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Operator: Greetings, and welcome to Public Storage First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If you would like to enter the queue, please follow the prompts from your phone system. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brandon Reagan. Thank you. You may begin. Brandon Reagan: Thank you, Operator. Hello, everyone, and thank you for joining us for our first quarter 2026 earnings call. I am here with the Public Storage leadership team, H. Thomas Boyle and Joe Fisher. Before we begin, we want to remind you that certain matters discussed during this call may be forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. All forward-looking statements speak only as of today, April 28, 2026. We assume no obligation to update, revise, or supplement statements that become untrue because of subsequent events. A reconciliation to GAAP of the non-GAAP financial measures we provide on this call is included in our earnings release. You can find our press release, supplemental report, SEC reports, and an audio replay of this conference call at our Investor Relations website, investors.publicstorage.com. We ask that you initially limit yourself to two questions. However, if you have additional questions, please feel free to jump back in the queue. With that, I will turn the call over to H. Thomas Boyle. H. Thomas Boyle: Good morning, everyone, and thank you for joining us. I will frame my comments around four points. First, the PS 4.0 era is now underway, with the new team in place and our Own It culture gaining momentum. Second, the announced acquisition of National Storage Affiliates (NSA) is an important early milestone in that strategy. Third, our operating platform, PSNext, is strengthening the customer experience while also improving how we run the business, with first quarter results in line to a touch better than expectations. And fourth, even ahead of the forthcoming recovery in storage fundamentals, we are continuing to invest behind a broader value creation engine that we believe can drive stronger per share growth over time. Let me start with PS 4.0. What PS 4.0 is really about is building the next phase of Public Storage around a simple idea: we have a unique opportunity to create value by combining the scale of our platform, the strength of our brand, the quality of our portfolio, our unique Own It culture, and increasingly the advantage of our data and analytics capabilities. We hosted our 160-person leadership team a few weeks ago to kick off the new era, with an enthusiastic response internally. Our teams have embraced the strategic vision, and there is real energy across the organization around what comes next. That matters because strategy only creates value if the organization is aligned behind it. Right now, that alignment is getting tighter. The energy is being translated into urgency for execution. That takes me to point number two: NSA. The announced acquisition of National Storage Affiliates is a major step forward for us and a very clear example of PS 4.0 in action. When we discussed the transaction in March, we highlighted three things. One, the portfolio combination is compelling. The two portfolios deepen our brand, scale, and operating presence across the national opportunity set. Two, there is meaningful upside from bringing that portfolio onto our platform. On the M&A call, we discussed the customer experience opportunity with managing the properties under the Public Storage brand and PSNext operating model. This will also lead to revenue potential and margin upside. And three, we structured the transaction with a win-win joint venture that optimizes portfolio structure for Public Storage and preserves financial strength. Public Storage will wholly own 46% of the over 1 thousand assets in the portfolio, with the remaining in joint ventures. Importantly, the transaction maintains our industry-leading balance sheet. When I step back and look at the NSA acquisition, I do not see a bigger company; I see a stronger platform, a deeper portfolio, and a broader opportunity set for value creation. This will drive differentiated per share earnings growth in coming years. Integration planning is progressing well. The teams are engaged, the workstreams are moving, and we are preparing the business to execute well upon closing. I also want to thank both the NSA and Public Storage teams. Transactions like this require an enormous amount of focus, coordination, and professionalism. We appreciate the strong collaboration we are already seeing across both organizations. There is obviously much more to come as we work toward completion, but I am encouraged by the work that is underway. That leads to point number three: the operating platform. A big part of why we are excited about NSA is that PSNext is built for this. PSNext is an operating platform that is increasingly shaping how we serve customers, price inventory, manage demand, and drive efficiency across the business. Customers are increasingly interacting through digital channels—whether through our website, app, agents, and over time, more through large language model–driven interfaces. We are building our operating model around those shifting customer expectations. That customer focus is central to PS 4.0. The team is aligning in this direction. Let us connect that strategy to what we are seeing in the business today. The operating environment remains uneven. We are seeing lower customer move-in activity overall in the first quarter, with some weather impacts and modest demand. At the same time, we have driven better rental rates than expected, and importantly, our existing customer base remains very healthy. Move-out activity was meaningfully lower in the quarter, leading to better occupancy than last year. This is not a one-speed environment; it is a market where execution matters. That is where the operating model transformation becomes so important. We are improving customer experience in a way that supports performance both on the revenue side and the expense side. We are seeing that playbook continue to develop, and that gives us confidence not just in integrating NSA, but improving the performance of the broader portfolio over time. Now point number four: the value creation engine. We are not waiting for the environment to get easier. We are acting now. We have confidence in the long-term fundamentals of storage and have the opportunity to invest today to benefit the platform over time. That mindset is important because while the near-term environment remains uneven, the longer-term setup is compelling. Several longer-term drivers support that optimism. Self-storage adoption has increased over the last decade. Participation has broadened across customer cohorts, with strong participation from younger generations. Our units present an affordable space solution in a high cost-of-living environment. Competitive supply is slowing as new development becomes harder and more expensive. We like that backdrop, and we are positioning the company now to outperform as the environment improves. NSA is the first major milestone of our value creation engine, but it is not the only one. We continue to execute upon value creation through multiple levers—acquisitions, development, expansion efforts, and our lending platform. Our capital will be allocated across those levers in order to: one, improve our portfolio; two, accelerate per share earnings and cash flow; and three, compound our returns. Our external growth and capital allocation capabilities continue to build. In March, we announced the strategic data science partnership with Welltower. That partnership brings together Welltower’s capital allocation–oriented data science platform and Public Storage’s operational pricing and customer analytics capabilities to better our micro market targeting and portfolio construction over time. Our value creation engine is driven by a combination of our PSNext operating platform advantages, enhanced data science approach, and team investments. To summarize the quarter: one, we launched PS 4.0 and aligned the organization toward a new strategic vision; two, we announced the NSA acquisition, which—with a unique structure—strengthens our scale, our platform, our portfolio, and our value creation opportunity; three, we continued advancing PSNext in our operating model transformation with a strong focus on customer experience; and four, we expanded the reach of our value creation engine through both external growth and the Welltower data science partnership. We are realistic about the operating environment—it remains uneven. But we are also optimistic about the demand and supply setup over the next several years, about the capabilities we are building, and about our ability to translate those investments into stronger per share earnings growth over time. With that, let me turn it over to Joe. Joe Fisher: Thank you, Tom, and good morning, everyone. The topics I will cover today include our first quarter results, a summary of recent transactions, and a balance sheet and capital markets update. Core FFO in the quarter was $4.22 per share, up $0.10 per share, or 2.4% year-over-year. These results were driven by better-than-expected same store NOI and significant growth from our non-same store portfolio and ancillary income initiatives. Same store revenue and NOI growth in the quarter were flat and positive 0.4%, respectively. Move-in rents, while still negative, came in better than expected at minus 2.4% versus full-year expectations of down mid-single digits, which had been expected to start the year lower and improve throughout the year. Occupancy was positive year-over-year by 0.4% versus guidance assumed at flat for the year. Lastly, our existing customers continue to perform well, as demonstrated by a material reduction in churn. We continue to see a market that is mixed by geography. In a number of Sunbelt markets, new supply continues to weigh on performance and pressure revenues, but at the same time, we are seeing strong growth in many of our coastal and Midwest markets. Lastly, Los Angeles continues to be hindered by the state of emergency, with the most recent extension through May. As a reminder, we have assumed the state of emergency remains in place all year at a negative 80 basis point impact to same store performance. But given the quality of our portfolio, low supply, high occupancy, and strong performance in other Southern California markets, LA will be a strong tailwind for performance in the future. Expense growth performed very well at minus 1.1% for the quarter. In property tax, we did see earlier-than-expected appeal wins of approximately $3 million in the quarter, which we had previously expected in the second quarter. Away from property tax, PSNext helped drive negative growth in payroll, R&M, utilities, and marketing. Outside of the same store pool, NOI growth of 27% in our non-same store pool and ancillary growth of 12% lifted results. Non-same store performance and our external value creation engine continue to be a substantial and repeatable driver of shareholder value. If we utilized a same store definition similar to that of peers, NOI would have been 50 basis points better in the quarter. While we are pleased with our results, having started the year ahead of our expectations, we have not adjusted our guidance at this time, with busy season still ahead of us. As we spoke about in our initial guidance, the leading indicators of our business remain positive, but year-over-year revenue growth as a lagging indicator will soften midyear. Onto transactions. Year-to-date, we acquired or are under contract for $186 million. The first quarter is typically a slow quarter for external growth. However, we continue to see opportunities that are a great fit for our PSNext operating platform and expect to have more activity to discuss in the second quarter. On the development and expansion front, we had openings of $45 million during the quarter. The development pipeline stands at $618 million with stabilized yields targeting 8% and remaining amounts unfunded of $416 million. For our lending business, we had $143 million outstanding at a current rate of approximately 7.9%. Lastly, our fortress balance sheet remains in excellent position from both a metric and liquidity perspective. At quarter-end, we had available liquidity of $1.3 billion between our line of credit and cash on hand, plus approximately $600 million of annual free cash flow. Subsequent to quarter-end, we issued $500 million of well-priced 10-year unsecured notes at 5%, with proceeds utilized to pay down our revolving credit facility and improve liquidity. Our balance sheet remains one of the strongest in the REIT sector, with debt to EBITDA of just 2.9 times, debt plus preferred equity to EBITDA of 4.2 times, and debt plus preferred equity to enterprise value in the low-20% level. In summary, we are encouraged by our start to the year and by the opportunities we see ahead. We delivered solid results, maintained a fortress balance sheet, and continued to execute against our capital allocation priorities. We remain disciplined on deployment, constructive on the long-term fundamentals of the business, and confident in our ability to drive per share value creation. I would like to turn the call back to the Operator to open up for Q&A. Thank you. Operator: Thank you. At this time, we will be conducting a question-and-answer session. As a reminder, please limit yourself to two questions. A confirmation tone will indicate your line is in the question queue. Our first question comes from Michael Goldsmith with UBS. Your line is now live. Michael Goldsmith: Good morning, good afternoon. Thanks for taking my questions. Joe, in your prepared remarks, you talked about a material reduction in churn during the quarter. Can you talk a little bit more about that specifically? Was that just in the month of March or throughout the quarter? What do you think is driving that, and what is the impact on the financials from a material reduction in churn? Joe Fisher: Hey, Michael. Good afternoon. Good question, and definitely a good statistic to highlight for us, as we have been very encouraged by the existing customer dynamic and them staying with us longer. We did see a pretty material reduction in churn and move-outs coming down in the quarter. In terms of what is driving that, I think it is a multitude of factors. One, we are seeing good pay rates and minimal delinquency from the existing customer and an ability to continue to pay those ECRIs as they come through. The health of the overall customer is strong at this point in time. At the same time, from a customer experience standpoint and focus on that experience and length of stay, as part of PS 4.0 we have talked a lot about the customer obsession. The teams are laser-focused right now on customer experience to ensure we deliver a good product and a good experience overall. Hopefully that results in a longer length of stay for us. From an economic perspective, that existing customer is more profitable for us. The more that we can hold onto that individual, and have less inventory available to sell going forward, that helps pricing on the new side as well, and you saw that move-in rate come up materially and ahead of expectations in the first quarter. Michael Goldsmith: As a follow-up, can you talk about what you have seen through April? I know we are lapping Liberation Day. Just trying to get a sense of the latest operating metrics. H. Thomas Boyle: Sure, Michael. We saw similar trends in April to what we saw through the first quarter—better churn year-over-year, so lower move-out volume; lower move-in volume; occupancy flat to a touch better; and improving trends as it relates to move-in rates—move-in rates flat to a touch positive through the month of April. Busy season is here and just getting started. We have a busy stretch ahead in May, June, and July. The team is ready, and we look forward to updating you on second quarter activity as we move forward. Michael Goldsmith: Thank you very much. Good luck in the second quarter. H. Thomas Boyle: Thanks, Michael. Operator: Our next question comes from Samir Khanal with Bank of America. Your line is live. Samir Khanal: Good morning, everybody. Joe, should we think about the cadence of revenue growth here? As we think about the next few quarters, you are tracking well above the midpoint in the first quarter. Help us unpack revenue growth. And secondly, how should we think about your investment activity this year, excluding NSA, and maybe comment on the lending platform? Joe Fisher: Hey, Samir. I would bifurcate that into two pieces—leading indicators and lagging indicators. On the leading side, we started off the year really well across the board—move-in rates, churn, occupancy, etc. We feel really good on that front. What we communicated in our original guidance was that year-over-year revenue, as a lagging indicator, does get a little bit worse before it gets better. We had some pressures in third and fourth quarter of last year that flow into the year-over-year number as we get into 2Q and 3Q. So we do expect year-over-year revenue to come down a little bit. But sequentially, we continue to be positive in terms of those trends Tom just talked about going through April. H. Thomas Boyle: On the transaction market, we are seeing similar trends to last year, which was encouraging—a broadening of the seller set, a combination of single one-off transactions as well as some smaller portfolios. The first quarter tends to be a little quieter seasonally, so I would expect that transaction volume picks up as we move through the year. A more stable interest rate environment, more stable operating trends, and a broadening seller set all point to encouraging trends. As Joe highlighted, we have acquired or are under contract for around $200 million year-to-date in acquisition activity, driven by our investments in capital allocation capabilities—building the team, enhancing data science, and utilizing the PSNext operating platform to drive differentiated cash flow. We are built for the small one-off transactions, which is where we have been most active year-to-date. About three-quarters of the activity has been off-market. We are targeting micro markets that fit well for the portfolio. The balance sheet is poised to support that level of activity, and we will keep going from here. Joe Fisher: On lending, this continues to be a growing part of the business. It was a slow start to the year, but we expect it to continue to grow over time and significantly enhance both the value creation and the size of the platform. Demand for lending is a little lighter right now, which, given the backdrop of lower development starts and lower supply, is a net long-term positive for the industry. It is also competitive among lenders making new loans. We remain disciplined on rate and underwriting metrics. We have not deviated to date. We may miss a few deals because of that, but we think that is in the long-term interest of shareholders. From a guidance perspective, there is no big implication to this year whether we are more or less aggressive on external growth. The focus is on compounding per share earnings into 2027–2028 and setting up the growth profile there, not a big swing factor for 2026. Samir Khanal: Got it. Thank you. Operator: Our next question comes from Todd Michael Thomas with KeyBanc Capital Markets. Your line is now live. Todd Michael Thomas: Thanks. First, a follow-up on revenue cadence. Would the pressure you anticipate on same store revenue growth in 2Q and 3Q—absent LA—still be there, or could stronger coastal and Midwest markets carry the recovery more evenly through the balance of the year? Joe Fisher: Hey, Todd. It would come off a little bit in both coastal and Sunbelt in 2Q and 3Q. You saw some broader-based weakness back in 3Q and 4Q of last year when new move-in rates went more negative than where we are today. It is a bit more broad-based in 2Q and 3Q. It is not material, but it is expected to be slightly lower than the first quarter. On LA, the state of emergency is still in place through May. In guidance, we factored it in for the entire year, at minus 80 basis points to same store revenue for the full year. Because of timing and comps, LA on a same store revenue basis does continue to get worse throughout the year if the state of emergency remains in place. We do not have insights one way or the other on timing. As I said, it should be a material tailwind to recapture market rent growth in the future. Todd Michael Thomas: Thanks. And on NSA integration, can you talk about measures to ensure NSA’s operations during peak leasing season are intact—leasing, revenue management, etc.