that help sellers grow their business with working capital, along with compliance and protection, to ensure we run an incredibly trusted marketplace. We are seeing really nice AI efficiency giving our teams leverage so we can innovate more on behalf of our seller community. It is why we are seeing great response to the tools we are building and strong seller CSAT. We are going to continue to invest to make eBay Inc. a great destination where you can not only get started, but build a strong business on the platform. Peggy Alford: We are really focused, as Jamie mentioned earlier, on investing in our strategic priorities. To do that well—and still do what we are very focused on, which is balancing our top-line growth and our operating income dollar growth—we are looking to create efficiencies in the business so that we can invest in our strategic priorities. Even as we invest significantly in our AI talent, capabilities, and tech stack, we are able to maintain that balance and generate more capacity to invest in these areas without pressuring our bottom line. That is the balance we will continue to take: drive efficiency to create capacity to grow these very strategic initiatives. Operator: Your next question will come from Michael Morton with MoffettNathanson. Your line is open. Please ask your question. Michael Morton: Hi, good evening. Thank you for the question. I wanted to talk about live shopping. It is something e-commerce platforms have tried for almost my whole career, and listening to what you are saying, it sounds like it is hitting a real inflection point. I was curious to hear why you think it is gaining so much momentum now. We were at an industry conference, and people were talking about eBay Inc.’s live commerce momentum. And this is a long shot, but would love if you could maybe quantify the impact or your expectations for the impact to GMV growth going forward. Thank you so much. Jamie Iannone: You have seen live shopping be strong in Asian markets, and we are seeing real excitement and momentum with live shopping in our Western markets. After our recent expansion, eBay Live is available across seven countries. It is becoming a more meaningful contributor to growth, particularly in our collectibles and fashion categories. That is part of why we saw such strong growth in focus categories. We have been doing meaningful activations around eBay Live. This quarter, we did a 48 Hours of Drops in the U.S., and we did the same in the U.K. and Germany where we did 24 Hours of Drops. That helped drive engagement and boost sales, with each market reaching a single-day milestone as a result. Even our newest markets—the U.K. and Germany—saw a seven-figure day on that day. We continue to scale by adding new sellers, growing content density, and expanding entry points. This quarter, we added eBay Live to the bottom navigation for all mobile iOS users in the U.S., helping to increase discoverability. What we are hearing is that buying inventory on eBay Inc. Live is different—there is engagement, community, and excitement. Many of our sellers are finding that streaming on Live brings their community together and drives excitement that not only drives new business for them in Live, but also drives more visits and buyers to their core business as a result. Our scale, global buyer base, and high bar for trust really differentiate us in live commerce. While it is still early, we believe Live can be a meaningful growth factor over time and an increasingly important part of how enthusiasts shop on our platform. Operator: Thank you for joining. This concludes today’s call. You may now disconnect.
Operator: Welcome to Glaukos Corporation's First Quarter 2026 Financial Results Conference Call. Copies of the company's press release are and quarterly summary document, both issued after the market close today, are available at www.glaukos.com. [Operator Instructions] This call is being recorded, and an archived replay will be available online in the Investor Relations section at www.glaukos.com. I will now turn the call over to Chris Lewis, Vice President of Investor Relations and Corporate Affairs. Christopher Lewis: Thank you, and good afternoon. Joining me today are Glaukos' Chairman and CEO, Tom Burns; President and CEO, Joe Gilliam; and CFO, Alex Thurman. Similar to prior quarters, the company has posted a document on its Investor Relations website under the Financials & Filings, Quarterly Results section tied with Quarterly Summary. This document is designed to be read by investors before the regularly scheduled quarter conference call. [Operator Instructions] Please note that all statements other than statements of historical facts made on this call that address activities, events or developments we expect, believe or anticipate will or may occur in the future are forward-looking statements. These include statements about our plans, objectives, strategies and prospects regarding, among other things, for sales, product, pipeline technologies and clinical trials U.S. and international commercialization, market development efforts, product approvals, the efficacy of our current and future products, competitive market position, regulatory strategies and reimbursement for our products, financial condition and results of operations as well as the expected impact of general macroeconomic conditions, including foreign currency fluctuations on our business and operations. These statements are based on current expectations about future events affecting us and are subject to risks, uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Therefore, they may cause our actual results to differ materially from those expressed or implied by forward-looking statements. Please to review today's press release and our recent SEC filings for more information about these risk factors. You'll find these documents in the Investor Relations section of our website at www.glaukos.com. Finally, please note that during today's call, we will also discuss certain non-GAAP financial measures, including results on an adjusted basis. We believe these financial measures can facilitate a more complete analysis and greater transparency into Glaukos' ongoing results of operations, particularly when comparing underlying results from period to period. Please refer to the tables in our earnings press release available on the Investor Relations section of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. With that, I will turn the call over to Glaukos' Chairman and CEO, Tom Burns. Thomas Burns: Okay. Thank you, Chris. Good afternoon, and thank you all for joining us. Today, Glaukos reported record first quarter consolidated net sales of $150.6 million, up 41% on a reported basis and 39% on a constant currency basis versus the year ago quarter. As a result of our first quarter outperformance, we are raising our full year 2026 net sales guidance to $620 million to $635 million compared to $600 million to $620 million previously. Our first quarter results reflect strong execution across our global commercial and development priorities, highlighting the commitment of our teams, strength of our differentiated technology platforms and our continued progression as an increasingly diversified leader in ophthalmology. Looking ahead, we believe we are well positioned to sustain this momentum driven by 2 transformational growth drivers, including the continued advancement of the interventional glaucoma treatment paradigm with iDose TR and launch of Epioxa, establishing a new standard in interventional cardoconis and rare diseases. Together, these compelling and durable market opportunities reinforce our confidence in delivering a best-in-class growth profile well into the next decade as we continue to invest in and advance a robust industry-leading pipeline while remaining disciplined in capital allocation focusing on ROI-driven investments to support our near-term objectives of continued operating leverage and cash flow breakeven. Now let's discuss our first quarter results in more detail. Within our U.S. glaucoma franchise, we delivered record first quarter net sales of $93.5 million on strong year-over-year growth of 58%, driven by growing contributions from iDose TR, which generated sales of approximately $54 million in the first quarter. IDose TR continues to deliver strong clinical outcomes that meaningfully improve patients' lives, driving strong physician interest and adoption. From an execution standpoint, we remain focused on our key initiatives, including expanding our base of trained surgeons and active accounts, increasing utilization, broadening market access, scaling targeted commercial investments and expanding body of clinical evidence. On the last point, iDose TR is supported by a robust and growing body of clinical evidence demonstrating strong efficacy, safety and durability of effect. This now includes 22 peer-reviewed publications, complemented by a broad portfolio of active Phase IV studies across diverse real-world clinical settings, further reinforcing its consistent performance in real-world practice. Importantly, iDose TR is serving as the foundation for a broader shift towards earlier intervention of glaucoma care. Our efforts to educate surgeons and key opinion leaders globally are gaining traction and helping to drive a steady evolution in the standard of care. This momentum was evident at recent major industry meetings, including AGS and ASCRS, where engagement and enthusiasm around interventional glaucoma and our novel therapies were notably strong and growing. To support these efforts, we continue to invest in our commercial organization and infrastructure to expand disease awareness and education, while enabling our customers to effectively adopt and operationalize interventional care into their clinical practice. Moving on, our international glaucoma franchise delivered record net sales of $35.8 million and year-over-year growth of 23% on a reported basis and 16% on a constant currency basis. The strong growth was once again broad-based as we continue to scale our international infrastructure and execute our plans to drive mix forward as a standard of care in each region and market -- major markets in the world. As previously discussed, we continue to expect new competitive product trialing headwinds in some of our major international markets as we progress through 2026, partially offset by growing contributions from iStent Infinite following its EU MDR certification and associated European commercial launch late last year. We also expect the currency tailwinds to abate going forward based on the current rate environment. And finally, our Corneal Health franchise delivered net sales of $21.3 million on year-over-year growth of 15%, including Fetrexan and very early Epioxa sales of $17.7 million. At the end of the first quarter, we are delighted to announce commercial availability of Epioxa, our novel groundbreaking advancement in corneal cross-linking for the treatment of cons a rare cytidine disease that is currently far too often underdiagnosed, undiagnosed and untreated. We believe Epioxa represents a transformative innovation in care comes care offering an incision-free alternative to traditional corneal cross-linking procedures, and it does not require the removal of the corneal epithelium, the outer most layer or the front of the eye. This novel oxygen-enriched topical therapeutic bioactivated by UV light is designed to reduce the pain associated with removal of the epithelium, streamline the procedure and minimize recovery, all while delivering clinically meaningful outcomes and exceptional value to patients, providers in the health care system. Response we received from surgeons in the broader ophthalmic community since FDA approval and the more recent initial commercial launch activities has been very encouraging. As we've discussed, with the launch of Epioxa, we have redefined our go-to-market approach to better address the site threat disease and truly expand patient care and access. Importantly, with this launch, we are substantially increasing our investments in patient awareness, education and access, while addressing the long-standing challenges of underdiagnosis and under treatment that have affected this rare disease community. As with all pharmaceutical launches, initial patient access will be gated by typical payer adoption headwinds in hurdles, but we've been encouraged by the progress we've made in the short order through the early days of our launch. First, I'm proud to report that we have successfully established and continue to selectively expand a broad-reaching site of care network. Our acquired O2N systems are already actively deployed across locations serving roughly 65% of the U.S. population with the pipeline progressing through various approval processes that we expect will expand our treatment center reach to approximately 95%. Looking ahead, we will continue evolving this network to bring treatment access closer to patients as reimbursement and drug acquisition pathways become further established and streamlined. Next, we continue to make considerable progress with payers to secure access pathways or policy coverage for Epioxa with several plants having already updated or are in the process of updating their policies to include this novel therapy. These efforts are translating into expanded access with pathways now established or more than 100 million covered commercial lives in the United States, including with 4 of the 5 largest payers reflecting encouraging initial receptivity of Epioxa's clinical value. While we expect the pace of policy adoption to build over time, we remain focused on driving broader commercial -- or sorry, broader coverage across both commercial payers and Medicaid programs to support more streamlined access pathways over time. Earlier this month, we achieved another important market access milestone as CMS has signed a product-specific J-code for Epioxa, consistent with our expectations and in response to our application. The new code J2789 is scheduled to take effect on July 1, 2026, and we believe it will help streamline the reporting and reimbursement process for Epioxa among U.S. payers over time. Until then, we anticipate Epioxa will be commercially available under a new technology miscellaneous J-code and anticipate measured adoption over this initial period until the permanent J-code is in place and solidified operationally by providers in our specialty pharmacy. Beyond market access, we're proud to lead the way once again on forging a new path for interventional care to come by advancing a targeted marketing and DTC initiatives to drive awareness, education and earlier detection, supported by greater optometric engagement and strengthened advocacy partnerships. Finally, we launched a co-pay assistance program for eligible patients and are operationalizing a specialty pharmacy partner network in support of Epioxa patients. As you can see, we are very excited by the significant potential Epioxa offers to patients living with keratoconus. While Epioxa remains in the early stages of its launch, our teams are energized and executing with focus, and we're encouraged by the solid progress we're making against our core launch priorities. Beyond Epioxa, we continue to advance a broad and differentiated clinical pipeline across our 5 novel therapeutic platforms encompassing 13 publicly disclosed programs and additional undisclosed assets supported by a robust portfolio of active clinical and Phase IV studies. This includes ongoing pivotal trials for iDose TREX, iStent infinite and mild to moderate patients and the PreserFlo MicroShunt, an active Phase II trial for iLution Demodex blepharitis, ongoing development for our Link platform, including a planned market introduction of our KC screening device late this year and our promising earlier-stage rental assets. Overall, we remain on track with our clinical time lines and encouraged by the progress across our complete portfolio. In conclusion, at Glaukos, we're in the business of pioneering new marketplaces within ophthalmology for the benefits of patients. Our record first quarter performance highlights the strength of our strategy and execution as we continue evolving into an increasingly diversified atomic leader with multiple transformational growth drivers in iDose TR and Epioxa and advance our mission to transform vision therapies for the benefits of patients worldwide. So with that, I'll open the call for questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Tom Stephan with Stifel. Thomas Stephan: Great. Thanks for the question. Nice quarter. First one on Epioxa, Tom or Joe, maybe if you can talk about early findings, one, on sort of how initial experiences in sort of the claims and prior of processes are going? And two, what demand in the market looks like sort of from an early utilization standpoint, maybe based on what you're seeing in the Epioxa patient portal? And then I'll have a quick follow-up. Joseph Gilliam: Sure. Thanks, Tom. It's Joe. I'll start off there. I think Tom gave you some of the higher-level stats, the progress we're making with the Epioxa launch, both in terms of the 2 fundamental, I think, foundational items, both our side of care network as well as the broader payer pathways. Underlying that, which I think you're asking a good question is the process of making your way through that. And clearly, it's hard to judge too much on that until we get into the post J-code period because at this point, you're dealing with the miscellaneous code. So all systems around that, you will are, by definition, slower than normal as you adjudicate on a claim-by-claim basis. But I will say that we've been very encouraged by those sites of care who come online, as Tom referenced. And the patient flow that's coming from that and into our portal in the hub, as you say, as a leading indicator of what it can mean for the clinical demand associated with an Epi-On therapy like Epioxa. So as we make our way through that, and we see those claims get adjudicated, which we've seen positive claims get through the process and also those procedures get done now. We're encouraged by, I'll call the is the leading indicator in terms of that funnel as it develops. Thomas Stephan: Got it. That's great. And then Follow-up just on iDose, really solid in the quarter. Joe, maybe to stick with you, can you just talk about drivers of the strength? And it'd be great if you could maybe also discuss kind of Noridian and Novitas versus the remaining MAX and what you're seeing in kind of each of those 2 pools, if you will? Joseph Gilliam: Yes, absolutely. I think the most encouraging thing about the results of the first quarter was it was very broad-based in terms of what drove that performance. It was continued expansion within the more established, I'll call it, MAX. And you referenced Noridian, Novitas subset by First Coast in that as well. I'll come back to that. But now you start to see NGS, in particular, turning on, the early signs of Palmetto turning on as well as we've more recently achieved a professional fee formally in that region. And I think also is encouraging was a real increase certainly the funnel into our hub associated with commercial and Medicare Advantage patient flow. So I think it was broad and consistent with what you would hope to expect in the context of our core initiatives. To put a finer point, I think on your question around Noridian, Novitas, typically, I talked about that in the context of Noridian plus Novitas First Coast is some of the earlier adopting MAX. And in the first quarter, that was down to about 7% of the overall region volumes, if you will, from 78% in the fourth quarter. And again, that's really because as they continue to grow, you might expect the adoption curves to be picking up even faster in areas like NGS and Palmetto. Operator: Our next question comes from the line of Adam Maeder with Piper Sandler. Adam Maeder: Congrats on a great start to the year. The first one for me, I wanted to ask a modeling question. So nice Q1 top line , you raised the full year outlook by more than the Q1 outperformance. You've given a lot of great modeling color in the past. So Joe, maybe for you or Alex, can you just kind of pull apart the updated guidance with iDose contribution versus the stent business versus corneal health and as we think about Q2 in particular and as it relates to Epioxa, I would appreciate if you could give us a little bit of modeling help. And then I have a follow-up. Joseph Gilliam: Sure, Adam. I'll dive in, and I'll give at least some introduced comments on that front. And if folks have additional questions, we could add in a little bit deeper. But as you said, it was a great start to the year. with really each of our franchises exceeding expectations, and we made considerable progress across all those fronts, including within interventional glaucoma and iDose in particular. And as a result, we were able to raise our guidance up to the $620 million to $635 million range. And as you think about that in your models by franchise on a handful of perspectives, first by franchise. On the international glaucoma side, I'd say really the dynamics here are somewhat unchanged. Obviously, we expect, as we move forward here, some of the currency benefits that you heard Tom call out in the prepared remarks will weight in. And so we do expect that going forward, we'll see sort of high single-digit growth for the remainder of this year. Now when you put all that together, that's going to translate into low double-digit growth for the full year. but the remaining quarters, we would expect single-digit growth in that franchise. On the Corneal Health side, Obviously, I think everybody knows there's a fair number of moving parts there. It was a strong first quarter. But we do continue to anticipate volatility associated with both the TREX and Epioxa transition, but also the temporary permanent J-code transition over the course of, call it, Q2 and Q3. And so when you put all together with the performance and what we're sort of seeing we now expect kind of high single-digit growth for this franchise for the entire year. with some puts and takes in the individual quarters as we get there. And as you've heard me say in the past, we certainly expect to be exiting the fourth quarter with a pretty strong performance curve as we start to pull through Epioxa in a more meaningful way. On the U.S. glaucoma side, again, another strong start to the year, we would adjust our views there probably to be more in the, I'll call it, low 30s type growth for the full year, and that's really driven by still an ongoing view that going forward we should expect kind of flattish non-high dose sales going forward until we've really been proven otherwise and continued sequential progress as we've been seeing with the iDose launch. So you put all that together, and I think as you said, we not only do we raise our overall guidance, but we raised the reach of our underlying franchises and the drivers. I will add just because you asked about, I think, for Q2 in particular, given there's a lot going on here, and it's all good, but I want to make sure we've got it as do as possible. that for the U.S. glaucoma franchise, as I alluded to earlier, in Q2, I think we expect sort of flat non-iDose and that continued sequential iDose expansion. In interventional glaucoma, we'd expect the high single digits as we talked about that benefit wanes. And the corneal side, I think as we said on the last call, we would expect in the second quarter to see a bit of a dip there on a year-over-year basis as we transition from Photrexa to Epi-On. Adam Maeder: Really appreciate all the color, Joe. And if I could just sneak in a follow-up. I wanted to ask about iDose and or reaching a point now where you have critical mass from a reimbursement standpoint. So Tom or Joe, can you just maybe talk about some of the new initiatives that you're going to start to put in place here. I think you've talked about growing the commercial team potentially looking at direct-to-consumer as we get into the latter part of the year. We just love some incremental color for kind of the next chapter. Joseph Gilliam: Yes, you're exactly right, Adam. We've always talked about you didn't want to put some of these things into place until you start to have a more solid foundation from a reimbursement standpoint. Certainly, what you're hearing in the context of our first quarter results and our guidance is increasing confidence in that foundation, both in terms of the 5 of the 7 MAX that are now stable by professional fees and the team is driving incremental confidence both on the reimbursement side as well as, obviously, the clinical and commercial side. But also now increasingly as we move forward here on the broader commercial Medicare Advantage. So I think as we've talked about in the past, as we move forward here, it's about driving increased awareness for iDose and interventional glaucoma and teams that help drive that broader environment of both education of patients as well as the process to get them treated by an interventional procedure like iDose. So we have been making significant investments for some time now in more of our reimbursement and business teams that surround the traditional sales force to really try to make sure that we can maximize both patient access and that broader awareness initiatives. So I think you should expect to see more of that certainly as we get into the second half of this year and as we get closer to exiting the year and heading into next based upon this trajectory where we're going to feel, I think, a lot more confidence in starting to make some of those more offensive investments. Operator: Next question comes from the line of Larry Biegelsen with Wells Fargo. Larry Biegelsen: Congratulations to you. Maybe one on iDose and one on Epioxa. Joe, if you could talk about how you've engaged with the MAX since the CAC meeting last year. Any updated thoughts on the likelihood of an LCD this year and the timing of those 2 RCPs you're running? And I had one follow-up. Joseph Gilliam: Yes, I'll start off at the beginning, and Tom can comment on the broader studies that we're doing associated with iDose here in a minute. So as we think about the engagement with the MAX, I'm not sure we have a particularly different strategy here. We've always engaged in an education process to make sure they understand our technologies, how they utilize the labels and indications for use around them. And we continue to do that. We continue to try to diagnose where we've got ongoing I'll call it, less streamline reimbursement in areas like CGS and WPS, and we continue to have momentum in some of those conversations. So hopefully, we're marching forward those 2 MAX in a productive way,, they can drive professional fee establishment similar to the other 5 larger MACs that have come before them. As it relates to the post-CAC conversation LCD conversation, really no changes on this front since our last call, Larry, and we've talked about it. At this point, we've not seen any signs of an LCD and we continue to believe it would be premature at this stage of the clinical adoption curve. Having said that, obviously, by nature of these things can be unpredictable and okay. So it certainly remains possible even if we believe it's less probable disappoint. Thomas Burns: And I think to address your question on Phase IV studies, Larry, that we've contemplated actually been enrolling for some time, once we receive NDA approval, we have done 2 major Phase II studies. The first would be iDose plus cataract versus cataract surgery alone to be able to demonstrate the incremental value of using iDose in combination with cataract surgery. And that study is actually fully enrolled, and we'll be following those patients over the course of this coming year. And we'll be looking to publish the data at regular intervals. And I think that will be a very powerful supplement to the data that we currently have on hand, again, another 22 peer-reviewed clinical trials. And then I think we were largely present in also doing a study looking at iDose versus iDose plus infinite because I want to show the incremental value of these 2 different mechanisms of action to be able to lower intraocular pressure to supremely low target pressures, which will by all evidence to be able to force the progression of glaucoma or progression in glaucoma. I think with both of these in hand, I think it will be timely in case in any event in the future, we're challenged by any magazine using either combination modalities or procedural pharmaceuticals plus MIGS or using iDose in combination with cataract surgery. Joseph Gilliam: One other thing I'll just add, Larry, I think even at a minimum on this these studies that Tom's are referencing as important as the broader payer community. So this is how you continue to expand that coverage irrespective of MAX and LCDs, et cetera, with the individual commercial players in Medicare Advantage plans to make sure that we're optimizing that access for our patients. Larry Biegelsen: And for my follow-up on Epioxa, Joe, I'm going to ask you kind of more of a big picture question. I think from our past conversations, you felt confident that Epioxa could return to peak Photrexa levels of roughly 18,000 to 19,000 eyes by the end of the decade. And if that's paid volume, that would be well north of $1 billion in revenue. So I guess, my question is you still -- how are you feeling about achieving that? And what is the ramp to that look like? Joseph Gilliam: Yes, Larry, I mean, I think I'll stop short of obviously making the longer-term predictions formally and just say I think we have been on record saying we view this as a potential $1 billion-plus franchise the pace in which we get there, we'll continue to monitor as we get into the actual true commercialization, especially if we get towards the second half of this year. But I think part and parcel of that is I don't think we view it just in the context of where we've been with Photrexa patient volumes. We're making the investments we're making, which are enormous moving forward to drive increased awareness and detection and ultimately action and access in the hopes that we can treat, quite frankly, far more than that. We believe that there are more than the 18,000 to 19,000 eyes at any given time that should be getting diagnosed and treated. And so from our standpoint, a lot of the DTC and the things that you've heard Tom reference, we'll be putting those investments towards hopefully growing this overall market from a volume perspective over that period of time and getting more and more of these patients treated. Thomas Burns: And I would just add on that, if you think about what the possibilities are to build this marketplace over the planning period, and it's really important to be able to recognize what we have beyond this planning care, certainly at the tail end of the planning period, this would be the second-generation customized algorithms that we have in place for the treatment of keratoconus that can't help but the market expanding if we show demonstrable changes in K-MAX for these patients. and have the possibility of actually increasing their best corrected visual acuity by virtue of customized algorithms that we're going to be able to dispense and use on these patients with keratoconus. So I'm very bullish not only on the near term of all the different mechanisms we're putting in place to build the marketplace, but our possibility of having a second wind moving into the 2030s, which will increase our presence in this rare disease. Operator: Your next question comes from the line of Ryan Zimmerman with BTIG. Ryan Zimmerman: Congrats on strong start here. Just kind of dovetailing on some of the questions before. There's been obviously a lot of investor concern about these LCD risk. I know you just addressed it. But Tom, I guess my question is around the existing body of evidence. I'm wondering if you could kind of talk about it in contrast to the Phase IV study. And remind us what percentage now that we have quite a track record with iDose, what percentage are you seeing today either in combination with cataract or with another MIG in terms of the iDose usage? And if some of the studies already bear out evidence of combinatorial usage of iDose with other products or procedures, do you think that is sufficient or the Phase IV study is really necessary to kind of refute any concerns there? Thomas Burns: I'll let Joe start and I might add some color. Go ahead, Joe. Joseph Gilliam: Yes. I'll start on the -- in the context of the trends that we've seen. Certainly, I think they remain consistent, Ryan, with the past commentary. The relative percentage of the procedures done today where surgeons are treating glaucoma with iDose and at the same time, in conjunction with the cataract procedure, it's growing as expected, given obviously, Glaukos has already changed the standard of care for those patients. But at the same time, our efforts remain focused on that interventional glaucoma opportunity, and we continue to see rapid growth in the number of stand-alone procedures. So I would say that the majority of patients last year still saw a stand-alone iDose procedure, but the mix is certainly shifting towards in combination with cataract or in combination with another mix as you might expect, because these physicians are trying to obviously do everything they can to slow the progression of the sight-threatening disease. Thomas Burns: And I would just say, based on the question that you have, most of the Phase IV studies we do and as Joe has mentioned, are really for the payers and for moving into commercial payers and Medicare Advantage. I think surgeons a priority already have the confidence that putting iDose in combination with cataract surgery is going to yield an incremental effect. I think that you will see that in any channel actually do. Likewise, the use of combination therapy of iDose plus an iStent infinite, surgeons will have high confidence that they're going to treat incremental effect. So the studies we're doing are less to be able to drive that portion of the market. They're more to validate surgeons already existing confidence in using these technologies together. Ryan Zimmerman: Understood. And then maybe a question for Joe and Alex even, which is just operating expense guidance and your thoughts on profitability. I mean it's almost getting to a point where despite your best efforts, you will become profitable in kind of the next year. And I'm wondering kind of how you think about the ramp in sales -- or excuse me, the ramp in expenses needed for Epioxa commercialization and kind of what that does or doesn't do to your time lines or at least in our model, our time line to profitability? Alex Thurman: Ryan, it's Alex. I'll start, and I'll start with profitability. Again, just to reiterate what Tom had mentioned in his opening remarks, our near-term focus in managing the business do so on a cash flow breakeven and driving basically operating leverage within the P&L, which we're pleased to say we saw in the first quarter, and we're glad that, that execution is happening. But as we look ahead to your point, we certainly can see with the commercial launches of iDose that we definitely have a fairly clean line of sight towards that pathway of profitability over the next few years. To your point, some of it will depend on the ramp of these commercial launches and the associated revenues that come with it. But as we continue to manage the business towards that cash flow breakeven, you'll see from an operating expense side that we continue to reinvest in the business and reinvest in these commercial launches. And we've talked about the fact that our operating expenses will grow this year, year-over-year. And we feel that way. And I'll just give you some commentary now that as we did overachieve in the first quarter, Tom and I and Joe have talked about adding additional fuel to fuselage and these commercial launches. So you should see the operating expenses tick up slightly and modestly from what we talked about at the beginning of the year, but still in the high teens and still showing that operating leverage overall as we progress throughout the year. Joseph Gilliam: I think, Ryan, the overall -- when you hear Tom and I talking about the incremental spending from DTC or otherwise, it's important to note that, a lot of that is by its very nature discretionary. So as we look forward, you're thinking about making those investments alongside the significant growth that we're achieving and hopefully with the hopes of a return on investment that makes that certainly worth the incremental spend associated with it. So we'll be in a process here where we're continuing to evaluate the effectivity of those efforts and what that return looks like before diving in with 2 feet, if you will, to go full spend on DTC related efforts. We've always been pretty disciplined in how we thought about those types of things. Operator: Your next question comes from the line of Allen Gong with JPMorgan. K. Gong: Thanks for the question. I wanted to start off with one actually on the core U.S. glaucoma business. I think iDose clearly had a really strong quarter, but underlying years glaucoma also did quite a bit better than expected and grew at a healthy clip year-over-year. albeit also a bit of an easy comp, I believe. So when I think about your forecast, your reiteration for flat for 2Q and the year, what are you seeing that kind of supports that outlook? Is it just conservatism? Or are there real challenges that you're seeing out in the market? Joseph Gilliam: Yes, Allen, thanks for the question. I mean you're right in the context that this was the second straight quarter where we've seen about the restoration of growth in that non iDose [ remainder ] or as you said, I think, core U.S. glaucoma franchise. So I think we've certainly seen signs of stabilization of the underlying market there. And I think that our teams are doing a great job in -- on the performance side within that more now more stabilized market. As we go forward, I think we're just not ready yet to make that call. that, that is, I'll call it, the new normal that we're operating in. It's been an encouraging 2 quarters. But as we look forward here, I think it's still safer for us and for investor expectations to be in that sort of more flat year-over-year basis until we've proven otherwise on a sustained basis. There are some things in there. Obviously, I think we benefited a little bit in the quarter from some supply chain disruptions on the competition front. It's hard to measure that. I don't think it's material, but that should subside as we move forward here. So I think we just want to play a couple more innings here of this on that side before we rerate our view on guidance there. K. Gong: Got it. And then, I guess, a follow-up, moving on to Corneal Health. You talked about how you've reached coverage of 65% of the U.S. population with line of sight to reaching 95%, I believe, the number was. How quickly do you think you can get to that 95%? Is that a target you think you can reach by the end of the year? Or is it going to maybe slow down a little bit now that you grab some of the low-hanging fruit? Joseph Gilliam: Yes. Thanks, Allen. In some ways, it's actually been accelerating, as you might imagine, once you announced commercial availability and the transition plan becomes more real. What we've seen is more of an acceleration than a deceleration on that front. Having said that, you also know that hospital systems and even certain other customers have longer cycles for bringing on new technologies and new drugs to the pharmacy network and the like. And so I think we'll continue to make substantial progress here every month and certainly hope that we're getting there or close to that target in terms of realized side of care network by the end of the year. Operator: And your next question comes from the line of David Roman with Goldman Sachs. David Roman: Maybe I could just start on Epioxa here. Could you maybe talk to us a little bit about some of the specific market development efforts that you have underway. And maybe you can kind of break them into whether it's physician and practice education, patient assistance programs and then engagement and education with payers? Joseph Gilliam: Yes. Sure, David. It's Joe. On the Epioxa side, I think about it kind of as follows. So I won't repeat what Tom has already said, and we comment on. There's a foundational element that's first and foremost, when you're kind of going through the stage of a launch. And that is that you get the Sidecar network established, affected trained and everything ready there. The second layer of that is that you're engaging with the payers in a way to establish access pathways and then ultimately from there, further streamlining and optimizing those. And then as you go alongside of that, you start to dial up, I'll call it, the more physician-related and even patient-related marketing efforts. But you don't want to do that too soon in that life cycle until really the overall ecosystem is ready. So a lot of where we're at right now is around the last part of what you said, which is making sure that as we're having success with the site of care network and on the patient side, that the machinery in the middle is working as efficiently as possible to make sure that we're working things through the hub and through our specialty pharmacy, and we're providing that visibility to our customers and to our patients, that our co-pay assistance programs are working as they're intended. And all the stuff that probably is a little less interesting to investors but are -- is critically important to the ultimate success here as we move forward. And as I mentioned earlier in the call, we're really encouraged by that initial burst, if you will, of patients that are going in there. And now we have to get through that process of trying to get them on therapy which can be a lengthy one when you're dealing with a miscellaneous J-code. And so navigating that is paramount for us before we get obviously the formal J-code in the second half. David Roman: Very helpful. Maybe just a follow-up here on iDose. And I know you talked a little bit about this, but could you just talk to some extent whether there was any contribution here from having the reimplantation approval that came early in the first quarter? To what extent that may be giving physicians increased confidence implanting iDose? And how we should think longer term about the interplay between having the readministration label as an iDose TREX? Joseph Gilliam: Yes. Well, I can confirm that we've now seen numerous successful readministration procedures as some of those earliest patients are getting out several years. It's not the predominant procedure being done. It's still a small fraction, but we've seen multiple surgeons do readministration and do so successfully. We've seen payer policy updates occur and a lot of, I'll call it, general progress on that front. So I think we're encouraged, and this is sort of in line with what we always expected that has the benefits of the initial procedure start to wane that both the patient and the provider are going to want to continue that therapy given the clear benefits to the patients. So we're seeing that start to happen. And I think as we look out over the long run, certainly, readministration becomes a much more material part of that overall mix. every month and every quarter that we move forward here, it should be more and more relevant to what we're looking at. But out of the gate, we're encouraged by what we're seeing. Operator: Your next question comes from Richard Newitter with Truist Securities. Richard Newitter: Congrats on the quarter. Just wondering if you could give us any kind of color on what's happened to the provider base as this transition to Epioxa is taking place? I'm not looking for you to necessarily give us a specific number of doctors or your installed base per se. But do you guys envision just a big concentration over the next few quarters in a small number of providers' hands to getting all of this refined and figured out from a consistency on the payment standpoint? Or is this potentially going to be broader and not as concentrated than maybe what I'm suggesting, as we think through this? Just trying to get a sense for is it really a dramatically fewer number of doctors? Or is it going to be potentially broader than that? Joseph Gilliam: I appreciate the question, Richard. I think -- well, first, I think on the definition of how you do concentrate it. I mean I think relative to our iDose user base, for example, inherently in keratoconus even with Photrexa, you had a relatively concentrated group of centers and sites that were doing the procedures. Now I won't surprise you and I think that with Epioxa, it was our intent, obviously, to make sure that your initial site of care network is as concentrated as you can reasonably be to try to make sure you're close enough to the vast majority of the U.S. population. So inherently, our Wave 1, if you will, efforts have been very targeted around the country in that context. But I'll tell you, in some respects, our wave 1 efforts have gone maybe a little too well. And that's caused us to have to accelerate some investments to meet the needs of that customer base and their patients that are coming out of that. So there will always be earlier adopters than mid adopters in a launch, and we'll see that here, obviously, part of Epioxa. But I'm not particularly concerned about any significant concentration issues in any 1 or 2 or even 10 customers. I think it's going to be measured much more in hundreds of customers ultimately than it is in single digits. Richard Newitter: Yes. That's helpful. And then is there any one area where the spend that you're stepping up from a position of offense, clearly is directed now that you've had some early learning experiences? In other words, where are the frictions most notable either to a doctor not wanting to do this, not wanting to buy Epioxa and move forward? Or is it more on the pull side from the patients and the demand awareness increase standpoint? Joseph Gilliam: Yes. I would say it's