—and any incremental thoughts on expected revenue or expense synergies as you work toward closing? H. Thomas Boyle: We have been encouraged by the dialogue and collaboration between the National Storage team and the Public Storage team. We are developing deep plans to integrate the properties as we move into the third quarter. In the interim, they are running their business well and we are doing the same. As we discussed on the M&A call last month, the plan is to integrate those assets immediately onto the PSNext platform, start the rebranding process, welcome their customers and employees, and get going in the third quarter. We will share more as we get closer. Joe Fisher: No change to synergy timing and value creation versus what we put out in early March. We still expect $110 million to $130 million of synergies over time. From an accretion perspective, 2026 is expected to be breakeven. By stabilization in 2028–2029, we think we will have $0.35 to $0.50 of per share earnings compounded on top of our existing profile. At our multiple, we had talked about total value creation of over $1.5 billion coming off a 10 billion transaction. We are excited to get going on the integration and prove the upside we have outlined. Todd Michael Thomas: Great. Thank you. Operator: Our next question comes from Eric Jon Wolfe with Citi. Nicholas Joseph: Thanks. It is Nick Joseph here with Eric. As part of the structure of JV in certain properties and full ownership of others, is there a difference in occupancy between those properties going into the JV versus what will be wholly owned? And is there any difference in stabilization that would drive different return profiles? H. Thomas Boyle: No. There is pretty similar occupancy between the different pools today. Both sets of assets have been owned by NSA for a period of time, and occupancies are in a similar place. As we thought about the formation of the joint venture—creating a win-win and a different return profile for the JV compared to on-balance-sheet—the drivers were more around market mix and composition rather than occupancy. Nicholas Joseph: Got it. Thank you. Operator: Our next question comes from Nicholas Philip Yulico with Scotiabank. Please proceed with your question. Nicholas Philip Yulico: Thanks. Looking at average occupancy in same store versus where you ended on occupancy, the year-over-year delta is different—not as much occupancy growth at period end versus year-over-year in the fourth quarter. Did something happen in March—were you pushing prices and saw some occupancy loss? Can you unpack that? Joe Fisher: Hey, Nick. From an occupancy perspective, we came in quite a bit better than expected in the first quarter given the lower move-out activity we saw. One thing you might be referring to is the change if you look at same store occupancy in fourth quarter 2025 versus first quarter 2026. It did come down a little sequentially, but we added about 17 million square feet into the same store pool from 2025 to 2026, predominantly weighted toward Sunbelt markets, which are running a little lower from an occupancy perspective. If you are thinking about 4Q versus 1Q, I would not read much into that. Focus on the year-over-year momentum we are seeing. Nicholas Philip Yulico: The follow-up is that the year-over-year delta in ending occupancy in 1Q versus 4Q showed lower year-over-year growth at ending. Anything late in the quarter that impacted March ending occupancy? H. Thomas Boyle: There was not anything in particular toward the end. As Joe mentioned, we were encouraged by lower churn through the first part of the year, and our models adapted to that, which led to a little more pricing power as we moved through the quarter. Through the quarter, churn was helpful, rates improved, promotions were down, marketing was down, and occupancy was up year-over-year—encouraging leading indicators as we move forward. Nicholas Philip Yulico: That is helpful. Thanks. Operator: Next question is from Brendan James Lynch with Barclays. Your line is now live. Brendan James Lynch: Thanks for taking my questions. Tom, following up on churn being lower year-over-year, could you discuss some of the initiatives driving that outcome and how much is in your control given most customers are not generally moving out to go to a competitor? H. Thomas Boyle: Great question. There are a number of factors. As Joe touched on, there are macro factors—overall activity levels, GDP growth, job growth—which we think are benefiting churn levels into the first quarter. We are also focused on customer experience—PS 4.0’s customer obsession—delivering a better product and service, which supports longer length of stay. Affordability relative to alternatives is also a factor. Brendan James Lynch: Thanks. And on more challenged markets like Tampa, Atlanta, and Phoenix, do you anticipate dynamics continuing to improve, or is there new supply or other challenges that could still emerge? H. Thomas Boyle: We continue to expect new supply to taper down, and that is impacting many of those markets. Tampa had storm-related comps that we are lapping. We have seen encouraging trends in Dallas, Atlanta, and Phoenix where new supply is being absorbed. Revenue growth is still negative year-over-year but improving sequentially. That speaks to modest improvement as we move through 2026 and forward. Joe Fisher: One thing we are watching is third-party data on occupancy and rate. We seem to be leveling out and stabilizing, which is a good sign for the trajectory coming out of this period. As supply comes down and we execute our initiatives to capture more than our fair share, we are optimistic that we have reached a period of stabilization cyclically. H. Thomas Boyle: Stepping back, the recovery in some of those markets has taken longer than we would have liked, but absorption is taking place, and strength in coastal markets continues to build. While timing has been slower than hoped a couple of years ago, we are investing in the platform, focused on deploying capital, improving operations, and taking advantage of the opportunity set. Brendan James Lynch: Thank you both. Operator: Our next question is from Juan Carlos Sanabria with BMO Capital Markets. Your line is now live. Juan Carlos Sanabria: Good morning. On churn and the interplay with ECRIs, the implied contribution of ECRIs seems to have come down. Is there greater ability for local or corporate to soften ECRIs if the customer complains to keep them on board and reduce churn? How should we think about ECRIs and churn given the moderating macro? H. Thomas Boyle: The encouraging thing is we have seen really steady customer behavior across the board—lower delinquency, stable payment patterns, and lower vacate activity. I would add price elasticity to that list; we have not seen a shift there. Replacement cost components of the ECRI modeling are improving as well. As for overall contribution on a year-over-year comp basis, a big component is Los Angeles—this year we cannot send rental rate increases at all, whereas last year we could send more modest increases. That is the primary component of the year-over-year comp change. Stepping back, price elasticity remains healthy, customers place value on our product, and rents remain affordable versus alternatives, which supports lower vacate activity. Juan Carlos Sanabria: Bigger picture: lessons from prior periods when oil or energy prices spiked and any impact on storage and churn? H. Thomas Boyle: In prior periods of macro stress—excluding COVID—we typically saw vacate activity tick higher. Encouragingly, we have seen the opposite, and that has continued through April. On oil and gas prices specifically, we have seen increases at several points over the last 10–20 years without a material impact on storage activity. That goes back to the needs-based nature of our product—customers come to storage because of life events, not discretionary choice. We are monitoring customer behavior closely, and it has been encouraging to date. Juan Carlos Sanabria: Thank you. Operator: Our next question comes from Caitlin Burrows with Goldman Sachs. Your line is now live. Caitlin Burrows: Hi, everyone. A number of 1Q metrics came in better than expected. Is the reason for no change to guidance simply that it is too soon with busy season ahead, or are there known offsets like timing of acquisitions or debt that we should note? Joe Fisher: It is the former. Hopefully you pick up our positive tone on the start to the year. We are very encouraged, but we are still early with a busy season ahead. We still have NSA to close and integrate. Our focus is on how we will finish the year, not how we started it. We will revert back in February with, hopefully, a positive update. Caitlin Burrows: Got it. On supply, you mentioned ongoing competition in some Sunbelt markets. How long do you think that takes to dissipate, and what makes you confident those headwinds do not reemerge? H. Thomas Boyle: Sunbelt markets have strong demand trajectories—population growth, job growth, income growth. We are encouraged by the longer-term setup in markets like Tampa and the West Coast of Florida, Atlanta, and Dallas-Fort Worth. New supply periodically impacts real estate cycles in those markets, and we are in that phase. Encouragingly, new supply is tapering and being absorbed. Sequential trends have been improving quarter-over-quarter in many of those markets. Development is more challenging nationwide—longer city timelines and processes, higher financing and construction costs, and, in many Sunbelt markets, lower current revenues. Economic barriers to entry are rising. We anticipate supply takes another leg lower this year and likely further into next year. Joe Fisher: It is important to note that our ability to lean into development reflects our team quality, scale, and PSNext. Our 8% stabilized yields are not representative of the broader market. That value creation is unique to us, which is why we can continue to lean into development while others pull back. Caitlin Burrows: Thanks for the details. Operator: Our next question is from Michael Anderson Griffin with Evercore ISI. Your line is now live. Michael Anderson Griffin: Thanks. Circling back on PSNext and how it relates to marketing spend and targeted marketing—can you give examples of how customer acquisition or marketing spend, leveraging data from Google or AI, has changed with PSNext relative to how Public Storage was doing it previously? H. Thomas Boyle: There is a lot there to unpack. We welcomed our new Revenue and Marketing Officer, Ayush Basu, earlier this year, and he is shaping our revenue and marketing strategies. Working with our existing team, we leaned in through the first quarter on targeting initiatives—both via Google and website conversion—to target customers with attractive lifetime value. They are working closely with Natalia Johnson and her data science team to utilize our data more precisely. When a customer lands on our website, we estimate lifetime value and tailor pricing and promotion mix accordingly. On Google, we go find more customers like that. All of those are in the mix, and we are excited to see what these leaders drive from here. Michael Anderson Griffin: Thanks. And a clarification: On the $185 million of deals that closed subsequent to quarter-end, were any related to the Welltower data science partnership, or were they already in the hopper? H. Thomas Boyle: Those were already in the hopper. The Welltower-related opportunities are to come. Michael Anderson Griffin: Great. Thanks so much. Operator: Our next question comes from Spenser Bowes Glimcher with Green Street Advisors. Your line is now live. Spenser Bowes Glimcher: Thank you. In LA, how long has it historically taken to get customers back to market rents after rent freezes, and could this catch-up take longer this time given a weaker demand landscape? H. Thomas Boyle: The demand landscape in greater Los Angeles remains healthy. Orange County, San Diego, and other nearby counties continue to see strong demand, high occupancies, and good rental rate trends. We have a differentiated, attractive, and irreplaceable LA portfolio that we have owned for decades and continue to improve. As for returning to market rental rates, that is not within our control today. Historically, after the Hill and Woolsey fires and the COVID emergencies, it took roughly 18–24 months to get back to prior rent levels. Those emergencies lasted longer than where we sit today, so that provides a guidepost. We will not rush, given our platform and brand breadth in LA, but we are confident in our ability to accelerate to market rents over 12–24 months once allowed. Spenser Bowes Glimcher: Thank you. And on the transaction market, what are you seeing in terms of assets on the market, the bid-ask spread, and cap rates? H. Thomas Boyle: We have been encouraged by a broadening seller set—activity from institutional sellers, mom-and-pop sellers, and everything in between. Stability in operations and interest rates has narrowed the bid-ask spread. On cap rates, stabilized product is trading in the 5s, getting into the 6s as we put them on our platform, reflecting PSNext’s ability to drive higher cash flow. About three-quarters of our year-to-date activity has been off-market, with targeted micro market focus. NSA, on the other end of the spectrum, is a large portfolio opportunity. We are interested across the spectrum and have tactics and team investments to address both. Spenser Bowes Glimcher: Great. Thank you. Operator: Our next question comes from Ravi Vijay Vaidya with Mizuho. Please proceed with your question. Ravi Vijay Vaidya: Thank you for taking my question. You offered comments on how you expect revenue to trend throughout 2026, but how do you expect expenses to trend given the strong start? Joe Fisher: Hey, Ravi. We had a lot of success in 1Q—better than expected—with property taxes, personnel, marketing, utilities, and R&M all down year-over-year. We had about a $3 million one-time benefit in property taxes from an appeal win we originally expected in 2Q, so there is no change to full-year guidance—just timing. Looking forward to our midpoint, we still expect constrained expense growth overall and relative to peers. It will tick higher as we track toward the midpoint we previously laid out, but we have many initiatives to keep expense growth constrained and below inflation. Ravi Vijay Vaidya: Got it. One more: You had less promotional activity this quarter than a year ago. Is that something we should expect going forward, and how do you consider promotions when both move-in and move-out volumes are declining? H. Thomas Boyle: Promotions are one tool; I would also highlight marketing and rental rates as tools to drive conversion and traffic into the customer acquisition funnel. Promotions have been down fairly consistently over the last year. Move-in rental rate trends have been improving, and marketing came down a bit given less churn and less inventory to re-rent. These are encouraging trends across all three levers. We will continue to use them dynamically at the store level to optimize revenue. Ravi Vijay Vaidya: Thank you. Appreciate it. Operator: Our next question is from Michael William Mueller with JPMorgan. Your line is now live. Michael William Mueller: Hi. On the lending program, are you looking at it largely as a lending business to make money in, or does there need to be an angle to ultimately get to the real estate or management? And how big could it ultimately be? Joe Fisher: Mike, of course we are looking to make a strong risk-adjusted return in the lending business. It is around a $150 million business today. We think it could grow into the $500 million to $1 billion range over time, but we are not striving to get there for its own sake—we will remain disciplined. There are ancillary benefits: it can be a potential feeder for future acquisitions, we secure third-party property management on these assets, and we provide tenant insurance. When you look at the platform’s profitability, you should take a holistic view of the loan yield plus these additional revenue and cash flow streams. Michael William Mueller: Got it. Thank you. Operator: Our next question is from Eric Thomas Luebchow with Wells Fargo. Your line is now live. Eric Thomas Luebchow: Tom, you touched on move-ins being down year-over-year due to less inventory. Can you talk about top-of-funnel demand—web search, in-store traffic—and whether recent volatility in mortgage rates, fuel prices, and slower home sales is creating any caution from incoming customers? H. Thomas Boyle: Some of the same macro themes influencing lower churn are also impacting move-ins. It varies by market. In stronger markets like Minneapolis, San Francisco, New York, and Boston, top-of-funnel trends are good. In markets still absorbing new supply—several in Florida, Dallas, and others—incoming traffic is a bit softer, as expected. Big picture, more modest incoming demand paired with lower churn and less inventory to rent is a favorable combination and gives us a bit more pricing power. Eric Thomas Luebchow: And a follow-up on acquisitions: Given the size and complexity of NSA, does it impact your willingness to pursue larger, more complex portfolios, or should we expect more one-off private-market assets to trade this year? H. Thomas Boyle: Bigger portfolios are tougher to predict and are dependent on sellers. Our team is built for one-off acquisitions and micro market targeting, and we have been investing in team size and data science to enhance that. Those capabilities are certainly applicable to portfolios as well. We do have a big closing coming in the third quarter. Around that immediate closing window, we will prioritize NSA integration to ensure it goes smoothly. Away from that, we are looking to continue to deploy capital at attractive risk-adjusted returns and grow per share earnings over time. The teams are built, the balance sheet is in a good spot, and we expect to be active through 2026. Operator: We have reached the end of the question-and-answer session. I would now like to turn the call back to H. Thomas Boyle for closing comments. H. Thomas Boyle: Thanks, everyone, for joining this morning and afternoon. We appreciate the questions and look forward to updating you on how the busy season progresses through the second quarter. Thanks very much, everybody.
Operator: Good afternoon, and welcome to the F5, Inc. Second Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] Also, today's conference is being recorded. If anyone has any objections, please disconnect at this time. I'll now turn the call over to Ms. Suzanne DuLong. Ma'am, you may begin. Suzanne DuLong: Hello, and welcome. I'm Suzanne DuLong, F5's Vice President of Investor Relations. We are here to discuss our second quarter fiscal year 2026 financial results. Francois Locoh-Donou, F5's Chairman, President and CEO, and Cooper Werner, F5's Executive Vice President and CFO, will be making prepared remarks on today's call. Other members of the F5 executive team are also here to answer questions during the Q&A session. Today's press release is available on our website at f5.com, where an archived version of today's audio will be available through July 27, 2026. We will post a slide deck accompanying today's webcast to our IR site following this call. To access the replay of today's webcast by phone, dial (800) 770-2030 or (609) 800-9909 and use meeting ID 6076834. The telephonic replay will be available through midnight Pacific Time, April 29, 2026. For additional information or follow-up questions, please reach out to me directly at s.dulong@f5.com. Our discussion today will contain forward-looking statements, which include words such as believe, anticipate, expect and target. These forward-looking statements involve uncertainties and risks that may cause our actual results to differ materially from those expressed or implied by these statements. We have summarized factors that may affect our results in the press release announcing our financial results and in detail in our SEC filings. In addition, we will reference non-GAAP metrics during today's discussion. Please see our full GAAP to non-GAAP reconciliation in today's press release and in the appendix of our earnings slide deck. Please note that F5 has no duty to update any information presented in this call. Before I pass the call to Francois, I am pleased to announce that F5 will be hosting an Analyst and Investor event in New York on Thursday, May 28, 2026. Details about the event will be provided in a press release soon. I'll now turn the call over to Francois. François Locoh-Donou: Thank you, Suzanne, and hello, everyone. Our team delivered another robust quarter with 11% revenue growth. Product revenue grew 22%, marking our seventh consecutive quarter of double-digit product growth. This includes strong 26% systems revenue growth and 17% software revenue growth. Hybrid multicloud has become a strategic architecture, and it is increasing demand across F5's core markets. Customers are rapidly scaling their digital infrastructures to improve resiliency, meet data sovereignty requirements and get ready for AI. Our strong Q2 performance reflects those dynamics and F5's alignment with where customers are headed. We captured robust international demand for digital sovereignty initiatives. We also converted hybrid multicloud adoption into meaningful systems and software growth. We capitalized on heightened demand for best-in-class security solutions, and we built on AI momentum with another standout quarter for AI wins. As a result of our strong growth and our proven operating model, we delivered 14% non-GAAP earnings growth and a record $348 million in free cash flow. The powerful combination of secular and cyclical demand trends is providing strong Q3 visibility and a growing pipeline. As a result, we are raising our fiscal year 2026 outlook to reflect revenue growth of 7% to 8%, up from 5% to 6% previously. Cooper will elaborate on our outlook in his remarks. Our outlook for stronger growth is reinforced by what we are seeing in the market. We see three forces significantly reshaping how our customers operate, hybrid multicloud adoption, threat landscape expansion and AI inference inflection. First, hybrid multicloud adoption. Workloads now span on-premises, private cloud and multiple public clouds. Our research shows more than 90% of enterprises run hybrid multicloud today across an average of 19 locations. Organizations need flexibility, resiliency and digital sovereignty in every environment, and they are investing to support these demands. Second, threat landscape expansion. As AI models become more capable, attackers are using them to launch attacks against production applications at higher volumes and with greater variation than traditional defenses were designed for. Our customers see this and they are responding. They are deploying more application security and prioritizing best-in-class defenses. The era of checkbox security is over. AI applications require best-in-class security to match both the volume and the sophistication of AI-driven attacks. Third, the AI inference inflection. Organizations are connecting their applications and APIs to AI models and inference calls are becoming a regular part of how applications run. Our research shows 78% of enterprises run inference themselves using more than seven models on average. Organizations are standardizing on a new architecture with models distributed across the data center, the cloud and the edge. And the next shift is already underway. AI agents are moving into production and enterprises are adapting their applications for agent interaction. This is driving more compute, more data delivery and more security to protect inference. These three market forces are driving demand across our business. Because of accelerating hybrid multicloud adoption, we are taking an already strong refresh cycle and leveraging it into significant opportunities for expansion, competitive displacement and platform consolidation. I will double-click on each of these, spotlighting customer examples from the quarter. With this refresh, we are seeing a Refresh plus dynamic that is different from prior cycles. Customers are deploying higher performance, higher capacity F5 systems as they upgrade their data centers to support modern applications, digital resilience and sovereignty and AI. And as customers refresh, we are capitalizing on that moment to attach new use cases, expanding our footprint and growing overall wallet share. For example, this quarter, a large healthcare services organization started with a life cycle refresh across hundreds of legacy systems. As the project progressed, they expanded the scope to support an AI-driven consumer engagement platform. F5 became the control point for secure, low-latency traffic and data movement across applications, storage and their GPU server environment. That gave the customer a more resilient foundation for both sensitive internal workloads and new AI interactions at scale. Our deliberate investment in hybrid multicloud solutions is translating into market share gains. We are winning customers from competitors who did not build the same breadth and depth of capabilities across on-premises, software and SaaS. In Q2, we displaced a long-standing incumbent at a Fortune 100 energy company whose environment had hit scalability limits. The customer needed a platform that could scale into cloud while maintaining strong on-premises performance. Their incumbent provider was unable to serve workloads in hybrid multicloud environments. F5 modernized traffic management and simplified operations, improving reliability and creating a clean path for long-term cloud adoption. Hybrid multicloud customers require stronger performance and security with fewer tools and simpler operations. We are replacing point products with a unified approach that improves performance and security and is easier to operate at scale. For example, during Q2, an energy and utilities provider, an existing BIG-IP customer needed to secure APIs with better visibility and automation across their data center, cloud and edge environments. They selected F5 Distributed Cloud Services to simplify their approach and standardize API protection across their full footprint with simpler management. Moving on to threat landscape expansion. The pace and scope with which the threat landscape is expanding is driving demand for best-in-class application and API security, both on-premises and across cloud environments. For example, this quarter, a software and managed service provider needed to standardize application and API security across a rapidly expanding hybrid multicloud estate built through acquisitions. They lacked a consistent way to enforce front-door and API protections across their multiple public cloud environments and on-premises. With F5, they deployed a single policy and management layer with security enforced locally in every environment, supporting strict privacy, audit and healthcare requirements. F5 enabled faster regional expansion with stronger security and improved data sovereignty alignment. Finally, the AI inference inflection is driving demand for F5. We are seeing this indirectly through hybrid multicloud adoption and the requirements that come with it. We are also seeing it directly through our three primary AI use cases. With our industry-leading traffic management, we are winning new AI insertion points, including AI data delivery and AI factory load balancing. And we are capturing AI runtime security wins, protecting AI applications, APIs and models from emerging threats such as model abuse, data leakage and prompt injection. In an AI data delivery win, a global payments company needed a more resilient way to move rapidly growing AI data between storage and compute as they scale the training and retrieval workloads. F5 improved performance and resiliency while displacing both an in-house solution and a competitor, positioning us at the center of the customers' AI infrastructure strategy. In an AI runtime security win, an industrial automation firm needed a scalable way to assess risk and govern a growing number of AI applications and models. They chose F5 based on the depth of our red teaming insights and strong integration with their existing security stack. In an AI factory load balancing win, a major manufacturer an existing F5 customer needed to support operations and established a digital twin of their manufacturing environment for simulation and optimization. They deployed BIG-IP as the production traffic layer across their GPU server environment, improving availability and offloading encryption. Taken together, these wins underscore two things. The forces reshaping our customers' environments are real and F5 is well positioned to capture them. Staying ahead of the pace of change requires relentless innovation. In Q2, we brought multiple new capabilities to market, strengthening our leadership in application delivery and security for the AI era and driving greater value for customers. We introduced AI-powered capabilities in Distributed Cloud WAF, replacing manual policy tuning with automated outcome-based threat blocking. Our F5 training model helps customers stay ahead of increasingly sophisticated AI-driven attacks that are growing in both speed and complexity. We launched Agentic Bot Defense, extending our industry-leading Bot Defense to autonomous AI agents, a new and fast-growing category of traffic. The result is that customers can confidently adopt Agentic AI while ensuring only verified trusted agents reach their applications. We released F5 AI Remediate, which closes the loop between our AI Red Team and AI Guardrails products. It collapses the path from vulnerability discovery to runtime protection from days or weeks into minutes. And finally, we launched F5 Insight for ADSP, providing deeper visibility across application estates. The result is that customers can identify and resolve issues faster with less guesswork. We are innovating so customers can run faster, stay protected and simplify their hybrid multicloud and AI environment. And we are accelerating that innovation by rapidly integrating AI into our solutions to create practical capabilities customers can deploy quickly. That innovation engine is also sharpening our view of what's next. As we look ahead, we have conviction in the power and durability of hybrid multicloud, the expanding threat landscape and inflecting AI inference as demand drivers for F5. We look forward to digging deeper into these drivers and our expectations for how they will shape F5's longer-term growth outlook at our May Analyst and Investor event. Now I will turn the call over to Cooper, who will walk through our Q2 results and our outlook. Cooper? Cooper Werner: Thank you, Francois, and hello, everyone. I will review our Q2 results before I provide our guidance for Q3 and update our outlook for FY '26. We delivered a strong Q2, growing revenue 11% to $812 million with a mix of 51% product revenue and 49% services revenue. Product revenue totaled $411 million, increasing 22% year-over-year, while services revenue of $401 million grew 2% year-over-year. Systems revenue totaled $226 million, up 26% over Q2 FY '25. Our software revenue of $184 million grew 17% year-over-year. Subscription-based software revenue totaled $165 million, up 20% year-on-year, representing 90% of our Q2 software revenue. Perpetual license software totaled $19 million, down 4% year-over-year. Revenue from recurring sources contributed 70% of our Q2 revenue. Our recurring revenue consists of our subscription-based revenue and the maintenance portion of our services revenue. Shifting to revenue distribution by region. Revenue from the Americas grew 3% year-over-year, representing 50% of total revenue. Both our EMEA and APAC regions delivered very strong quarters. EMEA grew 22%, representing 32% of revenue. APAC grew 19%, representing 18% of revenue. Looking at our major verticals, enterprise customers contributed 66% of Q2's product bookings. Government customers represented a strong 24% of product bookings, including 8% from U.S. Federal. Finally, service providers contributed 9% of Q2 product bookings. Our continued financial discipline contributed to our strong Q2 operating results. GAAP gross margin was 81.4%. Non-GAAP gross margin was 83.7%. Our GAAP operating expenses were $482 million. Our non-GAAP operating expenses were $406 million. Our GAAP operating margin was 22.1%. Our non-GAAP operating margin was 33.8%. Our GAAP effective tax rate for the quarter was 21.9%. Our non-GAAP effective tax rate was 21.5%. Our GAAP net income for the quarter was $148 million or $2.58 per share. Our non-GAAP net income was $223 million or $3.90 per share, reflecting 14% EPS growth from the year ago period. I will now turn to cash flow and balance sheet metrics. We generated $366 million in cash flow from operations in Q2 and free cash flow of $348 million, both records, highlighting the strength of our operating model. CapEx was $18 million. DSO for the quarter was 47 days. Cash and investments totaled $1.46 billion at quarter end. Deferred revenue was $2.12 billion, up 10% from the year ago period. In Q2, we repurchased $100 million worth of F5 shares at an average price of $269 per share. We had $522 million remaining on our authorized share repurchase program as of the end of the quarter. Finally, we ended the quarter with approximately 6,500 employees. I will now speak to our outlook and guidance, beginning with Q3, followed by our full year view. We expect the market trends we've outlined, hybrid multicloud adoption, threat landscape expansion and AI inference inflection to drive strong demand for our products and services in the second half of FY '26. We expect Q3 revenue in a range of $820 million to $840 million, reflecting approximately 6.5% growth at the midpoint. We expect non-GAAP gross margin in the range of 82.5% to 83.5%. We estimate Q3 non-GAAP operating expenses of $406 million to $418 million. We expect Q3 share-based compensation expense of approximately $68 million to $70 million. We anticipate Q3 non-GAAP EPS in the range of $3.91 to $4.03 per share. Turning to our fiscal year 2026 outlook. With continued strong close rates in Q2 and strong pipeline creation into the second half, we are raising our FY '26 outlook. We now expect FY '26 revenue growth of 7% to 8%, up from our prior outlook of 5% to 6%. We continue to expect mid-single-digit software revenue growth, double-digit systems revenue growth and low single-digit services revenue growth for the year. Our gross and operating margin outlook for FY '26 is unchanged. We expect FY '26 non-GAAP gross margin in a range of 82.5% to 83.5%. On a modeling note, we expect higher component costs, primarily related to memory will cause gross margin to step down sequentially from Q3 into Q4. We expect non-GAAP operating margin in a range of 34% to 35%. We now expect our FY '26 non-GAAP effective tax rate will be in the range of 20% to 21%. Reflecting the strength of our second quarter and our increased revenue outlook, we now expect FY '26 non-GAAP EPS in a range of $16.25 to $16.55, up from the prior range of $15.65 to $16.05. Finally, we expect our full year share repurchase to be at least 50% of our free cash flow. I will now pass the call back to Francois. François Locoh-Donou: Thank you, Cooper. Looking ahead, our strengths are well matched to the secular shifts transforming IT infrastructure, hybrid multicloud adoption, threat landscape expansion and AI inference inflection. We expect these trends to support continued growth for F5 in fiscal 2026 and beyond. F5 is built for hybrid multicloud and the AI era. We deliver and secure every app and API anywhere with one unified platform across on-premises, multiple public clouds and the edge. Our application delivery and security platform reduces complexity. Customers get centralized security, high-performance delivery and consistent policy without stitching together point products. And we provide a control point for traffic, APIs and data flows as applications and AI become more distributed. Operator, please open the call to questions. Operator: [Operator Instructions] We'll take our first question from Tim Long at Barclays. Timothy Long: Yes, one question and one clarification. On the software side, it looks like it was a pretty good quarter and you're keeping the mid-single-digit for the year. So I know sometimes these are on 3-year cycles given the term. So maybe just touch a little bit on why not a little bit more of a raise there after a pretty solid growth quarter. And are you still looking at potential acceleration on that number into next year? And then after that, I'll come back with a follow-up. Cooper Werner: Thanks, Tim. This is Cooper. Yes, I'll take that. So we did have a good growth quarter in Q2. I would say it was right where we expected it to be for the quarter. You're right, we do caution against kind of over rotating on any individual quarter's reported revenue growth rate. The second half of the year is where we have a more balanced growth expectation for the year. And just based on where we're at with the renewal base, we continue to expect to perform as we had seen it shaping up for the year. And so that's where we're still at the mid-single-digit growth rate for the year, but all trends look very healthy. And then, yes, as we look ahead to next year, we do expect to see an inflection in the growth rate. We're continuing to see strong trends around consumption rates across that renewal base, and we have a larger base coming up for renewal next year. And so with the expansion we would anticipate against that larger renewal base, we feel pretty confident about a higher growth rate into FY '27. Timothy Long: Okay. Great. And then if I could, on the AI front, a lot of different applications, a lot of activity. Maybe you could help us a little bit with some benchmarks or some metrics, how do we frame the success revenues, orders, customers? How should we look at it? Any data points you can give us as far as the scale and the traction you guys are seeing on the customer side? François Locoh-Donou: Yes, Tim, it's Francois here. The -- so what we're seeing in AI, Tim, is that enterprises are now putting AI into production. And what the term we use is inferencing. And that's creating substantial opportunity for F5. We've talked about three big areas where we see opportunity. The first one is in hardening data pipelines between data stores and AI models, a use case we call data delivery, and we're seeing growing demand for F5 in these use cases. We're also seeing growing demand in securing AI in runtime. So both AI applications and AI models increasingly require security that is tailored for AI models that traditional security solutions do not address. And we also address load balancing, AI factory load balancing, which is a third area where we're starting to see growing demand. If you look at all that, we -- if you look at the first half of the year, -- we had approximately $50 million in sales in the first half of the year on these use cases. That's up more than 200% year-on-year. And we're now approaching about 100 customers that are using F5 for their AI use cases. That's why we have a bit of a conservative estimate because those are our customers from whom we absolutely know that they are using F5 for these AI use cases. We believe there are other parts of the business where we're getting indirect benefits from customers getting ready for their AI infrastructure, but those are harder to quantify, harder to count. So the ones I'm sharing with you are ones where we actually have the data and can attribute it directly to these use cases. So enterprise AI is one of the big trends that's fueling some tailwinds in our business. And hybrid multicloud and an expanding threat landscape are the other two very significant trends we're seeing. Operator: We'll move next to Samik Chatterjee at JPMorgan. Samik Chatterjee: Francois, pretty strong quarter. You're raising the guide for the year as well and getting ready, it seems to give us a more longer-term view of the business. Just trying to get sort of how you're thinking about sustainability of the high single-digit growth as you look forward given that you did sort of have a softer year in software this year, but you also have the hardware sort of tailwinds in relation to end of support for some of your products. Like how should we think about sustainability of these growth rates as you look forward beyond this year? How are you thinking about that, if you can help us? And then I have a follow-up. François Locoh-Donou: Yes, Samik. The -- I mean, as it relates specifically to software, I think Cooper touched on it, where we expect stronger -- even stronger software growth next year than this year. But let me step back a little bit and talk about the overall business, Samik. We are seeing a couple of things. One, of course, is we are seeing a very strong refresh cycle and the refresh cycle, by definition, is cyclical. But we are also seeing three secular trends that we think are very durable and that are just growing and accelerating our business. The first one is hybrid multicloud. We went -- we've been talking at F5 about hybrid multicloud for several years. If you look at the past few years, hybrid multicloud was by default. Customers needed the flexibility to put their application in different environments. But now we're seeing it being more of a strategic architecture that is by design and customers are implementing that for digital sovereignty reasons to be able to rely not just on big public clouds, but local cloud alternatives or on-premise environments. And they're also implementing digital hybrid multicloud architectures for resilience reasons. And increasingly, AI is also pushing customers towards these hybrid multicloud architectures. That is a secular trend, Samik, that is there for the long term, and that is providing substantial tailwinds for the business that we believe are durable. And then the other trend that we're seeing is the threat landscape is expanding. And so what we're seeing is customers are having more frequent attacks that are more sophisticated attacks because of AI. There was a report published recently that showed the increase in web attack year-on-year was up 77%. The increase in bot attacks were up 150% year-on-year. And all of that means that our customers have more apps to protect because they're apps, they're APIs, they're now AI models, both on-premise and in the cloud. And with the frequency and the sophistication of attacks