actually maybe a bit more -- and so if you think about this, whatever -- there's always going to be conversation in education, both the sales force and the broader teams to make sure people understand what we're doing, why we're doing it, how we're doing it as it relates to the Epioxa launch. And certainly, in the future, as we've talked about, there'll be a lot more of that spend oriented towards, I'll call it, more growth and DTC education related. Right now, in this moment, where a lot of that spend is going, it should surprise you, is much more in that initial lift, confidence and process associated with claims prosecution and adjudication. It's about making sure that customers understand how it works that they're successfully seeking prior authorizations that were supporting that process where appropriate to plan and then ultimately getting those patients access to that care. So a lot of it is much more in the machinery, I'll call it within the market access world than it is necessarily in marketing or even sales from that standpoint. Operator: Your next question comes from the line of Mason Carrico with Stephens Incorporated. Harrison Parsons: This is Harrison on for Mason. Would you be willing to provide some color on the utilization of the various cohorts of surgeons trained on iDose? Is there portion of the surgeon base today that you would say has matured at this point with more stable utilization? Or are you still seeing pretty robust utilization growth across these older cohorts of surgeons, too? Joseph Gilliam: Yes, Harrison, I'm not sure I would say that we're reaching stabilization, if you will, in any one cohort. I mean if you think about it, even for some of the earliest adopters, there's still ongoing enhancements to how they think about interventional glaucoma, the amount of time they're spending on that versus other areas of their practice, let alone, as we talked about coming into this year and again on this call, the movement from, I'll call it, the more traditional fee-for-service patient population into the commercial and Medicare Advantage world. So I think we continue to see growth across both our more mature customer base as well as certainly with the addition of new surgeons and new practices throughout the country. So we're still pretty early in that overall evolution curve, if you will, of this launch. Harrison Parsons: Got it. Yes, that's helpful. And then second question here. Could you update us on the progress you've made this year from a commercial payer standpoint on iDose? I think the middle of last year, you called out more than 50% of Medicare Advantage and commercial policies had a positive policy in place. Where does that percentage stand today? Joseph Gilliam: Yes. So I'm not sure it's changed a significant amount in this past quarter, but just to put a line of sand sitting here today with iDose, we have about 99% patients have an access pathway in the commercial and Medicare Advantage arena. To the point you made in your question, about 50% of those patients are in plans where there's a specific policy attached to it and the remainder, where there's silence, we're certainly seeing successful pull-through on that. I'll also add that in these, I call the early days of the real efforts here, we're seeing a very, very high success rate in the context of the prior authorizations that are submitted for these patients across that landscape, which is what you'd expect given the statistics I just got done citing around the broader patient access pathways. Operator: Your next question comes from the line of David Saxon with Needham. David Saxon: Congrats on the quarter. I wanted to start on the specialty pharmacy channel or with RCM. So I mean, I imagine the docs doing Epioxa were previously doing buy and bill with Photrexa. So maybe you were seeing you. So what's the feedback been from them in terms of process and whether there's any friction in that kind of change of workflow? Joseph Gilliam: Yes, David. So I think that historically speaking, with the mix, there were certainly those customers who prefer to buy and bill Photrexa and those customers who acquired it through the pharmacy channel, in this case, in our case, Orsini, and that continues going forward. I think it will surprise you that certainly amongst our nonhospital-based customers the vast majority, certainly out of the gate are choosing to access the drug via our specialty pharmacy. And so that does mean some of them are doing this for the first time with our channel. I think it's a little too early to comment specifically around that dynamic because, again, as what I said earlier, when you're in the miscellaneous code environment, even with a perfectly streamlined, I'll call it, hub and specialty pharmacy process, the process to getting that access for the patient is much more elongated. And we've only had the drug on the market now for a month. So from that standpoint, I think we're still in the early days of adjudicating those claims and getting access to the drug via the SP channel. But more to come on that. And we're certainly encouraged with the work that Orsini's been doing to make sure that they're in network with these various plans. And I think ultimately, that's going to accrue to the benefit of our customers who choose that channel. David Saxon: Great. And then maybe one for Alex, just on the group gross margin. So maybe remind us what your expectations are for the year. And then as we go through iDose and Epioxa looking to next year, kind of how we should think about gross margin potential? Alex Thurman: You bet. Thanks, David. I mean -- we saw 84% margin in the first quarter, which was up 120 basis points from last year. So we -- that was please to see that. In the last call, we -- I gave a range for the year of an expectation of 84% to 86%. And sitting here today, we still continue to feel comfortable with that guidance range for the year with expected accretion over the course of the year as products like Epioxa become a greater share of the mix. And then to your point, looking forward in 2027, we'll comment more further when we get closer, but you would expect accretion as these products continue to ramp. Operator: Your next question comes from the line of Michael Sarcone with Jefferies. Michael Sarcone: Thanks for squeezing me in here. So just a follow-up on the Epioxa specialty pharmacy question. I mean, when you think about buy and bill, understanding that specialty pharmacy is coming first, can you talk about options that you may have or are evaluating to enable or efficiently enable buy and bill for Epioxa down the road? Joseph Gilliam: Yes, Michael, I, probably, won't go too far into the details around that. But obviously, there's always an ongoing education process around from our reimbursement teams and the experts within that as well as some of our site-of-care teams and the like to make sure those customers understand how the buyable process will work, the key terms and conditions that we have in terms of our payment terms and things like that to make sure that we can enable that where customers ultimately choose to buy and bill the drug. Obviously, when they think about it from a business standpoint, that can be an attractive option to them when they've got the right building blocks in place to enable buy and bill activity. Michael Sarcone: Got it. Just a quick follow-up on iDose Trio. What's the latest and greatest there in terms of time lines and where we stand. Thomas Burns: Yes, I'd be happy to address that, Michael. The -- as we said before, we would complete and we have completed the clinical study for iDose Trio. We'll monitor those patients over the course of this year. We plan to file by the end of this year, and we expect to be in position for targeted approval in the fourth quarter of 2027. So we're hitting on all marks in all cylinders. And as we talked about before, when we did our human factors analysis, we saw a real strong preference for this new design on the order of 90%. So we're encouraged about what we think we'll be able to bring to the marketplace. And more encouraged by the ability to drive in-office use over time. Operator: Your next question comes from the line of Joanne with City. Joanne Wuensch: Can you hear me okay? Joseph Gilliam: We can. Joanne Wuensch: Excellent. Now when we do some of our due diligence on IDS, Physicians are still pushing back or pushing back, maybe still is a wrong word, on the price tag of it. And honestly, I'm a little confused by that since you do have the J-code and you do have the reimbursement in place. So I'm sort of curious what your initial reinterested like and what the responsive to that. Joseph Gilliam: Yes, Joanne, I think -- I mean, you'll always have customers with varying views, but I'm not so sure that, that's really a material of a driver today as it was when we launched. Any time you launch a pharmaceutical like we have with iDose or Epioxa. There's a period where you have to make sure that your customers understand the why and how, right? But at this point, sure, there will always be some of that. But for the vast majority of the customers, certainly, you can see with the results, we continue to add them and drive that forward. We can continue to overcome that challenge where it represents itself. Operator: And your next question comes from the line of Steven Lichtman with William Blair. Steven Lichtman: Just a couple of quick ones on Epioxa. First, as it relates to the transition from Photrexa, are you still anticipating it Photrexa to fully sunset by the end of 3Q? Or has there been any change in that plan? Joseph Gilliam: No change and consistent with what we've communicated to our customers that we would expect in the third quarter to have that transition taking place. And ultimately, we will have Photrexa available in limited quantities through a different mechanism where their physician may require an epi off-based procedure thereafter. But I wouldn't call that out as a real material consideration for certainly the commercial aspects of it for you all. But for those physicians who seek ongoing access to Photrexa. We do have a pathway which we're going to make it available then. Steven Lichtman: Great. And then obviously, we're at the beginning of the runway with Epioxa in the U.S., but just thinking longer term, what is the potential for expansion of your platforms outside of the U.S., whether it's Photrexa or with Epioxa. Joseph Gilliam: Yes. I think it's -- it has to be much more selective, and it won't surprise you, Steven that today's environment where you're navigating a combination of reference-based pricing initiatives as well as other things in terms of payer dynamics and the like. There are certainly some markets internationally that can support the type of therapies that we're talking about with Epioxa and with iDose. But also, we'll have to continue to evaluate that as the landscape shifts that we bring success for generations of products forward. and bring as much of this technology over time as we can internationally. But it's not something that at the moment I would be factoring in any material way into your models. Operator: Our final question comes from the line of Anthony Petrone with Mizuho Group. Anthony Petrone: Congrats on the quarter. Maybe one on just keratoconus just broadly, when you think about the disease state that it's just -- it's underdiagnosed you're getting most of these patients that come in with Stage 2 severity, just thinking about the Epioxa opportunity, what is the really true TAM from a patient standpoint in terms of this disease state? I know it's kind of considered an orphan disease, but I think the prevalence probably stretches to somewhere between 80,000 and 100,000 patients. So what is the true TAM in terms of prevalence in the U.S.? And what is the diagnostic pathway to get more patients into the funnel? Joseph Gilliam: I think, Anthony, it's a great question in the context of exactly the why behind what we're trying to achieve here. So when you think about keratoconus and as a condition in where we've been, the 18,000 to 20,000 eyes that happen getting treated, we believe is likely going to be proven to be a fraction of what really should be getting caught should be driven to detection and ultimately into therapy over time. I think our best estimates here suggests that there should be between 50,000 and 100,000 keratoconic eyes a year at a minimum that are getting diagnosed and treated with Epioxa cross-linking. And -- but we're going to have to find that number out ourselves as we move forward with increased debt initiatives around awareness and detection and ultimately access that therapy. But we do believe that over time that this could be proven to be more of a rarely diagnosed disease than a rare disease. But today, it operates like a rare disease and we're going to make those investments accordingly. Operator: With no further questions in queue, I will now hand the call back over to Glaukos Corporation for closing remarks. Thomas Burns: Okay. I want to thank you all for your time and for your attention today, and thank you as well for your continued interest and support of Glaukos. Goodbye. Operator: Thank you again for joining us today. This does conclude today's conference call. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Qualcomm Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, April 29, 2026. Playback number for today's call is (877) 660-6853. International callers, please dial (201) 612-7415. Playback reservation number is 13759551. I would now like to turn the call over to Brett Simpson, Senior Vice President of Investor Relations. Mr. Simpson, please go ahead. Brett Simpson: Thank you, and good afternoon, everyone. Today's call will include prepared remarks by Cristiano Amon and Akash Palkhiwala. In addition, Alex Rogers will join the question-and-answer session. You can access our earnings release and a slide presentation that accompany this call on our Investor Relations website. In addition, this call is being webcast on qualcomm.com, and a replay will be available on our website later today. During the call today, we will use non-GAAP financial measures as defined in Regulation G, and you can find the related reconciliations to GAAP on our website. We will also make forward-looking statements, including projections and estimates of future events, business or industry trends or business or financial results. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our SEC filings, including our most recent 10-Q, which contain important factors that could cause actual results to differ materially from the forward-looking statements. And now to comments from Qualcomm's President and Chief Executive Officer, Cristiano Amon. Cristiano Amon: Thank you, Brett, and good afternoon, everyone. Thanks for joining us today. In fiscal Q2, we delivered revenues of $10.6 billion and non-GAAP earnings per share of $2.65, with EPS coming in at the high end of our guidance. QCT revenues were $9.1 billion, with another quarter of record automotive revenues as well as growth in IoT. Licensing business revenues were $1.4 billion. Before I share key highlights from the business, I would like to provide some perspective on Qualcomm's current customer design cycles and the opportunities ahead. We are in a period of profound change, and it may not yet seem obvious to the financial community. The emergence of agentic AI workload with [indiscernible] as an early example are fundamentally changing user experiences across connected edge devices and reshaping our roadmap in every platform we develop. For agents to work efficiently, they must run continuously in the background, fuel sensor data into context, orchestrate multistep tasks reliably and deliver strong security. Today's installed base of devices were not built for this new capabilities, and it represents a significant upgrade opportunity and expansion of our addressable market in the coming years. Agent orchestration is predominantly CPU bound and Qualcomm has the world's best-performing CPU across smartphones, PCs, auto and soon the data center. Qualcomm's unparalleled connectivity solutions empower efficient NPU for local models will also be key assets to delivering agentic AI experiences. No other semiconductor company matches the breadth and scale of our technology and product portfolio, which powers devices spanning milliwatts to kilowatts from smart wearables to data centers. As a result, we're seeing a step function increase in strategic customer engagement and is changing how we think about the broad AI opportunity as well as the speed of our diversification efforts. Beginning with automotive, in Q2, we exceeded $5 billion in annualized revenues for the first time, and we expect to exit fiscal '26 at a run rate above $6 billion. This growth is driven by our fourth generation Snapdragon Digital Chassis platform, which comprises connectivity, telematics, infotainment as well as advanced driver assistance and automated driving. Notably, we have now enabled more than 1 million cars operating ADAS and autonomy on our Snapdragon Ride processors. By the end of the fiscal year, we will begin commercial shipments of our fifth-generation Snapdragon digital chassis platform. This represents the largest generation-to-generation content increase in Qualcomm's history, delivering 3x higher CPU throughput, a threefold increase in GPU capability and 12x higher NPU performance while supporting in-vehicle agents and processing for Level 3 and Level 4 autonomous driving. Looking ahead to fiscal '27, we expect continued share gains and increased content, particularly in ADAS. We're pleased with the performance of our automated driving stack with BMW, and we're seeing broad customer engagement from other leading automakers. Our recent announcement with Bosch and Wave are good examples of what's to come as we build on our proven platforms and self-driving stack and scale ADAS. In IoT, agentic workloads and edge AI are driving major product renewal design cycles. Overall, our pipeline is healthy, and there is clear momentum for Qualcomm solutions. In personal AI, we expect a significant increase in the choice of new smart glasses starting in the second half of the year. We believe these launches, combined with the rapid progress in agentic AI will catalyze an inflection point in customer demand across this category. Our 2026 Snapdragon X2 PC platforms are currently in production and our world-class Orion CPU unlocks powerful always on agentic experiences, making it a true competitive differentiator. Agentic orchestrators such as Open Claw, Claude desktop, Claude Code, OpenAI Codex desktop, Perplexity Computer, Crew AI, Armes agent, Landgraf and Humane 1 running on Snapdragon X2 are early proof points. A recent PC MAG review of the ASUS ZenBook A16, notes the Qualcomm is now a serious challenger in the PC space and states, "the generational leap from the original Snapdragon X Elite to the X2 series is particularly striking. Qualcomm hasn't just caught up to the industry. In some cases, is now helping to set the pace." In addition, our [indiscernible] NPU is the world's fastest for laptops delivering up to 85 tops together with our industry-leading CPU, which has the best on-device token generation rate. Snapdragon X2 delivers the full agent experience end-to-end and outperforms Intel's [indiscernible] Lake by nearly 30%. In physical and industrial AI. Our Dragonwing IQ10 platform has generated substantial customer interest since our launch at CES. This is a significant upgrade compared to IQ9, feature an NPU with up to 700 [indiscernible] of on-device AI performance an 18 core Orion CPU over 20 camera sensors in an integrated safety [indiscernible]. Building on our design win with Figure AI, we announced an exciting multiyear agreement with Nora reinforcing our confidence that we can become a significant player in the broad robotics market. Also during the quarter, we introduced [indiscernible] at Embedded World. This is the second Arduino platform built on Qualcomm silicon and we view it as a world-class prototyping engine for both robotics and industrial AI developers as we expand our ecosystem across key verticals. [indiscernible] is purpose built to bring AI into the physical world, enabling fully autonomous AI agents in a wide range of Edge AI applications, including voice assistance and vision systems. Several new industrial AI products are also moving from design win to deployment across retail, utilities, oil and gas, agriculture and other verticals. In data center, the Alphawave integration is off to a great start, and we're pursuing multiple opportunities with large hyperscalers, cloud service providers, sovereign AI projects and other global partners. Building on that momentum, we're also entering the custom silicon space beginning our ramp with a leading hyperscaler and we expect initial shipments in the December quarter. In addition, development of our leading data center CPU and high-performance AI inference accelerators is progressing well. We look forward to sharing more details and customer wins at Investor Day in June. Regarding handsets, I would like to underscore 2 key points: First, the quarter played out as we expected. Sell-through held up in our chip business materially undershipped consumer demand. We believe our China Android revenue is bottoming out in fiscal Q3, and Akash will provide more specifics in his financial update. Second, we think agentic smartphone will soon begin to influence the premium tier and we expect this [ theme ] will only get stronger into fiscal '27 with examples like the [indiscernible] powered, agentic AI phone from ZTE Nubia. Xiaomi's recent announcement of [indiscernible] agent framework and other agentic [indiscernible] systems now in development across the Android ecosystem, we have a clear line of sight into how the AI upgrade cycle will unfold, and this is going to be an important tailwind for premium demand over time. Next, I want to highlight a major strategic initiative and long-term growth driver for Qualcomm, 6G, the next generation of wireless. Design for the age of AI will believe 6G will present one of the most significant transitions for the wireless industry. From a connectivity perspective, 6G will enable new classes of mobile and personal devices such as smart glasses with enhanced uplink capabilities to support agentic use cases like see what I see. Beyond connectivity, 6G will be an AI-native network where AI reasoning, learning and autonomous action are core functions. It is intended to act as distributed intelligent infrastructure that integrates communication in wide area real-time sensing. With these new capabilities, the network becomes critical infrastructure and provides the telecom industry an opportunity to develop completely new business and economic models. He will make possible new AI-enabled services, ranging from context relevant data data insights and analytics low altitude like aerial, terrestrial and autonomous traffic management, drone detection and tracking and 3D mapping with telemetry to build dynamic digital wins at scale. QUALCOMM's leadership in connectivity, AI processing and high-performance, low-power computing position us to be one of the key architects and beneficiaries of the 6G transition. In addition to the development of foundational technologies and standards, we're building end-to-end solutions for devices and the network from a genetic modems and compute platforms that power phones, PC, intelligent wearables and cars all the way to the network, including power-efficient next-generation radio units, wide area network sensing platforms and high-performance compute and AI accelerators for the RAN network edge, core and data center. To help shape and accelerate the 6G road map at MWC, we launched a 60 company coalition spinning carriers, cloud infrastructure, AI native partners and auto OEMs. The engagement and feedback on our 6G vision and plans from our partners, customers and governments across the globe has been very positive and we look forward to working across the industry to deliver on this generational opportunity. Before I turn the call over to Akash, I want to note that we will provide a broader update at our Investor Day to include our data center plans and our progress in other areas, including advanced robotics, next-generation ADAS, industrial edge AI, personal AI devices in 6G. We hope you can join us as we will be highlighting meaningful new avenues of growth to support our long-term diversification story. I will now turn the call to Akash. Akash Palkhiwala: Thank you, Cristiano, and good afternoon, everyone. Let me begin with our results for the second fiscal quarter. We delivered revenues of $10.6 billion and non-GAAP EPS of $2.65, with EPS at the high end of our guidance. QTL revenues of $1.4 billion and EBT margin of 72% came in at the high end of our guidance, driven by favorable mix with global handset units approximately flat on a year-over-year basis. QCT revenues of $9.1 billion and EBT margin of 27% were in line with our expectations. QCT handset revenues of $6 billion came in as anticipated as OEMs remain cautious on handset bills due to the impact of challenging memory industry dynamics. QCT IoT revenues of $1.7 billion were up 9% on a year-over-year basis, driven by growth across consumer and industrial products. In QCT Automotive, we delivered another record quarter with revenues of $1.3 billion, representing 38% year-over-year growth driven by accelerating demand and increasing content per vehicle due to the transition of new digital cockpit and ADAS launches to our fourth-generation chipsets. On a combined basis, QCT automotive and IoT revenues grew 20% year-over-year, underscoring the continued diversification of our business, consistent with our long-term revenue targets. We also returned $3.7 billion to stockholders during the quarter, including $2.8 billion in share repurchases and $945 million in dividends, reflecting acceleration of our capital return program. Lastly, we released a previously recorded tax valuation allowance, resulting in a $5.7 million noncash GAAP tax benefit in the second fiscal quarter. This benefit is excluded from non-GAAP results. This reversal reflects new guidance on corporate alternative minimum tax issued in February by Treasury and IRS permitting taxpayers to deduct previously capitalized domestic R&D expenses. Before turning to guidance, I'd like to provide an update on the continued impact of memory industry dynamics on our business. Last quarter, we highlighted that the increasing demand for memory and AI data centers was driving uncertainty in memory supply and price increases to handset OEMs. And as a result, the handset OEMs, particularly in China, were taking a cautious approach by reducing build plans and drawing down channel inventory. These dynamics played out as expected in the second fiscal quarter and are also reflected in our third quarter guidance. As a result, in both quarters, our China QCT Android shipments are meaningfully below the scale of end consumer handset demand. We now estimate that QCT handset revenues from Chinese customers will reach a bottom in the third quarter and return to sequential growth in the following quarter. Now turning to guidance. In the third fiscal quarter, we are forecasting revenues of $9.2 billion to $10 billion and non-GAAP EPS of $2.10 to $2.30. In QTL, we estimate revenues of $1.15 billion to $1.35 billion and EBT margins of 67% to 71% with sequential decline primarily due to the operating assumption of weaker low-tier handset units. In QCT, we expect revenues of $7.9 billion to $8.5 billion and EBT margins of 25% to 27%. We are forecasting QCT handset revenues to be approximately $4.9 billion as a result of the impact of the industry-wide memory dynamics I just outlined. We anticipate QCT IoT revenues to grow by high single digits versus the year ago period, driven by industrial and consumer products. In QCT Automotive, following another record quarter, we expect year-over-year revenue growth to further accelerate to approximately 50% in the third fiscal quarter. Lastly, we forecast non-GAAP operating expenses to be approximately $2.6 billion in the quarter. In closing, while our near-term revenues are impacted by memory industry cyclical dynamics, we're confident in the underlying fundamentals around Snapdragon product leadership and content growth opportunities, including the adoption of agentic AI technologies. We continue to execute on our secular growth opportunities in automotive and IoT and remain confident in achieving our long-term revenue targets. In addition, we are very excited about the progress in our data center products and customer traction. We now expect initial shipments for our custom silicon engagement at a leading hyperscaler later this calendar year. We look forward to providing an update on our growth initiatives, including opportunities in data center and physical AI at our Investor Day on June 24. This concludes our prepared remarks. Back to you, Brett. Brett Simpson: Thank you, Akash. Operator, we are now ready for questions. Operator: [Operator Instructions] Our first question comes from the line of Joshua Buchalter with TD Cowen. Joshua Buchalter: Obviously, I'm not sure you're going to be able to front-run the AI day you plan to host in June. But any details you're able to share or context on what the custom silicon engagement, what the scope is, what the magnitude is? Is this a CPU? Is it an accelerator? Is it a networking chip? Just any help you can give us beyond the press release and prepared remarks, I think would be helpful as that's where investors certainly want to dig in today. Cristiano Amon: Josh, this is Cristiano. Thank for the question. Look, I can't provide a lot of details, as you said, we don't want to front run, I think, June 24. But here's a couple of things I can tell you, which is alongside what we said in the script. I think we have spent the time, I think, building assets and we've been building our CPU. We have accelerator. We have a different solution for memory in the accelerator. We have added a lot of capabilities for custom ASIC with the acquisition of Alphawave and Connectivity, we have been pursuing customer ASIC. We talk about have an engagement with a number of companies and pleased with the engagement several quarters ago. And I think given the capabilities that we're developing and what's happening in the market, that's accelerating. So we're very excited. The only thing I can tell, it is a large hyperscaler and we're really thinking about a multi-generation engagement. But I think that's what we can say at this point. Joshua Buchalter: Okay. I guess we'll stay tuned. For my follow-up, can you maybe walk through why you're confident that -- I assume it's fiscal third quarter that you were referring to with the third quarter, but why you're confident fiscal third quarter can be the bottom for Android sales -- Android QCT sales into China. I mean that's typically -- September quarter is usually a typically down seasonal quarter. And just given how low visibility is right now overall in the handset market, I'd be curious just what inputs you're seeing that gives you the confidence it's going to bottom in the June quarter. Akash Palkhiwala: Sure, Josh. It's Akash. So if you think about the impact to from Chinese handset OEMs as a result of the memory dynamics. It's really 2 parts. The first part is the scale of the handset market. And there, we have seen some small decline in it, especially in the mid, low tiers. But by far, the larger impact have been the OEMs making a decision to slow down their bills and draw down on channel inventory. So both of these factors have been in our March quarter results and they're also represented in our June quarter guidance. And so what we end up doing in both quarters is really significantly under-shipping the end consumer demand for handsets as a result of the channel inventory drawdown factor. So as we look forward, we feel confident that the third quarter is now the bottom. And so as we go forward, the revenue is going to be much closer to the scale of the handset business versus the inventory drawdown factor continuing into our forecast. Cristiano Amon: And Josh, this is Cristiano. I just want to add one thing because -- there's another way to look into this. As you know, because of our licensing business, we do have visibility of what happens in the market. So we know [indiscernible] true. We know how the [indiscernible] market is behaving even with increased price on the handsets. So it gave us a real good idea on activations and customer demand versus what we're shipping. So that dynamic outlined by Akash, is kind of very clear to us that Q3 becomes the bottom. Operator: Our next question comes from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee: Cristiano, maybe just going back to the data center opportunity and just trying to think about if you can sort of help us think about the competitive landscape here. I mean you've had, which is the IP provider now announced they want to vertically integrate and make chips. You had NVIDIA announce that they are going to focus on the [ inferencing ] market as well. How are you thinking about the competitive dynamics where they are related to maybe 3 months ago or 6 months ago that you're now sort of going and trying to deliver these wins? And I have a quick follow-up after that. Cristiano Amon: Great question. Look, I'll give our perspective. And I think we have now, I think, more clarity than we ever have about where kind of we are in the AI space. So a little bit of maybe at a very high level, right? In the beginning, it was all about training. It was all about creation of AI, a lot of GPU, very GPU-centric deployment. Infra started gain scale and then the conversation changed to -- I'm going to use my GPU from training on the cluster that I build and when I'm not training, I'm going to use that for inference. As inference starts to gain scale, we started to see dedicated solutions. The data center becomes more disaggregated. You have separate computing solution, some for compute bounds, some from memory bound. And now we're entering the, I will say, the next phase, which how AI is really going from infant generating tokens how do you generate demand for tokens, which all those agentic experience and those orchestrators, they run into a lot of the devices. So when you think at that landscape and you look at our IP, in the places that we could be very differentiated, I will start by our CPU. I think when you think about agents, CPU becomes very important. And I will argue, we were one of the companies that have a pretty good CPU asset. We've proven that CPU performance with leading performance on the markets that we are right now, such as PC, smartphone and Auto. And we have built and we'll provide details on Investor Day a dedicated CPU for agentic experiences in the data center. We're going to show the metrics, we're going to show how it performs. People will be able to compare. As you know, we have an architecture license, and we have a very, very high-performance CPU. So that's one of the assets. The other asset is how you think about the scale of a semiconductor company like Qualcomm. We're not small. And the ability to combine the IP with the ability to do custom silicon, make sure that, that yields make sure it's delivered with quality and combine a lot of the connectivity IP, which I believe Alphawave because it was a licensing IP company has a leading IP, the more you license, the better your IP becomes. The number three is how we think about the accelerator. You're going to need high compute density, low TCO. And we think that we have something unique, which is focused on a cluster that is disaggregating very specific function especially like [indiscernible]. I think the activity you've seen with companies like Grok and [indiscernible] just prove that you have opportunity for a dedicated inference accelerator. And the last point is, I would not discount the position that we have on the edge. If you actually track what's happening with Open Claw in all of the different desktop and co-work solutions, you rely a lot on a high-performance CPU device, which is also causing an upgrade cycle for us. So we look at this whole landscape, and that's how we feel so good about the agentic transition of AI, what it means to Qualcomm. And hopefully, on June 24, we'll show the details on the road map and an investor will be able to see where we stand, and please reserve a seat. Samik Chatterjee: Yes. No, please look forward to talking about that more at the Investor Day. Maybe for my follow-up, just going back to the handset business. Can you just remind us of the multiyear agreement framework that you have with your primary premium smartphone customer, Samsung. You did have some sort of changes in the market -- in the share with them this year. I think there are some more indications for the step-down in share and more use of the in-house SoC sort of next year? Or can you just remind us sort of how you're thinking about that engagement long term? And what does the multiyear agreement sort of capture at this point? Cristiano Amon: No, absolutely. I love answering the question. So this is a very, very stable, I think, a relationship with Qualcomm. I want to remind you all that we have reset the framework of this relationship. Historically, we always had a business with [indiscernible] that was in the 50% share between us and their own in-house silicon. That has changed to greater than 70%, as you know, and that has been the framework. And sometimes we get more than that, but we plan our business in greater than 70% share, which is exactly what we have said. You should expect that that is the framework of this year, and that is also the framework for next year. I would say that, that's probably one of the most stable relationship that we have, and we have visibility of what that entails. And we feel good about the position of Snapdragon. And I'll argue, I think given what's happened with agents, we have an opportunity to actually have a positive bias on that share. Operator: Our next question is from the line of Chris Caso with Wolfe Research. Christopher Caso: I guess the first question is just returning to the data center briefly. And to clarify what you mentioned in terms of the hyperscale engagement for the December quarter. Is that an engagement for an accelerator or a CPU? I understand your targeting both, it sounds like, but what's the particular engagement for December? Cristiano Amon: This particular engagement, which we're going to have shipments in December is a custom product. We're working with a hyperscaler. Christopher Caso: Okay. So no other specificity past that okay. Just with regard to QTL, and it looks like that's modestly down and likely due to what you've been talking about with regard to what's going on in the handset market. What's the right way to think about the QTL business as we go forward into the second half of the year? Do you think that we kind of maintain these levels and adjust for seasonality as you get to the end of the year? Or do you expect the impact on QTL to be more significant as you go in the second half? Akash Palkhiwala: Yes, Chris, it's Akash. So as you saw in our results for the second quarter, year-over-year handset units were flat for the global units. And this was really kind of impacting our guidance as well, our actuals as well. As we look at third quarter, what we're guiding is some weakness in the mid, low tiers in the market. I mean this is obviously something that we are projecting forward, and we're going to track closely. But what we're seeing is the premium high tier of the market is continuing to hold and weakness in the lower tiers. And that's what's reflected in our guidance. That's a reasonable way of thinking about the market going forward as well. Operator: The next question is from the line of Stacy Rasgon with Bernstein Research. Stacy Rasgon: So if the China handsets bottom in Q3 and then they grow in Q4, that September quarter, September quarter, I think, is when we're supposed to get the Apple step down, which may be an offset. So I guess just how are you thinking about handset seasonality in the September quarter, given those kind of competing dynamics? How should we be thinking about that? Akash Palkhiwala: Yes. Stacy, it's Akash. You're right. I think in terms of kind of handset revenues for QCT from Chinese OEMs, we do expect that the June quarter is the bottom, and you will see sequential growth from there. And Apple, you're right as well that typically, it's a growth quarter for Apple product revenue, and we do not see that at this point given the share assumption change. So those are the 2 factors you would use to forecast September quarter. Stacy Rasgon: I mean do you think handsets growing sequentially in September or not given those two factors? Akash Palkhiwala: Stacy, we are not specifically guiding it at that point -- at this point, but I think those 2 factors would be the input into the forecast. Stacy Rasgon: Okay. And for my follow-up, you talked about like agentic devices and agentic smartphones like driving a shift and things, I guess, into '27. Do you think the memory issues are going to be done by -- like how much memory does an agentic smartphone need? And is that something that's going to continue to be a headwind do you think on this as we go into 2027? How do we think about the broader dynamics around memory as we go forward? Cristiano Amon: Thank you for the question, Stacy. Look, it's a little early to talk about '27. I think 1 thing to see is I think the pace of change of AI is getting scale. When I think about the framework that I talked about it before, which you go from inference to now, you know how you generate demand for tokens with a lot of agents. And I think what we see is 2 things. One is the devices are changing the requirements in the design and the players. We see interesting associations now starting to form between smartphones and AI companies. We're starting to see some very interesting dynamics there which is changing the nature of designs. We see designs moving towards products they have much more capable CPU to run those type of products. And there's a lot of noise in the memory environment right now. I wish I could make a prediction on '27 is a little early, but we see a combination of some of the same companies that want a lot of demand for data centers and also getting involved with some of the devices at the edge as well. And we see new memory players coming and building capacity. So we're going to have to monitor the situation and see what happens in '27. Operator: The next question is from the line of Timothy Arcuri with UBS. Timothy Arcuri: Thanks a lot. I wanted to ask also about this custom that is going to ship in the fourth quarter of this year. I know you brought a team in from Alphawave. It seems a little fast to get something to market that includes your IP by the end of this year, given cycle time. So I think they had some chiplet stuff and maybe some custom DSP stuff. Is that the sort of thing you're talking about? Or is this truly something that includes a big portion of your IP that you've been able to turn around since the deal closed? Cristiano Amon: Look, I think 2 answers. So we have -- I'm pretty positive for the past several quarters, we've been talking about engaging with customers in the data center. So I think when we start engaging and talking about some of the Qualcomm capabilities, it's probably, I think, even before the acquisition of Alphawave. I think the acquisition of Alphawave increase our execution capabilities in the portfolio of IP. I think you should expect that we're going to have a longer multi-generation agreement with those companies that brings a lot of Qualcomm capabilities to the table. I wish I could provide more details, but like I said, I don't want to front run what we're going to do on June 24. But I think we will provide a detail of everything we're doing. Our customers win in our roadmap and our IP. Timothy Arcuri: And then I guess just as a follow-up, is the assumption still the same that like around your share in Apple. I know there are some signs that there's going to be a little more aggressive displacement. Is the assumption still that it's going to be 20% for the new launch? Akash Palkhiwala: Yes. No change, Tim, to our assumption there. We've set of the 20% of the -- 20% share of the phones that will launch in fall this year and no product relationship beyond that. And this is -- this assumption has been consistent for the last couple of years. In terms of Apple product revenue for fiscal '27, we've seen sell-side models in the range of a little over $2 billion in terms of QCT product revenue in the year, and we think that's a reasonable place to model the business. Operator: Next question is from the line of Joe Moore with Morgan Stanley. Joseph Moore: You alluded to the weakness being more in the medium tier and the premium tier as being stronger. Is that something you can see where you're sort of taking limited memory allocation and that sort of drives just to sort of limit that puts it in the heart here. Just what are you seeing in terms of what that's doing to your mix going forward? Akash Palkhiwala: Yes. I think the actions from the OEMs are obviously very logical. If you had to choose between which devices you put your memory allocation to, you would pick the premium and the high tier, that's where the profitability sits, and that's what you're seeing happen in the market. Joseph Moore: Okay. And you talked about 6G in 2029. I mean is that -- what does that time frame represent? Is that sort of introduction of technology? Is there a shipments then? Just anything you can tell us about when 6G starts to become relevant? Cristiano Amon: Yes. And look, thank you for the question. The reason I brought it up is because 6G is going to feel, I think, very different than the other Gs for Qualcomm. I also believe that 6G creates some very interesting, I think sovereign AI and data center opportunities, I think, for Qualcomm as well. You should be thinking about our time line, and we've been consistent with it. We will have prototype base, I think, demonstrations in 2028. Likely, we're going to have first silicon in '28, and we want early launches in 2029, and then we expect that to get scale by 2030. Operator: Our next question is from the line of Ross Seymore with Deutsche Bank. Ross Seymore: I want to go back to the handset side. And if you could just level set us to whether it's the fiscal second quarter or fiscal third quarter, what percentage of handsets is China. And you mentioned that a lot of the dynamics is how far you're under-shipping versus true demand, are you believing that true demand, whether it's China or elsewhere, is truly weakening still? Or is that side of the equation stabilizing despite the memory fairs? Akash Palkhiwala: Yes, Ross, when you think about the total handset market, and this is more of a QTL comment, right, that's where we are seeing that the -- there's a slight decline in mid-low tiers, but the overall scale of the handset market has not changed much, at least in the March quarter, and we're going to obviously closely monitor that going forward. In terms of QCT shipments to Chinese customers, it's a factor, as I said earlier, of 2 things. It's not just the scale of the handset market, but the OEM decision to drawdown on channel inventory. And so my comments earlier were about the drawdown of channel inventory will end soon, and that's us calling the bottom on the quarter. And then really, our shipments will reconcile to the size of the handset market. Ross Seymore: Okay. And I guess for my follow-up question, shifting gears to the automotive side of things. You mentioned about the ADAS side starting to ramp and growing 50% this year, so -- or at least in the next quarter, so doing very, very well. As you go from more of a cockpit business to the ADAS mix increasing, how does that change the revenue trajectory and perhaps the gross margin trajectory in your automotive business? Cristiano Amon: Yes. So this is Cristiano. I think what you see is it accelerates revenue dramatically because it's a lot more silicon content. If you -- and that is true actually on both sides. I think what you saw is when we went from generation 3 to generation 4 in digital cockpit. We -- I think we keep mentioning the car, it's really becoming a computing surface. We saw a step function increase in the capability [ silicon content ]. You expect another 1 when we go from fourth generation to fifth generation. And as we add processors and you started to see more and more development of L2++ in direction towards Level 3, you're starting to see the amount of computing power going up. So for us, it's basically a significant revenue accelerator within automotive. Akash Palkhiwala: And specifically on your question on gross margin, I'd highlight maybe 2 additional factors to what Cristiano said. I think we have the we're transitioning from a chip sale to a [indiscernible] sale. And so as we go to a module, it increases the revenue opportunity for us as well. And then in addition, we have software opportunity on top of the the chipset, which also helps our margin profile. So net debt, we still model the business in line with our corporate average, but it really is a business that has several vectors of growth as both of us outlined. Operator: Our last question is from the line of Vivek Arya with Bank of America Securities. Vivek Arya: For the first one, Akash, you mentioned Apple product sales, I think, $2 billion plus for fiscal '27. What about the royalty contribution? How does that evolve as you approach the date for kind of renegotiation negotiating that business? Akash Palkhiwala: Yes. So pending the renegotiation, the royalty, we don't expect it to change, right? It should be in the same scale that it's at, and it's an independent business separate from the chip business. Vivek Arya: And for my follow-up, Cristiano, back to the hyperscaler discussion, I realize you'll give more details at Analyst Day. But was -- is Qualcomm's intention to approach this from an ASIC perspective, I thought you plan to enter the data center from a merchant perspective. But are you saying that now the goal is to approach it from an ASIC perspective? And if that is the case, what impact does it have on margins? Like are you really going to compete head on with the other ASIC suppliers that are out there. So this is going to be more kind of a one-on-one right type approach to the market as opposed to approaching the market in a broader merchant. So just what is kind of the broader strategy, go-to-market strategy that Qualcomm has in this business? Cristiano Amon: Very good -- great question. I think the answer is all of the above. Look, we -- first of all, as a new entrant, I think we we're very flexible. But we also look at the reality of what's happening in the hyperscalers. You can see that the majority of the revenue for semiconductor companies is heavily concentrated in a few number of very large companies. And those companies have now had indicated very clearly, they have different -- as the data center gets disaggregated, you have different approach to compute to connectivity. And you should assume that Qualcomm will play on merchant, on custom and it's going to be a combination of how we're going to configure our IP and different IP blocks for different solutions is going to be a bespoke business. Akash Palkhiwala: And specifically on your question on this custom engagement we talked about, we do expect that to be accretive at the operating margin level. Operator: Thank you. That concludes today's question-and-answer session. Mr. Amon, do you have anything further to a before adjourning the call? Cristiano Amon: I think the obvious thing I want to say is please ask everyone to attend our June 24 [indiscernible] Investor Day. We intend at the Investor Day to really highlight not only, I think, everything that is happening with the new Qualcomm, but also I think the details of the products and technology we have been developing for the data center space, provide an update in how physical AI is transforming our business and provide the clarity that we have today, how really agents and agentic experience exactly has a broad implication in our entire business. And I'm looking forward to speak to all of you, and I'd like to our partners, our employees for a great quarter as we continue to transform Qualcomm. Thank you very much. Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Waystar First Quarter 2026 Earnings Conference Call. [Operator Instructions] After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Edward Parker, Head of Investor Relations. Please go ahead. Unknown Executive: Thank you, operator. Good afternoon, everyone, and thank you for joining Waystar's First Quarter 2026 Earnings Call. Joining me today are Matt Hawkins, Waystar's Chief Executive Officer; and Steve Oreskovich, Waystar's Chief Financial Officer. This afternoon, we issued a press release announcing our financial results and published an accompanying presentation deck. You can find these materials at investors.waystar.com. Before we begin, I would like to remind you that this call contains forward-looking statements, which are predictions or beliefs about future events or performance. Examples of these statements include expectations of future financial results, growth and margins. These statements involve a number of risks and uncertainties that may cause actual results to differ materially from those expressed in these statements. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this afternoon's press release and the reports we filed with the SEC all of which are available on the Investor Relations page of our website. Any forward-looking statements made on this call are as of today and will not be updated unless required by law. We will also discuss certain non-GAAP financial measures. These measures are intended to provide additional insight into our performance and should not be considered in isolation or as a substitute for financial information prepared in accordance with GAAP. We have provided reconciliations of the non-GAAP financial measures included in our remarks to the most directly comparable GAAP measures, together with explanations of these measures in the appendix of the presentation slide deck and our earnings release. With that, let me turn the call over to Matt. Matthew Hawkins: Thank you, Edward, and good afternoon, everyone. Thank you for joining our Q1 2026 Earnings Call. Waystar delivered a solid start to the year reflecting strong execution across the business and our innovation road map as we continue to position ourselves as the market leader in delivering an end-to-end health care revenue cycle platform. We drove strong performance across the core business, built on our innovation momentum, including our recent innovation showcase and introduced a new AI-powered recruitment solution. What differentiates Waystar is the tangible value we deliver. Our platform is purpose-built and integrates powerful LMs into our core workflows to drive meaningful ROI for health care providers, improving accuracy, reducing friction and lowering the total cost of operating the revenue cycle. As requirements expand across payers, policies and workflows, providers increasingly choose embedded solutions they trust that deliver consistent financial outcomes. Importantly, the AI era is expanding Waystar's total addressable market opportunity meaningfully. Historically, revenue cycle technology addressed a roughly $20 billion software market. As we embed Agentic AI directly into mission-critical workflows, we're building toward what we believe is the future of this industry, the autonomous revenue cycle platform. That shift unlocks a much larger opportunity, the approximately $100 billion in annual revenue cycle labor services performed across the industry today. We believe we are well positioned to automate a meaningful portion of this labor pool through new AI-powered capability launches like denials, prior authorization and recoupment. In Health Care, where regulation and risk defines success. This shift is critical, and Waystar is built to win. Our AI advantage is anchored in billions of proprietary longitudinal, financial and clinical data points, deeply integrated workflows with significant switching and disruption risk. Hard one domain expertise that positions us as the trusted AI partner and proven ability to operate at scale in an environment with little tolerance for hallucinations. Our first quarter results reinforce our conviction. Revenue of $314 million, representing 22% year-over-year growth. Strong retention supported that performance with net revenue retention of approximately 111% alongside continued adoption of our AI platform and approximately 99% first pass acceptance rates across the platform. With that context, let me highlight a few key points from the quarter. First, our core growth drivers are durable. Continued expansion across the platform and solid core execution drove our results. We expanded within our installed base and demand signals are strong. Second, AI traction is accelerating. AI-powered capabilities drove roughly 40% of new bookings in Q1 and our clients leaned into the platform for prevention, automation and visibility rather than downstream rework. That shift reflects the value of embedded intelligence across the revenue cycle. Third, we maintained discipline through near-term headwinds. A few factors pressured patient payment volumes during the quarter, reflecting broader macro and weather-related dynamics, but we held financial discipline while continuing to invest in innovation. Steve will expand on these dynamics shortly. Let me discuss the quarter in more detail. We continue to expand our client base in Q1, adding 42 new clients with more than $100,000 in trailing 12-month revenue. Win rates exceeded our historical averages across segments, and we continue to see RFP activity shift toward platform evaluations over point solutions, favoring Waystar's unified mission-critical platform. We also delivered strong bookings ahead of internal expectations and building on a record Q4. Demand was broad-based, driven by both new logo wins and expansions within our installed base. We continue to build momentum with larger complex provider organizations as they consolidate vendors and standardize on a single platform. Our implementation backlog is elevated across segments. We carry what we believe is the largest qualified sales pipeline in our history, reflecting deep multiyear platform commitments from providers and supporting visibility into 2027. Waystar delivered adjusted EBITDA of $135 million in Q1, representing an adjusted EBITDA margin of 43%. Revenue mix elevated the margin slightly above expectations, which Steve will discuss. We continue to balance profitability with targeted investment in innovation and AI. Turning to iodine. Integration is running ahead of plan and continues to validate the strategic rationale of the acquisition. Iodine extends Waystar into the mid-cycle where clinical intelligence plays a critical role in preventing denials and ensuring compliant reimbursement. The convergence of financial and clinical data represents 1 of the largest unmet needs in the revenue cycle and new third-party research confirms it. A recent study of 50 mid-cycle leaders found that 86% of organizations have financial and clinical systems that are completely siloed or are reliant on manual data transfers resulting in a lack of visibility into payer payment and denial outcomes, 100% expressed interest in a single AI-powered platform to bridge the gap from mid-cycle to the final claim. We'll publish the full study in the coming weeks, but these findings reinforce why we acquired Iodine and the demand signal we're seeing in the market. Iodine's AI talent is now fully integrated into Waystar, accelerating AI initiatives across the combined platform. We're generating early cross-sell traction in both directions and go-to-market demand is exceeding our expectations. Last quarter, we outlined the 4 interconnected pillars that position Waystar to lead in the AI-powered revenue cycle. Now I'll focus on how those pillars translate into outcomes for providers. First, Waystar is the mission-critical infrastructure providers depend on to get paid, operating at scale in 1 of the most highly regulated payment environments, directly inside live revenue cycle workflows, eligibility, authorization, claims, denials, appeals and payments. This results in very sticky long-term customer relationships. Second is our proprietary data at scale. We process over 7.5 billion transactions each year and with Iodine, our models now learn from clinical data on approximately 1/3 of U.S. hospital discharges annually, giving us visibility into the financial and clinical dimensions of reimbursement, not just what happened, but why? Our models learn across hospitals, physician practices and ambulatory settings. Every claim, denial and payment improves performance. Clients benefit from patterns across tens of thousands of similar organizations. Third, Waystar operates a deeply deployed multisided network and proprietary data rails between payers and providers. We connect over 1 million providers to every major payer through 100,000-plus live integrations across electronic health records, practice management systems, clearing houses and clinical platforms. We touch roughly 60% of the U.S. patient population each year, yet we only penetrate a small portion of the total transactions those patients generate. As volume increases, our platform delivers better outcomes. Fourth, Waystar combines scale distribution with deep domain expertise. We serve providers across all care settings with low client concentration, creating both resilience and broad reach. Our forward deployed teams, product, clinical, revenue integrity and client success work directly inside real workflows. We develop and refine many of our AI capabilities in close partnership with clients, ensuring what we deliver works in production. With that foundation in place, let me turn briefly to how AI is operating and evolving across the platform today. At Waystar, AI is embedded directly inside workflows and where decisions are made and dollars move. The platform identifies issues upstream, resolves them inside live workflows and learns continuously from outcomes. This quarter, we accelerated the shift from task level automation toward Agentic workflows. Each step moves us closer to the autonomous revenue cycle where the platform absorbs the administrative burden, so teams can focus on exceptions, strategy and patient care. Today, approximately 50% of our solutions leverage AI and nearly 40% of revenue is generated by AI embedded workflows. At last week's spring innovation showcase, we introduced several net new capabilities that expand AI embedded workflows across the revenue cycle including deeper convergence of financial and clinical intelligence to prevent issues before billing and expanded Agentic intelligence that assesses documentation, prioritizes opportunities and guide next steps directly within live workflows. Early deployments are delivering strong outcomes. Our new prebill anomaly detection solution delivers an estimated $3 million in net revenue per 10,000 patient discharges and a 5x return in recovered revenue over 3 years. New Waystar altitude AI-powered capabilities within our patient financial experience are expected to drive a 50% increase in collections meaningful in a market where patients account for more than $556 billion in out-of-pocket spending. Some of the most damaging revenue loss in health care happens after providers have already been paid through payer recoupments. Payers regularly take back funds from previously paid claims, often months or years later by offsetting them against future payments with little transparency into which claims are involved, why the funds were recouped or whether the action is even valid. Based on our industry remittance data analysis, we estimate payers take back over $40 billion from providers each year through these offsets, and recruitments are growing at more than 2x the rate of overall claim volume creating significant accelerating cash flow volatility. Waystar's new recruitment solution built on Altitude AI brings transparency to this process. Providers can now detect previously hidden recruitments, understand the root causes and take action efficiently, all using remittance data at scale. Early results are compelling. Providers are reducing recruitment reconciliation time by over 80% and 1 early adopter health system matched $32 million in revenue risk, work equivalent to approximately 13 full-time employees. This new SKU integrates quickly for existing clients and demonstrates how we convert administrative complexity into financial outcomes through AI. Looking ahead, our priorities are clear: execute against our product road map with AI embedded deeper into every workflow, drive cross-sell and platform adoption across our installed base and maintain operational discipline while investing in the capabilities that widen our competitive advantage. Q1 reinforces that our role in the health care ecosystem is deepening. We're operating at the intersection of complexity, scale and outcomes, and our platform is engineered for exactly this environment. Before I turn the call over to Steve, I'm pleased to share that will be hosting our first Analyst Day on Tuesday, August 25, alongside our annual Waystar True North Client Conference. You'll hear directly from our customers partners and leadership team, we hope that many of you can join us. With that, let me turn it over to Steve. Steven Oreskovich: Thanks, Matt. Revenue increased 22% year-over-year in the first quarter to $314 million. Organic revenue grew 11% year-over-year. Performance in the quarter reflects strong execution across the business and expansion within the customer base. Bookings exceeded internal expectations and include a double-digit count of $1 million-plus annual value contracts, which is above our historical quarterly performance. These contracts have both longer lead time to revenue and attractive profitability. Clients generating more than $100,000 of revenue in the last 12 months increased by 42% in the first quarter to 1,433 at quarter end, an increase of 15% year-over-year. Our net revenue retention rate also viewed on a last 12-month basis was 111% at the end of Q1, slightly above the historical range of 108% to 110%. Subscription revenue of $172 million for the first quarter increased 38% year-over-year, 3% sequentially and was 55% of total revenue. On an organic basis, subscription revenue grew 14% year-over-year. The growth and revenue composition are in line with our expectations. Volume-based revenue of $139 million for the first quarter increased 7% year-over-year and 4% sequentially. As we moved through the quarter, we saw some modest offsets within our volume trends that were most evident in patient interactions with health care providers and taken together, affected volume-based revenues. These headwinds were primarily concentrated in patient payment solutions, which represent approximately 25% of revenue and include a combination of external and client-driven dynamics. Specifically, we saw accelerated conversion from print to digital patient statements as clients continue to focus on efficient ways to engage with patients. While we've been advocating for the shift to digital for some time, adoption in Q1 was ahead of historical rates, and we have updated expectations for the remainder of the year accordingly. We also saw 2 factors affecting patient utilization of the health care system during the quarter, changes in health care coverage and weather-related impacts. Importantly, none of these factors were competitive or product-driven as evidenced by our strong bookings performance over the past 3 quarters and a record qualified sales pipeline at the outset of Q2. Adjusted EBITDA of $135 million for the first quarter increased 26% year-over-year. The adjusted EBITDA margin of 43% was primarily driven by a shift to higher-margin solutions, specifically, provider solutions, which have higher margins and comprised approximately 75% of revenue organically grew year-over-year at double the rate of lower-margin patient payment solutions. Please see our latest investor presentation for more details on historic growth rates of these 2 solution sets. Our capital position is strong with healthy cash flows as we ended the quarter with $159 million in cash, equivalents and short-term investments and $1.5 billion in gross debt. Unlevered free cash flow was $90 million in the first quarter and we converted 67% of adjusted EBITDA to unlevered free cash flow. As of March 31, net leverage was 2.7x compared to 3x at the end of 2025, which aligns with our historical ability to delever 1 turn annually. As a reminder, we expect to run the business at or below a 3x leverage ratio. We are also pleased with the recognition of our efforts managing our capital structure as noted by both Moody's and S&P upgrading the ratings of our debt facility in the past couple of months. Based on the first quarter performance and our current visibility for the rest of the year, we reaffirm our revenue guidance range of $1.274 billion to $1.294 billion, with the midpoint of $1.284 billion, representing 17% year-over-year growth and adjusted EBITDA range of $530 million to $540 million, with the midpoint of $535 million. Our full year guidance at the midpoint continues to assume normalized organic revenue growth of approximately 10% consistent with our low double-digit long-term growth target. We expect the strong demand in booking activity we saw in the first quarter, along with similar results in the second half of 2025 to provide upside opportunity for growth in late 2026 and beyond. We are balancing that expectation with the near-term impact of the previously discussed offset, which we expect adjust the typical first half, second half of the year seasonality curve associated with patient payments to have much less variability in 2026 relative to the past couple of years. Thus, while we previously communicated that we expect 1% to 3% sequential quarterly growth throughout 2026, with Q3 at the low end -- we now anticipate Q2 sequential growth to be flat to 1% in Q3 to be 1% to 3%. This concludes our opening remarks. With that, we are ready for your questions. Operator, please open the call. Operator: [Operator Instructions] Our first question will be coming from the line of Adam Hotchkiss of Goldman Sachs. Adam Hotchkiss: I guess, Matt, you spoke about 40% of revenue being associated with work flows related to AI. I think that speaks to the defensibility of the platform as you work AI into the existing solutions. But how should we think about the degree to which AI can be additive to your TAM and show up as rating revenue growth. I guess I'm just trying to marry the stability of the current organic growth rate with some of the AI strength you're calling out in numbers and how we may see AI SKUs impact revenue growth in the future? Matthew Hawkins: I appreciate your thoughtful question about AI. One of the things that you heard us just speak to, I believe we've provided a slide or 2 this quarter and in the past is a much larger total addressable market that we're able to go after by deploying AI capabilities that replace manual services. We note that a recent McKinsey report stated that that this ongoing shift in value pools from services to technology and software platforms will expand its incredible addressable market opportunity. And so I think what you see with our recent spring innovation showcase launch where we are consistently pointing people towards the autonomous revenue cycle platform and then delivering new AI-powered capabilities, whether it's the new recruitment SKU that we highlighted or it's things that show up in our innovation showcase like the prebill anomaly detection solution that replaces manual work from needing to take place. It's going to allow Waystar to pursue a much larger addressable market opportunity. We're very excited about that. We view AI as a tailwind and as the biggest opportunity in our lifetime. Operator: Our next question will be coming from the line of Charles Rhyee of TD Cohen. Charles Rhyee: I want to ask about the comments you made about volume-based revenue is, obviously, it looks like patient revenue was up about 4% in the quarter. It's been going up more about 8% the last 2 quarters prior. You made some comment about accelerated move from print to digital building. Just curious, why would that necessarily have an impact in you did call out weather, but are you able to sort of isolate how much maybe weather might have had impact on that? Just trying to understand a little bit what's happening there and how we should think about patient payments to look as we think about the guidance, particularly as the 2Q commentary on flat revenue. Any help there would be helpful. Matthew Hawkins: Thanks, Charles. Let me start and then I'll turn it to Steve. We certainly work to be transparent with what we observed taking place in the business. And we did highlight couple of the offsets in the transaction volume. Most of that was a function of this dynamic of the acceleration of conversion from print statements to digital statements. We've talked about this for quite some time. We know that there's this tremendous digital transformation opportunity that exists in health care, where we reduce paper and postage and take cost out of the system while we actually increase the patient experience and ensure that we get providers paid accurately and successfully. So we view this digital transformation as ultimately being good for providers, good for patients, quite frankly, good for the earth and good for Waystar. And Waystar has digital integrated patient payment solutions that improve transparency, improve the patient payment plan adherence and really are also helpful to providers. So I guess I'd say 1 other thing and then we can comment on some of the quarterly commentary, and I'll ask Steve to help us there. I'd say it's important to note that while we see this trend -- and we're kind of factoring that into how we think about 2026, we view this as an opportunity. We view this transformation as something that's good, as you've heard me describe, and this offset, if you will, has 0 to do with AI competition and more to do with doing what's right for health care. And so with that, Waystar can be an enabler of that. And I'll turn it to Steve for added commentary. Steven Oreskovich: Yes. And hopefully, Charles, when you get a chance, I guide you to look at Slide 8 of our IR deck. We expanded it to include the split of provider and patient payment solutions revenue by quarter and the historical trends since the first quarter of transparently, most people could have picked it up from our filings, but you felt that it just made more sense to illustrate it here so you can actually see the same things that we're seeing going on in the business into. To Matt's point, right, you continue to see the strength of the business and growing in Provider Solutions, which are 75% of the total revenue. And we talked about in the past, very high margins when we look at it from a very low direct third-party costs associated with it. Over the past 6 quarters, that's continued to grow nicely on an organic basis, which we also called out on the slide, anywhere between, on average, 13% to 14% year-over-year. The offsets we talk about are in, and as you mentioned, inpatient payments that 25% of the revenue stream where we're helping providers connect with and interact with and get paid by patients. And that's where we're seeing that conversion of -- from print to digital statements. Transparently, that does impact the top line revenue number on a unit economic basis. But when you look at it from a margin dollars or a cash flow, that conversion is neutral. So we see positivity long term in the business there, because it's going to allow us to see margin accretion in the business overall. A little bit of that, what you see in the first quarter here as well, and we called out based on the revenue composition for the order. So hopefully, that's helpful commentary, and it's a good spot to go look and really dive into the details on that impact. Operator: And our next question will be coming from Jailendra Singh of Truist Securities. Jailendra Singh: I wanted to follow up on your comments that about bookings coming in ahead of internal expectations. I think you talked about 40% new bookings driven by AI solutions, and I petite all the color there. Can you elaborate on the remaining 60% bookings? Are there any particular areas that are seeing outperformance -- and considering the rates we are seeing between payers and providers, are you seeing an increased genes from providers, which might result in a faster conversion than what we have seen in the past? Matthew Hawkins: Thank you, Jailendra. Yes, we note that we've just seen nice momentum and I feel like our business is getting better and better every quarter. the bookings momentum is across both new prospects as well as cross-sell and upsell. We are growing across every segment of our business with high-quality opportunities. And as we -- it's interesting, we look at the size of the bookings, just a little color commentary here, we called out in the last 2 quarters of 2025 that the number of million dollar bookings were more than 2x the quarterly average of the past 3 years. That trend is continuing. We're seeing more large bookings. To us, that validates our platform approach as these these bookings are often multi-solution or platform sales often involving AI that hopefully can be turned on faster. Generally, cross-sell and upsell bookings, we're able to build in an implementation plan for existing clients. But given the larger nature, whether it's new or existing, if these bookings are larger in size, they're still taking 6 to 18 months to show up in our revenue model. And we've noted in the past how larger deals typically take this type of time for full revenue realization. But certainly, we have internal teams focused on compressing that time. It's just a balancing act. Sometimes it's what the actual provider organization. Overall, we're pleased with the progress that we're making. We start Q2 with the largest qualified pipeline of new and cross-sell upsell opportunities in our history. So that gives us a sense of momentum and conviction about the work that we're doing. And we also start -- as you might anticipate, at the start of Q2, a large implementation backlog. So hopefully, that commentary is helpful, Jailendra, I appreciate your question. Operator: And our next question will be coming from the line of Ryan Daniels of William Blair. Ryan Daniels: Matt, maybe 1 for you. You talked about early adopters of the payment recruitment solutions, seeing some very good ROI -- and I heard in your prepared comments, you stated that was a new SKU. So it sounds like a new AI-enabled revenue generation opportunity. So what I'm hoping you can dive into a bit more is how long does it take for solutions like this to kind of go broadly across your client base? And then also, are you doing any go-to-market changes given the potential increased value of solutions like this that are new and AI enabled that can really add value on a rapid basis. Thank you, Ryan. We're sure excited about this new EI powered recruitment solution. It does represent a new SKU. Matthew Hawkins: And as you've heard us speak to in the past, -- these AI-powered solutions have multiple ways to show up into our business model. First, certainly, longevity of clients and sustaining sticky relationships with clients Second, pricing, AI solutions, where we're strengthening in some cases, existing software with more LLM based AI capability. We price those to value for clients as we're delivering incremental capability. In the case of a new SKU like this, like this AI-powered recruitment and what will soon follow in the prebuild anomaly detection solution. If I were to pull back the curtain just a bit we go through an extensive amount of training for our teams. So certainly, the product and technology teams are stoked to build these kind of capabilities and to launch them. We do have a robust early adopter program. We're getting great feedback from some of the leading provider organizations in the United States. This is a robust kind of test and learn environment once we get ready to launch this, we also brought along our go-to-market teams, our product marketing teams. We do a little bit of outbound product marketing to build excitement and webinars and things that will educate provider organizations on the benefits of these types of solutions, while we're training our go-to-market teams. Just last week, we were at a growth summit. We had several hundred people engaged in hands-on training on making sure that we're able to talk about these solutions, get these solutions into the hands of provider organizations and do ROI calculators, things like that. And then along the way, we're training our operational teams as well to be able to implement these solutions. Depending on the -- and they do a fantastic job I might add. But depending on the SKU we're able to turn some of these things on rapidly. And to your question, we're always exploring ways for us to turn on new capability in a way that clients can absorb it into their -- into the platform and begin to use it and get the benefit of it. So that often involves training and some educational component. And the nice thing about our platform Ryan, is we're conditioning end users to consume AI in a construct that they understand. And as you know, we deliver hundreds and hundreds of capabilities onto our platform each and every quarter. We want people to understand the power that they have. And sometimes the technology is a little bit ahead of where the human factor is. And so -- it's not just about turning this capability on and on the platform. It's about making sure that providers can get the benefit that they want as they begin to consume this exciting new AI capability. Operator: And our next question will be coming from Craig Hettenbach of Morgan Stanley. Craig Hettenbach: Great. Matt, I just had a question. When I think about how fragmented the revenue cycle management space is your comments around kind of point solutions versus platforms -- what do you think is the tipping point in terms of driving a faster acceleration towards platforms? What are some of the things you're hearing from your customers and seeing in the market? Matthew Hawkins: Thank you, Craig. It's interesting. There's a lot of excitement right now. This is -- it's not necessarily a new phenomenon. Our health care and the revenue cycle space has had a long history of point solutions. And it was our vision from the very outset that Waystar could create an enterprise caliber end-to-end integrated platform. And that came -- that vision came from actually showing up and talking to provider organization decision-makers who are, quite frankly, fatigued at using point solutions. When you use -- I was -- the example that I've given recently was I was with a CFO -- excuse me, a CIO of a very large system not long ago, and very impressive lady. She said, Matt, can you help us, can your platform help us? I currently use more than 12-point solutions just to manage our revenue cycle process. And of course, that's where the platform approach really comes to play. What we hear providers want increasingly, they want a regulatory compliant, cyber secure, deeply integrated platform, and they want to be able to call 1 person, 1 organization to help them across the platform to be able to tackle their most persistent challenges. And I think that's where Waystar -- that's where you see the momentum and the size of the deals that we're signing the quality of our pipeline start to show up. The forward demand indicators to us mean that there's more excitement about our platform than perhaps ever before. This is what we were dreaming of 8 years ago from Waystar. So hopefully, that context is helpful. Operator: And our next question will be coming from the line of Sean Dodge of BMO Capital Markets. Sean Dodge: Yes. Maybe just kind of staying on this AI and how that likely changes the market. Matt, you talked a lot about embedding more AI and waste or offerings and that driving more value for clients. You also talked before about pricing to value, so adjusting the revenue model in a way that helps waster participate in some of that value creation. I guess what do you think the time lines are that, that likely happens over this kind of idea of pricing to value. How near term of an opportunity is that? And then like how big of a paradigm shift is that in your pricing approach? I guess you guys have always tried to price the value. So this is just kind of what you've always done. Matthew Hawkins: Yes, Sean, that's a great question. Let me speak to that. I'd say we've always priced to value that we deliver. As we deliver these AI capabilities and in a way that clients can absorb them, we're very excited about it. I think this is a long-term opportunity for us to truly price to the value that these are delivering. When we call out in our prepared remarks on the earnings call, the type of impact oftentimes will associate the reduction of manual work and the number of people involved in historically doing that manual work. And so we know that there's impact in the solutions that we have to offer. Now I would say we're already monetizing AI through our core business model. So part of this really isn't a science project by trying to tie it to modules or outcomes or operating discipline in a new way. We're already doing that. But also this does give us a chance to reflect on the continued effort to price to value. We know that the human labor factor in health care is the most expensive expense line in most health care organizations. And so if we can help then those people become even more productive and focus on higher order, higher value work. And we're doing our jobs, we're delivering AI in a way that can be very constructive to those organizations. And so while we don't want to disclose too much on our pricing philosophy on a public call, I think what I'd also say is that we're -- we've always been a consumption-based pricing model. We've always deployed amazing software and AI capability that ties to the actual business activity in an organization. We're not a per seat fee-based company were tied to consumption and successful outcomes for the organizations that we work with. Operator: Our next question will come from Stan Berenshteyn of Wells Fargo Securities. Stanislav Berenshteyn: I wanted to ask about the sales cycle. You obviously called out you have a lot more SKUs. You're generating much larger sales on a per client basis. And obviously, this requires your sales reps to do a bit more learning perhaps the clients have to do a bit more educating on what you're offering, how is that impacting the sales cycle? Any changes in the conversion rates as we think about this year and next year? Matthew Hawkins: Thanks, Stan. I wish I could have taken you with me to our Growth Summit that we hosted just last week. It felt like an NFL mini can because we take our growth account executives, and we feel like they're the finest best in the industry. We expect them to be very productive, very focused. These are very well-trained people. And our goal, if we do this right, is we want to consistently be delivering them new capability to introduce to clients and to prospects. First and foremost, we take a platform approach -- and so you can imagine that it becomes really additive to the platform every time we're talking about a new high-value AI-powered solution and our growth team loves that. So we have a methodology that we follow. We have great people in our training and development and strength and conditioning if I can use the NFL analogy and -- we have a really great team of people who want new product. And as we give it to them, it shows up in the type of demand statistics that we've talked about, elevated really nice bookings higher deal sizes, a great qualified pipeline that we work with great sales leaders to qualify that pipeline, and it allows us to get traction and create some longer-term vision towards what can we build towards. So I hope that commentary is helpful, Stan. But yes, they're always eager to get more solutions, and we take training very seriously, so we can empower great people to go help us grow. Stanislav Berenshteyn: And just to kind of reiterate, is that impacting the sales cycle at all given the shift towards more SKUs and larger sales? Matthew Hawkins: And let me say that it is not. We've highlighted that each of the segments that we sell to have different sales cycles. And along the lines of your thoughtful question, hospitals and health systems tend to be 12 to 24 months sales cycles. Certainly, depending on the size of a nonhospital or an ambulatory type organization, those sales cycles can be or shorter in length. But we're not noticing a compression of time or any elongation of time. We are also seeing elevated win rates. So as we're introducing new solutions, if anything, the validating point is that sales cycles are staying the same and we're seeing elevated win rates. Operator: Our next question will be coming from the line of Ryan MacDonald of Needham & Company. Ryan MacDonald: Matt, maybe we'll give you a little bit of a breather on this one. I got 1 for Steve on margins. Steve, I'm curious as how we should think about sort of the pacing and magnitude of incremental investment as we go throughout the year. Was there anything in Q1 in terms of investments where you sort of held back or pushed out to later in the year? The reason I ask is, obviously, has historically been sort of the low watermark from an adjusted EBITDA margin perspective. And sort of based on the implied guidance, even if you run rate out Q1 adjusted EBITDA throughout the remainder of the year, we're getting to that sort of $540 million sort of high end of the range. So just wondering if the -- what the puts and takes there that with the reaffirmation of the guidance. Steven Oreskovich: Yes. Certainly, Ryan. So our focus and where we're reinvesting back in the business hasn't changed to start with, right? It will continue to be an innovation in the client experience in cybersecurity. So no changes to areas of focus. To your question on the 43% margin -- adjusted EBITDA margin for the quarter versus 42% in overall guidance. And you are correct, typically, Q1 tends to be a little lower. That really truly is what we're seeing in the growth of the sort of the revenue breakdown that I had mentioned earlier with the provider solutions growing at a faster rate and having a much higher bottom line contribution than patient payments. Now the 1 thing just to be -- as we look out for the full year, with some of the offsets we talked about and some of what you're seeing in patient payments and the interaction in the first quarter of the year, we do expect that first half of the year, second half of the year variability that we tend to see, just seasonality that we tend to see in that business to be tighter to the normal or if I could say, a lighter beta than we've seen in prior years. So we would expect a little bit of that happening to the shaping it throughout the year, but there's nothing from an innovation or an investment perspective that we were light on from where we expected to be at in the first quarter. So good opportunity to continue to drive exceptional margins throughout the rest of the year. Operator: Now our next question comes from the line of George Hill of Deutsche Bank. George Hill: I'll say, Steve, I've got another 1 for you, which is can we unpack the slowdown a little bit more in the Q2 expectations for the volume-based revenue -- and I think a lot of this in services have seen a slowdown in utilization kind of in the first part of Q1 as it relates to flu and weather. Is this like a paper to electronic conversion process -- is this a claims lag issue, which is why you guys are seeing it in Q2? Is it you guys haven't seen the reacceleration or the uptick yet. I'd really