increasing, there is a need for best-in-class application security solutions. And that is right where F5 has been focused, and we are seeing that demand in our business. To give you a couple of data points, in our distributed cloud services platform, for example, we saw this quarter, the number of customers choosing F5 for web application firewalls are up 62% year-on-year. The number of customers choosing F5 for API security is up 54% year-on-year. And for bot defense, it's up 33% year-on-year. So you can see these trends of increasing attacks, our customers responding, needing more application security solution that are best-in-class and coming to F5. So these are important trends. We think they are durable, Samik. And therefore, we think the inflection we're seeing in our business is likely to continue. Samik Chatterjee: Got it. Got it. And Francois, maybe I'll follow up on that aspect itself on sort of the attacks that customers have to be ready for. Have you seen any change in engagement or even a step-up in engagement following all the discussion that enterprises have to deal with in relation to Anthropic's Mythos model and sort of the vulnerabilities that they've highlighted. Are you seeing any step change in your engagement with customers on the security front? How are you sort of looking for -- looking to your customers trying to address some of those issues? François Locoh-Donou: Thank you, Samik, for the second one -- the second question. Yes, we are seeing a step change, Samik. We've had a number of conversations over the last several weeks with customers. If you think about it, we are now in an era where the window of time for an enterprise to patch their applications has closed as we have AI models that are very powerful and can now find and exploit vulnerabilities in any application almost in real time. And so there are a couple of implications for that. The first is given if you don't have a significant window of time to patch your applications, you are going to rely more on runtime security and specifically runtime security that is protecting the front-door of your applications. That's precisely where F5 has focused. And we're having conversations with customers who are sharing with us that they're going to have to rely on us even more than they had in the past. The second implication is that we believe that all security is going to be AI-powered. Static security, static signatures are really not going to be able to cope with the power and the speed that these new models have in terms of creating exploits. And so this is a shift that we saw coming. We have been investing in AI-powered security for a while now. Just this quarter, you may have seen this, we released our AI-powered web application firewall. We also released our Agentic Bot Defense solution. And so over time, our entire portfolio is going to be AI-powered. But we are basically already fighting AI with AI, and that, we think, is a significant shift to our customers. And probably the other step change for our customers, it's a trend that has been happening, but I think the new era really accelerates this is the consolidation towards platforms. If you're a customer that's operating in multiple environments and 95% of our customers are operating into hybrid and multicloud environment, the era of having a point product solution in any one of these environments really just creates complexity that you don't want to have to deal with if you have to try and really patch your systems very quickly. And so I think we're going to see more customers move towards platform and the breadth of our portfolio can really help them simplify their operations. So those are three of the implications that we see with this change, and we're seeing that in our conversations with customers already over the last several weeks. Operator: We'll go next to Simon Leopold at Raymond James. Simon Leopold: I wanted to ask about, I guess, a phenomenon that may be occurring. And what we've heard is that some customers may be showing a preference for your hardware solutions based on the performance, the relative performance that perhaps the total cost of ownership of implementing software is actually more expensive than the relative hardware. I'm wondering if you're seeing this shift and that might explain some of the relative growth between your hardware and software. François Locoh-Donou: Well -- Simon, there is -- first of all, we are seeing, in fact, a number of customers that are recommitting to hardware. I wouldn't say that it's just about performance. Performance is a factor. There are a number of reasons for customers to want to be doing that. I think one of those reasons is a lot of customers are modernizing their data centers and wanting to have strong on-prem infrastructure with strong performance in their data centers. And we have seen over the -- in the first half, just to give you a data point, we generated about $60 million in sales from customers who had previously kind of stopped buying hardware and recommitted to hardware. So we are seeing this phenomenon of customers recommitting to hardware. But if you expand from that, what we -- because we delivered 22% growth on hardware this quarter and 17% growth on software. The broader trend we're seeing, Simon, is that the hybrid multicloud is really what's driving customers to both modernize their data center and continue to invest in software to have the flexibility to be able to deploy the same solution, the same software stack from F5, either on-prem or in public clouds. And so yes, at this moment, there is a very strong momentum on hardware, but we continue to see customers wanting to have the flexibility of software or subscription-based software to be able to deploy license across their environment. Simon Leopold: And just as a quick follow-up, please. Could you update us on any progress around the engagement and discussions you've had with NVIDIA? You've talked about that on earlier calls. I'm not sure that you've updated us on the prepared remarks. So any updates you can offer? François Locoh-Donou: Yes, of course. So yes, we have -- as you know, we have developed an integration with NVIDIA where we have been able to basically refactor our software to work in ARM architectures and specifically work on NVIDIA BlueField technology. We've done a lot of work with NVIDIA over the last 18 months. As of December, we have now been formally put into NVIDIA's reference architecture. Since then, there have been a number of tests, including third-party tests to test the efficiency gains from this integration. Those tests have validated that basically the integration of F5 software on these NVIDIA DPUs helps AI factories generate 30% to 40% more token for a certain amount of GPUs. And we are now taking that value proposition to market, and we are involved in a number of proof of concepts and trials around this technology and this integration. I would say that what we are seeing is that a number of customers who are building AI factories are early in terms of sophistication in that their first priority is to get these AI factories, these GPU farms up and running, get them running -- get them working, get these Kubernetes clusters to work. That takes quite a bit of technical sophistication and customers are really focused on that. And for those who are really providing GPUs as a service, really, the goal initially is to get these GPUs to work and to be able to provide that to their customers. I think the issue of making those GPUs more efficient is the issue that comes next. And I think as more and more customers go to inferencing, we think that this value proposition is going to resonate. Operator: We'll go next to Matt Hedberg at RBC Capital Markets. Matthew Hedberg: Based on a lot of our conversations with partners and customers, we think F5 sits at really a critical junction in really this hybrid cloud infrastructure build-out and increasing AI app traffic. In your prepared remarks, you talked about sort of your role in this evolving threat landscape. And I'm curious, you have a lot of security solutions now, but are you hearing customers pull you into additional use cases? Or you're in such a unique spot of the traffic flow with the lens that you see. Are there other opportunities for you to add either further security capabilities in this kind of this new AI era? François Locoh-Donou: Well, absolutely. We -- so a couple of things. I shared earlier that in this new era, runtime security and specifically securing the front-door of applications is going to be even more important than it was in the past and especially for folks who have invested like us in best-in-class application and API security. So the first thing we're seeing is really strong growth in web application security, in API security and in bot security. We're also seeing API discovery and whether on-prem or in the cloud being a growing use case with more and more customers really now worried about knowing where all their APIs are and being able to protect them. Now when you go to AI, we also have now a new attack surface, which is these AI models and these agents both of which will be using more APIs and our customers, of course, will need help discovering and securing them. But we've also introduced in the last few months, AI Guardrails, which is AI Red Team and AI Guardrails. So technologies that help our customers both detect vulnerabilities in their AI models and mitigate these vulnerabilities. And we have introduced a product called AI Remediate that automates the process of creating mitigation for these vulnerabilities. All of these are new use cases in security that are going to grow as our customers deploy more AI models in production. So we are seeing new use cases and new opportunities to insert F5. Security, I think, is a very significant opportunity. But as I said earlier, we're also seeing that opportunity in delivery, specifically in data delivery for AI. Matthew Hedberg: That's great. That's great. And then Francois, the other thing you touched on in your prepared remarks was you're starting to see AI inferencing inflect with your customer base, which is -- it makes sense given some of the AI models, the innovation that we're seeing. And I guess it feels to me like the broader sort of non-AI native cohort of customers are becoming increasingly AI-leaning. Is there a way to talk about how early we are in that? And is this part of a multiyear really inflection? Could we be talking about this inferencing inflection 2 years from now, for instance? François Locoh-Donou: Yes. So Matt, I think the customers who are today really focused on -- have already started worrying about AI security and protecting AI models and AI applications that have new types of vulnerabilities like prompt injections, model abuse, et cetera. Those customers are a small minority, typically the largest customers in any vertical, the customers perhaps have a lot of sophistication in security, financial services companies, very large technology companies. But today, it's a small minority of the universe of customers we serve. And I think that number of customers is only going to grow over the next couple of years as more and more customers actually implement AI in inference. So I think we are just at the very start of this trend and the number of models for inference and agents will dramatically increase over the next couple of years. Operator: We'll go next to George Notter at Wolfe Research. George Notter: If I look back, you guys have been raising prices pretty conservatively, I think, once per year. Obviously, there's some more memory costs here. You mentioned in the context of gross margins. But any thoughts about raising prices a bit more aggressively or a bit more frequently? And I think if I look back historically, you guys also talked about kind of balancing price increases with the opportunity to gain share. And I'm just curious like on the share side of things, are you making progress there? Are there any metrics you can give us in terms of logos or incremental revenue or share that you can point to that kind of reinforce the idea that you guys are winning share? Cooper Werner: Yes, George, thanks. This is Cooper. I'll start on the pricing. So we do have kind of an annual pricing review that we do. Typically, it's in our Q2 where we make price adjustments to factor in the innovation we've been bringing to market, and that's part of our ongoing playbook. We've also been closely monitoring what's been going on with memory and SSD pricing, which has just been accelerating through the year and really kind of had a big step-up in Q2. And that's something that we continue to look at price adjustments to pass through some of that impact through to offset the impact on our gross profits. It's a combination of price adjustments and discount discipline. And that's something that we have to stay really agile with, and we'll continue to kind of monitor that and make those adjustments on more of a one-off basis tied specifically to the rising cost of memory. But then long term, as we think about share, what we've seen, particularly recently is our competitive takeout rate has gone up pretty materially. And I think that really speaks to the hybrid multicloud adoption that our customers are seeing where we're really the only vendor in the space that can support the customers' applications in any environment. And that's really been resonating, particularly recently with the evolving threat landscape as customers are looking for a platform approach to resolve a number of complexities in their environment, and they've been coming to F5. And so we've been seeing a lot of share gain in that regard. Operator: Our next question comes from James Fish at Piper Sandler. James Fish: Great quarter. Maybe to give Francois a bit of a break on especially the AI side, Cooper for you. I'm going to get asked this tomorrow. So on the 2-point raise to guide here for the year, it looks about 1 point is from this past quarter's upside. Are you actually passing through memory much at this point? And what are you guys assuming from memory prices kind of in the back half of the year? Do you have enough supply still lined up given the outperformance of hardware? And how far along with, you are on migrating the DDR5 from DDR4 in particular? Cooper Werner: Yes. Okay. I'll try to make sure I hit all three. But if I forget, please let me know. So in terms of our revenue guide for the year, that doesn't really contemplate new pricing adjustments. I just referenced the work that we're doing around that. But any pricing adjustments that we did are more likely going to flow through into FY '27 just based on where we are with the cycle. So it is something that we continue to look at, but it's not really a significant component to our back half revenue guide for the year. In terms of supply availability, yes, we feel pretty good about our near-term visibility. We've really been out in front of this, and I'm really proud of our manufacturing team for identifying this as an issue going back to kind of mid-FY '25, where we increased our build forecast. We extended the length of our build forecast, and we took on additional supply on components that we thought might have more constraints. And so that's allowed us to secure the memory that we need not just for the revenue outlook that we had at the time, but for the upside we've been delivering over the last 6 quarters or so. And so we feel pretty good, at least for the near term. Now you get it longer term into FY '27, the build forecast we have out there are within our needs for what we would expect to do on the high side for our systems business. Obviously, the visibility 4 or 5 quarters out is not as strong as it is in the near term. But right now, we feel pretty good with where we sit. And then the last question -- DDR4. So yes, so the current appliance lineup that we have leverages DDR4. Future appliance cycles will be on newer technology. We haven't discussed the timing of those, the next generation of appliances. James Fish: Fair enough. If I could follow up, just because if I look at your billings, you had a really strong deferred here, especially on the current side. What are you guys seeing with any net pull-in of demand or buildup of product backlog here as a lot of us here will kind of be reminiscent of the supply chain crisis just a few years ago and that -- this would be about the time you guys would start to see a buildup in product backlog. Cooper Werner: Yes. So just to be clear, backlog does not show up in our deferred revenue. So our deferred revenue strength is almost entirely tied to our services business where we have maintenance renewals. And we saw the strength both on short-term and long-term deferred maintenance is actually a little bit higher on the long term. And we did see some customers that were doing multi-year renewals. I'm certain that some of them are getting in front of perceived risk around price increases as they're working with other vendors. And so that is playing out to an extent, I would imagine, on the maintenance side. But the growth is not tied to product orders. Operator: Next, we'll move to Meta Marshall at Morgan Stanley. Meta Marshall: A couple of questions for me. One, just on the continued strength that you're seeing in EMEA and particularly around data sovereignty, just how much further or kind of are there initiatives that you guys are taking to kind of capitalize on that opportunity? And then maybe second, a very clean competitive landscape kind of on the ADC front, just as a lot of those vendors have kind of fallen by the wayside. But just as you move more on to the security space, just what are you seeing in terms of the competitive landscape there or the chance to gain mind share there? François Locoh-Donou: Thank you, Meta. On EMEA we think the trend that we're seeing there is durable. In fact, we saw an acceleration in that trend this quarter. A lot of the customers, whether it's government agencies, the defense sector, of course, all regulated industries, including financial services, all have a strong push for digital sovereignty. That implies in a lot of cases, modernization, reinvestment in data centers and also creating consistency of security and delivery across their hybrid multicloud environments. We're seeing an interesting trend there where when customers went to the public cloud, they created a separate team between public cloud and on-premise environment. And now that they're kind of coming back and creating true hybrid multicloud architectures, they are merging those teams together, and it's creating more opportunities for the provider that can cover their needs across on-prem and public cloud with a single platform. That trend, we think, is going to continue in EMEA. We're leveraging it more. We have increased our coverage -- our field coverage in EMEA, and we'll probably continue to do that in the future and probably accentuate our focus there on the defense sector because we're seeing significant spend in defense in EMEA. As it relates to the landscape -- the competitive landscape in security, we are focused, as you know, on runtime application and API security. And in that space, we are seeing substantial growth, both for on-premises requirements and cloud requirements. Our differentiation is really the ability to serve both environments with an extensive security portfolio that includes application firewall, securing APIs, securing against bot, securing against DoS attacks. And frankly, none of our competitors, whether it's for application security or AI security are really hybrid multicloud. And so the more we see customers embracing these architectures and needing a solution for both on-prem and public cloud, we are alone in that category and have a very, very strong value proposition. There are a few examples that I mentioned in my prepared remarks where customers needed to secure APIs or they need to secure their applications for a solution that worked both on-prem and in the cloud, and they came to F5. That consistency is more important than ever, and that's where we are focused. And we're going to continue to invest there. One of the highlights of the quarter for me, and I'm really proud of our product team for the work that we did this quarter was incredible innovation in security. We released our AI-powered WAF. We have already a significant interest for that, a new solution for Agentic Bot Defense, which is really important now to understand which agents are authorized to access a model and which agents are not. We innovated on our AI security solutions with F5 AI Remediate, a new solution. We introduced new solution that is AI-powered F5 Insights. We brought API Discovery on-premise with our BIG-IP solution. So a lot of innovation that is accelerating, is in part -- by the way, because we're also leveraging AI to do that. But I'm excited about the place we're at as the company that invested in hybrid multicloud architectures, I think, ahead of everybody else and is now starting to reap the reward of that and now doubling down on our innovation, accelerating the pace of our innovation to capture a growing landscape of opportunities in front of us. Operator: We'll move next to Jeffrey Hopson at Needham. John Jeffrey Hopson: I just wanted to follow up on the memory situation and the gross margin implications. You gave guidance for the last quarter to have a step down from 3Q to 4Q. Just curious if there's any more color on the magnitude of that step down. I think I had like around 150 basis points. And is this just a function of memory bought today takes about 2 quarters to flow through, and that's kind of dynamics at play? Cooper Werner: Yes. Thank you. So yes, that's the dynamic. So we've -- as I referenced earlier, we had taken a pretty extensive position early. And so we've been able to kind of mitigate any impact up through the first half of this year, but we're now starting to see some of the later purchases that we have been doing at higher price points is -- are going to start to flow through into the model. And it will start to flow in, in Q3, but it will be kind of more at full run rate in Q4. It's an incredibly dynamic situation with memory pricing. It's -- we're trying to get the signals on what it could look like in the next few quarters. Our expectation is that there will be relief several quarters out. But right now, for at least through the better part of FY '27, we would expect memory prices to stay elevated. John Jeffrey Hopson: Got it. And maybe just on the U.S. Federal side. It's been a couple of really nice quarters. Maybe just any additional information on the dynamics that are going on in U.S. Fed? François Locoh-Donou: Yes. Generally, the dynamics are strong. We had a strong Fed quarter. And I would actually expand that beyond U.S. Fed to the global government sector in the first half was really strong. I think you're seeing that. That's not, I would say, just an F5 trend. I think you're seeing that generally defense spending across the globe has been growing, and we are a beneficiary of that trend, in part because generally, defense customers are investing more in security, in part also because those customers are very hybrid multicloud. We have a number of customers in the defense sectors that want air-gapped environment. Sometimes they want to leverage cloud as well, but a lot of them want air-gapped environment in their own data centers. We have been making investments for that opportunity, and we're seeing the benefit of that today. So I think the Fed has been strong for us. But globally, government spending has been strong, and I think will continue to be for the next several quarters. Operator: We'll move next to Amit Daryanani at Evercore ISI. Unknown Analyst: This is Ketan on for Amit. I guess services growth at 2% was fairly muted. Can you maybe just touch on what's happening there and maybe your updated thoughts on how to think about it in the long term? Cooper Werner: Yes. I'll start. I would say, ironically, I think this is tied to a good news story, which is the strength that we're seeing with the refresh, and this is kind of the dynamic that we've seen with past refresh cycles. When you see a strong refresh in the very near term, it has a little bit of a headwind to the services business. And part of that has to do with you're replacing legacy appliances that have been carrying service for a number of years. And as those come out of the system, and then you backfill with the new appliances, there's a little bit of a lag on the maintenance revenue stream. Conversely, when we've had periods where customers are sweating assets, that's where you saw some strength in the maintenance revenue. So the longer-term picture is that the refresh has been very strong, and it's a refresh plus expansion story. And what we're seeing is that we're getting better retention of that footprint than we had in prior cycles. Ultimately, that's going to be a great story for services because with the larger footprint that you get maintenance revenue against, you're going to see a better revenue outcome. But in the very immediate term, as customers are making the transition, it's a bit of a headwind on the maintenance revenue. Operator: Next, we'll move to Tal Liani at Bank of America. Tal Liani: I think everyone is trying to basically get to the same question, whether this is finally a sign that AI is showing its impact on the company's growth or whether this is just a refresh story that is temporary. And the question I have is why are we seeing -- I think you touched on some of it, but why are we seeing the growth only outside of the U.S. or less in the U.S.? Meaning U.S. is leading AI. Out of $80 million growth year-over-year, U.S. was only $11 million growth. And last year out of $56 million, it was $7 million. So the majority of the growth is outside of the U.S. And what I'm trying to understand is to link the story of AI uplift to the fact that the growth is coming only from outside of the U.S. Why don't we see more U.S.? That's number one. And number two, why do we see a lag between system growth that is consistently growing every quarter. You went from $160 million to $226 million in 5 quarters, but software is back to Q1 level of '25, so $160 million, give or take, $164 million. So why do we see a lag between software? And at the time of refresh, don't companies upgrade their software package as well and then we should see growth in software? François Locoh-Donou: Okay. Tal, thank you. I will start and then Cooper may complement me on a couple of aspects you've raised. So let me start with the U.S. First of all, the trends of our business in the U.S. are very healthy. I would not read too much into a given quarter's performance of this or that region. Some of it is the timing of what was able to ship to which customers in the quarter. But generally, the trends that we're seeing around the expanding threat landscape that's creating more opportunity. We had a very strong security quarter, as I shared. That trend around expanding threat landscape, driving more security opportunity for F5 is a global trend. The trend of AI that -- and I shared some numbers earlier, I shared we did -- we are approaching 100 customers in AI. We did about $50 million in sales in the first half of the year in AI. That is a global trend that obviously includes the U.S. and the U.S. is actually pretty strong in that trend. The hybrid multicloud trend is also global and including, of course, in the U.S., where we are seeing more customers want resiliency. But that particular trend is, in fact, very pronounced in Europe, Middle East and Africa because of digital sovereignty requirements there, and we are seeing extra growth coming from there. So I would say when you're trying to dissect, you said you're trying to dissect what's the refresh versus what are secular trends. The three trends that I've mentioned are secular and they are global. In addition, of course, we have a strong refresh cycle. Cooper mentioned the attributes of the refresh. It is stronger than usual because we have an even higher retention rate than we've had in the past, and we have more customers expanding at the time of refresh. That is also a global trend. But what I would take away is that the three big trends that I've talked about are cyclical -- sorry, they are secular and they are global, and they are at play in the U.S. as well. Cooper Werner: Yes. And then just to touch on the software and systems dynamic, just a couple of dynamics that I would point you to is, one, the software business is largely a subscription business. We said this quarter, 90% of our software business was subscription. And of that subscription business, the majority does come through in a renewal motion. And so we are seeing strong attach of software at the time of refresh, but it's still a relatively small component of the overall software number. The majority of the software number is this base that we continue to expand over time. And we referenced this year that because the renewal cycle is coming off of our flat software year from FY '23 that there would be a bit of a slower growth rate this year, followed by a much stronger growth rate next year. So don't mistake that the slower growth rate this year is having to do with expansion in attach rates at that time of refresh because those trends are actually pretty healthy. Operator: And next, we'll move to Michael Ng at Goldman Sachs. Michael Ng: I just have two. First, this is just on systems revenue growth in fiscal '27. Obviously, you guys have had two strong back-to-back years in systems revenue. Could you just talk about your early expectations around whether fiscal '27 systems can grow just given the strong refresh that we've had in the last couple of years? And then a related question, it's been about, I think, 4, 5 years since the launch of rSeries and BIG-IP VELOS. Are you expecting a new kind of ADC form factor system to drive another refresh cycle, particularly given all the incremental demand from AI? Just wondering how you guys think about new products on the ADC side. Cooper Werner: Yes. Okay. So I'll start with the growth question. It's a little bit early to be guiding for next year. But yes, we do expect there to be a growth opportunity for the systems business, just where we're at with the refresh cycle right now and the strong trends we've been seeing both in expansion at the time of refresh, but also new use cases. And we haven't spent as much time on that, but we really have been seeing new growth, pretty healthy growth outside of the refresh. So some of it's the AI use cases that we've talked about. We've been seeing higher takeout rates from competitors. Some of the data sovereignty -- digital sovereignty dynamics are coming through as new business in addition to expansion at the time of refresh. So all of that's kind of giving us pretty good visibility 2 quarters out into next year, and we feel pretty good about the growth opportunity in that regard. As far as the next range of appliances and systems offerings. We wouldn't get into specifics at this point. But yes, of course, we are well down the path of planning. We think there are some pretty interesting growth opportunities further downstream as we start thinking about things like PQC. And so continuous investment and innovation on our systems as well as our software has been something that's been critically important. And I think we're really kind of the only player in the space that has stayed steadfast in investing in systems. And I think that's really paying off right now. We've always felt like customers are going to need choice and that their environments are dynamic and how they architect can change over time. And so giving that flexibility for customers to deploy how they need to is going to be important, and that's really coming through right now with the business that we're seeing. Operator: And that concludes our Q&A session. I will now turn the conference back over to Suzanne for closing remarks. Suzanne DuLong: Thank you, Audra. We look forward to seeing many of you during the quarter and especially at our Analyst and Investor Day in May. Watch for more details in the press release about the event coming soon. And thank you all for joining us. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the NXP First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead. Jeff Palmer: Thank you, Lisa. Good afternoon, everyone. Welcome to NXP Semiconductors First Quarter Earnings Call. With me on the call today is Rafael Sotomayor, NXP's President and CEO; and Bill Betz, our CFO. The call today is being recorded and will be available for replay from our corporate website. Today's call will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations. These risks and uncertainties include, but are not limited to, statements regarding the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products and our expectations for the financial results for the second quarter of 2026. NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure of forward-looking statements, please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures and our first quarter 2026 earnings press release, which will be furnished to the SEC on Form 8-K and is available on NXP's website in the Investor Relations section. Now I'd like to turn the call over to Rafael. Rafael Sotomayor: Thank you, Jeff, and good afternoon. We appreciate you joining us today. Our first quarter performance exceeded expectations with broad-based improvements across all our focus end markets, led by our company-specific growth drivers and importantly, with momentum now visibly broadening into the core of our business. What we're seeing today is the compounding result of sustained investment, disciplined execution and deepening customer adoption across our differentiated portfolio that is increasingly well positioned for the most durable secular trends in semiconductors, software-defined vehicles, physical AI and now with greater visibility than before, data center infrastructure. The remainder of 2026 is set up to be stronger than we anticipated just 90 days ago. Now I want to walk you through the key drivers behind that improvement. Turning to the quarter. We delivered revenue of $3.18 billion, up 12% year-over-year and seasonally down 5% sequentially. All end markets grew year-over-year. And in aggregate, we outperformed by $31 million, above the midpoint of our guidance. Our company-specific strategic growth drivers across the auto and industrial and IoT end markets grew 18% year-over-year year and represented roughly 1/3 of first quarter revenue, 120 basis points above last year and 40 basis points above the midpoint of our guidance. Taken together, we delivered non-GAAP earnings per share of $3.05, $0.08 above the midpoint of our guidance. Now turning to end market performance. In automotive, revenue was $1.78 billion, up 6% year-over-year and in line with expectations. Adjusted for the sales of the MEMS Sensors business, automotive growth was 10% year-over-year. During the quarter, the growth was driven primarily by accelerating customer software-defined vehicle programs, improved electrification trends and continued momentum in radar and connectivity. Together, the auto accelerated growth drivers contributed nearly 90% of the year-over-year growth. From a customer adoption perspective, we're seeing strong design win traction for our S32N and S32K5 products, platforms that will serve as the backbone of our automotive processing franchise for years to come. We also secured new radar awards for imaging radar solutions, along with wins for our 10-gigabit automotive Ethernet products. These are multiyear platform commitments that expand NXP content per vehicle and deepen the structural relationship with our customers. The automotive opportunity is a long-duration compounding story and our progress reinforces that trajectory. In industrial & IoT, revenue was $628 million, up 24% year-over-year and near the high end of our guidance. Growth was driven by our newer industrial processing solutions, including i.MX, RT and MCX. Together, these products grew about 75% year-over-year and contributed nearly half the end market growth versus Q1 2025. Within the end market, industrial was strong with notable strength in factory automation, data centers and energy storage. Looking ahead, the industrial & IoT market is entering a transformative phase as physical AI moves intelligence into real-world systems and robotics. This is creating significant content growth opportunities for NXP, particularly in processing, connectivity and security. As AI is deployed at the edge, customers need greater processing headroom to future-proof their platforms. As a result, we're seeing customers making deeper multigenerational commitments to NXP because of the strength of our AI-enabled product portfolio. Now I want to take a moment to speak directly about our data center exposure because this is an area that we haven't previously emphasized. In 2025, revenue related to data center applications was about $200 million, and it was reflected evenly in both our industrial & IoT and communication infrastructure end markets. Based on our other programs now ramping, we believe this business will be north of $500 million this year with a similar end market split. We have established meaningful positions in system cooling, power supply, board management and control plane switching applications. Across these subsystems, customers choose NXP for our processing depth and security capabilities. Based on customer engagements, we are reinforcing our i.MX application processor family for this opportunity, creating a durable and expanding revenue presence in data centers. With communications infrastructure, revenue was $380 million, up 21% year-on-year and at the high end of our guidance. Growth was driven by digital networking exposure to data center and continued ramps of our UCODE RFID product. And lastly, mobile revenue was $391 million, up 16% year-over-year and in line with guidance, reflecting continued strength in our secure mobile transactions franchise. Now turning to the second quarter. Our outlook is better than we anticipated 90 days ago. We are guiding second quarter revenue to $3.45 billion, up 18% year-over-year and up 8% sequentially. This sequential growth represents an acceleration of our company-specific drivers. We expect all regions and all end markets to be up year-on-year, a reflection of expanded customer adoption of our differentiated portfolio. At the midpoint, we expect the following trends in our business during Q2. Automotive is expected to be up in the low double-digit percent range year-on-year and up in the high single-digit range sequentially. Adjusted for the sales of the MEMS Sensors business, our guidance implies a high teens percentage growth year-over-year and 10% sequentially. Industrial & IoT is expected to be up in the high 30% range year-over-year and up in the high teens range sequentially, continuing the acceleration we saw in Q1. Mobile is expected to be up in the low single-digit percent range year-over-year and down in the low double-digit percent range on a sequential basis. And finally, communications infrastructure and other is expected to be up in the mid-30% range versus Q2 2025 and up in the mid-teens percent range versus Q1 2026. In summary, our second quarter outlook and our growth trajectory in 2026 reflect the story of breadth, depth and acceleration. Our company-specific growth drivers are performing as designed. Our core business is inflecting. And today, we have made the growth of our data center revenue transparent to support your understanding of our exposure to this important market. Data center revenue is ramping now, and it will more than double in 2026 from a year ago. We remain disciplined in how we invest, how we allocate capital and how we manage the factors we can control. Our framework is unchanged: invest for growth, pursue targeted M&A to strengthen the portfolio and return excess cash through dividends and buybacks, consistent with our long-term model. And now, I would like to pass the call to Bill for a review of our financial performance. Bill Betz: Thank you, Rafael, and good afternoon to everyone on today's call. As Rafael has already covered the revenue drivers, I will turn to the financial highlights. Overall, our Q1 results were solid, which were led by our company-specific growth drivers across our focused end markets, reinforcing the strength of our strategic priorities. We continue to ramp our new products and see strong customer adoption and design win momentum across our latest products and solutions. This momentum reinforces the value of our long-term R&D investments and the strength of our product road map. In summary, revenue, gross profit and operating profit were all better than the midpoint of guidance, and we delivered non-GAAP earnings per share of $3.05 or $0.08 better than the midpoint. Non-GAAP gross profit was $1.82 billion, with a 57.1% non-GAAP gross margin, modestly above guidance, driven by solid fall-through on higher revenues. Non-GAAP operating expenses were $758 million or 23.8% of revenue, favorable to guidance, driven by efficiency gains. Non-GAAP operating profit was $1.05 billion, and non-GAAP operating margin was 33.1%, 40 basis points above guidance. Below the line, non-GAAP interest expense was $90 million and taxes were $173 million. Noncontrolling interest expense was $11 million and results from equity accounted investees were a $4 million loss. Taken together, below-the-line items were $3 million unfavorable to guidance. During the quarter, stock-based compensation was $109 million, and it is excluded from our non-GAAP earnings. Turning to changes in cash, debt and capital returns. Our balance sheet remains strong and provides flexibility to invest in our strategic priorities and hybrid manufacturing plans. We ended Q1 with $11.7 billion in total debt and $3.7 billion in cash. Cash usage during the quarter reflected debt repayments, joint venture investments, capital returns and CapEx, partially offset by cash generation, including $878 million of proceeds from the sale of the MEMS Sensors business. Net debt was $8 billion or 1.7x adjusted