like just to understand more of the mechanics of the accounting and what you guys are seeing -- recognizing it's 25% of the revenue. Matthew Hawkins: Yes. Certainly, George. So weather had an impact in the first quarter. We wouldn't expect knock on wood, wouldn't expect an impact going forward for the rest of the year. It is primarily the conversion of print to digital statements and then also a little bit of the utilization of the health care system by patients. Now typically, to your question specifically on the second quarter and the shaping, typically, the second quarter tends to be 1 of the stronger utilization quarters historically that we've seen -- right now, what we're seeing with the printed digital conversion and how we're seeing that play out from a rest of the year perspective. Do you think that largely offsets what we see in sort of the the patient visitation uptick. So that's really what we're looking at and how we're sort of giving the guidance for Q2 and then the rest of the year. Now the rest of the year is an impact of why we're seeing strength there. Some of those longer term -- the larger deals that we've seen and we've talked about in the Q3 and the Q4 time frame -- that we've previously said and still believe on the whole, they tend to take longer lead time to revenue more towards that 18-month side of the 6 to 18-month sort of full ramping period. We're also seeing some good opportunities, as Matt had mentioned, working with clients to move some of those clients and get them up and running and seeing that ROI faster, positively impacting the back half of the year. And I know you're familiar with it, George, on the seasonality aspect in patient payments, especially in the processing of collections tends to be with those -- that segment of patients that are on high deductible plans, which that generally causes that seasonality aspect. But for others on there, did want to mention that, and that's really why we see in that 25% of the revenue sort of that first half, second half of the year dynamic. Operator: Our next question will be coming from the line of Daniel Grosslight of Citi. Unknown Analyst: This is Louis on for Daniel. I just had a follow-up. You noted earlier in the call that AI drove 40% of your bookings, and I know that you offer a broad array of AI products and not just products like Dale, can you give more details if providers are more in just the new or more innovative solutions like altitude -- or is the demand just for AI broad across your portfolio? Matthew Hawkins: Thank you for the question. We know that providers are very interested in the use of AI to help them operate and run their businesses. And we know they want to use AI, but they're reticent to use point solutions, the vast majority of provider organizations aren't equipped to necessarily stand up their own technology teams, let alone teams that can support AI on a stand-alone basis in their organizations. And so they're looking for trusted partners like Waystar. I think as we engage, we know that there's certainly excitement around the new LLM or AI-powered solutions that Waystar offers. There's also broader-based interest in some of our AI-powered solutions. AI is a broad category. So it would include machine learning and some data science that produces intelligence or insight -- and as you've heard us talk about in our prepared remarks, our deeply deployed multisided network, there's just so much learning that takes place on that network. As a result of all these different forms of AI. That tends to be very interesting to provider decision makers. They're focused on outcomes. They want cybersecurity, they want efficiency they want industry compliance and to stay abreast with what's going on in the industry, and they want deep integration to the EHR systems that they may be using or the practice management systems. They may be using -- and they want the benefit of being able to do that at scale and get the learnings from thousands of other organizations like them and Waystar helps to deliver that to these providers. Operator: And our next question will be coming from the line of Elizabeth Anderson of Evercore ISI. Elizabeth Anderson: Can you -- maybe to sort of macro-type questions. One, are you seeing any sort of change in anything as we're seeing hospitals have more difficulties on the financing side? And then two, are you hearing anything from your customers about like managed care companies and payers like back against some of these new solutions to do that? Any color on that would be super helpful. Matthew Hawkins: Thanks, Elizabeth. We're seeing our solution which tend to get prioritized, as you've heard me talk about, because we're mission critical in nature and because we help organizations get paid for the services that they're rendering. We tend to get prioritized in the decision-making of things. And I think our pipeline and our bookings results and our financial results are a testament to that. We continue to believe that, that will be the case. As we think about the -- you mentioned the payer provider tension, so to speak, and perhaps sometimes push back. I'm not sure exactly what you're referring to. But what I would say is we know that there are payers that are working to deploy AI capability to do the things that they're organized to do to make sure that payments are accurate to avoid broad waste and abuse. And -- and sometimes that means they've denied claims, but they're increasingly using AI to do that. I don't know how an individual provider who isn't as deeply resourced as the deep-pocketed payers are could stand up against these payers by themselves. So we're really grateful to have to put waste are in a position where we can represent over 1 million providers and we can develop AI capability that leads to more accuracy in coding, leads to a higher first pass claim acceptance rate where the payer is accepting the accurate claim -- and that's leading to accurate payment, faster payment, a more efficient payment. And so we'd like to think that Waystar's role can be that constructive referee that intermediary that brings fairness and transparency to the marketplace that really needs it. And honestly, we're also seeing outreach from a number of payer organizations directly who would like to talk about things like real-time claim adjudication for a portion of the claims that they're processing through Waystar. They're doing that -- and I think they're doing that as evidenced because they're seeing that we're bringing accurate plans. And so we'd like to think that we can help bring fairness and balance to this exchange between providers and payers. Operator: Our next question will come from the line of Constantine Davides of Citizens. Constantine Davides: Matt. I appreciate all the bookings color you provided. But I did want to just drill in a bit on momentum in the acute space, more specifically. And just wondering if you can describe how your execution and competitiveness are tracking there on the inpatient side of the market where you, I guess, historically had lower market share relative to what you've carried in ambulatory. Matthew Hawkins: Thank you, Constantine. We're seeing nice momentum on the acute side. It's right. It's fair to say that when we formed Waystar 8 years ago, we had a small handful of hospitals and health systems that we're working with us. But today, we've built a really nice presence where approximately now we work with 16 of the top 20 hospitals and health systems in the United States. We work with nearly hospitals in some form or another. And we're delivering them the message that we have a unified end-to-end revenue cycle platform that's marching towards an autonomous revenue cycle platform. And it tends -- that message is really taking hold. I'd also note that about 40% of our revenue today is hospital and health system or acute related. And we're excited about the progress that we're making in every segment of care, but certainly, the growth and continued momentum we see in the hospital health systems. Operator: And I would now like to turn the call back to Matt Hawkins for closing remarks. Matthew Hawkins: Well, thank you for joining our call today. We're very grateful for your interest and appreciate your thoughtful questions. As we wrap up today, I'd like to just reaffirm that our business is getting better and better every quarter. We're doing what we said we would do from the outset, and that is we're focused on disciplined execution. This is now 8 consecutive quarters of strong revenue growth, EBITDA performance and cash flow above the consensus has allowed us to continue to delever. We've seen recent upgrades in -- by standard and S&P, excuse me, and Moody's and we're really grateful for the momentum that we see in our business. And it's all possible because we have great people who buy into our mission of simplifying health care payments for providers so that they can spend more time caring for patients and less time trying to work through the administrative hassles that they do. So I'd like to just thank our team, thank our clients and thank our partners and we look forward to continuing to execute against our plan in 2026. Thank you. Operator: This concludes today's program. Thank you for participating. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Commonwealth Financial Corporation First Quarter 2026 Earnings Release Conference Call. [Operator Instructions] And I would now like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. You may begin. Ryan Thomas: Thanks, Abby, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's first quarter financial results. Participating on today's call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Brian Sohocki, Chief Credit Officer; and Mike McCuen, Chief Lending Officer. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We have also included a slide presentation on our Investor Relations website with supplemental information that will be referenced during today's call. Before we begin, I need to caution listeners that this call will contain forward-looking statements. Please refer to our forward-looking statements disclaimer on Page 3 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I will turn the call over to Mike. Thomas Michael Price: Thank you, Ryan. Good afternoon, everyone. Several headlines for the first quarter of 2026 follow. Net income of $37.5 million resulted in $0.37 of earnings per share as compared to our consensus earnings estimate of $0.40. Net interest income was down from $4.2 million for the quarter to $109.3 million as we sold $210 million of Eastern PA commercial loans and loan balances fell another $74.2 million due to heightened payoffs. Our commercial loan repayments swelled to $630 million in the first quarter, up some $150 million over the first quarter of 2025. In the first quarter, we had 18 successful CRE projects. They were refinanced or sold, representing a payoff of approximately $240 million in loan outstandings. The net interest margin or NIM fell as expected to 3.92%. Among other items, positive replacement yields on new fixed rate loans in the first quarter were 54 basis points higher and coupled with $150 million of swaps rolling off in the second quarter, this should provide the impetus for further NIM expansion. Deposits grew 6.3% end-to-end annualized in the first quarter, and our money market promotions have resulted in new consumer checking accounts. Heretofore, we have been reticent to aggressively drop rates. But given the elevated loan payoffs and a markedly lower loan-to-deposit ratio, we are well positioned to test lower deposit rates in the next several quarters. Noninterest expenses were up $1.2 million to $75.5 million in the quarter as salaries and incentives increased alongside $500,000 of prepayment fees for the repurchase of long-term debt. Our efficiency ratio climbed to 55.4%, and we intend to slow down our expense growth rate. The provision for loan losses increased $3.7 million to $10.7 million on a linked-quarter basis as we had $9.6 million in specific reserves for 3 larger credits, one of which was from Eastern Pennsylvania. Our nonperforming loans or NPLs to loans remained stubbornly high at 0.98% in the first quarter, specifically 3 previously discussed relationships totaling $20.5 million moved to nonperforming status during the quarter with $9.6 million of associated specific reserves. These downgrades offset otherwise positive asset resolution during the quarter. And please recall that of our $92.3 million in NPLs, $28.1 million or 30.4% is guaranteed by the SBA. The balance sheet and liquidity continued to strengthen in the first quarter as we paid off virtually all borrowings, lowered our loan-to-deposit ratio to 91% and grew tangible book value per share by 4.3% while at the same time repurchasing our stock. Other notable first quarter items include our Center Bank acquisition has exceeded financial expectations and helped lead Cincinnati to company-leading loan and deposit growth in the second quarter. Residential mortgage had a strong first quarter with both loan volumes and gain on sale income. The Small Business and Business Banking segment volumes were brisk as we have added new bankers and enhanced credit processes. Also, our retail bank had the highest Net Promoter and customer satisfaction scores since we began tracking. As we think about the ensuing quarters in future, it will be important that we focus on the basics, namely live our mission, grow the bank, get better. As we grow the bank, we must do so steadily and ensure our credit costs converge and surpass peers. Getting better will necessitate new approaches and technologies to both make it easier for customers to do business with First Commonwealth while simplifying internal processes. Given our adoption of fintech over the years and our current AI usage, we have important tools to continue to evolve our company. Simultaneously, we must become more efficient as we scale the bank. Our first strategic initiative, live our mission to improve the financial lives of our neighbors and businesses remains the cornerstone of our brand and is what sets us apart as a community bank. With that, I'll turn it over to Jim Reske, our CFO. James Reske: Thanks, Mike. Mike has already provided an overview of financial results, so I'll drill down a bit on spread income and the margin. Spread income was down from last quarter by $4.2 million, but approximately $2.6 million of this decline can be attributed to having fewer days in the quarter. The remainder stems from the lower level of earning assets and the impact of last quarter's Fed rate cuts on the variable rate loan portfolio. The Fed cuts resulted in a 9 basis point contraction in the yield on earning assets, somewhat offset by a 5 basis point decrease in the cost of funds. The decline in earning assets is largely the result of the disposition of $210 million in loans that were moved to held for sale at the end of the fourth quarter. This quarter's net interest margin or NIM of 3.92% is in line with our previous guidance. While it is down from last quarter's 3.98%, the NIM in the fourth quarter benefited from about 3 basis points from several unique items that we talked about last quarter, including the recognition of accrued interest from the payoff of several loans that had previously replaced on nonaccrual status. Looking ahead, the NIM should benefit from fewer-than-expected rate cuts to keep the variable rate loans from repricing downward while continuing to allow the fixed rate loans and securities to reprice upward. And the expiration of $150 million of macro swaps on May 1 this Friday is even more valuable in a higher rate environment as it will allow those loans to flow to higher rates than expected. Based on our new one cut base case, we are revising our previous NIM guidance upwards slightly, about 3 to 5 basis points higher each quarter than before, drifting upwards to the low 4% range by the fourth quarter of this year. First quarter noninterest expense or NIE, increased by $1.2 million from last quarter, but first quarter NIE included about $1.3 million in expense for finalizing incentive payments related to prior year volumes and performance similar to the first quarter last year, along with the $500,000 FHLB prepayment penalty that Mike mentioned. We expect NIE per quarter to hover in the $74 million to $76 million range this year. Fee income is a little changed from last quarter. First quarter fee income included approximately $435,000 from the payoff of several loans that had been included in the held-for-sale portfolio at year-end, where they paid off at par, the difference between par and the mark was recognized as fee income. Wealth, mortgage and SBA are all up significantly from the same quarter a year ago. Fee income should range from $24 million to $25 million per quarter this year. We repurchased approximately $22.7 million in stock last quarter at a weighted average price of $17.67. We have $25 million remaining in repurchase authorization, not the $18.4 million figure that was in the earnings release. We announced a $0.02 increase in the dividend yesterday, marking the 11th straight year of dividend increases. Combined with the dividend, we returned nearly 100% of internal capital generation to our shareholders last quarter, and yet tangible book value per share grew from $11.22 to $11.34. We intend to continue share repurchase activity in the second quarter. Our CET1 ratio improved from 12.1% to 12.5%. Our TCE ratio was unchanged at 9.7% And with that, we'll take any questions you may have. Operator: [Operator Instructions] And our first question comes from the line of Daniel Tamayo with Raymond James. Charles Driscoll: Maybe starting just on the increase in the charge-offs. I appreciate the comments on the loans that were paid down or sold in the second quarter early on. Maybe just a clarification on that. First of all, were there any charge-offs associated with those credits that were sold or paid off? And then, Jim, I was just wondering if you had any thoughts on provision or net charge-offs for the rest of the year. Thomas Michael Price: Brian Sohocki? Brian Sohocki: Yes. Daniel, I can jump in. The charge-offs from the portfolio, we recorded $2.8 million during the fourth quarter when we moved them to held for sale. And then there was approximately $400,000 that had paid off at par that were reversed and run through the income statement in the first quarter. As you look at the other charge-off activity, my comment would be that we remained above our long-term target, but we did improve sequentially. And the level continues to be driven by a limited number of isolated credits. We're not seeing any indicators of systematic stress across the portfolio. Overall, the performance has been remaining consistent outside of those isolated numbers. And I think your last part of the question was just related to the activity in the press release post quarter end. There was 2 names that were in nonperforming at the end of the first quarter. One, we ultimately exited via a loan sale and incurred just a charge-off outside of our reserved amount of just under $150,000. The second was an exit full payoff at par. Daniel Tamayo: Okay. Very helpful. And I appreciate that detail on the second quarter. So I think what you're saying is you're -- and correct me if I'm wrong, you're expecting -- I guess you said they were a little bit above your long-term target in the first quarter. So that should drift down towards that range kind of as the year plays out. Is there like a ramp down, you think still from here? Or we're moving pretty quickly back into that range? Brian Sohocki: Yes. We'll continue to work through the resolution. Specifically, as you saw in the release, the one item which was moved to NPL during the first quarter is a second quarter charge-off. So more of a slow ramp down to the historical level as we resolve those credits that moved into NPL. Daniel Tamayo: Okay. Great. That's helpful. And then, Jim, maybe or Mike or anyone on the loan growth. Just curious what paydown activity looked like in the first quarter, kind of how you're forecasting that to trend down for the rest of the year and how that offsets against origination activity? Thomas Michael Price: Yes. Just in the -- we compared the first quarter to the first quarter of last year, and we had $10 million more of production, well over $900 million in the first quarter of 2026. Our payoff activity was heightened. It went from about $480 million to about $630 million. It was up $150 million. And so we felt that, and we felt that on top of the loan sale and last year, we grew modestly. We grew about $90 million, $95 million in the first quarter. It was about 4.5%, maybe 4.4%. To notwithstanding those payoffs, our activity was steady. It was good. It was -- HELOC key loan was a bright spot, I would say, small business, business banking and still trying to get the commercial real estate construction portfolio to overtake the payoffs and some of the originations there. So we just -- we feel the year sets up pretty well, notwithstanding $150 million more of payoffs from a year ago. And I would say that in the ensuing quarters since the first quarter of last year, the payoffs went up every single quarter. We feel with rates maybe cresting here, perhaps that -- and moving up that, that activity has slowed somewhat here in the last 30 days or so or maybe it's coming at a natural end because we don't have that many big names left to pay off. So that's the calculus, and we do feel good about the level of activity and that we can hit the guidance that we've given historically of mid-single loan growth. Operator: And our next question comes from the line of Charlie Driscoll with KBW. Charles Driscoll: This is Charlie on for Kelly Motta. Just one clarifying question on the margin. I appreciate the comments on the 3 to 5 bps of expansion from here. But just drilling down on that exit margin, do you expect to kind of exit the year near 4% or a bit above that level? If you could kind of help us with how you're thinking about some of the pieces here or what could cause you to kind of exceed that exit rate, reach the high end or low end of that guide? James Reske: Yes. Thanks for the question and the opportunity to clarify. We think the fourth quarter should be over 4%. But I'm really glad you asked because there's variability and the big variability, especially if you look over the last few years has been deposit behavior. I think we're in a really good spot now. The loan-to-deposit ratio now 90.9%, so down to -- we really have some room here to bring down our deposits just because the balance sheet is so liquid. give us just more freedom to be a little more aggressive on deposit rates and bring that down. So that's kind of -- that's the big variable factor in our NIM forecast. But yes, all else being equal, we expect to end the year a little over 4%. Thomas Michael Price: Yes. I would just add that in bringing down the cost, we will balance that with -- we hang promos and we have nice -- we've gathered a lot of deposits, core deposits as well as interest-bearing. And it's been a terrific way to gain new checking accounts. And the team has done a nice job. So it's more of a balance than you think, so that we'll pick our spots as we decrease rates, probably perhaps a little bit more on CDs. And by the way, we're going to test this and we're going to move the steering wheel, but we're just going to be cautious because household growth, the granularity of our depository is tied to -- when we get a customer, we're going to have to lend to them. It's just a good thing when we get a new consumer customer. And our depository is about 50-50 consumer, which makes it very granular. And we sail through events like Silicon Valley 3 years ago. And you can see our string of -- we grew deposits pretty steadily over the last 3 years or so. Charles Driscoll: Great. I appreciate the commentary there. I guess kind of on that deposit gathering activity, you saw a nice quarter here. But do you expect that to keep up with the mid-single-digit loan growth you guys are getting? Just kind of trying to get the right side of the balance sheet here, seeing up. Thomas Michael Price: Yes. Long term, yes. Maybe shorter term, we're going to test some things and just -- we'll test some things. We have a good team. Charles Driscoll: Great. And then last one for me, just on expenses. Wondering if this is a good core run rate to build off of in 2026. Maybe you could provide some color on what sort of investments you're making and where you're exercising more discipline on the expense front. James Reske: No, I think the guidance we gave, we talked about NIE covering the $74 million to $76 million range. I wish I could actually give you a tighter range, but I know it's a $2 million range, but those just vary a little bit quarter-to-quarter. We're just committed to keeping expenses under control. Mark, I don't know if there's anything you want to add. Thomas Michael Price: No, we've been good stewards of expenses over the years, and we like efficiency ratios that are less than 55%. And we just need to keep -- we've been pretty good at operating leverage through the years. And we just -- as we scale the bank, we have to stay true to that culture of -- and at the same time, we're getting stretched on expenses and talent. We have to find the right mix and really have lots of good discussions just like other management teams. Operator: And our next question comes from the line of Karl Shepherd with RBC. Karl Shepard: Can you guys hear me? Thomas Michael Price: Yes. Karl Shepard: Okay. Great. Jim, just one quick one on the NIM guidance. I think you said you moved from 2 cuts to 1 cut. Is that later in the year? Or is it earlier and might have a little bit of impact? James Reske: I think it's a little later in the year, like, late summer. I can verify that. It's an interesting dynamic I kind of -- again, I'm glad you asked because if there is one cut, it kind of -- if the rate environment is down a little bit, it gives us an opportunity to be -- to take deposit costs down even further. Generally, we say we're asset-sensitive balance sheet, but if the activity is on the deposit side, if it's a falling rate environment, it gives us a little more opportunity on the deposit side than it cost us in the downdraft in the variable rate loan portfolio. So when we look ahead on one cut versus -- this is the question you asked, I'm just kind of thinking about as you asked the question, one cut versus 0 cuts, the delta isn't all that big. The one cut in our base case forecast is, as I said, late summer, not September actually. So I hope that helps a little bit. We mentioned in my prepared remarks is that the base case last a budget for us was based on a purchased vendor that most banks use, and that was 4 cuts for the year, it's quite dramatically different now. Karl Shepard: Okay. That's helpful. And then I wanted to pick up a little bit on the credit discussion. I know the provision will kind of be an output of what's sitting there at 6/30. But if I put all your comments together and the specific reserves for the credits that were resolved after quarter end, it seems like there's room for the provision maybe to drift back down a little bit. I think you're kind of signaling with no stress in the portfolio, a stable reserve. Is that a fair way for us to think about this? Thomas Michael Price: I think so, yes. Operator: And our next question comes from the line of Manuel Navas with Piper Sandler. Manuel Navas: Can you speak a little bit more on the buyback pace? And is it impacted at all with any potential shifts in loan growth? I mean, I know you reiterated the guide, but if loan growth comes in at different parts of the range, would you buy back more? Is that part of the calculus? James Reske: Great question, Manuel. It's not really driven. It's not leveraged by the loan growth. We have plenty of capital to capitalize the loan growth. In other words, I don't think that if we grew [indiscernible] we'd be pushing the capital ratios into any kind of place where we'd be concerned. It's really more driven by just a dollar amount of capital generation. We're kind of operating under the Fed guidance that says you allow to buy back -- return to shareholders between the dividend and then the buyback up to the dollar amount of capital generation in any given quarter, but not beyond that. And that's kind of what we've been operating at. There are -- if you -- there are peers that do go beyond that, but that requires a full loan application with the Fed, we just haven't done that. So that's what we're doing. So last quarter, there's a chart in the supplement that we published on the Investor Relations portion of our website, the PowerPoint that shows we returned about 95%, close to 100%. I think we came within $1.7 million so no, it's not so much loan growth. It's a fair question because we always say the primary use of capital is organic loan growth and capitalizing as we go. So that's -- I guess you're coming from, but that's really driven by just the dollar amount of capital generation the cap. Manuel Navas: Okay. Shifting over to loan growth for a moment. Any shift to the mix or just because the production is pretty solid, you're going to keep the same mix. And one specific, could you comment a little bit on the equipment finance growth? Are we approaching a cap? Or does that still have a year or so left to run? That was kind of the nice positive area of growth for the quarter. Thomas Michael Price: Yes, the mix is probably 1% more commercial, probably 61-39 now commercial consumer mix. So that's changed. And obviously, to move it 1% or so even in 2 quarters, takes a lot more production on one side than the other. So we are becoming more commercial. We actually talked about that this morning. And because we love the consumer households and the deposits and the granularity of that, and we just want to have good balance there. And then -- so great question. And then on the equipment finance side, I think there's room to run there for another year or so. And knock on wood, it's really met our credit projections and that portfolio mature here, begin to mature here in the next year or so, and we'll see how those credit costs come through and how that matures. But I -- we feel good about that business. The other thing the team has been very nimble and creative is we had a goal to kind of -- once we got that up and running to really switch that to an in-market true leasing business, and they're already pivoting there in a meaningful way that will result in a good portion of that business being in-market leases to our commercial clients. And so it's just a talented team, and we are we're just delighted with how that has unfolded. So hopeful that that's helpful, Manuel. Operator: And our next question comes from the line of Matthew Breese with Stephens. Matthew Breese: A few questions. First one is towards the back of your presentation, it looks like you have $35 million in maturing office next quarter. You have $17 million in the third quarter and $13 million in the fourth quarter. Given we're not totally out of the woods on office yet. Just curious, have you looked at the maturities and any sort of credit worries as we come upon those dates? Thomas Michael Price: Yes. We've looked at it going out about through the end of next year, actually. Brian, do you want to comment on that? Brian Sohocki: Yes, I'll just jump in. And I guess we continue to actively manage the portfolio. We have seen exposures continue to trend lower. And my comment on the maturities is part of that is also managed purposely through shortening maturities and extending into a certain period in order to facilitate an exit or a refinance or a sale of a property. One of our biggest successes in 2025 was just that where we had a large reduction in the second half of the year through an asset sale as a result of that. So we evaluate maturity by maturity throughout the whole portfolio and focus over the next 24 months and are actively pursuing exit that makes sense for the portfolio. Thomas Michael Price: Is that helpful? Matthew Breese: Yes. Okay. Jim, it looks like the cash position is up a little bit, maybe excess $100 million, $150 million, kind of the near-term deployment for that? James Reske: Well, a couple of things. The cash position is up in part because of that the execution of the sale of the loans that are held for sale. So we see that cash we pay down and Mike mentioned this, we pay down some FHLB borrowing, bought some securities and still have -- with the loan book shrinking a little bit in the first quarter, we had an excess cash position. So we can foresee the pattern of some of our depositors, some of our large deposits that are in the public funds category. A lot of those come out in the second quarter, so we make sure we have cash around for that. So we don't invest that money and find ourselves having to borrow money because we have those outflows. So knowing that those are coming, we're holding some cash for that and holding the cash for excess loan growth. But to the extent it doesn't materialize, we de would be buying more securities. We're buying now expand the securities portfolio a little bit. That's kind of actually one of the issues at the moment. Matthew Breese: Okay. And then I did want to touch on some of the categories outside of equipment finance. So traditional C&I ex equipment has been down for 3 quarters. It looks like commercial real estate has been down for 2 quarters, and we talked about prepays and payoffs and things like that. But for the larger segments, C&I commercial real estate, when do you start to -- when do you think we'll start to see some net growth there? Is that a 2Q event? Thomas Michael Price: Yes, it will be definitely this year. We've added some business bankers. We're seeing -- and that's really more on the small end, more granular end. The payoffs are happening on a little larger credits. And so that's kind of a tough swap because you got to do 4 loans for every one that's paying off. I like that long term, but the team -- we've added a lot of business bankers over the last few years. They seem very productive. We actually, in the C&I segment, on the smaller end, small business and business banking actually grew that in the first quarter, $30 million or $40 million and really haven't done that on that bottom $600 million, $700 million, $800 million in that space. So that's good news, and we feel good about that. And that's obviously granular and comes with more depository. But we still have had some payment headwinds, no doubt. We do think we can grow there. We will grow it. Matthew Breese: Last one is just between Ohio and Pennsylvania, there's just a ton of activity between chip manufacturing, AI data centers, and power plant build-out stuff. I was hoping for your comments around all that. And then how much of it can you say has had or potentially could have an impact on the pipeline or loan growth to date? Thomas Michael Price: It might already be having an impact. I mean we have really probably our deepest pipeline after Cincinnati had a great first quarter, our deepest pipeline is probably in our $4.5 billion community PA market, particularly on the small business up through the business banking segment. And I think that I was with a contractor for dinner on Monday night and who's doing a lot of power generation, gas-powered, one in Homer City, it's having a real impact. And it's good to see. But I also think that, I mean, Ohio has really grown in the last few years and helped really led out in growth. So I expect that to continue. That's everything together. And Community PA always generated a lot of deposits. And now it looks like they're setting up for a good year on HELOC key loan and small business and business banking. So that's -- it's -- we like the business. It's fun, and we feel like we make a difference but it looks good. Operator: And our next question comes from the line of Daniel Cardenas with Brean Capital. Daniel Cardenas: Just a couple of questions. Have you noticed any change in customer sentiment just given the current economic environment right now? Thomas Michael Price: It might be too early to tell. I did notice that our interchange income on debit card was off a couple of hundred thousand dollars. James Reske: With the holidays in the fourth quarter, too. Thomas Michael Price: Yes. But -- and activity and swipes even, but I -- that's probably the first quarter, too. But yes, we've been and I think we've shared this with you, Dan and others. We've been watching our consumer books like a hawk. Our HELOC key loan, our mortgage and our indirect auto, and we're just -- we're seeing some pretty solid performance. So it kind of belies gas that I just filled up was in Pennsylvania is high at $4.47 a gallon. So we're just -- we're watching that closely. Brian Sohocki: Yes. I just -- I'd confirm that, Mike. And I mean that was one of the positives in the first quarter as consumer delinquency trends improved and was somewhat of an offset, helped our overall total delinquency level for the period. But we're monitoring everything that's touching energy and potential inflation impacts as we go through the quarter. Thomas Michael Price: And Dan, I would add, we have probably -- it's not like we have 15,000 or 20,000 customers. We have -- plus indirect auto, we have 300,000 customers of the bank. So we have a lot of clients. So it's a pretty good sample set -- sample size. Daniel Cardenas: All right. And then just jumping quickly back to credit. Within your level of nonperformers, is there any geographic concentration in any one particular market where perhaps some of these credits are housed in versus others? Brian Sohocki: No, nothing from a geographic standpoint as you look through it, it's been isolated credit events that have driven the overall dollar amount of NPLs. The one point I'd add is Mike made a comment in his opening statement. It's just important to distinguish between the guaranteed and unguaranteed exposure within the SBA portfolio. Those are all very granular. But from a concentration standpoint, as you asked, there are $28 million of guaranteed NPLs in that portfolio. Daniel Cardenas: All right. And then just one quick modeling question on the tax rate. Is a 20% tax rate kind of a good run rate for you guys? James Reske: Yes, very close. I think we are at 20.6%. Yes, 20.26% for the first quarter. Operator: And we have no additional questions at this time. So I will now turn the conference back over to Mr. Mike Price for closing remarks. Thomas Michael Price: Thank you for your interest in our company. I did want to mention, lastly and importantly, after 37 years at our company, Norm Montgomery, our Chief Information Officer, is retiring, and we will miss him. And we have hired Ryan Gorney to replace Norm and have a talented team at our company and excited for Norm and his retirement, and welcome to Ryan Gorney. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the TTM Technologies Q1 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Sean Hannan, Vice President of Investor Relations. Please go ahead. Unknown Executive: Greetings, everyone. Welcome, and thank you for joining us today. I'm Sean Hannan, Vice President of Investor Relations for TTM. With me on the call are Edwin Roks, our President and Chief Executive Officer; and Dan Boehle, our Executive Vice President and Chief Financial Officer. Before we get started, I'd like to remind everybody that today's call contains forward-looking statements including statements related to TTM's future business outlook. Actual results could differ materially from these forward-looking statements due to 1 or more risks and uncertainties, including the risk factors we provide in our filings with the Securities and Exchange Commission, which we encourage you to review. These forward-looking statements represent management's expectations and assumptions based on currently available information. TTM does not undertake any obligation to publicly update or revise any of these forward-looking statements whether as a result of new information, future events or other circumstances, except as required by law. We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA. A -- such measures should not be considered as a substitute for the measures prepared and presented in accordance with GAAP, and we direct you to the reconciliations between GAAP and non-GAAP measures included in the company's in release, which is available on the Investor Relations section of TTM's website at investors.ttm.com. We have also posted on the website and earnings presentation that we will refer to during our call. Here is Edwin. Edwin Roks: Thank you, Sean. Good afternoon, everyone and thank you for joining us for our first quarter 2026 conference call. At TTM Technologies, we are focused on designing and manufacturing complex products and solutions in 2 strategic directions. The first is advanced interconnect, which includes highly complex printed circuit boards, substrates and advanced packaging. The second strategic direction built on our advanced interconnect technology to design and manufacture sophisticated modules, subsystems and systems. Examples of this include our RF modules, thermal and power management systems etch and AI processing products as well as complex subsystems and fully integrated mission systems. We believe the future of electronics lies in speed to market, high reliability and efficient technology interim. The markets in redo business continue to demand highly complex technology solutions in an increasingly compact size and footprint. Our strategy is to stay at the cutting edge of advanced interconnect technologies through innovation and continue to move up the value chain into complex modules and subsystems that combine sensors, actuators RF and Photonics. We engaged early with our customers to ensure alignment on product development and speed to market while also enabling optimal management of their complex supply chains. From a demand standpoint, we are experiencing healthy multiyear tailwinds due to our participation in 2 key megatrends currently driving economic growth, artificial intelligence and defense. We previously stated that approximately 80% of our net sales are related to these 2 megatrends, and that this puts us in a unique position to benefit our investors. Our ability to seize these organic growth opportunities requires our continuous focus on technological innovation as well as expanding our capacity across our strategic footprint. We are further investing capital and resources to take full advantage of these opportunities today and in the future through our global footprint, which offers our customers manufacturing options across 24 sites located in China, Malaysia, Canada and the United States. We stand well positioned to support this growth across our end markets, and we are tracking well ahead of our previously communicated plan to grow revenues 15% to 20% per year for the next 3 years and to double our earnings from 2025 to 2027, which were closed that were reiterated on our February 4 earnings call. In our commercial segment, we are highly focused on supporting the demand wave of artificial intelligence in the data center and networking end markets where customer demand has materially accelerated. We are also focused on evolving opportunities in the use of automation and AI in our medical, industrial and instrumentation end markets, while we remain strategically positioned in automotive where our highly valuable solution designs are positioned to benefit from competitor consolidation and have additional transfer application into other markets. In our airspace and defense end markets, we continue to excel with our leading position in advanced interconnect products and we work to expand our product offerings in indicated and electronics, including modules, subsystems and full mission systems. Recently, we were proud to be a participant in the success of Artemis-I mission with our microelectronics, PCBs and assemblies for both the space large vehicle and the Orion crew capsule. As for this, current state of the defense budget as well as the geopolitical environment considering the conflict in Iran, our solutions are ever present in the categories of advanced radar systems, advanced gaming systems, missiles and decoys, electronic surveillance systems and satellite and ground-based communication systems. In the commercial aerospace market, we recently won an award from an innovative electric autonomous aerospace company for light passenger travel to provide the sense and the void radar system for their autonomous aircraft. I'll now begin with an overview of our business highlights from the quarter. Then we'll follow up with a summary on our Q1 fiscal 2026 financial performance and our Q2 and fiscal 2026 guidance. We will then open the call to your questions. We delivered an excellent first quarter of 2026, and I would like to thank our employees for delivering these results. We achieved sales of $846 million and non-GAAP EPS of $0.75 per diluted share, both above our guidance issued in early February and both all-time quarterly highs. Sales grew 30% year-on-year, reflecting continued demand trend in our data center and networking end markets driven by the requirements of AI while our medical, industrial and instrumentation and aerospace and defense end markets also experienced strong growth. The company adjusted EBITDA margin was 15.7% in the first quarter of 2026 compared to 15.3% in the prior year, largely reflecting positive mix impacts. Non-GAAP EPS of $0.75 per diluted share was a 50% improvement year-on-year. The aerospace and defense end market represented 40% of first quarter 2026 sales. Sales in the Aerospace and Defense market grew 11% year-on-year for the first quarter. The sales growth in defense market continues to be a result of positive tailwinds in defense budgets, our strong strategic program alignment and key bookings for ongoing programs. During the first quarter of 2026, we saw significant A&D bookings related to the Alteams Air Defense Radar, APS 153 maritime surveillance radar and a transportable radar safaris system for ballistic missile detection and tracking. In addition, we continue to see an increase in bookings for respective programs and we also have first booking that was confirmed to support Golden Done. A&D book-to-bill was [indiscernible] for the quarter, which led to a program backlog of $1.6 billion, similar to a level a year ago. We expect second quarter 2026 from this end market to represent [indiscernible] 36% of our total sales, while still delivering both year-on-year and sequential growth. Sales in the data center and networking end market represented 36% of our first quarter 2026 sales. This end market experienced 61% year-on-year growth in the first quarter above our growth expectation and reflecting continued demand strength from our data center and networking customers, building out the AI data centers. For the second quarter of 2026, we expect this end market to represent 42% of net sales. The medical industrial instrumentation end market represented 16% of the first quarter 2026 sales. This end market saw a year-on-year growth of 61% during the first quarter aided by healthy demand of AI-enabled robotics in medical, automated test equipment for AI applications in instrumentation. A notable example when in the quarter was for a major continuous glucose monitoring customer products with our involvement on both the current and next generation, which will feature a materially smaller footprint and more powerful performance. For the second quarter of 2026, we expect medical, industrial and instrumentation end markets to represent 14% of total sales, growing both sequentially and year-on-year. Automotive sales represented 8% of the first quarter of 2026 sales. We continue to be very selective in this market to focus on higher value-add products that carry margin profiles consistent with our financial goals as we also believe long-term business cycles should migrate back towards advanced capabilities. We are also supporting our Tier 1 automotive customers as they transition some of their more advanced capabilities towards products, in ancillary end markets. We expect the automotive end market to represent about 8% of our total sales in the second quarter of 2026. The overall book-to-bill ratio was 1.41% for the first quarter of with the commercial reporting segment at 1.65% and the A&D reporting segment at 1.10%. At the end of the first quarter of 2026, the 90 days backlog, which is subject to cancellations, was $787 million compared to $517 million a year ago. Now then Bailey will summarize our financial performance for the first quarter. Dan? Daniel Boehle: Thanks, Edwin, and good afternoon, everyone. I will review our financial results for the first quarter of 2026 that were included in the press release distributed today. Key financial highlights are also summarized in the earnings presentation posted on our website. For the first quarter, our net sales were $846 million compared to $649 million in the first quarter of 2025. The 30% year-over-year increase was due to continued strong growth in our data center networking, medical, industrial and instrumentation and aerospace and defense end markets, partially offset by a more modest than anticipated decline in our automotive end market. GAAP operating income for the first quarter of 2026 was $72.4 million compared to comp operating income for the first quarter of 2025 of $50.3 million. On a GAAP basis, net income in the first quarter of 2026 was $50 million or $0.47 per diluted share. This compares to GAAP net income for the first quarter of 2025 of $32.2 million or $0.31 per diluted share. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes M&A-related costs, restructuring costs, certain noncash expense items such as amortization of intangibles, impairment of goodwill stock compensation, gains on the sale of property, unrealized gains or losses on foreign exchange and other unusual or infrequent items. We present non-op financial information to enable investors to see the company through the eyes of management and to facilitate comparison with expectations in prior periods. Gross margin in the first quarter of 2026 was 22.3%, an increase of 150 basis points from 20.8% in the first quarter of 2025. The year-on-year increase was due primarily to higher sales volume and favorable product mix, particularly in the data center networking and aerospace and defense end markets. Selling and marketing expense was [indiscernible] million in the first quarter or 2.8% of net sales versus $20.3 million or 3.1% of net sales a year ago. First quarter general and administrative expense was $49.3 million or 5.8% of net sales compared to $38.9 million or 6% of net sales in the same quarter a year ago. Our operating margin for the first quarter of 2026 was 12.8%, a 230 basis point improvement from 10.5% in the same quarter last year. The increase in the period was due both to the improved gross margin as well as operating leverage resulting from selling, general and administrative expense discipline. Interest expense was $10 million in the first quarter of 2026 compared to $10.9 million in the same quarter last year. Interest income was $2.5 million in the first quarter of 2026 compared to $3 million in the same quarter last year. Realized foreign exchange and other nonoperating income and expenses in the first quarter of 2026 totaled a net expense of $6.8 million as compared to net income of $1.5 million in the same quarter last year. The increased expense was driven by the weakening of the U.S. dollar, which resulted in a $7 million foreign exchange loss in the first quarter of 2026 as compared to a $0.9 million gain in the same quarter last year. Our effective tax rate was 14.5% in the first quarter of 2026, resulting in a tax expense of $13.6 million. This compares to an effective tax rate of 15% or a tax expense of $9.3 million in the same quarter last year. First quarter 2026 non-GAAP net income was $80.1 million or $0.75 per diluted share. This compares to first quarter 2025 non-GAAP net income of $52.4 million or $0.50 diluted share. Adjusted EBITDA for the first quarter of 2026 was $132.9 million or 15.7% of net sales compared with first quarter 2025 adjusted EBITDA of $99.5 million or 15.3% of net sales. Cash flow provided by operating activities was $21.7 million in the first quarter of 2026, despite the increased net working capital supporting our continued revenue growth. This compares to cash used in operating activities of $10.7 million in the same quarter last year. Free cash flow in the first quarter of 2026 was a net usage of $85 million as compared to a net usage of $74 million in the first quarter of last year both periods reflecting increased capital expenditures in support of organic growth opportunities. Now I'll return to our guidance for the second quarter of 2026 and a directional outlook for fiscal 2026. We project net sales for the second quarter of 2026 to be in the range of $930 million to $970 million and non-GAAP earnings to be in the range of $0.82 to $0.88 per diluted share. In addition, considering the current demand dynamics reflected in our first quarter results and second quarter guidance, we believe that the net sales growth trajectory in the first half of the year should continue in the second half. The second quarter 2026 non-GAAP diluted EPS forecast is based on a diluted share count of approximately 107.5 million shares, which includes the dilutive effect of outstanding stock options and other stock awards. We expect SG&A expense to be about 7.4% of net sales in the second quarter and R&D expenditures to be about 1% of net sales. We expect interest expense of approximately $10.6 million, interest income of approximately $2.5 million. and realized foreign exchange and other nonoperating expenses of approximately $6.9 million. We estimate our effective tax rate will be between 13% and 17%. Further, we expect to record depreciation of approximately $32.1 million, amortization of intangibles of approximately $9.2 million, stock-based compensation expense of approximately $11.5 million and noncash interest expense of approximately $0.5 million. Finally, I'd like to announce that we will be participating in the Barclays Leverage Finance Conference in Austin, Texas on May 19 and the B. Riley 2026 Investor Conference in Los Angeles, California on May 20. In addition, we will host an Investor Day on May 27 at the NASDAQ Exchange in New York City, as announced in our press release last week. That concludes our prepared remarks. Sherry, will turn it over to you for questions. Operator: [Operator Instructions] Our first question will come from the line of Steven Fox with Fox Advisors. Steven Fox: Great. I had 2 questions, if I could. First of all, I was wondering if you could maybe discuss the current interest you're seeing from your customers in bringing business into the UK facility as you ramp it? What kind of customers are looking at the facility and maybe how have the discussions progressed versus a year ago? And then I had a follow-up. Daniel Boehle: Yes, happy to answer your question. If you think about Once, I think we're making really, really good progress there. we are identifying, let's say, our anchor customers like we did in Penang. So that's going well. a core team is identified to see what we're going to do. As you remember, probably remember, it's about 750,000 square feet, and we have basically 3 modules. So we can use them for both our commercial business or our defense business, and we're very flexible with that. So we're identifying the customers right now. We have, of course, our supplier agreements in place. We have -- we are dealing with our equipment centers. So that's going well. And what I really like in that site as well is that we are going to build an R&D center, which is not only, let's say, providing capacity for our customers but also being very close with them on new R&D developers. Steven Fox: Great. That's helpful. And then as a quick follow-up, can you give us your latest thinking around the impact of higher oil prices on laminate costs and how that flows through your income statement in coming quarters? . Unknown Executive: Yes, Steve. So it's Sean Hannan here. So we did have some conversations within the company here and what we're observing within our supply chain and suppliers we are observing some pressure in the supply chain environment as is the rest of the industry and that can relate certainly to lead times and to pricing, but we don't think it's restricting our ability to reach our goals. In terms of a derivative specifically due to oil pricing, that's not something that we're currently observing through our questions. Operator: Out next question. And that will come from the line of Jim Rashidi with Needham & Co. . James Ricchiuti: Just wanted to focus on the growth you're seeing in the Davis Center networking portion of the business. Is there a way for you to give us a sense of how much of that is volume driven versus price? And when I say price, I guess there are 2 components to that, right? They are the higher ASPs for the more complex forwards and maybe just higher pricing in general. So I'm just wondering if you can maybe drill down a little bit more on that. . Unknown Executive: Yes, Jim, actually Happy to do that. And again, good to meet you again. First of all, I think if we -- before we get to the ASP and the volume aspects let's go back to the visibility first. I think our visibility is still, let's say, for normal order still within the quarter. As you know, we are doing some larger order for larger players here where we have a visibility of, let's say, a year. And we still have our strategic alliance with the stop customers. And these are, let's say, in the multiyear regime. That is, let's say, the whole point with respect to complexity. These boards are getting more and more complex. We spoke in the past about the number of layers. We can go to 80 layers. We had 100 players, even 140 layers, which is really the summer. And then, of course, we have these atomical panels as well where we distinct the power from the signals. So that's going very, very well. because of that complexity, our ASPs are going up, let's say, a factor of 4, maybe a factor VIII. But I hate to talk about ASP because it's basically the complexity. It's basically the complexity of what's going on -- then the volume aspect of it, yes, there is more volume. There are more panels. But also if you look at volume, if you want to create a more complex panel, you need more cycles in the facility to build that panel that's also a volume aspect. So if you -- let's say, bottom line, bottom line, if you look at ASP versus volume, yes, it's mostly ASP, but it still has a big effect on the facility because complex panels require more cycles in the facility. Hopefully, that answers your question. . James Ricchiuti: It does help. And maybe 1 quick follow-up. I'm wondering if you can give us an update on how the ramp is going in Penang. And Dan, maybe if you can give us some sense as to what kind of a headwind it might have represented in the quarter and how you see that unfolding in Q2 in the second half? Daniel Boehle: Yes, yes, one, absolutely. I'm very happy with the performance [indiscernible] yields, let's say, are improving a lot. If I look at these anchor customers, and I pick one of them, there we are seeing yields, let's say, in the past, we saw yields above 40% last quarter. Now we are seeing it closer to 70% and 80%. So that's going very well. In the past, I would say a year ago, we disclosed some of the breakeven numbers. I can tell you, we were getting very close to that number. So I will be very surprised, let's say, in Q4 and hopefully earlier, we are in a breakeven situation for Penang. So that's going well. We spoke about the headwinds of 160 basis points, bringing that back, so let's say, in half to 80 basis points headwind for the full year. we're still on track there. And again, we hope to do better. So again, we changed the team. I was at myself, by the way, a few weeks ago. It is going very smooth. It's a highly automated facility, so yes, I'm very positive, Jim, about that situation there. James Ricchiuti: And then just to clarify, when you say an anchor customer, is that an anchor customer in the data center networking area. Daniel Boehle: It is but in that facility, we also do a lot of medical industrial instrumentation business. But in this case, I was talking about one of the data center networking players, yes. Operator: Next question. And that will come from the line of William Stein with Truist Securities. . William Stein: Congrats on the great results and outlook. First, I want to ask something about data center networking, can you help us understand the your size in that market relative to the market overall because most of this market really has served out of Asia. I think there are many investors here in the U.S. who might not appreciate you may not be the biggest. And so it highlights the potential for significant growth, maybe almost you can take whatever you can build to. Can you maybe characterize that? And then the other question I had was about the exposure or concentration in that end market relative to the various GPU or TPU type customers and the other hyperscaler customers. Maybe talk about the dispersion of -- or the customer concentration. Daniel Boehle: Yes. Thank you, Will. These are really good questions. So first of all, your first question, if you look at the size of the market, that's always a big that's always a bit difficult to define, correct. It's -- the spend, let's say, in all these data centers, about 75% of it is still in hardware, which I really like. It's the energy component, and it's basically what we do is the interconnect. Yes, we are the nervous system, as you know, of all these interconnects putting all these chips together. The market overall is a bit difficult to define in that sense. But I can tell you, we play in the high end of that market. So everything what has to do with, let's say, more than 40 layers. And like I said in the previous question, [indiscernible] high complexity, very small pitch. That's where we play in. If I look at our competition, so thinking about Giant, thinking about boosting and micro and others, let's say, we are in that top 4. There is a lot of demand and we are in that top 4. Some of the, let's say, innovations, some of the innovations we did, let's say, I'm talking about emplozem, which is, for instance, the asymmetrical boards where power is on one side of the board and signal the other side of the Board, we basically transferred some of that IP to our competition to be able to make sure that we can supply a whole business. So the whole landscape is, let's say, 5, 6 layers where we are in the top 4. That's about the situation. Of course, we have a pretty unique situation here. We are a U.S. player that also means that we are very flexible with our location perspective what the customer wants. We can, if you want the process in China, we do that. We have 5 facilities in China. We have a facility in Malaysia, if you want, China plus 1 but if these customers want to be in the U.S., we have 16, 17 sites in the U.S. supporting this. So that's basically what's happening. Then related to your second question, regarding GPU, TPU XPU, whatever you want the PU. I can tell you we're agnostic. We're agnostic for that particular situation. Even if it goes to Quantum processing, QPUs, there is a lot of conventional processing required after quarter -- so there is always a need for these boards. These boards for whatever customers are very, very, very similar. And the complexity is fairly similar. So I'm so happy to say that we are very agnostic for that situation. Hopefully, that answers your question. Operator: Our next question. That will come from the line of Mike Crawford with B. Riley Securities. . Michael Crawford: Within your aerospace and trans vertical, how much was commercial? How much was space? And where what do you expect to see space in the future, especially as compute migrates to Leo Geodis linereven loom based space? Daniel Boehle: Yes, Mark, that's a very clear question. If you look at the aerospace and defense and by the way, you probably saw in the earnings that we did move our commercial space business from our commercial through the Aerospace and Defense group. And we did that for a reason because there is a lot of synergy between these businesses and it's much, much easier to put it in their own business. So that's what we did. If you look at, let's say, aerospace and defense, the breakdown is about 50% of the aerospace and defense business and that can be printed circuit boards can also be up to chain what we call the chain, let's say, all kinds of modules or subsystems or systems it's about 50% radar related. Then we have about, let's say, 25% communication, mostly communication related, some guidance systems, these type of things. Below the smaller fraction here below 10% is munitions. That's, by the way, that's where I expect a lot of upside in the coming periods. And then 5% only 5% -- currently, 5% of our business is space. And I agree with you, there is a lot of room to maneuver. There's a lot of potential, especially with our radiation heart designs and all the other things we do. So space is absolutely in the area of focus area, but currently, it's only 5% of our business. Michael Crawford: Okay. And then switching gears. CapEx was high at $107 million in Q1. Can you just provide any updated thoughts on where that might fall out this year and next, and that's assuming that you are not only ramping in China and Malaysia and Syracuse, but also clear. Edwin Roks: Yes, Mike, I'll take that question. So we -- you'll see in our 10-Q when it comes out, we disclosed the CapEx forecast for the year. It was originally about $250 million -- $240 million to $260 million. We're increasing that to $300 million to $320 million is the range that we're currently looking at. So we've accelerated some of the capital expenditures that we talked about for Asia as some of the lead times on equipment we're starting to get indications that those would -- would start stretching out. So we got our orders in early. We were starting to really get some of that equipment in a little bit quicker we've had to pay deposits for that. So that's why the cash expenditures have been up a little bit higher. But as you can see in our numbers, it's also generated fast revenue for us. So we've accelerated some of that $200 million to $300 million of CapEx that I said we were going to expand in Asia. Operator: Our next question and that will come from the line of Ruben Roy with Stifel. Unknown Analyst: This is Fed saying on for Ruben. Look yesterday, one of the major EMS guys reported. And then you made mention of challenges in 40-plus layer PCBs and sort of sourcing them. We've already talked about price leverage. It sounds like you have that headwind. Correct me if I'm wrong, I think I heard you say [indiscernible] on that. We're talking about volumes via the accelerated CapEx ramp, which sounds perhaps tied to the anchor customer. Maybe we look at perhaps the contract structures themselves and the length of contracts, the update into '27 we got earlier this year was healthy and great. And curious if you're seeing contract structures extend out as we're seeing with some of these other rack scale input and what that looks like in terms of securitizing supply with you being the supplier over a multiyear period, particularly as you're investing on an accelerated cadence into CapEx? Edwin Roks: Yes. That's a good question. Thank you very much for the question. Yes, if we look at contracts, it works a bit different here. I think it's it's all over these hyperscalers and data center and networking customers, it's about very tight relations. We have very, very tight relations. That basically means we have a lot of alignment on road maps or future. How do you think about, let's say, multilayers or you think about 0 stop, which is basically making sure there is no antenna function in these boards, you can imagine that everything becomes more and more complex. So you get a lot of antenna functionality in that thing which you don't want. So 0 sub is a new thing there. We spoke already about the empower the power and the signal is separated, there's a lot of, let's say, material science in our boards, which makes sure that signal integrity becomes at the highest part. I think that's the key thing for these customers. you need to be the technology leader. You cannot be a follower here. And then the other thing is, of course, you need to have the capacity and the flexibility. And that's what we provide, let's say, being in China, being in China Posninoucase, Malaysia and being in the U.S. and hopefully soon in Europe. So that's basically where we are, and that's basically tightened that relation with the customers. The other side is, let's say, the suppliers, they are the same thing. We have strategic alliances with all the critical components. And yes, of course, we have contracts in place. But if you have to rely on that contract, you're just too late. It's always a matter of, let's say, relation and making sure you're very relevant for that supplier, you're very relevant to your customers. So that will be my answer here. Daniel Boehle: By the way, just to add to Edwin's answer. So -- and also coming back to part of the question. So to clarify, within data center and networking, we don't have just an anchor customer. I think there was a reference to an anchor customer specific to a facility being Penang earlier in the conversation. But we have about [ 10 ] very major customers within that segment. Only 1 is a 10% enter right now, but we're playing with [ 10 ] substantial names. . Unknown Analyst: Okay. That's great. That was actually going to be a follow-up, particularly Daniel because of your CapEx commentary, I think last quarter, you -- as you mentioned, we're pointing to $250 million at the midpoint. And quarter, it sounds like $310 million, and you're still talking about FY '27 going up. So you're talking about an incremental [indiscernible] relative to at least what we signaled last quarter. if you can point to any sort of puts and takes on the pace at which you might recognize these ramps. I don't know if you're ready to make those types of disclosures. I understand if you're not. And if you're not the question on A&D you're pointing ammunition in the space, similar sort of question on contract structure, are these procurement-based contracts whereby margins are fixed? Or are these fixed firm price, whereby there's potential of margin accretion and I'll stop there. Edwin Roks: I guess I'll first address your capital expenditures. So I'm not going to go beyond what I just said about this year, as you mentioned, so our capital expenditures from this year is going up from -- yes, centered on $250 million to now centered on $310 million. So the range is from $300 million to $320 million. And so that's accelerated a little bit of what we had previously talked about over the next 2 years, and that's to continue to stay at pace with the demand that we are experiencing from our customers in the data center area. So I'll maybe pass it over you to answer the other question. Sorry, do you want to repeat that second 1 a comment earlier. Unknown Analyst: And as far as -- you're talking diminution in space, and it sounds like Edwin you're saying munitions might be the upside more near term space for a longer build upside. Edwin Roks: Yes, absolutely. By the way, we see strong demand in general, in our Aerospace and Defense business. And for the obvious reasons, of course. But on the munitions side, yes, if you read the newspapers, the there is the supply becomes more and more important. And we see that. We are long lead time items. So basically the primes are already coming to us, let's say, with respect to what can you do additionally on the munition side. So -- and that's -- for us, it's more of the same. We already do that. So that's a very, very good thing. So yes, that's the answer. Operator: Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Edwin Roks for any closing remarks. [indiscernible] Edwin Roks: Yes. Thank you, Sheri. Now I'd like to close by summarizing 3 key items. First, we are experiencing a high healthy growth. We delivered strong sales growth in Q1 of 30% year-on-year, resulting in an all-time high for quarterly revenue, driven by increases in our data center networking, medical, industrial and instrumentation and aerospace and defense end markets. Secondly, our adjusted EBITDA for the first quarter of 15.7% as reflected strong operating performance, leading to another all-time high record and quarterly non-GAAP EPS results of $0.75 per diluted share. And third, we continue to generate solid cash flows from operation, which enables us to invest in our projected continued growth while maintaining a healthy net leverage ratio of about 1. In closing, I would like to thank all the employees of TTM, our customers, our suppliers and our shareholders for your continued support. Thank you very much, and goodbye. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Thank you, and welcome, everyone, to FormFactor's First Quarter 2026 Earnings Conference Call. On today's call are Chief Executive Officer, Mike Slessor; and Chief Financial Officer, Aric McKinnis. Before we begin, Stan Finkelstein, the company's Vice President of Investor Relations, will remind you of some important information. Stan Finkelstein: Thank you. Today's a company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the company's financials. Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company and on the Investor Relations section of our website. Today's discussion contains forward-looking statements within the meaning of the federal securities laws. Examples of such forward-looking statements include us with respect to the projections of financial and business performance, future macroeconomic and geopolitical conditions; the benefits of acquisitions and subsequent integration, anticipated time line for and benefits from Farmers Branch, anticipated industry trends and volatility the impacts of regulatory changes, including tariffs, the anticipated volatility in demand for our products, our abilities to develop, produce and sell products and meet ongoing demand. Advancements of artificial intelligence impact on industry and demand and the assumptions upon which such statements are based. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filings on Form 10-K with the SEC for the fiscal year ended December 27, 2025, and in our other SEC filings, which are available on the SEC's website at www.sec.gov. Forward-looking statements are made as of today, April 29, 2026, and we assume no obligation to update them. With that, we will turn now the call over to FormFactor's CEO, Mike Slessor. Mike Slessor: Thanks for joining us today. FormFactor's first quarter revenue grew sequentially to another all-time record. The gross margin and earnings per share significantly above the high end of our outlook range. In the current second quarter, we got to again set a revenue record and delivered sequential increases in both gross margin and earnings per share, extending the momentum that began in the second half of last year. These outstanding results exceed our target model on a quarterly run rate basis, and our current quarter outlook is expected to cap a string of results that validate the model on an annualized basis. . We're proud to have delivered on this commitment and at our upcoming Investor Day at the NASDAQ market site on May 11, members of FormFactor's executive leadership team will introduce our next target model. Along with the strategic priorities, long-term growth opportunities and operational initiatives that underpin it. We're also encouraged by how these financial results were achieved. We continue to benefit from our leadership position at the intersection of high-performance compute and advanced packaging, 2 powerful trends transforming the semiconductor industry. Our growth is fueled both by strength in familiar areas like probe cards for high bandwidth memory and accelerating contributions from newer foundry and logic opportunities like networking. The first quarter growth in probe cards for networking applications caused a leader in high-performance compute to become a 10% customer for the first time, and we're continuing to build our relationship with this leading customer in not only networking, but also probe cards for GPUs and systems for co-package optics. Operationally, these results represent a significant improvement from the execution challenges that previously limited our performance. While the pace of profitability improvement will moderate as we approach the limitations of our current footprint, later this year, we expect our Farmers branch site to come online, providing increased capacity with structurally lower costs will in turn create the foundation for future revenue growth and gross margin expansion. Aric will discuss our current operational performance and future plans later in the call. Turning now to segment and market level details. In DRAM probe cards, we delivered the expected sequential growth from the fourth quarter to reach another record with increased demand in HBM applications paired with sustained demand in DDR applications. As you've heard recently from our major DRAM customers, the environment continues to be supply constrained in DRAM overall. -- and we expect our customers to dynamically shift their wafer start mix between a variety of HBM and DDR designs to maximize their opportunity. Since probe cuts specific to each customer chip design, we expect our DRAM mix to correspondingly shift between HBM and DDR of these unusual end market condition resist. We're again forecasting record revenue in DRAM probe cards in the current quarter, driven by another step-up in HBM demand. Most of this incremental growth is coming from a second customer's increased adoption of FormFactor's differentiated Smart Matrix full wafer contactor technology. Smart Matrix provides a unique combination of high parallelism productivity and high-speed performance, enabling our customers to test hundreds of completed HBM deck simultaneously at the 10 gigabit plus I/O data rate of HBM 4. This capability is critical in advanced packaging processes like TSMC's Coos where stack die test insertions provide the final test for the HBM stack where it's combined with GPUs or custom ASICs. Our second quarter outlook shows the impact of FormFactor's competitive advantage and the resulting market share gains as P&IO speeds and overall stack bandwidth for HBM continue the relentless increase as the industry progresses from HBM3 to HBM4 and then on to HBM5. Shifting now to the foundry and logic probe card market. As expected, First quarter foundry and logic demand increased significantly over the fourth quarter driven primarily by growth in probe cards for networking applications. In the current quarter, we expect continued growth in foundry and logic probe revenue, driven primarily by incremental strength in data center CPU applications, building on top of continued strong demand in networking, as well as steady demand in PC and mobile. This data center CPU probe card demand is directly linked to the newly appreciated trend of increasing CPU compute intensity in AI inference use cases. This offers a powerful example of the value of FormFactor's diversification strategy as we strive to be a leading supplier to all major customers. In this case, we benefit from having put ourselves in a position to capitalize on unexpected demand for CPU probe cards from one of our long-term major customers. As we shared last quarter, we've continued to partner closely with this customer to support turnaround initiatives in the core business as well as in their effort to become a leading foundry. In addition, Intel recently awarded us the 2026 Epic Supplier Award, recognizing our world-class commitment to continuous improvement, collaboration and performance excellence. At the same time, as in HBM, we're successfully executing our strategy to be a top supplier to all the leading customers in the industry as we continue to build the foundation for market share gains at a large fabless XPU customer. Specifically, we've now been awarded a second design, building off our successful qualification and initial design win. In addition, our production qualification in leading-edge GPU applications at the world's largest foundry is nearing completion, with preparation now underway for second half volume shipments and production support. Finally, as an additional component of FormFactor's expanding high-performance compute exposure, we continue to grow our custom ASIC business, following a multimillion dollar design win in deepening engagement with several hyperscalers and their ASIC design partners. Turning to our Systems segment. In the first quarter, we experienced the expected seasonal reduction in demand. In systems, our focus continues to be two-pronged: one, executing on the growth opportunity in co-package optics; and two, helping customers solve the challenges of building scalable and commercially viable quantum computers. Staying with Quantum for the moment. In the first quarter, we announced the flat iron dilution refrigerator, a new benchtop millikelvin platform designed to simplify optical and electrical measurement and accelerate quantum device development, characterization and chip scale validation. In CPO, we're building on our decade-long R&D engagement with leading customers in their development silicon photonics and CPO and are now beginning to ramp our Triton production test system co-developed with Advantest and Tokyo Electron. This ramp is accelerating, and we now expect 2026 CPO revenues to come in at the high end of the $10 million to $20 million range we've previously communicated. This acceleration is driven by 2 factors: first, the growing volumes of CPO chips planned for later this year; and second, our leadership in the important test insertion on which ensures known good die on the photonic integrated circuit or pick wafer. Insertion 1 is proving to be a cost-effective and production-ready solution to ensure high yields of CPO modules built with advanced packaging processes like TSMC's coup. Because of cost and complexity challenges, other test insertions like insertion 2, after stacking the electrical dye on the PIC are proving to be difficult for customers to implement the production. Finally, we successfully integrated our [indiscernible] fourth quarter acquisition of Keystone Photonics, and our teams are collaborating to define and execute the world's leading silicon photonics and co-packaged optics probing road map. This includes electrooptical probe cards, which offer the promise of higher parallelism and higher throughput for our customers as we bring together our technology leadership in both electrical and optical oven. Before turning the call over to Eric, I want to thank the global FormFactor team. Achieving our target model is the result of their resilience in implanting multiyear investments in technology leadership talent, customer focus and operational execution. We're well positioned as test intensity and complexity continue to rise at the intersection of advanced packaging and high-performance compute and we're excited to share our vision for the future of FormFactor at our May 11 Investor Day. Aric? -- you're up. Aric McKinnis: Thank you, Mike, and good afternoon. Over the past 3 quarters, one of our top priorities has been to increase gross margins and deliver on our commitment to our target model of 47% non-GAAP gross margins at $850 million in annual revenues. We're proud to say that in Q1 '26, we achieved this target on a run rate basis, but we're even prouder of how we achieved it, driving what we believe are durable gross margin improvements. Through operational effectiveness and financial discipline. The actions we took included: first, deploying our workforce and existing manufacturing footprint more effectively, which included the restructuring actions announced in early Q1. Second, driving improvement in manufacturing yields in key process areas; third, innovating to reduce manufacturing spending and lastly, reducing cycle times in key manufacturing operations. Even as we executed on record demand, we remain focused on driving improvements in these critical areas. This is the type of discipline that we believe is fundamental to driving sustainable financial results. Thanks to the FormFactor team's focused execution, we generated additional operating leverage on sequentially higher demand levels. Driving even better progress than expected and a cumulative improvement of more than 1,000 basis points in gross margins over the last 3 quarters. At the midpoint of our Q2 guide, we expect to generate another 50 basis points of expansion. We believe the bulk of the improvements in gross margins are durable in nature. Driven by improved operational effectiveness as well as discrete changes in our cost structure. We expect these fundamental improvements will help us to profitably navigate the impact of inevitable shifts in product mix and volumes. Non-GAAP gross margins improved by 500 basis points from Q4 '25 and exceeded the midpoint of our first quarter outlook by 400 basis points. As expected, continued operational improvements and higher volumes drove an approximately 100 basis point improvement from Q4 '25 that we believe is durable in nature. The overperformance against Q1 expectations is about half related to timing items and half related to durable improvements. The timing items of about 200 basis points are primarily driven by changes in customer-driven priorities within the quarter. This element may be transitory as driven by timing. The remaining overperformance of 200 basis points was split about 50-50 between first, faster realization of cost savings from our first quarter restructuring action and second, unexpected relief from tariffs. As IEPA tariffs were discontinued and placed by lower Section 122 tariffs during the quarter. These improvements are likely durable in nature. We continue to drive the unit cost of our products down in part enabled by increasing output from our existing infrastructure. Our exposure to fast-growing markets that Mike drive is generating demand that requires more output. As reflected in our record quarterly revenue in Q4 '25, again in Q1 '26 and now in our outlook for Q2, we are manufacturing at levels that would not have been possible even 1 quarter earlier. Improvements in cycle times, yields and how we deploy our workforce in addition to reducing unit costs and improving gross margins are enabling us to get more out of each tool, process and sight by ensuring more good product out and better fungibility of our workforce. Our Farmers Branch site expansion is the next key priority. And the project is on track and expected to begin to come online later this year and to ramp over the course of 2027. Bringing up this capacity on time and on budget is a key focus over the as it will enable the next phase of growth and gross margin expansion beyond our current target model. The trajectory of gross margin improvement and attainment of our target model is now evident, but our journey is not over. While we are optimistic about our ability to continue to drive profitable growth and believe we will continue to drive incremental improvements throughout 2026. We recognize that sustaining the progress that we have made will require ongoing focus and discipline. Further, we expect future gains to be achieved at a more moderate pace as incremental improvements require both more effort and more time than the rapid progress to date. We are excited to share our longer-term view at our May 11 Investor Day. Q1 '26 revenues of $226.1 million came in $1.1 million above the midpoint of the Q1 '26 outlook range of $220 million to $230 million. GAAP gross margins for the first quarter were 38.4% and down 380 basis points from 42.2% in Q4. Cost of revenues included $23.9 million of GAAP to non-GAAP reconciling items, of which $21.5 million related to our Q1 '26 restructuring actions announced on January 5. Details of the GAAP to non-GAAP reconciling items are outlined in our press release issued today and in the reconciliation table available on the Investor Relations section of our website. On a non-GAAP basis, gross margins for the first quarter were 49%, 510 basis points higher than the 43.9% we achieved in Q4 and 250 basis points above the high end of our Q1 '26 outlook range. This increase in non-GAAP gross margins was driven primarily by improvement in the probe card segment, which were up 603 basis points to 50.5% and partially offset by the decrease in our Systems segment, which declined 350 basis points to 38% on seasonally softer demand and as we transition to production of our Triton system for co-packaged optics applications, as Mike described. Our GAAP operating expenses were $70.1 million for the first quarter, down slightly as a percent of revenue from the prior quarter and a decrease of 470 basis points from the same period in the prior year. Included in Q1 '26 operating expenses were $7.1 million of expense related to the preproduction ramp of Farmers Branch. Despite the incremental spending, the decrease as a percent of revenue demonstrates continued spending discipline across the P&L. -- even as we drive innovation through R&D and fund the Farmers branch expansion. GAAP net income for the first quarter was $20.4 million or $0.26 per fully diluted share. Down from GAAP net income of $23.2 million or $0.29 per fully diluted share in the previous quarter. The decrease was driven by restructuring-related costs, net of tax of $17.6 million incurred in Q1. First quarter non-GAAP net income was $44.5 million or $0.56 per fully diluted share, up from $36.6 million or $0.46 per fully diluted share in Q4. The GAAP effective tax rate for the first quarter was 2.1%, and the non-GAAP effective tax rate for the first quarter was 16.1%. Moving to the balance sheet and cash flows. We had free cash flows in the first quarter of $30.7 million compared to $34.7 million in Q4. The $4 million decrease in free cash flow was driven by greater capital expenditures and lower exposure from operations. The decrease in cash flows from operations which were down about $1 million from the prior quarter to $45 million in Q1 is driven primarily by higher working capital needs driven by our growth and $4.1 million in cash paid related to restructuring actions. At quarter end, cash and investments were up $28.1 million to $303 million. We continue to expect that cash CapEx for Farmers Branch will be between $140 million and $170 million in 2026. Preproduction ramp costs and G&A will be between $20 million and $25 million. Upon completion of the ramp to initial target capacity, we expect Farmers branch to be acetic to gross margins. Associated with our investment in Farmers Branch, we secured certain incentives, which we expect will partially offset these expenditures. Among others, incentives include about $24 million in cash grants designated to fund capital expenditures upon meeting certain criteria. During the first quarter, we did not repurchase any shares. At quarter end, authorization of $70.9 million remains available for future repurchases under the $75 million 2-year buyback program that was approved and announced in 2025. We are committed to our share repurchase program as a tool to offset dilution from stock-based compensation over the 2-year period of the program. In the short term, we have prioritized our deployment of cash to accelerate the ramp of our new manufacturing site in Farmers Branch. Turning to the second quarter non-GAAP outlook. We expect Q2 revenues of $240 million, plus or minus $5 million. This increase in revenues and the impact of continued gross margin improvement initiatives described earlier, are expected to result in a higher non-GAAP gross margin of 49.5% plus or minus 150 basis points. As a reminder, we continue to see an adverse impact to gross margins from tariffs despite recent reduction in an amount paid. We have assumed around 140 basis points of tariffs in our outlook for Q2. We have paid substantial