EBITDA, and our adjusted EBITDA interest coverage ratio was 14.5x. During Q1, we retired the $500 million, 5.35% tranche due in March. And after the end of the quarter, we retired the $750 million, 3.875% tranche due in June. In Q1, we returned $358 million to our owners comprised of $256 million in dividends and $102 million in share repurchases. After quarter end, we repurchased another $32 million under our 10b5-1 program. We remain committed to our long-term capital allocation strategy, balancing returns to shareholders with disciplined investments in the business to support long-term profitable growth. Turning to working capital. Days of inventory were 165 days, including 7 days of prebuilds. Receivables were 34 days and payables were 59 days, resulting in a cash conversion cycle of 140 days. Inventory levels remain aligned to support our future growth and our planned front-end factory consolidation plans. Cash flow from operations was $793 million, and net CapEx was $79 million, resulting in non-GAAP free cash flow of $714 million or 22% of revenue. From a cash deployment perspective, during Q1, we continue to advance our manufacturing strategy, which supports our long-term supply resiliency. Over time, this is expected to contribute approximately 200 basis points of structural gross margin expansion once the facility is fully operational in 2028. In the quarter, we invested $385 million in VSMC, our manufacturing joint venture in Singapore. This is comprised of $189 million in long-term capacity access fees and $196 million in equity contributions. Overall, we are about 67% through the investment cycle for VSMC and about 30% for ESMC. For VSMC, we expect an additional $425 million in 2026. For ESMC, we expect the 2026 investments to be about $50 million. Now turning to our expectations for Q2. We expect Q2 revenue of $3.45 billion, plus or minus $100 million. This is up 18% year-on-year and 8% sequentially. The expected first half results support our view that NXP's growth is increasingly company-specific and reinforces our confidence in achieving our long-term revenue growth targets. We expect non-GAAP gross margin of 58%, plus or minus 50 basis points, up 150 basis points year-on-year and up 90 basis points sequentially. This is driven by higher revenue, product mix and front-end utilization improvements. We expect operating expenses of $800 million, plus or minus $10 million. This reflects the $17 million annual RFID licensing fee and normal annual merit increases. At the midpoint, this results into a non-GAAP operating margin of 34.7%. Below the line, we expect non-GAAP financial expense to be approximately $92 million and our non-GAAP tax rate to be 18%. We expect noncontrolling interest to be $14 million, including $4 million losses in our equity accounted investees. Stock-based compensation is expected to be approximately $107 million and is excluded from our non-GAAP guidance. This implies Q2 non-GAAP earnings per share of $3.50 at the midpoint. Turning to Q2 uses of cash. We expect capital expenditures to be approximately 3% of revenue with a capacity access fee payment to VSMC of $55 million and equity investments into VSMC of $125 million and for ESMC $10 million. Overall, our first half performance and expectations reinforce the durability of our financial model, driven by our company-specific growth drivers finally shining through, gross margin back to expansion mode and improved efficiency in our operating expenses. In closing, we remain confident in delivering our 2027 financial commitments which implies double-digit revenue growth in both 2026 and 2027, gross margin expanding towards 60-plus percent and continued discipline in our operating expenses. I would like to now turn the call back to the operator for your questions. Operator: [Operator Instructions] First question will be coming from the line of Vivek Arya of Bank of America Securities. Vivek Arya: Rafael, I was hoping that you could give us a sense for what is driving the growth in your automotive business, both kind of within China and outside of China. And then how much of a pricing benefit are you seeing because everything appears to be in kind of short supply right now, and I was wondering if NXP is seeing any benefit from the pricing side of the equation? Or do you think this is more just kind of company-specific and these are more unit rather than pricing given growth upside that you're seeing right now in autos? Rafael Sotomayor: Yes. Thank you, Vivek, for the question. I think let me tackle the question on auto. I think that we have right now is a backdrop of constant news of SAAR being down and maybe people getting confused about what does it mean for us in auto business. And I'll say out of the back, while SAAR gives you how many vehicles are produced, it's nothing about semiconductor content per vehicle. Now in this environment, our auto business, NXP is performing well. And you can see from the print in Q1, it grew 10% after you account for the sensor business, and Q2 guide implies a high teens year-over-year growth on the same basis. So you can see that clearly, the momentum is improving. And so that tells you already that this is not necessarily a story about unit growth, this is a story about the transformation, the architecture transformation that is driving content growth. So my answer to you is architecture led. And that's a real story, right? For us, it's a content story that's starting to show in our numbers. The one thing I want to leave you as well is this growth is increasingly structural. What does that mean? Well, our accelerated growth drivers have been growing double digits since Q4. And that also happened in Q1, is going to continue in Q2, and that contributing to 90% or 90-plus percent of the growth of the segment. And that kind of tells you that our growth is increasingly structural. You talk about China, you talk about some of the events that says production is down, but every segment -- I'm sorry, every region in automotive is up year-over-year. Despite the sequential decline a quarter, year-on-year, we're actually growing year-over-year in every segment, and that continues into Q2. Vivek Arya: And for my follow-up, perhaps on the comms infrastructure segment, I think the last call, you kind of broke it out, right, half, I think, in your tagging products and then digital networking and RF power. And back at your Analyst Day, you had said essentially kind of a flattish outlook from '24 to '27. What is the right way to think about this business? How much of this do you still plan to exit? How much of this are you reinvesting in? So what is kind of the true growth rate of your comms infrastructure business in '26 and '27 that we should be looking forward to versus what you thought of at the Analyst Day? Rafael Sotomayor: So let me answer just by stating that we're not going to change the long-term model of comms and infra, but I think your question is very valid with respect to the composition of what's in, in comms and infra. And if you -- if you remember what I said is that this end market was going to be flat -- CAGR, basically flat for the next 3 years between '24 and '27. And we experienced a decline on close to 25% last year. Now we closed the year on this segment with about 50% of this revenue being tied to secure cards, about 1/4 of that was the digital networking and 1/4 of that was RF power. Now you can see that the comms and infra end market is recovering, primarily on the back of the strength of secure cards, RFID is actually going up and our exposure to data centers through our digital networking products is actually rebounding. And so I think the composition of this segment is going to shift a little bit more into -- from RF power, which we are actually deemphasizing and is going to probably start decelerating in 2027. The revenue composition is going to change from RF power more towards digital network and secure cards is likely to stay around 50%. And that's the way you should think about it. Operator: And our next question will be coming from the line of Ross Seymore of Deutsche Bank. Ross Seymore: One of the lines you said in your preamble, Rafael, as well as in your press release was about the momentum accelerating throughout the rest of the year. Can you just talk about what that is? I'm not trying to get you to guide for the back half of the year, but just is your visibility improving? What gives you the confidence in that? How much is cyclical versus secular, those sorts of things? Rafael Sotomayor: No, I think it is a fair question. First of all, I will kind of resonate with you. I'm not going to guide second half today. But I would say the setup has clearly improved. And if you take the Q2 guide, you can probably right estimate at 15% growth in the first half of 2026 versus second half -- sorry, first half of this year versus first half of last year. And actually, it's 18% if you adjust for sensors. So actually, you can see that we're starting the year stronger. What has changed? The visibility has improved. I think what has changed, direct order book continues to strengthen. The distribution backlog continues to improve. So I think we believe the momentum continues. And so we're going to stay disciplined in the way we guide, but the signals that we track gives us confidence that the momentum of our company-specific growth drivers will continue throughout the year and it's going to drive what we believe is going to be growth in the second half. Ross Seymore: I guess for my follow-up, thanks for breaking out the data center side. Talk a little bit about that 200 more than doubling this year. You went through a few of the drivers there. But are these new products? Is this just the rising tide of that CapEx lifting all the boats you included? Or is this a strategic area that you're targeting? Just talk a little bit about what gives you the confidence in that and how NXP is differentiated. Rafael Sotomayor: Yes. Maybe, Ross, I'll start by maybe explaining what is our exposure to data center because that could be confusing. So off the bat, right, I would say we're not claiming exposure to the data plane. So no GPUs, no accelerators, no high-speed AI connectivity. So our domain is in the control plane. So the way to think about it as data center scales, the constraints are not just compute and memory, they're also power, cooling, uptime, secure controls. And I think this is where NXP plays. What are our products? Our products are Layerscape networking processing for control plane networking. We have our i.MX products for board management. We have our MCUs doing root of trust or being part of the cooling system. So the way to think about it is we play in the part of the system where you need high reliability and long life cycle applications. And I think this is where NXP's industrial strength portfolio is differentiated. And so the growth that we anticipated from last year to this year is underpinned. I mean these are products that they're not only designing, but they're ramping. And I think this is just about just making sure the momentum continues into the second half. Operator: And the next question will be coming from the line of Thomas O'Malley of Barclays. Thomas O'Malley: Just on the channel, you guys went from 9 weeks to 10 weeks now, it looks like 10 weeks to 11 weeks. Clearly, the demand profile for the rest of the year is stronger. I was curious if you guys had any additional views on the channel. Do you think that you would expand it just given the stronger demand profile? Are you comfortable with it at that 11 weeks mark that you guys have kind of described in the past? Rafael Sotomayor: Yes. So in this quarter, right, in Q1, we went to 11 weeks. And if you remember, our guide of Q1 last quarter already reflected the 1-week increase in our inventory. And it was primarily to actually service what it was a much stronger demand environment. And if you look at our growth in industrial & IoT in Q1, it grew over 20%, and 80% of that business is serviced through distribution. So you can see that we already had an idea of where the strength is going to come. And then our Q2 guide in industrial & IoT, which is -- but you have to remember, 80% of that comes from the channel is guiding towards high 30% range. So we're clearly servicing the channel. Now Q2 guide is based on inventory channel staying flat, staying at 11 weeks. So we intend to stay in our long-term target, which is 11 weeks. Thomas O'Malley: And then just as a follow-up on the data center side. You guys are obviously seeing gross margin benefit from volume, and you also talked about mix as well. You guys don't give specific gross margin targets on your segments, but could you maybe give us a flavor of are these new products beneficial to corporate gross margins? And as that scales, should you see a tailwind from the data center business as well on the gross margin line? Bill Betz: Yes. Tom, this is Bill. Thanks for your question. Let me address the gross margin in general and specifically your question. Our gross margins continue to expand, driven by the higher revenue, the product mix and the utilization levels. Our utilization on our front end, think about the first half to be in the low 80s and think about the second half to be in the mid-80s. So we will get benefit from that from the utilization levels for our gross margin. Again, all the investments we're making is all about -- and servicing is all about focus on being accretive to our corporate gross margins. So in these areas and when we make investments or provide our broad portfolio into different applications, it's extremely important that we extract value and also create value for our customers. So the way to think about that, to your question is, yes, they are very favorable to the corporate gross margins, but we'll continue to drive and focus there. Operator: And the next question will come from the line of Francois Bouvignies of UBS. Francois-Xavier Bouvignies: I wanted to follow up on the -- maybe on the pricing dynamics. I mean we have seen pricing increase in the industry so far since the beginning of the year. And also we have seen some reports that NXP is also involved in these pricing dynamics. You don't talk much about pricing. So maybe I think that maybe it's not that a big impact yet. But should we impact the pricing move for the rest of the year as an upside potential if it's getting tighter? And Bill, you mentioned [ 85% ] in the second half of the year. So maybe you are reaching a level where maybe you could increase the pricing over time. Is that a scenario possible? Rafael Sotomayor: Francois, let me answer the question here with -- in the way we see. I mean, I think your question relates to inflationary costs and the impact into pricing. And pressure in terms of cost is always a challenge. And this is something that we do that -- we're paid to actually handle. And so we must tackle it. So our first reaction to cost increase is always to mitigate it through operational efficiency. And that for us is our preferred approach. That said, in selected areas, we are seeing high input cost pressure. And so we are taking selectively smart pricing adjustments to protect the economics of the business. The reason we haven't talked about it is because the Q2 impact is immaterial. Now we will continue to be disciplined and protect gross margins when cost inflation requires a response. And so we'll keep you updated if things change. Francois-Xavier Bouvignies: Makes sense. And maybe the second question is on this broad-based recovery across all products and China when you said China is also growing. And of course, when we look at the Q1, the China auto car sales, at least for the domestic part is actually down meaningfully, I mean, mid-teens percentage year-on-year. So do you see as well China still strong year-on-year in Q2 and for the remainder of the year? Or do you see as well some impact from that data we see for the sales of cars in China or the content is higher and offsetting, any color on this China specifically would be great. Rafael Sotomayor: No. Francois, I acknowledge the headlines of China, right? I think it's been very public that the production in China was weak, primarily driven by the weakness on the internal consumption and some of the headlines that the Chinese OEMs are focusing more on export to overcome some of the challenges that are happening with the domestic market. But I think the contradiction is that -- and I continue to say it is that production volatility is very small compared to content growth. And China is no different than the rest of the world. And I tell you for us, China grew year-on-year in Q1. I mean it wasn't necessarily massive, but it grew and it continues to grow into Q2. And so I think that is the story. And if the story doesn't change, content growth overcomes unit volatility. Operator: And our next question is coming from the line of Jim Schneider of Goldman Sachs. James Schneider: Given the commentary you've made and the idiosyncratic growth drivers you're seeing relative to '26 and '27, just wanted to clarify that you are still on track to sort of deliver to your Analyst Day targets from 2024 out into 2027. And maybe you can confirm both the revenue and gross margin side of that. Rafael Sotomayor: Yes. I think the question on 2027, we were specific both in our script, both Bill and I in our prepared remarks that we are confident and we have a conviction on the trajectory that we have with our secular growth drivers that 2027 is achievable. And so I think the answer is yes. We stay put with our 2027 targets. Bill Betz: Yes. And just to add the secular drivers, they continue to perform very, very well. We expect for the auto ones to be above our high end into Q2 and also for industrial & IoT, the growth rates to be above the high end of what we said for our industrial & IoT growth drivers that are company specific. James Schneider: That's helpful. And then relative to the data center disclosure you provided, that by all accounts appears to be at least at or potentially above the rate of data center growth for many of your analog peers. Can you maybe talk about whether there's any specific areas that are growing -- sort of outgrowing the overall envelope there? And whether you plan to deliver or introduce any new products to further apply towards that opportunity? Rafael Sotomayor: Yes. The data center -- so the way to think about data center is that we are just ramping, right? So the growth -- and again, we're going to be focused in the control plane of the data center. The growth of that exposure to that segment is just beginning because we're just ramping. And our SAM, if you look at our SAM on the control plane, it's probably growing about 10% to 11% per year. We are going to outgrow the SAM because we're just ramping and I expect that to continue to happen in '26 and '27. We are doubling down on some of the products to actually seize kind of the opportunity that we have in the current engagements. We are talking to our customers what the next generation of products is going to be. And I'll tell you, the exposure in the data centers has about 20 to 25 products. Obviously, some of the higher ASP products are in the networking side and the i.MX products for management control. And so we're speaking to our customers what the next-generation needs are going to be, and we're developing those products. Operator: And our next question is coming from the line of Matthew Prisco of Cantor. Matthew Prisco: Maybe to kick it off, can you share a little more color on the customer ordering patterns that you've seen, what's changed over kind of the past 90 days? And have you seen any impact from memory dynamics out there or Middle East conflict either in the order patterns today or in customer conversations? Rafael Sotomayor: Well, the visibility on our backlog and then the distributors' backlog has improved significantly. And that's what gives us the confidence that we have going into the second half of the year that the demand is strong. Memory is always a topic, and our customers are doing everything possible to actually secure supply. This is more of a supply issue versus a price issue. We all know what the prices are in the memory. We are -- if you look at our customers on the consumer side, they are very well-funded customers that they have the ability to actually go get the supply they need. So we haven't seen any impact in our orders yet in industrial, IoT and automotive due to memory, even though memory is still a big conversation in every customer meeting that we have. Matthew Prisco: Helpful. And then maybe talking about the supply backdrop a bit. Are you seeing any tightness out there impacting the business as we kind of see those Tier 2 wafer pricing increases and kind of what we're talking about supply, an update on VSMC or ESMC timing? Bill Betz: Sure. Let me take that. Let me take your last question first on the timing of VSMC and ESMC. Both are on schedule. VSMC Navy, I know the tools are installed. They're going to start ramping soon. And hopefully, we get up and running in 2028, where we get the -- expand our structural gross