EPA-based tariffs since they were put in place in 2025, and we expect some or all may be refundable in the future due to the Q1 '26 Supreme Court ruling. [indiscernible] We did not record a recovery of these amounts in Q1 and have not assumed recovery in our Q2 '26 outlook. We are actively monitoring developments in this rapidly evolving space. If the amounts we previously paid are deemed recoverable, we could receive a refund of $9 million to $11 million in tariffs previously recorded in cost of goods sold. At the midpoint of our outlook range, we expect Q2 non-GAAP operating expenses to be $65 million, plus or minus $2 million. Our Q2 non-GAAP effective tax rate is expected to be within the range of $15 to 19%. Non-GAAP earnings per fully diluted share for Q2 is expected to be $0.61 plus or minus $0.04. A reconciliation of our GAAP to non-GAAP Q2 outlook is available on the Investor Relations section of our website and in our press release issued today. As demonstrated by our Q2 results and our Q2 outlook, we have now achieved our current term model. We believe we have more room to run and driving operating leverage, underpinned by our initiatives to improve our structural costs, increase capacity and expand our leadership position in the fast-growing markets that Mike described. We look forward to sharing our new target financial model and key elements of our strategy at our planned Investor Day in a little under 2 weeks. With that, let's open the call for questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Brian Chin from Stifel. [Operator Instructions] Brian Chin: And congratulations on the really good results. First question. NVIDIA 10% come other than the nice ring that it has to it. Can you explain why you break this out separately versus rolling up under TSMC? And also how much roughly of this is networking related? And what does that suggest or what does this suggest for your market share of the SAM for new existing platforms? Mike Slessor: Brian, it's Mike. I'll take that one. With all customers, as we report them as -- when they cross the 10% threshold is required to it's based on who's placed the PO and who's paying the invoice. And so in this case, you see we have 2, 10% customers in this quarter. And as I described on the call, the second 10% customer is associated with networking. We're still making excellent progress on the GPU qualification. As I said, we're now reaching the final stages of that and expect essentially the $20 million in revenue we've described in the second half. We're now investing and preparing the capacity and local support for that. Those POs we would expect to come from the foundry, just different business models in different part of a fabless customers' business. Brian Chin: I'll leave CPO for the next question here. But 1 thing I wanted to ask you about, Mike, is that you've talked about the production ceiling that you're kind of working with until Farmers branch comes online, good sequential growth kind of in line with the midpoint of Q1 further growth ahead of our models for Q2, to ask this, but kind of curious how much of your near-term growth is being driven maybe by NIC or ASP relative to just units. Given the constraints you're operating on and maybe your ability to optimize within those constraints. . Mike Slessor: Yes. So it's a great question, Brian. And it ultimately comes down to ASP versus volume. And as Eric went through in his prepared remarks, he provided a pretty clear bridge that showed the gross margin improvement up to the 49% level is really based on cost reduction on COGS. Now it's split on things that we believe are durable and things that we think are temporary. But pricing in ASP is not a major factor in that. We've always run a business where customers will definitely compensate us for value. Typically, that's been performance of our products, cost of tests that we produce reductions in cost of tests that are produced. And in this case, there are some isolated incidents where customers are willing to pay expedite fees for a certain design because that offers the value in this capacity-constrained environment, but pricing really is not a driver of the gross margin improvement. It's COGS reduction and our operations team continuing to improve yields and cycle times and get more out of the existing footprint. How far that can run, we'll see. But so far, they've done a fantastic job. Operator: And our next question comes from the line of Matthew Prisco from Cantor. Matthew Prisco: So given the gross margin strength, I'd just like to dig in a little bit there. I know you listed out a few drivers, but can you perhaps just offer some more detail on how each of those drivers contributed to that 510 basis point increase quarter-over-quarter. And as we look forward over the last couple of quarters, combatted than expected. So how much more juice is there a squeeze with these current drivers ahead of that farmers branch ramp? . Unknown Executive: Yes. So as mentioned in the prepared remarks, the 510 basis points roughly 400 basis points were driven by a mix of durable and what I call transitory items. And if I break those down, the durable piece is really related to faster realization of savings from our restructuring action. So we thought the expenses were going to be a little bit higher and we ended up being able to do better than that as we executed on that restructuring action. Those changes are -- it was about 100 basis points in the quarter. And those changes are going to persist at those savings will persist as we move forward, our permanent in nature. The other 100 basis points of that 50% of the 400 basis points -- so the other 100 basis points is really related to tariffs. The new tariff construct that we're operating under just has lower weighted average tariff rates. And so that's resulting in a savings for us. We do continue to pay tariffs today. It still continues to be a headwind. But as long as the current framework is in place, we expect those savings to also be durable in nature. The piece that is transitory in nature really relates to timing items both on spend and also in terms of just prioritization of certain products that we were producing within the quarter. Those were decisions that were made in order and were not included in our original outlook. We think those things are temporary and will flip around as we move forward, primarily mix and cost timing items. And so we don't expect those to necessarily persist going forward. Now we do expect those to be replaced by durable improvements as we move forward into next quarter into Q2. So as you can see by our outlook, we are still expecting sequentially up -- that is because even though we have some of the improvement we saw in Q1, even though some of that goes away, it is replaced by other improvements, and those are primarily related to the full quarter impact of our restructuring actions and the savings associated with that. Also, volume is a factor as we move from $226 million to $240 million in revenues. Matthew Prisco: And then maybe on the foundry logic side, that business obviously coming in better than expected. Can you help give us the breakout of that business as it stands today, kind of between that networking smartphone [indiscernible] all different moving parts within it. And as you talked about kind of the genetic AI driving the PP demand as we think about your ability to service that demand given the constraints on supply, are you falling short of that today? Or is there some kind of work around where you can actually supply these incremental parts . Mike Slessor: Yes, it's Mike. I'll take that one. We don't break foundry and logic down other than qualitatively in some of these different drivers as we go sequentially forward. As we've done this quarter with the CPU demand that you talked about, -- the step-up in Q1 was expected, if you go back and parse our comments from the last call and right about where we thought it would be. Now part of that's the answer to your second question we are running at very, very high utilizations. And basically, if you look at the Q1 revenue results, we came in pretty close to the midpoint of the guidance, and that's a reflection of some of the constraints we have. The operations team, as you can tell from our outlook, we're stepping up again pretty significantly sequentially. -- has continued to squeeze, I think you call it squeeze more juice out of things. That's true on the revenue side as well. One of the reasons gross margins are improving is we're producing more out of the same fixed cost footprint by and large. There's a tremendous amount of leverage when we do that. Now we're working closely with customers on their demand visibility is still a challenge in this business with lead times right around mostly shorter in the quarter. But this is an area where we've got a more active dialogue going with customers to make sure we're planning for whatever we can produce. So we're meeting their needs and surprise demand like this, the CPU agent AI driving. Operator: And our next question comes from the line of Krish Sankar from TD Cowen. Hadi Orabi: Congrats on the great results. This is Eddie for Krish. I'd like to follow up on the same question regarding CPUs. Your main IDM customer remains 100% of revenues and for the past 2 quarters, the demand outlook for CPUs have meaningfully improved I wonder, do you expect later this year for that customer to return to more than 10%. And if we look at the revenues, they're still like 40%, 50% below their peak in 2022. I wonder how you think about the recovery profile from that customer going forward? Mike Slessor: Yes. And if you look, obviously, this issue of 10% customers that customer was not a 10% customer in Q4 nor was it in Q1. With some of the CPU demand, they'll be pretty close in Q2. I don't know whether they'll make the line, but they're going to be buttoning back up. Of course, the other thing that's going on is we're making the absolute revenue threshold to hit 10% larger as we grow the overall top line for FormFactor. . So will it return to the 2022 highs? I don't think so just based on some of the strength in CPUs, but as they continue to execute their turnaround plan as they continue to make progress in the foundry business, especially associated with their advanced packaging technology, given the strong relationship that we have with them, I referenced the award that they gave us earlier this year. We're certainly hopeful that we can return and even exceed the peaks of '22. Hadi Orabi: And a follow-up. I mean, it seems you have these meaningful demand drivers from -- whether it's from NVIDIA, from the IDM, but your revenues seem -- correct me if I'm wrong, are they capped near that $240 million level until you guys ramp your facility later this year. I'm just wondering how to think about September and December revenues. Should we expect like flattish from that $240 million? Or do you think there are some optimization techniques that can take us $10 million to $20 million more than that. . Unknown Executive: I'll take that question. As you can see from our Q1 results and our outlook, we've been able to now execute on $225 million in the Q1 quarter and then looking forward to next quarter to 240. I think if you were to back a quarter off of each of those a quarter before that, we probably couldn't have produced at those levels. We've been real-time driving efficiency improvements in terms of cycle times and yields in our sites. And I think that is very much real time, increasing our output out of our existing sites. It's very closely related to these efficiency improvements that we're making. And it remains to be seen how much more of that we can drive. I do believe that there is still room for improvement, and we're going to continue to strive to make those improvements as we move through the remainder of 2026. To the extent we're successful in that, that will -- we expect to be able to continue to incrementally increase our output over the coming quarters. Operator: And our next question comes from the line of Craig Ellis from B. Riley Securities. Craig Ellis: Yes. Congratulations on the really strong execution guys. -- both on the top line and gross margin. I wanted to start just by following up on the last question. So we've done a really good job over the last couple of quarters. Tuning the knobs with our operations to drive significantly greater capacity and we're doing that with better yields, and that's helping to give us much better gross margin. How much of what you're doing at current facilities is going to be leverageable into Farmers branch when you ramp that up late this year and next year? Unknown Executive: Our intent is to leverage all of that work, right? What -- it's really fundamentally improving how we run our manufacturing processes. And I think that moving a portion of our manufacturing and having the benefit of new tools we will only improve in those areas in terms of cycle times and yields with some of the additional capability we get from a new tool set. So we all intend to preserve the gains that we have made and in fact, build on them as we get access to newer equipment sets and a site that is more consolidated, if you will, that allow us greater fungibility of our resources. Hadi Orabi: And then the follow-up question is regarding the networking business. So interesting to see big green there. On the 10% customer list. My question is this, as we think about that customer and the revenues that it's now driving, how do we think about how this most recent quarter performed relative to the trend lines that you all have been seeing and what you expect from that customer? Is there a seasonal sign wave that goes along with that demand -- or how do we interpret where revenues could go from here, given what you've seen in the past and what your expectations would be? Mike Slessor: Yes. I'll address the seasonality part, Craig. There is going to be some seasonality in that business. You've seen it reflected in our HPM business, which obviously feeds into that customer's overall supply chain. First half heavy second half a little bit lighter, although some of the product releases are starting to blend together. So I would expect some seasonality. Having said that, if we look at the overall demand environment, it's pretty clear from an external perspective that the second half continues to be pretty strong, right? We've got, as I said, in response to the CPU question, more active conversations with our customers because they understand there's capacity constraints, not just for us, but for our competitors as well. And so I think there's other opportunities that we can take advantage of, even if there is some seasonality around the annual cadence of these high-performance compute product releases, if you will. Hadi Orabi: That's really helpful, Mike. And if I could sneak in one more. We're seeing more low-power DDR designing into certain AI systems going forward, it seemed like that could give legs to the kind of the legacy DRAM market that the company has served not making it as probe card intensive as HBM, but at least extending the life of different formats that might have had a different sign way. What does that mean for form? Is that right? Or is it not something that can benefit the business? Mike Slessor: It depends, right? The real details of how our customers -- and I referenced this earlier in the call, shift their wafer start mix between HBM and DDR, primarily DDR5, but some legacy DDR4, as you alluded to in the mix is going to be really a pretty dynamic situation. the Chairman of 1 of our largest customers a few weeks ago publicly said that they're now getting better margins out of the DDR business than they are on the HPM business. . And I think you're going to see all 3 major DRAM manufacturers optimize their mix around this in this overall bit capacity-constrained market. So there definitely is -- remembering that probe card demand is driven by new design releases and ramps of those specific designs. Each probe card is specific to a customer chip design there's a lot of devil in the details, but there is the potential for that to fill in some of the seasonality goals. Operator: [Operator Instructions] Our next question comes from the line of Christian Schwab from Craig Hallum. Christian Schwab: Congrats on a great quarter. I just have 1 quick question. Can you remind me -- I can't find any way now. What is the target revenue capacity that on a yearly basis that you're putting on in Farmers Market. Unknown Executive: Yes. farmers Brad. So just to remind you Yes, are Yes. Just a reminder on the time line. So we are initially starting production that site at the end of this year, and we intend to ramp over the course of 2027 to the initial target capacity approximate sizing of the initial target capacity is something equivalent, more or less equivalent to our existing California footprint. You can think of that as maybe 40% of our -- I'm sorry, a little bit more than that. Yes, roughly 60% of our existing probe cards business today. So a pretty substantial capacity, what I think is probably more relevant is our ability to bring that capacity online modularly over time. So we're going to we're going to target initial capacity and then make sure that we're monitoring the outside environment. We're going to talk a bit more about this in our Investor Day on May 11 and should be able to provide some more details around it. Operator: Our next question comes from the line of Dennis Paton from Needham & Company. Unknown Analyst: So just could you maybe give us an update on your data test partnership? Kind of what's the progress there? And what is the time frame to monetize on that partnership? . Unknown Executive: Yes. I think the partnership with Advantest, we've talked about it as being most prominent with CPO. The Triton system over the years we've codeveloped with them in Tokyo Electron. But I wouldn't characterize it too much differently than our partnerships with a variety of other suppliers in the industry. We work very closely every day with Advantest competitor Teradyne because fundamentally, we believe that the test ecosystem needs to be an open ecosystem. We trained our customers to rely on that for business continuity. We've all developed interface standards. So I think the CPO momentum that both of us and Advantest have talked about, I think as an example, where this codevelopment together with partners in ATE and probers and other instrumentation really produce a system that's useful for solving an important customer problem. So a great result of that partnership, we got partnerships similar to this all over the place. Unknown Analyst: Great. And then another question on Farmers Branch. So if I understood correctly, so you expect to replace basically most, if not all, of your California capacity with the capacity in Texas, right, which will be about 60% of it. And if that's correct, so when do you expect kind of revenue to start hitting the top line from Farmers Branch? What's going to be the first quarter that hits? And then when do you think you hit full capacity in that facility? . Unknown Executive: Yes. To clarify, it's not a replacement. We're expanding our available capacity. And as I mentioned in my response earlier, we intend for that ramp to happen over the course of 2027. So pretty fast ramp time line with the first initial capacity coming on here at the end of the year at the very end. So not much impact to this year. Operator: And our next question comes from the line of David Duley from Steelhead Securities. David Duley: I guess the first 1 is -- you mentioned your codeveloped tool and the Triton there for, I think, insertion number. You mentioned an insertion number. Will that be the vast majority of your TAM opportunity in CPO is top 1 particular step. I think there's like 4 insertion points and then a couple of like final testing. But -- so can you just kind of explain where you think most of your TAM and revenue would come from CPO as this insert you referring to or a different one? And then what is your total expectation for CPO revenue perhaps in 2027. Mike Slessor: Yes. So David, I'll try to parse that in different ways. We're in the very early innings of CPO, right? This is the initial production ramp. We are focused on insertion One for a couple of reasons. One, it represents the sort of the foundational optical probing technology that's going to be needed in any of the insertions. If you think about any of the insertions you have to be able to optically probe the device. It's just insertion on essentially is the exclusively focused on that. There's a little bit of electrical program there, but it's really the optical proping step. So we're going to be able to port that technology, if you will, across all the other insertions. I do expect, and I think most industry participants who are really in this game expect the spending between different insertions to move around as a function of yield, as a function of product mix from our customers. So we have active conversations on all of these different sections with various partners and with customers, we've just chosen the initial ramp to really focus on insertion 1, and that's turned out to be a good ben,right, as you can tell from us raising our outlook for 2027. the sort of revenue opportunity with CPO, I'm going to punt to Investor Day. We're going to spend time talking about why we're differentiated the different insertions and the longer-term opportunities I think it fits pretty well in the context of the next target model we're going to share for you. David Duley: Just as a follow-up on the insertion #1, that's where you're basically optically proven the PIC or the optical part, which is like super important, right? Because you're going to team that up with an electronic part later on. And once you package it together if the PIC doesn't -- if that part doesn't work, then a real key part breaks the co-packaged expensive part, so you don't feel like this is the most important step for you to address. Mike Slessor: Again, it goes back -- so I'm not going to -- I'm certainly not going to argue with you given where we focused our R&D resources and the momentum we're seeing. But imagine a scenario where you've got very, very high yields. Our customers have very, very high yields on the PIC wafer. Now I think you can infer that's probably not the case now. And for a while, as the new technology ramps, there's going to be a yield learning curve. But that's 1 of the reasons why we're continuing to pay attention to all the other insertions. And again, I can't overstress the idea that any insertion is going to require optical probing -- so if you get it right at insertion 1, you've got the toughest part of the problem solved for any of the other insertions. David Duley: Okay. Final thing for me is, could you just elaborate, I think you mentioned that most of your growth in HPM probe card revenue in Q2 is going to come from a new customer adopting a new application. Could you just elaborate a little bit more on what you said and what the opportunity is? . Mike Slessor: Yes. What I said was for Q2, we do expect HBM to grow to another record -- and really, this is -- comes from a second customer increasing their adoption of our Smart Matrix technology for the at-speed stack test. This has been one of the staples of our HBM differentiation. And we're now seeing some more significant adoption from the 2 other customers, others that are our primary driver customer. And we see this as central to our differentiation in the HBM space. . Operator: And our next question comes from the line of Elizabeth Sun from Citi. Unknown Analyst: Congrats on the results. So first on the follow-up on the HPM question earlier, you talked about the second customer increasing adoption in Q2. So I'm just wondering on the third HPM customer, are you seeing -- are you expecting to gain share as well going down the road? Mike Slessor: Elizabeth, in the long term, consistent with our strategy that we've articulated basically since I got here, we want to be a leading supplier to all customers in the industry. So that's an initiative. Now clearly, there's some prioritization and choices going on given not just the production volume, but how thinly or -- and the whole industry's R&D resources are stretched. So longer term, it's a question of time frame, right? Longer term, yes, we expect to be a leading supplier to all 3 DRAM manufacturers for these at speed DRAM test. And I think there's a nice sort of validation of that here in the second quarter. . The other thing I wanted to make sure I snuck in here was if you look at the growth in HBM, from the first half of 2025 to the first half of 2026, if you take the midpoint or guide we've grown our HBM probe card business by more than 50%. It's a great example of the increase in test intensity, test complexity now in the second quarter, a little bit more of a contribution from a second customer for this highly differentiated at speed test. Unknown Analyst: And on the CPO side, other than insertion one, are you still working -- are you also working with this similar group of partners? Or are you working with other like partners as well, like Teradyne or other probers testers providers? Mike Slessor: Yes. So to be clear, the bulk of our work is on insertion 1, as you might imagine, we're very focused on that because that's the foundational here and now opportunity that we must execute on. I'll go back to what I've said before on this call and in other settings, we leave in the open ecosystem. And so a partner like Teradyne wants to focus together with us and make sure that we've got a compelling solution for some of the other insertions. We'll certainly engage in that discussion. There's some details of resourcing and different relationships that need to be figured out as we do that. But the fundamental principle is we all need to operate in an open ecosystem to be as successful as we can and enable our customers to take on these significant technology challenges. Operator: This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mike Slessor for any further remarks. Mike Slessor: Thank you very much for joining us today. We're really excited to share the future of FormFactor now that we've achieved our target financial model, share with you the next target model. And really, the fundamental operating principles, development initiatives and growth areas that underpin that next target model for FormFactor. Hope to see you on May 11, either live in New York or we'll be webcasting the event as well. Until then, take care. . Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Welcome, everyone. Thank you for standing by for the Alphabet First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jim Friedland, Head of Investor Relations. Please go ahead. James Friedland: Thank you. Good afternoon, everyone, and welcome to Alphabet's First Quarter 2026 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler and Anat Ashkenazi. Now I'll quickly cover the safe harbor. Some of the statements that we make today regarding our business, operations and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to our forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward-looking statement. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our Investor Relations website located at abc.xyz/investor. Our comments will be on year-over-year comparisons unless we state otherwise. And now I'll turn the call over to Sundar. Sundar Pichai: Thanks, Jim. Hi, everyone, and thanks for joining us today. it was a terrific quarter for Alphabet. Our momentum was on full display at Cloud next last week and the month of May brings even more with I/O, Brandcast and GML. I hope you will tune in see our progress. It's clear that our AI investments and full stack approach are driving performance across our business. In Search & Other revenue grew 19%. People love our AI experiences like AI Mode and AI overviews and they're coming back to search more. Cloud accelerated again this quarter due to strong demand for our AI products and infrastructure. Revenue grew 63%, exceeding $20 billion for the first time and our backlog nearly doubled quarter-on-quarter to over $460 billion. Gemini Enterprise is seeing tremendous momentum with 40% growth quarter-over-quarter in paid monthly active users. In subscriptions, this was our strongest quarter ever for our consumer AI plans, primarily driven by adoption to Gemini app. Overall, the number of paid subscriptions has now reached 350 million with YouTube and Google One being the key drivers. And our AI models have great momentum. First-party models now process more than 16 billion tokens per minute via direct API used by our customers, up from 10 billion last quarter. Today, I'll share our progress across the AI full stack then Search and Cloud, followed by YouTube and Other Bets. Starting with our AI infrastructure. It's the foundation of our full stack approach to AI, driving customer growth and product adoption. Our custom TPUs, Axion CPUs and the latest NVDIA GPUs continue to form the industry's widest variety of compute options. NVDIA GPUs are a core part of our AI accelerator portfolio and will be among the first to offer NVDIA Vera Rubin NVL72 in addition to the Blackwell and Hopper-based instances already available. At Cloud Next, we introduced our 8 generation TPUs, individually specialized for training and serving and able to take on the most demanding agentic workloads. TPU 8t provides high-performance model training with 3x the processing par of Ironwood and 2x the performance. TPU 8i delivers cost-effective low latency inference with 80% better performance per dollar than the prior generation. This exceptional infrastructure powers world-class AI research that includes models and tooling, which continued to progress really well. Gemini 3.1 Pro continues to push the frontier in reasoning, multimodal understanding and cost. We have quickly expanded the Gemini 3.1 Series of models to offer more choices for developers, including our cost-efficient flash models. 3.1 Flash Live, our latest audio model has improved precision and reasoning, making voice interactions more natural and intuitive. It's now powering conversational features in search in the Gemini app. Speech to text is now available in 70 languages. And with 3.1 Pro, our deep research agent got a big upgrade, including MCP support and native visualizations. Our generative media models are incredibly popular. Lyria 3 has generated over 150 million songs since launching on the Gemini app. Nano Banana 2 reached 1 billion images in nearly half the time of Nano Banana 1. And Veo 3.1 Lite is the most cost-efficient video model today. On top of this, we launched Gemma 4, our most intelligent open model. It's been downloaded over 50 million times in just a few weeks. In fact, our open models have now been downloaded over 500 million times. Looking ahead, we are focused on pushing the next frontiers of foundation models, including intelligence, agents and agentic coding. And we are using the latest technologies to transform how we work as a company. For example, with Antigravity, we are shifting to truly agentic workflows. Our engineers are now orchestrating fully autonomous digital task forces and building at a faster velocity, much more to come here. Next, we are bringing healthful AI into the hands of billions of people every day through our products and platforms. Earlier this year, we introduced Personal Intelligence, which helps people get more personalized and helpful responses. It's now in the Gemini app, AI mode and Gemini in Chrome. Early traction has been good, and this month, we integrated Nano Banana 2 to make personalized image creation possible in the Gemini app. Maps recently got its most significant upgrade in over a decade with Gemini. Users can now have a conversation with maps and get more personalized suggestions and intuitive directions and the Pixel 10A launched to positive reviews, providing the best of Google's AI features like Gemini Lite and AI-powered camera features. Turning to Search. AI continues to drive search usage and queries are at an all-time high. We continue to invest in improvements to AI overviews, which are driving overall search growth and we're also seeing strong growth in both users and usage of AI mode globally. Personal Intelligence expanded broadly in the U.S., and we are seeing people ask more personal questions and getting responses that are uniquely relevant to them. We also shipped agentic experiences like restaurant booking to new countries and new multimodal capabilities like search live globally. We are also continuing to improve efficiency and speed. Even as we have brought new AI features into our results page, we have reduced search latency by more than 35% over the past 5 years. And since upgrading AI overviews and AI mode to Gemini 3, we've reduced the cost of core AI responses by more than 30%, thanks to continued hardware and engineering breakthroughs. We are excited to share more about search at I/O. Now over to Google Cloud. Google Cloud is differentiated because we are the only provider to offer first-party solutions across the entire enterprise AI stack. Our growth in revenue, operating margin and backlog highlights this differentiation. Our enterprise AI solutions have become our primary growth driver for cloud for the first time. In Q1, revenue from products built on our GenAI models grew nearly 800% year-over-year. We are winning new customers faster with new customer acquisition doubling compared to the same period last year. We are seeing strong deal momentum, doubling the number of $100 million to $1 billion deals year-on-year and signing multiple billion dollar plus deals. And we are deepening relationships with existing customers outpaced their initial commitments by 45% accelerating over last quarter. At Cloud Next last week, we introduced hundreds of new capabilities across our vertically optimized AI stack that are designed to work together for our enterprise customers. We introduced a new Gemini enterprise agent platform that empowers users to build, orchestrate, govern and optimize agents with the controls that enterprise customers need. Along with new capabilities in Gemini enterprise app, like projects, canvas, long-running agents and skills, every employee can build agents. In Q1, Gemini Enterprise paid monthly active users grew 40% quarter-over-quarter. That includes major global brands like Bosch, Cityweft, Merck and Mars Inc. Our partner ecosystem plays an increasingly critical role in driving Gemini enterprise adoption. We saw 9x year-over-year growth both in seats sold with partners and in the number of partners adopting it for internal use. This momentum is leading to accelerating usage of our models. Over the past 12 months, 330 Google Cloud customers each processed over 1 trillion tokens. 35 reached the 10 trillion token milestone. To give agents business context from enterprise data to help them reason intelligently, we introduced a new agentic data cloud. It includes across cloud Lake house, knowledge catalog and deep research agents, which combine research and analytical skills. As an example, using our Data Cloud, American Express is enabling agentic e-commerce at scale by moving an enterprise data platform along with hundreds of production applications to BigQuery. Vodafone is proactively resolving outages, automating network planning and precisely targeting capacity. Enterprise data has become critical for agents to reason. Our strength with BigQuery and Gemini Enterprise has led Gemini-powered workflows in BigQuery to grow over 30x year-over-year. As cybersecurity threats from the use of AI models accelerate, our expertise in AI and cybersecurity is driving strong demand for our agentic defense offerings. In March, we closed the acquisition of Wiz, a leading cloud and security AI platform, which is an incredible fit for the moment we are in. We have seen tremendous interest from customers in our unique cybersecurity and AI products and services to protect their IT estate. The performance of Wiz so far has exceeded our expectations. Together with Google's Threat Intelligence, security operations and AI models, the business helping organizations [ deduct ], prevent and respond to threats. We introduced new Gemini-powered agents for threat detection, continuous red teaming and automated remediation to protect software code and cloud systems. Customers like Deloitte, Priceline and Shell are using our agentic defense to strengthen their security posture. All of this is powered by the AI infrastructure I mentioned earlier. Our TPUs continue our leadership in performance, cost and power efficiency for customers like Thinking Machines Lab, Hudson River Trading and Boston Dynamics. As TPU demand grows from AI labs, capital markets firms and high-performance computing applications will begin to deliver TPUs to a select group of customers in their own data centers in the hardware configuration to expand our addressable market opportunity. Turning to YouTube where our momentum continues. In the living room, U.S. viewers are watching over 200 million hours of YouTube content daily. And as of March, we have reached a new milestone with over 10 million channels now publishing shots each day. This level of daily activity is a testament to how people enjoy this content and how we made it easier for creators. And in Q1, our YouTube Music and Premium offering saw its largest quarterly increase in the total number of nontrial subscribers, both globally and in the U.S. since YouTube Premium launched in June 2018. I hope you'll tune into Brandcast on May 13. Moving to Other Bets. Waymo is on a great trajectory. It launched in Nashville a few weeks ago, that makes 6 new cities so far in 2026 and operations in 11 major U.S. cities in total. Waymo also surpassed 500,000 fully autonomous rights per week, doubling in less than a year. [indiscernible] continues to expand across the U.S. in partnership with Walmart and DoorDash and announced plans to operate in the Bay Area. In summary, a terrific start to the year with so many great opportunities ahead. We are not slowing down. Huge thanks to all of our employees and our partners. See you at I/O on May 19. Philipp, over to you. Philipp Schindler: Thanks, Sundar, and hello, everyone. As usual, I start with the performance of Google services and then cover the progress we're delivering across search, YouTube and partnerships. Google Services revenues were $90 billion for the quarter, up 16% year-on-year, primarily driven by the continued growth of Search, adding some further color to our results. Certain Other delivered 19% growth, primarily driven by retail and finance. YouTube advertising revenues grew 11%, driven by direct response followed by brand. Network advertising revenues were down 4% year-on-year. Starting with Search & Other revenues, which delivered $60 billion in revenue for the quarter. We are accelerating the deployment of Gemini across our entire ads infrastructure to help businesses reach more customers in more places than ever before. This is driving significant improvements across all areas of marketing and continues to fuel new performance breakthroughs across 3 areas critical for our customers' success, as quality advertiser tools and new AI user experiences. First, ads quality. AI is boosting our ability to deeply understand user intent for a given search query and to find the most relevant ad. Even when we don't have a direct user query, we're making significant strides in improving relevance. In Discover, new AI models and Classifiers are driving higher relevance by better aligning ads with unique user interest. In Maps, we're using Gemini to ensure promoted pins are deeply relevant to user surroundings, location of interest, history and intent. This work is improving ad's relevance by nearly 10%, leading to a significant increase in user engagement. We're pairing the strength and prediction-driven relevance with bottom of funnel precision. Over the past year, we've made over 20 improvements to certain shopping bid strategies. Smart bidding now uses Gemini to match user intent to an advertiser's product and services more accurately and further drive performance. This level of granularity was previously impossible to achieve at scale. Second, on advertiser tools, where Gemini helps advertisers drive more efficient and effective campaigns. People no longer search in fragments, they search conversationally and share more context. We launched AI MAX to help advertisers adapt to this new way of searching. And earlier this month, it moved out of beta with improved performance quality across targeting and creative capabilities. Take [ Hilton EMEA ]. They captured 1/3 more clicks for 1/5 of the spend, while simultaneously increasing the average booking value by 55%. And Etsy saw a 10% search volume uplift with 15% of those queries being net new to their business. We see significant opportunity as advertisers continue to make good progress on AI readiness and the adoption of AI tools. For instance, more than 30% of our customers [ search ] now uses AI-enabled campaigns, AI MAX or Performance Max. And these advertisers are seeing more conversion for the same spend. Third, how we monetize new AI user experiences in search. We aren't just bringing existing ad formats into AI experiences. We are reinventing ads for this new era. Direct offers in AI mode are resonating with users and continue to receive positive customer feedback. GAP, L'Oreal and Chewy are just some of the latest partners who have now signed up to test this Google Ads pilot. We're also exploring new formats for retailers. AI mode already services organic product recommendations based on the users query and we're now testing a new ad format that displace retailers who sell those recommended products. In addition, the retail industry is rapidly coalescing around the open-source universal commerce protocol, or UCP, we launched in January in partnership with the Ecosystem. Last week, we welcomed Amazon, Meta, Microsoft, Salesforce and Stripe as new members to the UCP tech Council. They joined founding members Shopify, Etsy, Target, Wayfair and Google to further accelerate the transition towards an agentic future. Partners like Sephora and Macy's have joined companies like Ulta Beauty, who are already rolling out UCP and can now redefine consumer journeys from discovery to checkout. Ulta Beauty just last week launched agentic e-commerce within AI mode and search and the Gemini app. Shoppers can now review product recommendations, compare options and complete streamlined checkout for eligible purchases directly within AI mode and Gemini. Turning to YouTube, which now has led streaming watch time in the U.S. for 3 consecutive years. We're in an unmatched position to connect brands with the audiences they care about in the moment they engage in. We are applying Gemini to drive better matching and discovery between brands and creators of all sizes. And Gemini now powers YouTube creator partnerships, a centralized platform integrated directly into YouTube Studio for creators and Google ads for advertisers. We've also made it easier to buy premium ad space in top-tier podcast shows by curating the most watched podcast into popular genres. For example, Super Group partnered with YouTube creator, Liza Koshy on a multi-format shorts and long-form CTV campaign, resulting in a 93% lift for their glowscreen product and a 55% overall brand lift. Looking at monetization across YouTube, momentum continues in shorts and the living room and demand gen continues to drive momentum in direct response, in particular, with smaller advertisers. Brand who is benefiting from growth in a living room where we continue to scale greater brand deals. YouTube subscriptions revenue continues to grow faster than ads, particularly YouTube Music and Premium. By the end of Q1, YouTube Premium Lite was fully launched in 23 countries, and we plan to launch in more than a dozen new countries in Q2. As always, I'll wrap with the progress we're seeing across partnerships. Retailers are increasingly looking to Google to support their AI transformation. This quarter, Kingfisher, Target and Wayfair closed significant multiyear cloud and ads deals. Combined with the implementation of UCP, these partnerships will help deliver personalized AI-driven agentic experiences from discovery to checkout. In closing, I'd like to thank Googlers everywhere for their contributions to our success. And as always, our customers and partners for their continued trust. Anat, over to. Anat Ashkenazi: Thank you, Philipp. My comments will focus on year-over-year comparisons for the first quarter, unless I state otherwise. I will start with the results at the Alphabet level and will then cover our segment results. I'll end with some commentary on our outlook for the second quarter and full year 2026. We had an outstanding first quarter, delivering our 11th consecutive quarter of double-digit revenue growth. Consolidated revenue reached $109.9 billion, up 22% or 19% in constant currency. Total cost of revenue was $41.3 billion, up 14%. Tech was $15.2 billion, up 11%. Other cost of revenues was $26 billion, up 15%, primarily driven by increases in depreciation, content acquisition costs largely for YouTube and compensation. Total operating expenses were up 24% to $28.9 billion. R&D expenses increased by 26% driven by compensation due to investment in AI talent as well as depreciation. Sales and marketing expenses were up 23%, driven primarily by marketing investments to support the Gemini app and search as well as compensation. G&A expenses increased 21%, primarily due to an increase in compensation costs related to legal and other matters. Operating income increased 30% to $39.7 billion and operating margin was 36.1%. Other income and expenses was $37.7 billion, representing a meaningful increase from the prior year, primarily due to unrealized gains in our nonmarketable equity securities portfolio. Net income increased 81% to $62.6 billion and earnings per share increased 82% to $5.11. We generated operating cash flow of $45.8 billion in the first quarter and $174.4 billion for the trailing 12 months. CapEx was $35.7 billion in the first quarter with the overwhelming majority of the spend in technical infrastructure to support the AI opportunities we see across the company. Approximately 60% of our investment in technical infrastructure this quarter was in servers, and 40% was in data centers and networking equipment. Free cash flow was $10.1 billion in the first quarter and $64.4 billion for the trailing 12 months. We ended the quarter with $126.8 billion in cash and marketable securities and $77.5 billion in long-term debt. And as we announced today, our Board of Directors declared a 5% increase in the quarterly dividend. Turning to segment results. Google Services revenues increased 16% to $89.6 billion reflecting strong growth in search and subscriptions. Google services revenues also benefited from a strong FX tailwind. Google Search & Other advertising revenues increased by 19% to $60.4 billion driven by growth in the retail and financial services verticals. YouTube advertising revenues increased 11% to $9.9 billion, driven by direct response advertising as well as brand. Network advertising revenues of $7 billion were down 4%. Subscription platforms and devices revenues increased 19% this quarter to $12.4 billion due to strong growth in both YouTube subscriptions, particularly in YouTube Music and Premium and Google One subscriptions, which benefited from increased demand for AI plans. Google Services operating income increased 24% to $40.6 billion and operating margin was 45.3%. The Google Cloud segment delivered outstanding results in the first quarter. Cloud revenues accelerate across all key areas and were up 63% to $20 billion. Revenue growth was driven by strong performance in GCP, which continued to grow at a rate that was much higher than cloud's overall revenue growth rate. The largest contributor to cloud's growth this quarter was AI solutions driven by strong demand for industry-leading models, including Gemini 3. In addition, we had strong growth in infrastructure due to continued deployment of TPUs and GPUs and core GCP continues to be a sizable contributor driven by demand for infrastructure and other services such as cybersecurity and data analytics. Workspace again delivered strong double-digit revenue growth, driven by an increase in the number of seats and the average revenue per seat. Cloud operating income was $6.6 billion, tripling year-over-year and operating margin increased from 17.8% in the first quarter of last year to 32.9%. And Google Cloud's backlog nearly doubled sequentially, reaching $462 billion at the end of the first quarter. The increase was driven by strong demand for enterprise AI offerings and the inclusion of TPU hardware sales that Sundar referenced earlier. The majority of the backlog is related to typical GCP contracts and we expect to recognize just over 50% of the backlog as revenue over the next 24 months. In Other Bets, revenues were $411 million, and operating loss was $2.1 billion. For the past few years, we have been working to prioritize our efforts and investments in the Other Bets. In Q1 of this year, Verily completed an external capital raise that resulted in its deconsolidation from Alphabet. GFiber announced plans to combine with Astound Broadband, which will result in its deconsolidation from Alphabet when the deal closes, which we expect to take place in Q4, and we continue to allocate significant resources to businesses where we see meaningful opportunities to create value, such as Waymo. Turning to our outlook. I would like to provide some commentary and factors that will impact our business performance in the second quarter and full year 2026. First, in terms of revenues, we're pleased with the overall momentum of the business. At current spot rates, we would expect to see an FX tailwind of approximately 1 percentage point to our consolidated revenue in Q2 compared to a 3 percentage point FX tailwinds in the first quarter. In Google Cloud, as Sundar mentioned, we will begin to deliver TPU hardware to a select group of customers in their own data centers. We expect to begin recognizing a small percent of the revenues from these agreements later this year with the vast majority of revenues to be realized in 2027. It is important to keep in mind that revenues from TPU hardware sales will fluctuate from quarter to quarter depending on when TPUs are shipped to customers. And finally, we're excited to welcome the Wiz team to Google Cloud with the closing of the acquisition in March and are very pleased with the performance to date. A couple of items to highlight related to the acquisition. First, Wiz will be reported in the Google Cloud segment. And second, we expect a low single-digit percentage point headwind to cloud's operating margin for the remainder of 2026 related to the acquisition. Moving to investment. We are updating our full year 2026 CapEx guidance range to $180 billion to $190 billion, up from our previous estimate of $175 billion to $185 billion to now include investment related to the acquisition of Intersect, which closed in March. We are seeing unprecedented internal and external demand for AI compute resources. The investments we are making in AI is delivering strong growth as evidenced by the record revenue and backlog growth in Google Cloud and strong performance in Google services. Looking ahead, the strong results reinforce our conviction to invest the capital required to continue to capture the AI opportunity. And as a result, we expect our 2027 CapEx to significantly increase compared to 2026. In terms of expenses, as we've discussed previously, the significant increase in our investment in technical infrastructure will continue to put pressure on the P&L in the form of higher depreciation expense and related data center operations costs such as energy. We also expect to continue hiring in key investment areas such as AI and cloud and are investing in marketing to support our AI products. To conclude, Q1 was an outstanding quarter for Alphabet, and our teams continue to execute with a high level of discipline and velocity, delivering amazing innovation. We look forward to sharing more in the coming weeks at I/O, Google Marketing Live and Brandcast. I want to take this opportunity to thank our employees for their contributions to our performance. Sundar, Philipp and I will now take your questions. Operator: [Operator Instructions] Your first question comes from Brian Nowak with Morgan Stanley. Brian Nowak: I have 2. The first one, Sundar, on a recent podcast, you talked about how you were acutely constrained [ by compute ], something you focused on almost every week to sort of make sure you're deploying capacity correctly. So Let me ask you this, as you sort of look at the Search business, what are the areas that you are most excited about applying next-generation compute toward to sort of generate an ROIC on that return in search in the next 12 months. And then the second one is on the sale of the TPUs to third parties. Just can you help us philosophically understand the strategy around pricing them, given the high ROIC of using TPUs to power multiyear Google Cloud workloads a little bit? Sundar Pichai: Thanks, Brian. I'll take the Search one first. Obviously, you've seen we are taking advantage of all our investments in building the Gemini models and both obviously applying it in Search in the Gemini app, driving innovations in AI overviews in AI mode and they're all contributing to the increased usage of the product. . I do think looking ahead across both these surfaces, there is a massive opportunity to go deeper in what we do for our users, I think, bringing agentic flows, workflows to consumers in a way that it's easy for them to do, including in the context of search, I see as a huge opportunity ahead obviously, we are in very, very early innings of all that. But our investments in our full stack of AI approach, I think, puts us in a good position to bring those experiences to search, and I'm pretty excited about it. On the second question around TPUs, obviously, I would -- we do think about it as what are we doing through Google Cloud to help our customers. And that's the framework with which we think about it. In that context, there are situations where it makes sense. For example, you take customers like capital markets where they are running highly performing AI workloads. They wanted TPUs in their data centers. So there are -- and those trends are true across a diverse set of industries and in certain cases, frontier AI Labs too. And so we are opportunistic about it. But I do think we step back and think about it overall as the opportunity for Google Cloud. A lot of it is providing infrastructure through cloud, at times it is direct sales of TPU hardwares to a select group of customers. But again, we do take ROIC approach. And some of it helps us get more economies of scale, scale in our overall compute environment as well. And so it helps us invest in the cutting edge, which we need to do the next generation as well. . Operator: Your next question comes from Doug Anmuth with JPMorgan. Douglas Anmuth: One for Anat and 1 for Philipp. Anat, you talked about 2027 CapEx that it will increase significantly. And I know you didn't quantify it, but how do you think about the current CapEx trajectory, the ability to service this massive backlog that you've built up in just the last quarter and what will no doubt increase going forward. And then, Philipp, can you just talk more about the drivers of search queries at an all-time high? And then how you're thinking about how much room there may be to increase coverage of search queries, just the ability to show ads against the higher percentage of queries than the 20% you've been at historically? Anat Ashkenazi: Thanks, Doug, for the question. Let me start with your first question on CapEx and how we think about CapEx increase going into 2027. As you've seen us over the past several years, increased CapEx every year, and we have done it very thoughtfully to meet the demand that we are seeing both from external customers as well as demands across the organization. And you're seeing the proof point, the ROIC on that in terms of just the growth rate we're seeing, whether it's growth rate within search or certainly the cloud business, and the opportunity we have within the cloud backlog. So as we're seeing that robust demand across the business, we are looking at what can we do to support that growing demand and the opportunity ahead of us and increasing CapEx to meet that demand. We'll provide more clarity in future earnings call about what that number will be, but that's the opportunity we're seeing ahead of us. It's quite meaningful and we want to make sure we capitalize that and we do it in a way that's responsible as we've done to date. Philipp Schindler: So the second part of your question, first of all, just [indiscernible] for a second. I mean we're very pleased with the performance of our ads business here. And as Anat shared, Google Services benefited from a strong FX tailwind-- that's important to keep in mind. The strength we saw in search was not due to a single driver, but was really the result of many parts of our business showing strength and working very well together. If I just keep that for a second the vertical perspective, retail finance, I talked about it in health, drove the greatest contribution, although all major verticals actually contributed, we make hundreds of changes every quarter to improve the user experience, the advertiser experience. And so that's really contributing to our performance here. And we've also been able to generate very strong ad performance while significantly involving the search results page here. The queries continue to grow. And as Sundar mentioned, they are an all-time high. We see AI overviews and AI Mode continue to drive greater search usage and growth in overall queries, including in commercial queries, you specifically asked about the 20% on the coverage side, as I said before, I think with the ability of AI to better understand inten t and a lot of other vectors around it. I think there is upside in that coverage number. And overall, understanding that we have at Gemini on intent has just significantly expanded our ability to deliver ads on longer, more complex searches that were previously really difficult to monetize. And Anat shared earlier, we are deploying our Gemini models now across our ads infrastructure, and it's really driving improvements across the big 3 areas that I highlighted in my prepared remarks. Operator: Our next question comes from Eric Sheridan with Goldman Sachs. Eric Sheridan: Maybe 2, if I could. The first one, just building on the answer so far. When you look at the backlog you disclosed today. Sundar, I would love to know if you can come back to your comments on AI infrastructure and your unique approach and how that positions you to either build capacity, scale, compute and do it in a way that is, as Anat said, sort of effective from a margin standpoint as well as a compute standpoint, just to understand where you sit competitively in your mind relative to others. That would be one. And then Philipp, to bring you into the conversation, you referenced UCP and there's been a lot of industry inertia around UCP very quickly. Talk to us a little bit about what for the services business as agenti commerce scales in the years ahead? Sundar Pichai: Thanks, Eric. Look, I do think part of -- I mean I do think we are genuinely differentiated. We're unique in the market because of our vertically optimized AI stack and the way we co-develop the components from our infrastructure and models to platforms and the tools to applications and agents. And the fact that we own frontier models, own the silicon really helps us stay ahead of the curve. And on top of it, I'll just to put an extra point on it, the deep investment in our security layers to keep everything safe. And I think we are the only provider in the market that offers all of these vertical stack. And so overall, again, to my earlier comments to Brian, I think about it all as Google Cloud. We can -- we have many different ways to serve our customers so we can meet them in a way, suited to their needs, I think better than other players here. And I do think looking ahead, our ability to invest in this moment and stay at the frontier I think, puts us in a strong position. And I think we are doing it based on tangible demand signals we are seeing. And it's not just on the revenue side, but I'm talking from an ROIC framework, and that's what is helping us navigate this moment responsibly. Philipp Schindler: To the second part of your question, look, I mean, we're in the early stages of the agentic era. Agnetic is more than just complete transactions. We all know this. We see agenetic experiences as additive, and it will really transform how we shop from discovery to decisions while helping obviously, brands differentiate themselves. We've been very intentional about creating an agentic experience that works for our users, our partners for the entire ecosystem. Our goal is really to remove the grunt work of shopping. So consumers can focus on the enjoyable parts. For decades, you could either shop fast or smart and I think with the agentic ecommerce, you no longer have to actually choose between speed and certainty here and the vision is to make commercial experiences across the board, assisted more personal, more fluid. And we're carefully designing space and agenetic workflows for users to really see valuable components of their shopping journey beyond just price, such as customer service, brand loyalty and more while removing the friction of the process that I just talked about. And this is exactly where the part of your question kicks in the Universal Commerce protocol, a new open standard for agentic commerce that works actually across the entire shopping journey, from the discovery to the buying and the post-purchase support that we just talked about. And it was really co-developed with the industry leaders, including I mentioned them Shopify, Etsy, Walmart and so on. And we received tremendous feedback so far from hundreds of top companies, payments partners, retailers really interested in integrating and it will help power a new checkout experience in AI mode in search and the Gemini app and allowing shoppers to actually check out from select merchants right as they're researching on Google and going through this journey. So we're very, very excited about it. Operator: Our next question comes from Ross Sandler with Barclays. Unknown Analyst: Yes. Just following up on the last question on agentic shopping. So it seems like we're at the point in time where this is actually going to start happening finally. So Philipp, just to elaborate a little bit, as you look at carrying the AdWords business from kind of the old way of doing things to this new agentic frictionless shopping way. How do you see the price and volume kind of growth trends for core AdWords evolving as you start implementing more agenetic workflows in search? Philipp Schindler: Look, our #1 focus is obviously on the user experience here. And I think the most important part then this is what I mentioned before, we are carefully designing the space in the agentic workflows for the users to actually see the valuable components within that shopping journey and a second, you have the space, you obviously have the ability for interesting app advertising models. I think it's also worthwhile noting that beyond just the traditional agents, there's a lot of additional ways we can actually use AI to improve the shopping experience. And you can think about it like our apparel try-On tools that is now available in U.S., you can think about Google Lens. So there's a lot more to do here. But I think the key part is actually what I said before. We focus on the user experience here and think -- I think all else will follow if we pay attention to the points I mentioned. Operator: Your next question comes from Michael Nathanson with MoffettNathanson. Michael Nathanson: One for Sundar, one for Philipp. Sundar if I can connect Brian's question, Eric's question, and go a little bit higher. I wanted to understand, how are you deciding how are you allocating which divisions and projects get excess capacity given that you're constrained, right? So how do you decide between all the internal projects you have and the external projects, right? So what types of screens are you running to decide who gets incremental capacity? And then to Philipp, I have noticed you said this on the Gemini app there's more and more images that come to you in the shopping journey. Can you talk about your thoughts about adding advertising on that app? And what's guiding your decision-making here on adding ads on Gemini? Sundar Pichai: Thanks, Michael. I think a great question on an ongoing basis. I'm looking forward to Gemini helping me more and more as I'm thinking that through. Look, I do think that the foundation where we start with it is what we need from a R&D standpoint to develop models at the frontier. So what do you need for training these models. And so effectively, the compute needed for GDM because it's a foundation for everything we do. And so that's a core principle at which we operate. And then obviously, with the ability to plan ahead, we are, we do long-range plans on our core areas, be it be it search, be it YouTube and so on as well as we see in Google Cloud. And obviously, in Google Cloud, we have -- we are providing enterprise AI solutions, which this quarter had an 800% year-on-year increase from the prior year. So we are seeing strong demand for Gemini enterprise our AI solutions there. We see strong demand for infrastructure in Google Cloud. And as I said earlier, in some cases, we are seeing demand for TPU hardware. -- hardware and other data centers as well. So we are modeling these out and working to allocate across these areas. Obviously, we are compute constrained in the near term. And as an example, our cloud revenue would have been higher if you were able to meet the demand. So we are working through that moment, and we are investing, but we have a robust long-range planning framework, and we see extraordinary opportunities ahead, and we are allocating with that framework in mind. Philipp Schindler: And to the second part of your question, as I said in my previous answer, we are obviously focused on the user first and creating a really great user experience with all of our products, especially on newer products. And specifically on monetization in the Gemini app, our focus right now is on AI Mode. But it's fair to say that we really believe a format that works well in AI Mode would transfer successfully to Gemini app. And so today, in the Gemini app, we're focused on the free tier and subscriptions and our AI plans were a sizable contributor to our Google One revenue growth. But let's also be clear, ads have always been a big part of scaling products to reach billions of people. And if done well, ads can be really valuable and really helpful commercial information. And at the right moment, we'll share any plans as we have said, but we're not rushing anything here. Operator: Your next question comes from Mark Shmulik with AllianceBernstein. Mark Shmulik: Philipp, one more on search performance, if I can. You talked a few times about kind of optimizing for the consumer experience. And I guess besides higher query volume, is it fair to conclude that consumers are using these AI tools [indiscernible] or otherwise, and it's shrinking their purchasing journeys, converting at higher rates? And if so, is there a way to dimensionalize how much of the strength in search is being driven by that behavioral change against perhaps some of the newer advertiser AI tools that you'd be launching and rolling out . Philipp Schindler: I think the way to think about it is really to think about the expansionary moment we see here for search. This is the key part. AI is fundamentally changing how the world searches for and how it access information, queries are at an all-time high, Sundar said this. Traditional search really started with [indiscernible], and now we have overviews in AI Mode and they have made search more intelligent than ever and they let you ask for more complex questions. And we have Lens or Circle to search live, And search Live, Search Live now available to all countries and languages that support AI Mode again, shows you the expansionary nature of it, and we have our AI-driven search campaigns, and we have now [ SMBs ] that can reach customers at a scale that it really wasn't possible even a few years ago, and you can add in Google Translate and so on. So I feel like you've factored all of this and we're in a pretty good place and are quite excited about where this is going. Operator: Your next question comes from Ron Josey with Citi. Ronald Josey: Maybe this one is for Anat. We continue with margins continue to expand here. I wanted to understand maybe if you could break down the cost drivers or really the drivers of margin expansion, particularly amongst cloud, there's a thesis out that AI revenues are lower margin in general, but we are seeing margins improve. So more insights on just the cloud business and what's driving that margin expansion. Obviously, demand may be pricing, but that would be helpful. Anat Ashkenazi: Sure. Let me help impact the margin expansion. Obviously, we're pleased to see that there are pushes and pulls across the business, including the wiz and Cloud specifically. And I would start with the top line, when we see this robust strong revenue growth, both in cloud and Google services, it does provide leverage all the way down to the bottom line within the income statement. And you know we've been working hard to ensure we have -- we're running a productive and efficient organization, and it's not just how we operate the business, but even in areas such as our technical infrastructure, where we are investing the significant CapEx investments in our data centers and servers. We are looking at how we drive scientific process innovation within that organization. And that is reflected both in cloud and Google services as we allocate cost based on consumption. In the past, I did talk about the depreciation associated with these investments that is hitting both Google Cloud and Google services. Google Cloud expanded margin quite significantly from a year ago, as you've seen in our numbers that we just previewed. And a lot of it is the top line growth that Google Cloud is providing or producing as well as an incredibly efficient way of running the business. I will give Thomas and a team a lot of credit for running a very productive organization and making sure that we are supporting our customers and providing the services and products that they want and benefit from continue to drive top line growth and doing this well within the middle of the income statement, all the way from a very efficient technical infrastructure thinking through how do we leverage AI across our business. As Sundar mentioned, the use of coding internally or how Gemini helps us there optimizing our real estate footprint. And we're going to continue to do this. This is not -- we're not going to stop here. We're going to continue to push for more efficiency, knowing that we're going to have the headwind associated with the depreciation coming with higher CapEx level. Operator: Our next question comes from Ken Gawrelski with Wells Fargo. Kenneth Gawrelski: Two for me, please. First, on the cloud and capacity, could you speak about how your verticalized capabilities enable you to navigate a complicated supply chain, especially when experiencing inflation and constraints. Are you factoring any supply chain price inflation into '26 and '27 CapEx commentary? And as part of that, maybe Anat, could you talk -- could you update us on the allocation of compute capacity internal versus external cloud? And then one more, please. When you think about search quality volume growth. We're clearly seeing expanding use cases. Historically, it's always been free to the consumer with and completely ad-supported do you see future use cases where certain consumer use cases are more effectively monetized via subscriptions? And maybe a different mix of the consumer "search" the new search opportunity? Sundar Pichai: All right, Ken. Maybe there are a few thoughts to it. Maybe I'll touch on it. And on overall compute. I think I spoke earlier on how we think about allocation of compute across our businesses. And I think, again, the long-range planning and the ROIC framework give us a good way to plan ahead. I do think we -- I mean, obviously, we are working through a complicated supply chain environment as you point out, and we are factoring that into any commentary we give. But I think the scale at which we are operating and our ability to work across all layers, both -- our supply chain partners see the strength of our diversified businesses and the demand we drive and our frontier technology and the investments all through the stack, I think they help us get into deeper partnerships all across the supply chain. And I think that's -- and I mentioned earlier, the economies of scale point as well. So all of that factors in a positive way there, I think. In terms of search, look, I think we -- we are proud that we build models at all, we are at the frontier across the period of Frontier. We do think about capability and the cost front here deeply so that we can serve users at scale. -- but at the same time, we can bring in the most powerful models for the most demanding queries. But the future, as you are right, that in a valuable as we serve more and more valuable use cases. There are going to be use cases where people will want to use the most powerful model. And there may be different ways to accomplish that. So we're going to put the user first and support them in the way they want to use the product, and we already provide various tiers of our subscription plans in which you can get access to more powerful models and that applies across your Google user experience and including in search, and you've seen the momentum we saw a very robust quarter in terms of our AI subscriptions growth, driven by interest in getting access to better Gemini models. And so I think that sets us up well to serve the breadth of use cases people would want in all places, including in search. Operator: And our last question comes from Justin Post with Bank of America. Justin Post: I expect a lot of interest in your TPU sales. So can you help us think about how you're thinking about the opportunity there? And then maybe how much break down the backlog growth a little bit between TPUs and cloud? And then second question, just thinking about the margins on these big generative AI cloud deals. How do you think about these $100 billion deals coming in and the margins associated with those? Can they be similar to your cloud business as it is? Sundar Pichai: Look, overall, I would say, look, we see tremendous interest and there's tremendous demand for both AI solutions as well as AI infrastructure, including massive interest in our GPU offerings as well as TPUs. And so we are proud that we can provide customers with a very diverse with the breadth of our offerings and let them -- they can meet them in terms of where their needs are. And maybe I'll pass it Anat to give some color on the backlog growth. Anat Ashkenazi: Yes. So the backlog, the TPU hardware agreements that Sundar referenced in his prepared remarks, are reflected in our cloud backlog of the $462 billion. Although the majority of the backlog is still GCP agreements. Now as you think about the total backlog, just over half of it will convert to revenue in the next 24 months. And the TPU hardware sales, more specifically, we expect a small percent of them to see coming through as revenue later this year and then the majority to be realized as revenue in 2027. Justin Post: And then anything on the big AI deal margins with the generative AI companies? Sundar Pichai: Look, I think nothing to comment on any specific contracts. But overall -- earlier, there was a lot of questions about how do we allocate and remember, in a constrained environment when we are choosing to allocate across all these opportunities, we are working off a robust ROIC framework. Operator: And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Jim Friedland for any further remarks. James Friedland: Thanks, everyone, for joining us today. We look forward to speaking with you again on our second quarter 2026 call. Thank you, and have a good evening. Operator: Thank you, everyone. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Greetings. Welcome to the Align First Quarter 2026 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Shirley Stacy, with Align Technology. You may begin. Shirley Stacy: Good afternoon, and thank you for joining us. I'm Shirley Stacy, Vice President of Corporate Communications and Investor Relations. Joining me for today's conference call is Joe Hogan, President and CEO; and John Morici, CFO. We issued first quarter 2026 financial results today via Business Wire, which is available on our website at investor.aligntech.com. Today's conference call is being audio webcast and will be archived on our website for approximately 1 month. As a reminder, the information provided and discussed today will include forward-looking statements, including statements about Align's future events, product outlook and financial expectations. These forward-looking statements are only predictions and involve risks and uncertainties that described in more detail in our more recent periodic reports filed with the Securities and Exchange Commission available on our website and at sec.gov. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We have posted historical financial statements with corresponding reconciliations, including our GAAP to non-GAAP reconciliation, if applicable, and our first quarter 2026 conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information. With that, I'll turn the call over to Align Technology's President and CEO, Joe Hogan. Joe? Joseph Hogan: Thanks, Shirley. Good afternoon, and thanks for joining us today. On today's call, I'll start with an overview of our first quarter 2026 results, discuss performance across our two operating segments, Clear Aligners and Systems and Services. John will then walk us through our financial results and outlook for Q2 and 2026. After that, I'll come back to highlight a few key takeaways before we open the call for questions. We're pleased to report another better-than-expected quarter in Q1. Clear Aligner volumes from both the GAAP and non-GAAP operating margins exceeded our outlook. These results reflect continued execution against our strategic priorities and the resilience across our global business. We delivered first quarter revenues of $1.04 billion, up 6.2% year-over-year driven primarily by high Clear Aligner volumes and increased ASPs. Clear Aligner shipments reached a record 686,000 cases, increasing 6.7% year-over-year, reflecting double-digit growth across our international businesses, and continued stability in North America. Growth was broad-based across customer channels with shipments to orthodontists up 7.4% and GPs up 5.6% year-over-year, along with solid momentum across adult, teen, and growing kid patient categories. Dental and orthodontic service organizations continue to be force multipliers in every region, driving global double-digit Clear Aligner volume growth during the quarter. We remain encouraged by how naturally our digital platform fits with DSO operating models and how it continues to benefit customers and patients and support both Invisalign adoption and increased iTero scanner utilization. Q1 highlights the continued strength in Invisalign demand across age groups and geographies, even amid varying macro conditions. For Q1, 449,000 adults were treated with Invisalign aligners, up 7.8% year-over-year, reflecting strong growth across both orthodontists and GP channels in all regions, led by EMEA, APAC and Latin America. Teens and growing kids continue to represent the largest orthodontic patient opportunity globally. In Q1, 237,000 teens in kids started Invisalign treatment, up 4.8% year-over-year, led by China and Latin America. Growth was supported by continued adoption of Invisalign First, the Invisalign Pal expander and mandibular advancement with occlusal blocks, reflecting broader use across growing patient indications. A clinical study by researchers at the university of in Serbia in Italy, found that Invisalign palate expander or what we call IPE, was shown to effectively widen the upper jaw by opening a natural growth seam in the palate, achieving bone and bite changes similar to traditional metal expander. IPE also delivered more controlled and predictable results in Hyrax. When further considering the greater ability to maintain hygiene and the simplicity many parents desire compared to Hyrax device, these findings supported the use of IPE as a reliable option for growing patients and highlights its role as an important step towards fully digital orthodontic care. For imaging systems and CAD/CAM services, including iTero, exocad and x-ray insights software, Q1 revenues totaled $184 million, up 1% and year-over-year and declined sequentially, reflecting expected first quarter capital equipment seasonality. Q1 Systems and Services year-over-year revenue growth reflects continued adoption of iTero Lumina Full systems, service revenues and CPO sales, along with the continued mix shift towards lower-priced scanner offerings included PC-based configurations, leasing and rental units. These offerings provide greater affordability and flexibility to doctors in certain markets and practice models. In addition, the number of scanners sold to new doctors increased double digits year-over-year. For Q1, the total installed base of active scanners exceeded 125,000 globally. In addition, during the quarter, over 12 million iTero digital scans were performed supporting Invisalign, restorative wellness and numerous other digital workflows and applications. Exocad delivered double-digit year-over-year revenue growth, reinforcing our strategy to integrate orthodontics and restorative dentistry within a customer and patient-centric digital platform. Following the success of our inaugural Invisalign Advanced restorative treatment or ART pilot in EMEA, we recently began an Invisalign ART pilot in the United States with labs and doctors beginning training in several markets. Invisalign Art integrates with exocad enabling clinicians in labs to plan tooth alignment ahead of restorative work within the exocad environment without changing the tools doctors and labs already use. We're very excited about this opportunity to enhance the goal of preserving patients' natural dentition as much as possible. ART allows us this by incorporating the prior alignment of teeth into the overall restorative treatment plan as opposed to the removal or grinding them down before minimally invasive restorative work. It allows us to further expand our reach and offer existing and new products to the large and growing restorative market through lab-based channels. Clear Aligner revenue in Q1 was $856 million, increasing 7.4% year-over-year and 2.1% sequentially. Q1 Clear Aligner volume reached a record 686,000 cases, up 6.7% year-over-year and 1.3% sequentially. On a year-over-year basis, our clear aligners revenues reflected double-digit volume growth in EMEA, APAC and Latin America, along with overall stability in North America. Importantly, growth was primarily driven by both submitter expansion and higher utilization across the orthodontists and GP channels and across adult, teen and growing kid categories. During the quarter, more than 88,000 doctors submitted Invisalign cases globally a year-over-year increase of 3% or an additional 3,000 orthodontists and GP driven primarily by increases in APAC and the Americas, led by Latin America. Doctor utilization also increased year-over-year by 3.4% led by EMEA, Latin America and APAC. These metrics illustrate the continued adoption and penetration of the Invisalign system through our strategic geographic growth efforts as well as the meaningful addition opportunities in the large untapped demand for digital orthodontics, both in gaining share in the existing 22 million annual orthodontic case starts and expanding access to care to the more than 600 million potential patients that our digital technology can serve through GP dentists globally. Our DSO channel continue to be meaningful full growth driver. In Q1, DSO Clear Aligner volumes grew double digit across all regions and represented approximately 1/4 of total global volumes. The retail channel continued to be mixed, particularly in the United States, where our doctor customers reported less patient traffic during the quarter. To drive adoption and utilization across channels, we expect to continue to expanding targeted initiatives focused on affordability, patient conversion, clinical confidence and practice efficiency. These initiatives are beginning to show traction with GP, dentists, orthodontists and DSOs, helping to drive increased engagement and directional growth and case volumes. These initiatives include the doctor subscription program, or DSP. We continue to see strong growth from our DSP program, which includes retention and touch up or relapse cases. DSP touch-up cases continue to grow double-digit year-over-year across regions. DSP was originally launched in the United States in 2023, expanded into EMEA in 2025 and is expected to launch in APAC in Q2 of this year. North America DSP is also supporting early momentum with orthodontic groups and DSOs, helping drive reengagement among competitive and historically lower utilizing doctors as pricing simplicity and bundled value resonate across accounts. Patient financing in the United States, Healthcare Financial Direct or HFD is now live in over 4,000 offices, enabling patients to prequalify for financing before their first appointment. allowing doctors to see these patients directly within our Invisalign Doctor site. We saw particularly strong adoption in Q1 among the American Academy of Clear Aligners or AACA member practices, where we expanded access to patient financing is helping improve affordability, increase patient conversion and drive meaningful directional growth in case starts. Beyond AACA, adoption continues to expand across independent practices, multisite groups and DSOs. Practices report that HFD simplifies their front office workflows and reduces complexity and payment discussions and increases staff confidence when offering financing during consultations and special patient events. -- prequalification and flexible monthly payment options are helping practices broaden access to care, in many cases, providing affordable options to patients to increase scope and types of treatment, including Invisalign clear aligners. Feedback we've received from offices highlights that the speed of approvals, clarity of options and prompt funding are shifting conversations away from price and back toward delivering treatment options that match patient needs. While also easing administrative burdens for staff and operating teams. These benefits are proving particularly impactful in multi-practice environments where consistency, simplicity and scalability are critical. Invisalign Pay, which is available in Brazil, with further expansion planned across Latin America continues to improve affordability and treatment conversion and serves as a proof point for how patient-centric embedded financing can complement our clinical and digital workflows. In Brazil, Invisalign Pay is now used in a majority of Invisalign cases, reflecting strong doctor endorsement and patient adoption. Providers report that financing helps optimize cash flow, reduce friction for patients and supports reactivation of lower utilizing providers, reinforcing financing as a meaningful lever for sustained growth across the region. Peer-to-peer mentoring, on the clinician-to-clinician mentoring programs, Connect Doctors over a structured 12-month period to build clinical confidence in drive engagement and treatment conversion. These programs are especially effective for accelerating adoption of new technologies, increasing confidence treating kids, teens and more complex cases. Peer-to-peer programs are active across all regions, and we expect to expand them over the year. These efforts complement our broader engagement strategy, particularly with GPs and competitive orthodontic accounts that benefit from hands-on clinical support and shared best practices. Treatment planning services or TPS. TPS addresses one of the largest barriers to adoption, low clinical confidence and uncertainty around treatment planning, particularly among GP dentists. TPS provides case assessment and treatment planning support through a combination of internal TPS and external TPS partners, enabling doctors to submit cases with confidence. TPS has emerged as a direct go-to-market engine with materially higher utilization among TPS users versus nonusers and strong adoption across regions in markets such as Canada, TPS adoption among participating GPs continues to increase with TPS users consistently outperforming nonusers and contributing to low double-digit year-over-year growth in case starts. From a regional standpoint, Americas Q1 Clear Aligner volumes increased year-over-year, reflecting very strong double-digit growth in Latin America, partially offset by a modest but stable year-over-year decline in North America. Latin America delivered record first quarter shipments driven by increased submitters, higher utilization across both orthodontists and GP channels, along with strength across adult teen and growing kid categories. In EMEA, Q1 Clear Aligner volumes grew double digits year-over-year, reaching record first quarter levels, led by increases in Iberia, Italy, Nordics, U.K. and also Turkey. Growth was driven primarily by utilization gains across both GP and orthodontic channels and continued strength from adult and growing kid patients. In APAC, Q1 Clear Aligner volumes also grew double digits year-over-year with record first quarter shipments for APAC led by China, India, Korea and Japan. In addition, APAC markets had record first quarters, including China, Japan, Korea, India and Taiwan. Growth was broad-based with a teen and growing kid patients growing double digits alongside continued growth among adult patients. Overall, while the operating environment remains uneven in some markets, our Q1 results illustrate the resilience of our global business and we continue to see orthodontics and oral health and digital dentistry as durable long-term growth categories. With that, I'll turn it over to John. John Morici: Thanks, Joe. Now for our Q1 financial results. Total revenues for the first quarter were $1.041 billion, up 6.2% from the corresponding quarter a year ago. On a constant currency basis, Q1 revenues were favorably impacted by approximately $44.9 million year-over-year or approximately 4.5%, in line with our Q1 expectations. Q1 Clear Aligner revenues were $856 million, up 7.4% year-over-year, primarily due to higher volume, favorable foreign exchange price increases and lower net deferrals, partially offset by higher discounts and a mix shift to lower-priced countries and products. Favorable foreign exchange impacted Q1 Clear Aligner revenues by approximately $38.2 million or approximately 4.7% year-over-year. Q1 Clear Aligner average per case shipment price of $1,250, increased 1% or $10 per case on a year-over-year basis, primarily due to favorable foreign exchange, price increases and lower net deferrals, partially offset by higher discounts and mix shift to lower-priced countries and products mentioned previously. Clear Aligner deferred revenues on the balance sheet as of March 31, 2026, decreased $77.2 million or 6.4% year-over-year and will be recognized as revenue as additional aligners, also noted as refinements are shipped. As we continue to scale our 0 additional aligner configuration and introduce other streamlined configurations with limited or no additional aligners which do not require revenue deferral because there are