margins by another 200 basis points. Related to other supply factors, yes, supply in different parts of the supply chain are tight. And we do see these inflationary costs that Rafael referred to. And if we can't offset them internally from operational efficiency or productivity, we then unfortunately have to pass them along to our customers. And so we are starting to do that in selective areas, but trying to do that in a controlled way. If things get really tight, we'll do what we did during COVID to do -- to make sure that we protect our gross margins related to it. But we are seeing bottlenecks -- slight bottlenecks in certain parts of the supply chain. Operator: And the next question will come from the line of Joe Moore of Morgan Stanley. Joseph Moore: I wonder if you could talk about the growth drivers in the auto space, and you sort of talked about seeing your business get better from that. Any -- is that kind of an indication of 2027 model year? Or I sort of think of these as 5-year rolling programs. Just anything you can do to help us what's giving you the confidence to sort of call that an inflection rather than something cyclical? Rafael Sotomayor: Yes. So let me talk about the auto growth drivers. They've become a very important part of the business now, and it's really changing the composition of the revenue in auto. The growth drivers -- just to give you a sense, the growth drivers in Q1, they were north of 45% of the revenue composition. And so we continue to see growth. And just to give you a sense, this is now coming from a 39% composition. I think we're going to end up the year in 2026 closer to the 50% range as opposed to the mid-40s. And because they are growing strongly, right, and they are growing double digits. And it's driven by the software-defined vehicle portfolio that we have. That is the strength of NXP and automotive is we have products in the processing portfolio that today don't have equivalents in the market, and they are really well positioned for zonal architectures and central compute architectures. So we expect this transition into SDV to really be a very, very strong tailwind and position NXP as the leadership in automotive. But it's all driven by our SDV platform. Joseph Moore: Great. And is there anything different about that in the China market? I'm sort of thinking when you build the car architecture from scratch, it's probably easier to build around software-defined vehicles than it is if you're sort of in an entrenched architecture. On the other hand, there's local suppliers and things like that. Just is the China market any different in terms of those growth drivers? Rafael Sotomayor: It is not necessarily different in terms of the adoption of the growth drivers. I think what is different is in the speed in which they adopt the products. And for instance, I would say that -- let me just take an example, the S32K5, which is our 60-nanometer -- latest 60-nanometer zonal product, a product with a lot of performance. We expect the K5 to go to production in China despite the fact that this product has been sampled to Western customers first. So the speed in which they adopt the next-generation architectures is what is different. Now you made a comment with respect to local competitors. I think the shift in architecture is also benefiting us because at the end of the day, you will see local competitors emerge in the automotive market, and they are likely to emerge in the low end. But this architectural shift to zonal and central compute, it favors higher processing capabilities, it favors higher redundancy. The other thing that you have to take into account, China is moving fast to automation to Level 3, Level 4 ADAS. So that also requires more redundancy, a better security, better safety. And so this is where I think innovation and MCUs and MPUs is going to be key to actually win in the market. So we are quite excited about the transformative move that Chinese are making in architectures and the speed in which we're doing it because we have the right road map for them. Operator: And the next question will be coming from the line of Chris Caso of Wolfe Research. Christopher Caso: First question is coming back to some of the comments you made about input costs rising. And if you could talk to us about what you're seeing with regard to foundry wafer pricing now? And how that gets affected as you -- as VSMC starts to ramp next year? What impact is that on you? And perhaps does that provide you with some sort of an advantage if pricing does go up as VSMC ramps? Bill Betz: Yes. Let me take that one. The way to think about the supply, VSMC services is one sort of supply which we kind of have a little bit more control over and why we're paying additional capacity access fees to get additional supply. But that's probably more linked to some of our technologies that are mostly in-house from part of our consolidation rationalization project that we're doing. The other capacity, what we're seeing is when you want additional, so if you have surprises above what the agreement that you kind of entered in the beginning of the year, we're seeing additional charges because they may need to obviously, capacity gets tight, so they also may need to add new tools and so forth to help you supply. But we're not -- from the current agreement, it's probably more upside that they charge and then can we offset that internally? If we can't, then we pass it along to our customers. Christopher Caso: Right. Understood. As a follow-up, you mentioned in your opening remarks that the -- I guess you were confident still in the Analyst Day targets and that implied double-digit growth for '26 and '27. Obviously, '27 is far away. I'm not sure what we should read into that. Is there any particular visibility that you have? Or is this just some confidence that perhaps we finally turned the corner? And if that's the case, we get a good growth year next year. I'm not sure how much we should read into those comments. Rafael Sotomayor: Well, let me address that because I think it's a question on the model and why we're doubling down on basically our commitments in 2027, which will imply just doing the math, a particular growth rate in 2026 and 2027. And that conviction, our revenue targets emanate from the traction that we have in our accelerated growth drivers and the traction that we have now with data center and the traction that we show you in both industrial & IoT. And I think you can get there through different contributions by the different end markets and some segments are going to be in the low end of the range, some segments are going to be in the high end of the range. But our targets for us in 2027, they seem to be within reach. Now just to be honest, I don't -- internally in NXP, we don't see 2027 as a destination, of course, just a milestone. And if you were to look into 2027, getting -- what's important, obviously, for you from a revenue perspective is why we have the conviction, but for us internally is how we close the year and enter 2028 with momentum in our focus markets. The progress we make in our portfolio, the traction that we have on becoming mission-critical to our customers. And I think the conviction that we have is the progress we're making right now in 2026 and last year with the adoption of our customers and our new products, I think makes our view on this path towards 2027 very, very constructive. Bill Betz: Yes. And maybe I'd just add just on the secular growth drivers. Obviously, we have visibility next quarter, the quarter after and the following quarter. And the order intake on those secular growth drivers for the company specific are all at high end or above what we said during Investor Day. So really a lot of company-specific growth that's given us confidence behind it because, again, it's a content, it's a ramp of products, design wins that have won and they're ramping now. And so since they're tracking to at the high end or above the high end of the model that we provided, we feel very confident that this will continue because of the adoption of our solutions. Operator: And our next question is coming from the line of Gary Mobley of Loop Capital. Gary Mobley: I was hoping that you can give us an update on the integration of Kinara, Aviva, TTTech, how that's progressing, whether it relates to enhancements to existing road maps or full commercialization on an independent basis? Any update there would be helpful. Rafael Sotomayor: Yes. I'll give you an update. This is Rafael. So I think let's start with TTTech. I think great engineering organization. They have been redeployed now to our internal efforts to do S32 CoreRide. This is a very important kind of initiative that we have. We expect to sample with customers in Q3, the zonal reference design, the zonal K5 reference design that involves not only the K5, but other MCUs and our 48-volt architecture, and we're doing it both in the East and the West. I think we have high single-digit number of customers engaged in POCs. So it's quite exciting. And we do expect that this effort is going to accelerate the K5 adoption into 2027. Aviva Links, I think, is a great platform that we got on SerDes platform. This is an open standard, very important for SDVs given the fact that the sensors and displays are multiplying in next-generation vehicles and all these are connected to SerDes. And I think companies are looking for an open platform versus the proprietary solutions they have today. We have customer awards now, and we expect to be in production with them in 2028. So this is a new SAM for us. This is a new market that we haven't entered. And in the past, there were 2 very entrenched, obviously, competitors there. But now with this open standard allows NXP to come and compete and compete with great technology. And the last one on Kinara. Kinara was a great acquisition directly in the middle of our North Star, which is becoming intelligent systems at the edge. And Kinara is -- it's been a perfect combination for our i.MX platform that is our application processor. It allows us to really engage with customers in ways that we couldn't have done in the past just because we didn't have the capability, we didn't even have the credibility on it. And so today, sales funnel is quite large and literally over $1 billion of sales funnel. So obviously, a lot of things to go and go and chase. Our customer reaction is really good. We have I think we have like more than 30 POCs going on, and we expect -- again, we are on track to have some revenue of combination of the Kinara asset with i.MX in the second half of 2027 and 2028. The other important thing is that we're starting to integrate the Kinara IP already into our industrial processors and our auto processors. This is monolithic integration of the IP. So this is also going to be part of our next-generation processing for our auto and industrial products. Gary Mobley: Appreciate it, Rafael. I want to ask really more of a direct question on your comfort to the 2027 targets. We all know what the revenue would materialize to at $15.8 billion if you hit the growth targets as laid out in November 2024. But we've had, of course, the divestiture of the MEMS Sensors business. So should we think about the endpoint or I guess, the milestone for 2027 is about $15.4 billion in revenue? Jeff Palmer: So Gary, let me take that modeling question. So first, in your calculation, remember, you've got to back off the sale of the MEMS business. So that's just a housekeeping item. But I think that what you've heard from both Rafael and Bill today is we are standing solidly behind our long-term growth rates. At the total company level, that means we're going to hit 6% to 10% total company. And I know you guys know how to do modeling better than anybody. You can kind of back into what that means for '26 and '27, and we're going to leave that exercise to you. But we are not backing away from those targets. And I would say the thing to take away from maybe some of the comments from both Bill and Rafael is the design wins we have, and they are starting to go into production. So our clarity and our belief in achieving those targets is increasing daily. Operator: And the next question will be coming from the line of Quinn Bolton of Needham & Company. Quinn Bolton: I guess I wanted to come back to the IIoT business. And if I've got my numbers right, it looks like that business will hit a record revenue level in the second quarter. How much of that is just broad-based industrial end market recovery versus your company-specific growth drivers? And then I've got a quick follow-up for Bill. Rafael Sotomayor: Yes. Let me jump on that one. I think you're right. I think the strength -- IoT, industrial and IoT for us started showing strength in Q3 last year. We started to grow year-over-year, and that growth continued in Q4, continue in Q1 with a 20-plus percent range, and now we're guiding to the high 30s. So we said it clearly, the strength is broad-based. It's all geographical regions in all markets. We have certain products right now that are driving the growth. We said that half of that growth came from new industrial processing portfolio. That is on -- that is the accelerated secular growth drivers. What is also very encouraging is that we're seeing the core part of industrial IoT also growing. This is a part of the revenue of the last year decline now is back into growth. In Q1, it grew 15% year-on-year. And so you can see that the rest of the portfolio is also recovering. So it's very -- it's broad-based now. It's also not only the accelerated growth drivers performing, but the core part of our business in industrial and IoT is coming back. And so that kind of tells you hopefully a little bit of flavor of the strength of the momentum that we have going into Q2 and likely carry in the second half of the year. Bill Betz: Yes. Maybe I'll just put a number there. The way to think about industrial IoT, the secular growth drivers are representing about 37%, and they're growing north of 40%, 50% kind of range, just to give you a feel. Quinn Bolton: Great. And then for Bill, you've talked about the 200 basis points that you get from the ramp of VSMC and in-sourcing or moving production from 200-millimeter to 300-millimeter. Can you give us a sense as that facility comes online, how quickly do you get that benefit? Does it -- can you see it all in 1 year? Or does it take several years to achieve the full 200 basis points? Bill Betz: Yes, it's a great question. Typically, we should start to see it when the factory is fully utilized, which is probably a good utilization number for that type of factory runs 90%, 95%. And so it will take several quarters to get that full benefit, depending on the ramp, of course. So my guess is you'll probably get a partial of it for sure in 2028. Will you get the full amount? Not sure. It all depends on the timing of the ramp, but we're pushing strong, and we want to get it as well and drive it. Jeff Palmer: Lisa, I think that will be our last question, and I think we'll pass it back to Rafael to conclude the call today. Rafael Sotomayor: Thank you, everyone, for joining us today and for your thoughtful questions. In closing, I would like to leave you with three takeaways. First, NXP growth is driven by leadership in SDV and physical AI and industrial & IoT. Second, our company-specific growth drivers are performing as designed. Lastly, we're reaffirming our Analyst Day commitments, which implies double-digit growth in both 2026 and 2027. This quarter reaffirms the strength of the execution to our strategy. We remain committed to disciplined investment, margin expansion and portfolio optimization to deliver sustainable long-term value for our shareholders. Thank you. Operator: Thank you. This does conclude today's program. Thank you all for joining. You may now disconnect.
Operator: Thank you for standing by, and welcome to Magnachip Semiconductor's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mike Bishop with Investor Relations. Please go ahead, sir. Mike Bishop: Thank you, Jonathan. Hello, everyone, and thank you for joining us to discuss Magnachip's financial results for the first quarter ended March 31, 2026. The first quarter earnings release that was issued today after the close of market can be found on the company's Investor Relations website. The webcast replay of today's call will be archived on our website shortly afterwards. Joining me today are Camillo Martino, Magnachip's Chief Executive Officer; and Shin Young Park, our Chief Financial Officer. Camillo will discuss the company's recent operating performance and business overview, and Shin Young will review the financial results for the quarter and provide guidance for the second quarter of 2026. There will be a Q&A session following the prepared remarks. During the course of this conference call, we may make forward-looking statements about Magnachip's business outlook and expectations. Our forward-looking statements and all other statements that are not historical facts reflect our beliefs and predictions as of today, and therefore, are subject to inherent risks and uncertainties as described in the safe harbor statement found in our SEC filings. Such statements are based upon information available to the company as of the date hereof and are subject to change for future developments. Except as otherwise required by law, the company does not undertake any obligation to update these statements. During the call, we will also discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles, but are intended as supplemental measures of Magnachip's operating performance that may be useful to investors. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in our first quarter earnings release in the Investor Relations section of our website. And with that, I'll now turn the call over to Camillo Martino. Camillo? Camillo Martino: Thanks, Mike. Good afternoon, everyone, and thank you for joining us. I am very happy to be here today for my third earnings call with Magnachip. Let me reiterate a point that I've made consistently over the past several quarters. Specifically, MagnaChip has a strong technical foundation with a long history in power semiconductors and deep relationships with important customers. We are building on that foundation to execute a multiyear transformation to return the company to profitable growth. Although we are in the early stages of this transition, I believe that we are making good progress. Let me address the quarter directly. From a revenue standpoint, Q1 came in stronger than typical seasonality would suggest with both sequential and year-over-year growth. Allow me to provide some clarity on how to interpret that result. A portion of the strength was driven by actions we took in prior quarters, specifically our previously communicated onetime sales incentive program to reduce channel inventory. This action was necessary to improve the health of the sales channel, but it also creates some short-term variability in revenue. While the top line growth is encouraging, we are still operating in a challenging competitive environment. Consistent with our communications in prior quarters, we continue to face pricing pressure on legacy products, particularly in China. And as we have said before, product competitiveness is the key to winning. Where we have competitive products, we can win. Where we do not, it is difficult to win in this market. On gross margin, we saw sequential improvement. We feel good about our progress, and we are at the beginning of a multiyear journey to substantially improve gross margin. Let me now step back and reconnect this quarter to our broader strategy. As you may recall, last quarter, we articulated a new strategy comprising 6 foundational pillars for the company's longer-term recovery and profitable growth. We are actively executing on all of them. I will not go through each one of them in detail today, but I would like to reinforce a few key points. As we have consistently said, at the center of everything we are doing is improving product competitiveness by developing new generation products. These are all critical to our long-term success. We have focused our efforts on accelerating our R&D and launching new products. We launched 55 new generation products in 2025, and we are now aiming for another 55 new generation products in 2026 after launching only 4 new generation products in 2024 and 0 in 2023. We believe that the launch of many new generation products on a consistent basis will have a meaningful contribution to our financial recovery efforts. Some of these new generation products include those we mentioned in our recent press releases, including our newest 8th generation of products for the BatteryFET set as well as for MV MOSFETs. While it takes some time for our customers to qualify a new product and subsequently drive revenue, we believe that over time, these new products will return the company to revenue growth and improve margins. Consistent with our comments last quarter, we expect new generation products to comprise approximately 10% of our total revenue in the fourth quarter of 2026 up from only 2% for the