no future performance obligations, we expect the overall Clear Aligner deferred revenue balance to decrease over time. This reflects earlier revenue recognition and cash conversion rather than any changes in free cash flow economics. Q1 Systems and Services revenues of $184.1 million were up 0.9% year-over-year, primarily due to favorable foreign exchange, higher scanner systems and sales and nonsystem sales, partially offset by lower scanner on sales. Foreign exchange favorably impacted Q1 Systems and Services revenues by approximately $6.7 million year-over-year or approximately 3.8%. Systems and Services deferred revenues decreased $22.4 million or 10.8% year-over-year due in part to the shorter duration of service contracts selected by customers on initial scanner system purchases. Moving on to gross margin. First quarter overall gross margin was 70.8%, up 1.4 points year-over-year primarily due to operational efficiencies and higher Clear Aligner ASP. Q1 overall gross margin was unfavorably impacted by foreign exchange of 0.4 points year-over-year. On a non-GAAP basis, which exclude stock-based compensation, amortization of intangibles related to certain acquisitions, depreciation expense on assets disposed of other than by sale, gain on assets held for sale and restructuring and other non-GAAP charges, gross margin for the first quarter was 71.8%, up 1.6 points year-over-year. Clear Aligner gross margin for the first quarter was 71.6%, up 1.1 points year-over-year primarily due to higher ASP and operational efficiencies. Q1 Clear Aligner gross margin was impacted by unfavorable foreign exchange of approximately 0.5 points year-over-year. Beyond mix and cost actions, margin expansion is increasingly driven by lower refinement rates, improved treatment predictability and higher manufacturing throughput benefits that scale with volume and data over time. Many of our lower price product configurations, such as COMP 3in3 and DSP Touch-Up include fewer or no additional aligners and require less manufacturing production which supports gross margins and improved cash conversion despite lower upfront pricing. Because of the clinical capability of the Invisalign system, we are able to offer configurations such as Zero AA products that give doctors the ability to use and scale with the Invisalign system and deliver on patient expectations and enable us to more effectively compete with traditional wires and brackets and Clear Aligner suppliers that we believe primarily compete based on price. Over a year ago, we expanded the Invisalign portfolio to include Comp Zero AA configuration primarily with U.S. DSOs that began piloting in the retail channel in Q1. It's still early, but given results from DSO partners showing Comp Zero AA drives adoption by supporting improved efficiency, utilization and overall practice economics for doctors, we see interest and momentum building around this offering and anticipate expanding it over the year. Systems and Services gross margin for the first quarter was 67.2%, up 2.5 points year-over-year, primarily due to operational efficiencies, partially offset by lower ASP. On a year-over-year basis, foreign exchange had no significant impact on Q1 Systems and Services gross margin. Q1 operating expenses were $594.6 million, up 8.3% year-over-year. Year-over-year operating expenses increased by $45.6 million, primarily due to legal settlement costs and higher employee compensation. On a non-GAAP basis, excluding stock-based compensation, restructuring and other charges, amortization of acquired intangibles related to certain acquisitions and legal settlement costs, Q1 '26 non-GAAP operating expenses were $523.1 million, up 4.5% year-over-year. Our first quarter operating income of $142 million resulted in an operating margin of 13.6%, up approximately 0.3 points year-over-year. Operating margin was unfavorably impacted from foreign exchange by approximately 0.1 points year-over-year. On a non-GAAP basis, which excludes stock-based compensation, restructuring and other non-GAAP charges, amortization of acquired intangibles related to certain acquisitions, legal settlement costs, gain on assets held for sale and depreciation of assets disposed of other than by sale, operating margin for the first quarter was 21.5%, up 2.5 points year-over-year. The Q1 '26 6 GAAP effective tax rate was 24.3% compared to 33.6% in the first quarter of 2025. The first quarter GAAP effective tax rate was lower than the first quarter effective tax rate of the prior year primarily due to change in our jurisdictional mix of income, lower tax expense related to uncertain tax provisions, lower tax expense recognized related to stock-based compensation and a decrease in U.S. taxes on foreign earnings. Our Q1 2026 non-GAAP effective tax rate was 20%, which reflects our long-term projected tax rate. First quarter net income per diluted share was $1.57, up $0.31 compared to the prior year. Our EPS was favorably impacted by $0.01 on a year-over-year basis due to foreign exchange. On a non-GAAP basis, net income per diluted share was $2.58 for the first quarter, up 21% year-over-year. Moving on to the balance sheet. As of March 31, 2026, cash and cash equivalents were 1,059.8 billion, up $186.8 million year-over-year. Of the $1,059.8 million balance, $206.6 million was held in the U.S. and $853.2 million was held by our international entities. Align maintains a disciplined capital return program. In August 2025, we announced our intention to repurchase $200 million of our common stock under our previously authorized $1 billion stock repurchase program from April 2025. Between August 2025 and January 2026, we repurchased approximately 1.4 million shares at an average price per share of $143.85, completing the $200 million repurchase plan. As of March 31, 2026, $800 million remains available for repurchase of common stock under our repurchase program. Today, we announced that we expect to repurchase up to an additional $200 million of our common stock over a 6-month period beginning on or about May 1, 2026. We believe this action reflects our conviction that Align shares remain attractively valued, supported by improving underlying business fundamentals. Q1 accounts receivable balance was $1.1251 billion, our overall days sales outstanding was 97 days, flat as compared to Q1 of 2025. Cash flow from operations for the first quarter was $151 million. Capital expenditures for the first quarter were $30.8 million, primarily related to investments in our manufacturing capacity and facilities. Free cash flow, defined as cash flow from operations minus capital expenditures amounted to $120.3 million. Our financial priorities are centered on disciplined execution and long-term value creation. Through restructuring actions and ongoing efficiency initiatives, we believe we are strengthening Align's cost structure and positioning the business for improved operating leverage as we grow returns. We remain focused on managing input cost pressures, investing for long-term returns and maintaining balance sheet flexibility to support sustainable margin expansion over time. We also continued to return capital to shareholders in Q1 through disciplined share repurchases, supported by our strong balance sheet and cash flow generation. With Q1 2026 results as a backdrop, we remain focused on executing our strategic growth initiatives and building on the recent quarterly results. At the same time, there is uncertainty and the potential for adverse impacts on patient traffic, consumer demand and shipping and freight resulting from ongoing military action in the Middle East. With respect to the Middle East, we continue to monitor developments closely while our doctor customers in EMEA have noted some impact on patient traffic and conversion. The overall effect on our EMEA results was immaterial in the first quarter. Given the ongoing uncertainty, we have taken a prudent approach in our second quarter outlook by assuming some impact on both Clear Aligner and scanner demand. Beyond the second quarter, it becomes increasingly difficult to predict how the conflict in the Middle East will affect our business, particularly in the event of further escalation, sustained constraints on oil and gas supplies or broader softening in consumer and patient sentiment. As we look to Q2 and the remainder of 2026, assuming no circumstances occur beyond our control, such as additional ramifications as a result of the aforementioned military action in the Middle East, beyond what we have already assumed, adverse foreign exchange fluctuation, changes to currently applicable duties, including tariffs or other fees that could impact our business, our outlook is as follows. We expect Q2 2026 worldwide revenues to be in the range of $1.040 billion to $1.06 billion, up approximately 3% to 5% year-over-year. We expect Q2 2026 Clear Aligner volume to be up sequentially and year-over-year, and Clear Aligner average selling price to be flat sequentially and year-over-year. We expect Systems and Services revenues to be up sequentially. We expect our 2026 GAAP operating margin to be approximately 16.4% and non-GAAP operating margin to be approximately 21.5%. For fiscal 2026, we remain confident in our outlook that we provided previously and reaffirm our full year fiscal 2026 guidance as follows. We expect 2026 worldwide revenue growth to be up 3% to 4% year-over-year. Our full year 2026 revenue guidance continues to assume a benefit from foreign exchange that is consistent with the assumptions underlying our initial full year outlook. We expect the impact of foreign exchange to moderate in remaining quarters, trending toward the full year assumption of approximately 100 basis points. We expect 2026 Clear Aligner volume growth to be up mid-single digits year-over-year. We expect 2026 GAAP operating margin to be slightly below 18% and an approximately 400 basis point improvement over 2025, and non-GAAP operating margin to be approximately 23.7%, a 100 basis point improvement year-over-year, consistent with our previous guidance. We expect our investments in capital expenditures for fiscal 2026 to be $125 million to $150 million. Capital expenditures primarily relate to technology upgrades, additional manufacturing capacity as well as maintenance. As we consider our full year 2026 guidance, we want to be clear about our approach. While we are encouraged by our first quarter performance and the outlook for the second quarter, we are maintaining a prudent stance with respect to the full year. The macroeconomic environment remains uncertain, and we believe it's appropriate to maintain the guidance framework established at the beginning of the year. We remain focused on disciplined execution in a dynamic environment, and we will provide updates as visibility improves over the course of the year. As mentioned, we expect to repurchase an additional $200 million of our common stock over a 6-month period commencing on or about May 1. With that, now I'll turn it back to Joe for final comments. Joe? Joseph Hogan: Thanks, John. Stepping back, we're pleased with our Q1 performance and consistency of execution we're seeing across the business. Growth this quarter was broad-based across regions, patient segments and channels, supported by record submitters for our first quarter and a higher utilization within our existing customer base. We also continue to see strong momentum from our doctor subscription program with Invisalign Touch up and retention products growing double digits year-over-year. We continue to observe the dental needs we address such as orthodontics, restorative, diagnostics, oral health and digital dentistry and durable consumer demand, which we expect will continue to drive our long-term growth expectations. Importantly, teens and growing kids remain a central driver of Invisalign demand and long-term opportunity. In Q1, we saw continued strength in teens, kids across key international markets, supported by adoption of Invisalign First, palate expansion and mandibular advancement. These products are helping doctors treat a broader range of growing patients with Invisalign aligners and allowing us to compete more effectively against traditional wires and braces at earlier stages of treatment. We have moved forward in 2026, our focus is on maintaining discipline as we invest strategically in innovation and growth opportunities. That includes advancing digital dentistry through the Align digital platform, scaling our iTero Lumina ecosystem, expanding internationally with localized strategies and continuing to build differentiated portfolio for teens and growing kids. While macroeconomic conditions remain dynamic, we continue to benefit from long-term investments in AI-enabled treatment planning and integrated digital workflows that improve predictability, efficiency and scalability across the business. These capabilities are designed to increase planning consistency and throughput and support more predictable outcomes for doctors helping us operate more efficiently across volume environments. A key part of strategy is expanding the role Align plays in oral health and restorative dentistry. Increasingly, doctors are using our platform not just to align teeth, but to identify oral health issues earlier and integrate orthodontics into comprehensive treatment plans by connecting iTero, exocad and Invisalign through digital workflows. We're helping doctors deliver better long-term oral health care outcomes for patients, especially as they transition from orthodontic to restorative care. Our vision is to make tooth alignment using Clear Aligner therapy the standard of care. By revolutionizing traditional treatment modalities, appliances, tools, practice workflows and businesses and go-to-market models across the dental industry. By focusing on oral health and the benefits of tooth alignment as part of orthodontic restorative treatment, we're developing products and technologies that are helping doctors deliver the best treatment experiences and clinical outcomes for their patients. To date, nearly 23 million patients worldwide have been treated with the Invisalign system, including approximately 7 million teens in kids. Every case adds to our proprietary clinical data set generated within our integrated digital platform. This data set continues to fuel our innovation and ability to scale across orthodontics, oral health and change lives for our doctors, customers and their patients. Innovation remains central to our strategy, but always with a clear purpose, helping doctors deliver better outcomes, improving efficiency and enhancing the patient experience. Looking forward, that includes continued progress in direct fabrication, which we are advancing deliberately and in phases with quality and reliability as our guiding principles. While still early, direct printing unlocks new design flexibility, strengthens our long-term cost structure and allows us to operate more cost effectively. We began initial limited market releases of direct 3D printed attachments and retain our products. In Q1 and look forward to updating you further as direct printing programs progress. Our objective is as straightforward to keep earning trust through clinical leadership, thoughtful innovation and consistent execution quarter after quarter. With that, I thank you for your time today. And now I'll turn it over to the operator. Operator? Operator: [Operator Instructions] Our first question comes from Daniel Grosslight with Citi. Daniel Grosslight: Congrats on another strong quarter here. I wanted to focus on the cadence of profitability for the remainder of the year. Obviously, a very strong beat this quarter. 2Q looks about flattish sequentially, which implies a fairly significant step-up in the second half. Can you just comment on the underlying assumptions for the cadence of profitability this year, particularly I know there's a lot of uncertainty around the Middle East, but how much impact around the conflict are you assuming in 2Q? And kind of what are the assumptions around the second half? John Morici: Yes. Dan, this is John. So we're pleased with our profitability and what we saw in the first quarter. It's really a reflection of what we've been able to do is a lot of the restructuring and other changes that we made last year both from a COGS standpoint and OpEx standpoint, really starting to take hold in the first quarter. So we're pleased with that. We expect that profitability and the productivity to continue as we go through the year. And that's typically the cadence that we have as we go quarter-over-quarter, we see that profitability and especially as volume increases as well, we see that profitability come through as well. So good start to the year, and we look forward to the rest of the year playing out as expected. Operator: Our next question comes from Daniel Grosslight with Barclays. Glen Santangelo: Just two quick ones for me. Joe, I want to touch on this Middle East situation. I know you guys don't break it out specifically, but we sort of place it in the mid- to high single-digit range with respect to revenues. Can you confirm, is that in the right ZIP code? And I'm just kind of curious if there's been any impact on the iTero manufacturing facility there. And if you have any insight on how that business trended in April because I think that would be helpful for us sort of assessing the balance of the year. And then I just have a follow-up on share repurchase. It's kind of interesting to me as you completed the $200 million in January, and you said you're going to start on the next $200 million over the next 6 months. But I'm kind of curious, given the transient nature of the conflict, like why wouldn't it make more sense to kind of lean in here more heavily through that $800 million in 1Q, for example, given you have over $1 billion in cash on the balance sheet. And so any thoughts on the timing of your share repurchases would be helpful. John Morici: Yes, Glen, I can start with answering some of these questions. This is John. On Middle East, you're right. It's in the Middle East part of our numbers to the company is in the single digits. And so there's some impact that we saw, but it was pretty minimal in March, and our reflection is in the second quarter and kind of beyond based on that. And in terms of iTero, Joe, you want to... Joseph Hogan: On the iTero side, Glen, honestly, we haven't -- we didn't have any disruption from a production or shipment standpoint. That team is very rigorous over there. We understand when the move equipment well and whatever. And so I'm not saying that's always perfect, but the team has responded well, and we didn't have any really impact on the business in the first quarter. John Morici: And then on the share repurchase, you're right. We saw the $200 million that we just completed and now an additional $200 million. Remember, it comes down to U.S. cash, and about 20% of our cash is in the U.S. versus out of the U.S. So we have that constraint as well. But it's part of our overall plan that we have. We want to grow the business as fast as we can use our cash to be able to help do that. We have a good business model that generates a lot of cash. You saw that reflection in the first quarter. And then we do the buybacks to be able to put cash back to our shareholders. So that's been the plan that we have. And it's a disciplined approach that we've taken, and we've seen that investments made back in the business that way. Operator: Our next question comes from Brandon Vazquez with William Blair. Brandon Vazquez: Congrats on a quarter here, good quarter here in uncertain macro. I want to follow up on the Middle East question, but actually, not like the specific exposure to the Middle East, but you guys have kind of called out some prudence around the guidance just for the uncertainty around the Middle East situation. I assume you guys are talking about potential like impacts to consumers, things like that. Maybe just talk us through what are the potential risks, what is the prudence that's being baked into the guidance just so we understand if we do have a prolonged situation in Middle East, what's the wiggle room within guidance and where you guys would expect across the P&L, there could be an impact, right, because it could be in revenue? And then maybe the other one I'll ask on margins related to this is like are you guys exposed to resin costs that we keep seeing headlines about rising from the Middle East? John Morici: Yes, Brandon, this is John. So there's a minimal direct impact. Like I said, the Middle East part of our business is actually relatively small in the single digits as a result -- as a comparison to the rest of the business. It's really just the higher fuel prices that you see that every country is seeing now as a result of this and what it means for their inflation and what they have to be able to purchase other products, including ours. We've done a lot to be able to help drive that conversion. So much of what we talked about was helping potential patients with financing and helping doctors to be able to provide financing and so on, and we'll continue those efforts. But it's really more around something that's prolonged with higher inflation and higher share of wallet that goes to other places that puts us from a forecast standpoint, just trying to be as prudent as possible. Operator: Our next question comes from Jon Block with Stifel. Jonathan Block: Two for me. Maybe I'll break them off. But just on the first one, Joe, Shirley Stacy: John, can you speak up. Okay, that's better. Jonathan Block: All right, sorry about that. Two questions. I'll try to break them up. So I was saying, Joe, trends are always really important, but certainly top of mind with investors with, call it, the current state of the globe and what's going on. So I'm wondering if you can give us any color just how things trended or call it closed in the first quarter, call it, more the month of March? And then any early 2Q trends to call out for the first month that you experienced in the month of April? Joseph Hogan: John, look, I mean, overall, when I look at the quarter and I look at it globally and all, it was pretty consistent across the board when we look month-to-month. Obviously, iTero is kind of back-end loaded, obviously, in the way capital equipment purchases go. But when we look at Invisalign, we felt good about Invisalign, all country and country and the consistency of what we saw. So -- and no, I would say overall pockets of weakness that was different than what we experienced in the fourth quarter. So overall, we felt good about that. And we felt good is how we entered the second quarter, too. So John, anything to add? John Morici: No. I mean there's going to be puts and takes as you go through any quarter. But on balance, we kind of take a balanced view of that from a guidance standpoint and reflect that. Jonathan Block: Okay. And John, maybe the second one, and hopefully, you can hear me okay. Just a follow-up. So you mentioned Zero refinement or no AA, and it seems like that rollout is going to broad. And you talked about seeing some good proof points with some of the accounts that had like notably the DSOs. So what's the assumption in 2026 guidance? Have you built out any, call it, like incremental contribution from Zero refinement as that rolls out more broadly for the balance of the year and the tack on to that, but certainly related is in the wording on the 2Q guidance, you mentioned prudence due to what's going on in the Middle East, for 2Q. To be clear, have you seen it yet as and in the month of April? Or are you building that in in case it's on the come. John Morici: Yes. So when we see the Zero refinement, it's really not in a big way in our forecast for the year. So we're very pleased with what's happening and how this rollout happens. Again, doctors have to get comfortable with these products. They want to see results for themselves. They want to get that clinical confidence so that they can increase adoption. So it's a rollout, but what we do see is doctors started to utilize it more and more. So we're pleased with that, but we're not expecting much just because of the time nature of the rollout for this year. And then when we look at the overall that we see, we're pleased with that. And I think from a guidance standpoint, we've been able to see the puts and takes of the first quarter and you factor that into April, and that's what's gone into our guidance. So I would say it's a balanced view of all those puts and takes. I wouldn't say it's overly cautious. It's just a reflective of what we expect and from a guidance standpoint for Q2 and then the reflection of maintaining our overall for the year. . Operator: Our next question comes from Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: Maybe a two-parter from me. One, can you go into a little bit more detail about your sort of like change in ASP view. It just seems a little bit more positive than what you're saying. So just to like parse through that in a little bit more detail in terms of like mix or FX and that kind of thing. And then two, as you think about the margin opportunities in 2026, would you see any changes in those buckets versus sort of what you were thinking about later last year? Are there any incremental opportunities? Any more details on that would also be helpful. John Morici: So Elizabeth, on the ASP, you're right. There are moving pieces certainly that we called out foreign exchange and we talk a lot about country mix and product mix. And certainly, those play through our ASPs. But on an overall basis, when we look year-over-year, it's a $10 increase, which was good. It was as expected. And even on a quarter-over-quarter basis, $10. And that's kind of how when we look forward, you're still going to have that country mix and product mix, but A lot of times things are offsetting, and we see that as a result. So ASPs stable. It is when we see some of those lower-stage products that we talked about with the NOAA or some of the moderate products, they come at a higher gross margin. And we see that coming through. And first quarter is a good example of that. As you increase your NOAA products, as you increase your moderate with NOAA, the cost of service is just less. And we end up with being able to see improvements in gross margin. So as we go through the year, we should expect to see that in terms of our product mix. Improvements in gross margin. We should continue to see productivity. We made a lot of cost actions at the end of last year. We're seeing good effects of those cost changes, whether it's getting closer to our customers, in some cases, it's just equipment that's more efficient, drives productivity. And certainly, as we have more volume, we get that leverage as we go through. So that's how we expect things to play out this year and so far in the first quarter, it was a good start. Operator: Our next question comes from Jeff Johnson with Baird. Jeffrey Johnson: So Joe, I wanted to start maybe two questions, but let me start just on kind of your North American case growth. I think you mentioned it was down a little bit year-over-year. every other market, I think up double digits, although correct me if I'm wrong on the every other market comment, part of that. But what do you think the difference is in the U.S. or North America versus rest of world? Is it just all consumer? Is it competition? What is driving such a stark contract? I know that's not really different over the last several quarters or handful of quarters. But just what's your updated thought on how we get that kind of North American number back to something that can be contributing at least to the double-digit elsewhere. Joseph Hogan: Yes. That's a good question, Jeff. First of all, I'd say the competition aspect hasn't changed. And just to take off on John's question a second ago, that NOAA allows us to play offense out there, and we're playing more offense in that sense, and we feel good about it overall. I'd say broadly, I was actually anticipating this question, Jeff, is that it's broadly a macro of the way I look at it versus here in the rest of the world. And it's almost like you put the macro in Asia being the best. Secondly, in Europe, spotty. Europe is a lot of different countries. But you can see that the countries we highlighted like Iberia, U.K. and different parts of EMEA is growing pretty well. And then when you look at the Americas, which includes Latin America, did extremely well. We've seen some improvement in Canada right now and some improvement in the U.S. So overall, I feel good overall, but that variable you're looking for, Jeff, has been U.S. macro as far as I can tell. Jeffrey Johnson: All right. Fair enough. And then maybe just a two-parter around NOAA. One, I think last quarter, you had talked about going into 2Q being pretty complete with the rollout of Zero AA across most markets. It sounds like maybe that has a little extended launch timeline now. Just wondering if anything has changed there. And then on some of the LMR, the limited market release you did of NOAA last year, any early evidence of whether these docs who are using NOAA are still doing 1 or 2 refinements in an a la carte way? Are they using DSP to pay for it? Just how to think about kind of years months through year 2 of those NOAA cases, do additional revenues come in over time or not on those -- on that product? Joseph Hogan: John, why do you see... John Morici: So on the NOAA, when we look at -- it's been available to many doctors. It's just a question of, do doctors want to utilize it and start to utilize it right away. So there's a roll up based on the doctor's preference in terms of how much they want to utilize and that ramps up. And in success, when doctors start to see the benefits of it, their clinical confidence that they can treat patients even on complicated cases with no refinements or maybe one refinement, then they continue to do more and more. And that's what we've seen in our data as we've gone. And now as it's been out for over a year in many markets, now you see doctors saying, okay, they need to purchase a refinement or they might be -- they might have something that they need to to add to the case to make sure it can finish properly and you start to see some of the refinements come later. So that was our expectation when we started this, that there would be an adoption, and those doctors then start to use it. They want to see what refinements they need, and now we're starting to see some refinement, but it really helps doctors be able to keep that initial case cost lower for them so that they can fit that into their practice and see those patients as they would want. So good adoption that we've seen across the globe, you're starting to see refinements come in, but it's pretty much as expected. We just want to keep rolling this out and getting doctors more and more options. Joseph Hogan: Jeff, I think just to add something what John said, I think one is, over the years, the doctors have gotten more and more confidence in our product lines. I talked about TPS in my script and different things that we do to train doctors. And I think it gives us much more confidence to go out there with NOAAs. Secondly, is it aligns doctors' economics, along with our economics, too. And so it helps to bring the two of us together in a much better way. Operator: Our next question comes from Michael Cherny with Leerink Partners. Michael Cherny: I know we've been talking a lot about macro. Obviously, not something you can control, but you can control some of the reaction to macro. So as we sit here, wondering what's going to happen with the Middle East. I appreciate all the color in terms of what's baked into the guidance on the top line as well as the COGS side. How are you thinking about the OpEx spend in the push and pull to make sure that the appropriate level of demand is being stimulated, and especially in a world where you do have a broader product portfolio. Is there any color you can give us in terms of the scenario analysis that could lead to ongoing margin upside? John Morici: So Michael, this is John. So we're constantly looking at understanding the macro and then our investments into that macro. And it's not one size fits all. some countries, there's maybe not as much awareness and we're at different points in the overall journey of Invisalign there. You make different investments compared to maybe the bigger markets like you see within the U.S. But we're very attuned to making changes and being able to reflect what's working and what might not be working, what macro is happening in certain markets versus not, and we'll make adjustments to that. Ultimately, wanted to get the best return on investment. And when we take that approach, we can manage that in the short term to be able to hit our -- the expectations we have. Then of course, we want to be able to drive the category and grow, and that's something that we make maybe on a more longer-term basis. But we're really looking at what's happening kind of market by market and even within the market. Whether you advertise at the high level or more at the customer level, and we're making those trade-offs and doing this active conversion that we've talked about to really help doctors. Operator: Our next question comes from Jason Bednar with Piper Sandler. Jason Bednar: Nice start to the year here. One to follow up, I think, on Jeff's question earlier on focusing on here in the U.S. Good to see a lot of the record quarters in the international side. The U.S. market seems like maybe it's had some green shoots at least in some of the data that we look at, maybe more focused on the orthodontic channel. Is that consistent with what you're seeing to. I'm just -- sorry if I missed it but you seeing any differences in your business when you look across that teen-focused U.S. ortho channel relative to more of the retail adult-oriented U.S. GP segment? Joseph Hogan: Just deciphering your question, Jason, I'd say when you look at like a DSO approach versus a retail approach, we obviously get a broader signal on a DSO because we're looking at a lot more patients and doctors. And the DSO traditionally they have really good skills to go out and recruit, finance in different areas. On the retail doctor side, when I talked about HFD and those different things, those are types of systems that we're bringing together to address things that we feel hurt our retail doctors at times and an ability to be able to finance or to make quick decisions and financing with patients in different areas, how we go about that as a business overall. So I'd say the macro is there, but I feel good about what we've been offering from a product standpoint, we do from a financing standpoint and delivering it from a -- we changed our organization to move to the call on both orthodontists and GPs going forward. That's given us more coverage out there to be able to deliver this kind of message and support to our doctors, too. Jason Bednar: All right. Got it. And just as a follow-up, shifting over to different side of the globe. China to us is a bit of a surprise, a good surprise, double-digit growth, record first quarter you referenced. Are you comfortable saying demand is returning to normal across China? And can you remind us what's embedded in your full year guide for China volumes and revenue this year? Joseph Hogan: I think anybody in the business has to be careful of using the word normal in China, okay? It's just -- I think you take that business almost on a year-to-year, sometimes quarter-to-quarter basis. We have a great team there, Jason. They execute well. Jude Ho that ran that business has been moved and he runs all of Asia right now. We have a great team there that helps to drive that. It's a very dynamic marketplace. We're well positioned with our manufacturing, well positioned with what we offer over there. But I would never say it's always business as usual in China. It's the most competitive market in the world. Operator: Our next question comes from Steven Valiquette with Mizuho Securities. Steven Valiquette: This question has been, I guess, sort of half asked so far, but just wanted to get a little more color around this 2Q guidance. It seems probably stronger than what probably most people were expecting, which is certainly positive. But as far as just kind of the geographic mix across that, should we assume generally the same trends stronger in international than maybe America is a little more -- I guess you're characterizing as stable in particular. And also, I think for just North America, in particular, last year, you talked about this ratio of patients getting scans versus patients starting treatment kind of being off a little bit. Have you been able to at least kind of close the gap on that across a lot of geographies, especially on the back of some of the patient financing programs you have in place. John Morici: Yes, Steve, when we think about Q2, I think the growth that we've seen is pretty consistent or our expectation is pretty consistent to what we've seen. We would expect international to grow faster for many of the reasons that we spoke about. We've seen that for a number of quarters now compared to North America. So that would be our expectation for Q2. And I would say just on the conversion piece of it, that dislocation we saw in the second quarter of last year. And some of that, as it played out went through the quarter, we saw that dislocation, it really has more or less returned to normal really since that second quarter. So we haven't seen some of that dislocation as we've gone through, which is good. We want to be able to drive our volume, get with more more -- sell to more and more doctors and increase the utilization, and we want that conversion to be as active as possible. We're trying to make that happen, and therefore, more as predictable as possible. And we've been able to see that and the expectation as it continues. Operator: Our next question comes from Erin Wright with Morgan Stanley. Erin Wilson Wright: Another question on sort of the North America or U.S. market, but what are you seeing in terms of the Gaidg data like when it comes to the broader growth trends and then what you're seeing in terms of growth across brackets and wires versus clear aligners in the market, just more broadly? And then a follow-up on Zero AA or NOAA. I guess when could this move the needle for you? It sounds like you're not expecting much this year or maybe you're just leaving up for upside in the guide, but I guess, can you remind us the economics for you? And can you quantify also that relative margin profile for the offering? John Morici: Maybe I can start with the AA or the product Zero AA product. It continues to ramp, as we said. We started more on the DSO side. Now it's getting more and more retail doctors, and we'll play that up. Look, as that adoption happens and it drives incremental cases, that would be upside compared to what we've expected for the year because, again, it's a slow gradual adoption. And if doctors adopt faster and that's what they want to use then great. And then in terms of the revenue recognition, we don't have to defer revenue on that. So it's basically revenue neutral kind of in that current period. Of course, there's additional refinements that come later that we'll get that revenue as that comes later. But when we think of those lower or NOAA product, the gross margin is excellent for us. It's accretive for us as a business. We're starting to see that in more and more of our results. If you look back the last couple of quarters, including this first quarter, you start to see some of the benefits in there, and it's very efficient for us because it's one set of treatment planning, one manufacturing, one shipment and you're kind of done with it unless there's a refinement that's needed. So -- and then the most important part of it is it fits with how a doctor might want to practice where they don't want to pay as much upfront. They kind of -- they want to look at it maybe paying as you go and and an NOAA product gets to that. Joseph Hogan: And back to your question, it's Joe, on the U.S. marketplace, particularly wires and brackets and ratios with clear aligners. I tell you, you got to be careful with the data that you gather out there today and where it's coming from. We find there's a pretty big delta in that data overall. What I'd say is I feel good about our team play overall because -- advancement with the plus blocks, Invisalign First that I referenced in my script and also IPE, we're doing better and better on that preteen area because what we're offering is so much better than what the traditional kind of appliances were to be able to do that, and we see good progress in that area. But overall, I don't -- I wouldn't say a whole lot of change over the quarters in the U.S. orthodontic market wires and brackets versus aligners, except for what we're seeing in the preteen side has been pretty substantial. Shirley Stacy: Our next question comes from Kevin Caliendo with UBS. Kevin Caliendo: I have two, if I can. First one is with all the questions around resin and oil, can you just remind us what percentage of your COGS are resin? And what would be the impact on direct fab in terms of reducing those costs, like the potential opportunity there? Just trying to think about this as an overhang. And then the second question is more, I just want to make sure I understand the commentary broadly about your guidance. In essence, what you're doing is you're taking the trends that you've seen in 1Q and into April. You're sort of running those through for the full year, but then adding on some kind of undisclosed amount of prudence with regards to the macro and the war and everything else. Is that a fair way to describe it? John Morici: That's a fair way to describe it, Kevin, in terms of the guidance. It's like you got puts and takes as you go through the quarter. We net those together, put that into Q2 and total year. So that's an accurate way to view that. And then in terms of oil prices, there's really two effects that can affect our business from that standpoint on a direct basis. One is the actual material costs, say about 25% of our COGS is kind of the resin plastics. There's a lot of contracts that we have where we have fixed amounts that there's not a lot of room for negotiation in terms of inflationary effects that we take. So we feel we're pretty protected on that. The other piece might be on freight and logistics. And again, we're pretty controlled on that as well. So not to say that there's not some impact that we've seen from higher costs related to some inputs, but it's been manageable and we managed it in the first quarter and expect to be able to manage it going forward. . Joseph Hogan: Kevin, Joe, on the direct fab side, I mean you called out, I mean, there's an obvious aspect when you direct print, you don't have a 95% kind of scrap base that you used on our current vacuum forming piece. So that's always there. And our feed stream is more of a natural feed stream. There's not really a feed stream from a petrochemical standpoint, so it helps isolate you overall. But remember, I mean -- that play is a great thing about that on direct fab is it will help us significantly in a sense of efficiency in that way, but how you can make an aligner and the flexibility to make it in variable wall thickness and being able to be able to design aligners to each individual cases to an extreme. We could never do before, still a primary driver, but you do have these ancillary areas that really help in the sense of how the resin is obtained and how it's used. Operator: Our final question comes from Michael Ryskin with Bank of America. Michael Ryskin: I'll try to be quick. One is just following up on, I think, Elizabeth's question on ASPs. In the past, I think you talked about a 1% to 2% decline in ASPs for the year. Your 1,250 in 1Q, I think you pointed to around 1,250 in 2Q implies still a little bit of a step down in 3Q, 4Q. Is that still in the guide? I think it is, but I just want to confirm you didn't call out the full year ASP dynamic. John Morici: Yes, Michael, 1% to 2% decrease on a year-over-year basis is is our expectation. You're going to have that mix that we talk about, whether it's product or country mix that plays out each quarter and throughout the year. Michael Ryskin: Okay. And then a quick follow-up, if I may. Another question earlier asked sort of about U.S. versus OUS and some of the U.S. not quite at the same level as the other as you talk about the macro. I'm going to ask it in a different way. The DSO versus retail channel, is that some of the same dynamics? I know retail has obviously been weaker DSO has been a strong point for a while. So it's nothing new. But just is that sort of the same answer of macro and just harder to push that through? Or is there anything new that it back in that channel? John Morici: Yes, no change to what we've seen, Michael. We're very pleased with the DSO growth, and it continues to be, in many places, double-digit growth. And that's a reflection of of really those groups taking a lot of the tools that we offer and bring together, whether it's the scale, the technology and the brand, and they do a great job of bringing all together and really being much more active to try to drive that conversion with their potential patients. So that plays out, and that's the force multiplier that we talk about. You just don't see that as much, at least on a consistent basis on the retail side. we're working to try to get those retail doctors to operate more like some of the DSOs. But broadly, it plays out as we've seen. And it's up to us to try to get after those retail doctors with our sales force, with the technology, with the marketing and so on to try to get them more active. Operator: And we have reached the end of our question-and-answer session. I will now turn the call back over to Shirley Stacy for closing remarks. Shirley Stacy: Great. Thank you, everyone, for joining us today. We look forward to meeting you at upcoming conferences and industry meetings, including the AAO meeting in Orlando this Friday. If you have any follow-up questions, please contact Investor Relations. Have a great day. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.