full year 2025. In parallel, we expect to continue deepening our relationships with important industry leaders in our target market segments. This will be crucial to returning to growth. I would like to address our Power IC business as that is an area of opportunity and is also critical to our long-term success. It is a smaller portion of our business right now, and we expect it to remain so through 2026. At the same time, we do see significant opportunity for our Power IC business in the coming years. We continue to align our Power IC products as well as our future gate-driver IC products with our power discrete product road map, such as MOSFETs and IGBTs. The longer-term alignment of our discrete MOSFETs and our Power IC products will enable Magnachip to launch higher value-added integrated power modules in the future as well. We believe Magnachip's longer-term potential is substantial, and the accelerated launch of new generation products are building initial successes. So while we are confident in the direction, the financial improvement will be gradual. Let me turn over to Shin Young. Shin Young? Shin Young Park: Thank you, Camillo, and welcome, everyone, on the call. I'll start with key financial metrics for Q1. Total Q1 consolidated revenue from continuing operations, which includes Power Analog Solutions and Power IC was $46.2 million, around the midpoint of our guidance range of $44 million to $48 million. This was up 3.3% year-over-year and up 13.9% sequentially compared to $44.7 million in Q1 2025 and $40.6 million in Q4 2025. Revenue from Power Analog Solutions in Q1 was $41.6 million, up 4.5% year-over-year and up 13.1% sequentially. The sequential improvement was primarily driven by the $2.7 million of onetime sales incentive that was recognized as a reduction in revenue in Q4 2025 as part of our efforts to reduce elevated channel inventory. Revenue from power IC in Q1 was $4.6 million, down 6.2% year-over-year, but up 21.3% sequentially. In Q1, consolidated gross profit margin from continuing operations was 15.6%, above the midpoint of our guidance range of 14% to 16%. This compares to 20.9% in Q1 2025 and 9.3% in Q4 2025. Year-over-year decline was primarily attributable to an unfavorable product mix, driven mainly by ASP erosion, particularly in China. As a reminder, the $2.7 million of onetime sales incentive was recorded in Q4 2025. Excluding this item, Q4 gross profit margin would have been 15%. On that basis, gross profit margin improved by 60 basis points quarter-over-quarter, primarily due to higher utilization rates. Moving to operating expenses. SG&A was $7.7 million in Q1 compared to $9.2 million in Q1 2025 and $8.6 million in Q4 2025. As mentioned in our prior earnings call, we expect to see annual OpEx savings of approximately $2.5 million beginning in Q4 2025 from our cost reduction efforts, primarily related to the voluntary resignation program implemented in Q3 last year. Stock-based compensation charges, included inSG&A, were $0.6 million in Q1 compared to $0.8 million in Q1 2025 and $0.4 million in Q4 2025. R&D expenses were $6.7 million in Q1 compared to $5.4 million in Q1 2025 and $7.6 million in Q4 2025. The year-over-year increase reflects the acceleration of investment in new product development. As Camillo noted earlier, we are now aiming for 55 new generation products in 2026. Before turning to our non-GAAP results, please note that our GAAP financial results are available in our Form 8-K filing with our first quarter earnings release. Our non-GAAP results are as follows. Adjusted operating loss was $6.5 million in Q1 compared to a loss of $4.4 million in Q1 2025 and a loss of $11.9 million in Q4 2025. Adjusted EBITDA was negative $3.6 million in Q1 compared to negative $1.2 million in Q1 2025 and negative $8.9 million in Q4 2025. The quarter-over-quarter improvement in both adjusted operating loss and adjusted EBITDA was primarily driven by higher gross profit, along with lower operating expenses as discussed earlier. Q1 non-GAAP diluted loss per share was $0.11 compared to a loss per share of $0.08 in both Q1 2025 and Q4 2025. Weighted average non-GAAP diluted shares outstanding for the quarter were 36.4 million compared to 36.9 million in Q1 '25 and 36 million in Q4 2025. Moving to the balance sheet. We ended Q1 with cash of $94.6 million compared to $103.8 million at the end of Q4 2025. The decrease was primarily driven by $3.9 million in capital expenditures with the remaining change largely attributable to operating cash outflows. At the end of Q1, total borrowings were $42.3 million, including $15.9 million of equipment loan. Of this amount, $26.4 million associated with the term loan was reclassified to short term during the quarter due to its maturity in March 2027. While this is standard accounting treatment, our lender is aware of the maturity profile, and we expect to be able to extend the maturity date beyond March 2027 and we'll address it in the ordinary course of business, consistent with typical market practice in Korea. Now moving to our second quarter 2026 guidance. Consistent with Camillo's earlier comment, Q1 revenue came in stronger than typical seasonality due to the onetime sales incentive program. While actual results may vary, for Q2 2026, Magnachip currently expects consolidated revenue from continuing operations, which includes Power Analog Solutions and Power IC businesses to be in the range of $44.5 million to $48.5 million, roughly flat sequentially and a decrease of 2.3% year-over-year at the midpoint. This compares with $46.2 million in Q1 2026 and $47.6 million in Q2 2025. Consolidated gross profit margin from continuing operations to be in the range of 17% to 19%, up from 15.6% in Q1 2026, but down from 20.4% in Q2 2025. Finally, I would like to note that a planned upgrade to the electrical substation by a service provider in Gumi is expected in Q3 and will have an impact on our factory operations. To mitigate any potential customer disruptions, we plan to build some additional inventory in Q2 and into Q3. As a result, we would expect our factory utilization rate to be somewhat higher in Q2, followed by lower utilization in Q3. Since utilization is the main driver of gross margin, we expect our gross margin in Q2 will likely be higher as implied by our guidance. Gross margins are expected to decline in Q3 and decline further in Q4 as a result of the planned upgrade. Thank you. And now I'll turn the call over to Camillo for his final remarks. Camillo? Camillo Martino: Thank you, Shin Young. Allow me to reiterate that we are committed to executing on our turnaround strategy and in particular, the 6 foundational pillars that we articulated a quarter ago. While we proceed through this multiyear journey, we are pleased to see the initial signs of success. Ultimately, this new strategy should drive long-term shareholder value. I want to thank our employees for their continued hard work and dedication and our investors and partners for their patience and support as we return the company to growth. We will continue to be transparent, disciplined and focused on execution. I will now turn the call to the operator and open the call for questions. Operator: And our first question for today comes from the line of Suji Desilva from ROTH Capital. Sujeeva De Silva: Could you please start first with maybe the gross margins by segment and how they vary? And is one more manufacturing exposed than the other? Any color there would be helpful. Shin Young Park: You're asking for this quarter, Suji, right? Sujeeva De Silva: Yes, you had the gross margins in the press release by segment, and they were very different. I was just curious what the driver of one versus the other was and then, yes. Shin Young Park: So we have a discrete business, which we call the Power Analog Solutions and Power IC businesses. So we've been kind of broken them down into those 2 buckets and power IC, that's the IC and the custom chip. So that the gross margin has been hovering around like 40 percentage, and it used to be a little over, but depending on the product mix. So that business, I mean, relatively revenue size is relatively small compared to the total company's revenue, but the margin has been pretty -- I mean, a lot higher than the normal corporate gross margin. And the other Power Analog Solutions gross margin, that's kind of -- that's the product we are producing in our Gumi Fab, so there are multiple factors that go into the gross margin calculation, meaning utilization and fixed costs and all of those kind of put into that the Gumi Fab cost profile that we're going to dictate how the gross margin can kind of vary quarter-over-quarter of that product line. Camillo Martino: And as Shin Young mentioned, utilization is a key factor that's driving that. Sujeeva De Silva: Okay. And then can you talk about the products you're expecting in '26? And what kind of gross margin trend we can expect above the product you've already introduced in '25? Camillo Martino: Yes, sure. The products that we have mentioned -- that we mentioned today, The 55, that's the plan for this year, new generation products. they are across the board. They are medium voltage, low voltage, IGBT, for example, super junction. So we are -- a whole bunch of new products right across the board. We're excited about that. That will have an impact on gross margin. But as we communicated on the call, it does take time to have an impact this year. I think we said that in Q4, we expect that new generation products to contribute approximately 10% of the total revenue. But at the same time, you need to offset that with Shin Young's comments on the planned upgrade to the electrical substation because that will have an impact on Q4 margin as well in the other direction. So there's a few factors going into the second half. Sujeeva De Silva: Okay. Great. And lastly, can you update us on where the manufacturing is from filling back into the manufacturing services capacity you had before? Shin Young Park: Manufacturing services for the... Sujeeva De Silva: Before when you had a contract where you were providing manufacturing services at cost and now how you're filling that in now today? Shin Young Park: That's the foundry services that we provided to the buyer of our foundry business and the factory that we used to own them. So there are a certain margin on that one, although that's actually lower than our corporate margin in the past, you see that margin profile. So that foundry service actually ended in the beginning of the last year, so not in 2026 in 2025. So that's what we are dealing with the whole -- the idle capacity, approximately 20% of our Gumi factory is actually was dedicated for the foundry service and now that's kind of idle. So like you see that our gross margin has been suppressed because of that idle capacity. So the whole kind of CapEx that we announced that we spent not all of them, but we cut them half and we are spending it. That's to upgrade our equipment to support this new generation Power product rather than kind of convert that idle capacity for the Power product just simply. I mean that's because of the pace of our product development and also the revenue, it takes some time to do it. So -- and also the softness of the -- I mean, our legacy product environment. So we are kind of being prudent to spend the CapEx to support that. So it's really not over time, overnight kind of transition or the conversion from the foundry capacity to the Power capacity. But as we said previously, we're going to be very cautiously assess what's going to be the best for the company from the cash and also the profitability standpoint, how we're going to convert the capacity for the Power. Operator: This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mike Bishop for any further remarks. Thank you. Mike Bishop: Thank you, everyone, for participating on our call today. We appreciate your support of Magnachip. This concludes the call. Operator? Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good afternoon, ladies and gentlemen, and welcome to the UCT Reports First Quarter 2026 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Tuesday, April 28, 2026. I would now like to turn the conference over to Rhonda Bennetto, Investor Relations. Please go ahead. Rhonda Bennetto: Thank you, operator. Good afternoon, everyone, and thank you for joining us. With me today are James Xiao, CEO; Sheri Savage, CFO; and Cheryl Knepfler, VP Marketing. James will begin with some prepared remarks about the industry and highlight some of the opportunities ahead for UCT. Sheri will follow with the financial review, and then we'll open up the call for questions. Today's call contains forward-looking statements that are subject to risks and uncertainties. For more information, please refer to the Risk Factors section in our SEC filings. All forward-looking statements are based on estimates, projections and assumptions as of today, and we assume no obligation to update them after this call. Discussion of our financial results will be presented on a non-GAAP basis. A reconciliation of GAAP to non-GAAP can be found in today's press release posted on our website. Also, beginning this quarter, our non-GAAP results now exclude the impact of unrealized gains and losses on foreign exchange and our revised reference to prior periods was included in our fourth quarter earnings press release back in February. And with that, I'd like to turn the call over to James. James, please go ahead. James Xiao: Thank you, Rhonda, and good afternoon, everyone. We appreciate you joining us for the Q1 2026 earnings call. In my prepared remarks, I will provide my thoughts on the near and longer-term market drivers and highlight where UCT has a clear competitive advantage to capitalize on a variety of opportunities during this multiyear up cycle. Following that, Sheri will provide a financial update, and then we will open up the call for questions. We started the year out strong and delivered revenue and earnings above the midpoint of our guided range for the first quarter, driven by solid execution across a broad set of products, services and customers. As you can see in our Q2 guidance, we're seeing momentum build across the semiconductor landscape, supported by growing industry-wide investments in AI-driven computing. I'd like to acknowledge our global teams for the sense of urgency, focus and operational excellence they continue to demonstrate every day. Their commitment to our customers and to driving the continuous improvement is elevating our performance today and positioning UCT to compete and win in the next phase of AI-driven growth. The rapid expansion of AI infrastructure is fueling increased investments across the semiconductor ecosystem, with hyperscalers and cloud providers expect to deploy significant data center capacity by spending around $600 billion in 2026, driving demand sharply higher. Investment by memory companies to address the bottleneck will remove a major constraint to the overall server supply chain, increasing foundry unit demand to support this growth. AI data center growth is being fueled by the rapid adoption of generative and agentic AI, and we're now seeing the early impact of physical AI as well. This new wave is driving increased demand for AI memory and leading-edge foundry logic, further accelerating fab capacity investments. These investments are driving the surge in WFE spending, with notably strong demand in leading-edge foundry logic, high-bandwidth memory and advanced packaging, all critical enablers of AI workloads. Increasing device complexity is driving higher process and equipment intensity, especially in deposition and removal, sustaining the WFE cycle and expanding UCT's opportunity. Demand continued to build week by week, and we expect this momentum to increase as customers gain clarity on fab time lines, delivery schedules and ramp readiness. Long-term customer forecast and capacity requests reinforce our confidence in continued WFE demand growth with our services business directly tied to wafer starts. We are also seeing increasing wafer volumes across IDMs and foundries, driven by AI demand and ongoing fab expansions with higher tool utilization, creating a durable multiyear growth tailwind for our service business. We're aligned with our customers and industry sentiment that we're in the early stage of a multiyear cycle that should accelerate into the second half of this year and beyond. Strong demand is occurring alongside emerging supply side constraints, including clean room capacity and the time required to bring new fabs online. As a result, today's environment is driven not only by demand, but also by the industry's ability to scale efficiently. By executing on our UCT 3.0 growth strategy, we are strategically positioning to win in this environment. Ramp readiness remains a top priority under UCT 3.0. We are executing with urgency and a customer-first mindset. We align our teams, systems and supply chain to deliver with speed, quality and consistency. We see the AI-driven ramp as a meaningful opportunity to drive growth and expand margins through improved utilization and more efficient operations and infrastructure. In parallel, we're advancing our MPX strategy, new product introduction, development and transition to accelerate time to market through our global centers of excellence. By co-innovating earlier with customers, compressing NPI cycles and strengthening responsiveness and the supply chain resilience, we are enabling faster ramps to high-volume production near our customers. This positions us to execute at speed and scale, supporting incremental share gains as customers prioritize development velocity and ramp speed, while driving UCT's operating leverage and margin expansion through higher volumes, improved mix and greater efficiency. Supporting ramp readiness and MPX, we're making strong progress on our third UCT 3.0 initiative, digital transformation. We are upgrading our systems, processes and data infrastructure with AI compatible solutions to improve visibility, reduce cycle times and increase productivity, while enabling faster customer response. These efforts are strengthening our foundation for AI-enabled operations, increasing agility, driving productivity gains and transforming UCT into a more scalable enterprise aligned to capture growth in this multiyear AI-driven industry upturn. Our global footprint supports around $3 billion in revenue today and can scale up to $4 billion with modest incremental capital investment. Assuming continued progress in workforce development, strategic supply chain and operational scaling, we do not expect infrastructure capacity to be our constraint. As volumes ramp, this should allow UCT to drive stronger operating leverage, improve profitability and create sustainable value. In closing, while the long-term outlook remains strong, the near-term environment remains dynamic with variability across customer spending, potential supply chain constraints and geopolitics. In this environment, disciplined execution will define the winners. With our trusted partnership with key customers, strong ramp readiness and a global footprint that enables speed, agility and scale, we believe we are well positioned to capture an outsized portion of the opportunities ahead of us. I will now turn the call over to Sheri, who will summarize our first quarter results and update you with our second quarter guidance. I look forward to your questions following the financial summary. Thank you. Sheri Brumm: Thanks, James, and good afternoon, everyone. Thanks for joining us. In today's discussion, I will be referring to non-GAAP numbers only. As James mentioned, we are seeing increased momentum from the early stages of a multiyear AI-driven expansion, and we're executing with urgency to support customer ramps while maintaining a strong focus on operational efficiency, cost discipline and margin improvement. For the first quarter of 2026, total revenue came in at $533.7 million compared to $506.6 million in the prior quarter. Revenue from products was $465.7 million compared to $442.4 million last quarter. Services revenue was $68 million in Q1 compared to $64.2 million in Q4. Our global footprint supports about $3 billion in revenue today and can scale to approximately $4 billion with modest incremental capital investment. With ongoing progress in workforce and operational scaling, we do not expect capacity constraints. As production increases over time, we would expect to benefit from improved operating leverage and corresponding margin expansion. Total gross margin for the first quarter was 16.5% compared to 16.1% last quarter. Product gross margin was 14.6% compared to 14.1% in Q4 and services was 30% compared to 29.7% last quarter. Gross margin improved primarily due to better product mix and higher volumes, driving factory efficiencies. Margins continue to be influenced by fluctuations in volume, mix and manufacturing region as well as material and transportation costs. So there will be variances quarter-to-quarter. Operating expense for the quarter was $61.1 million compared to $56.6 million in Q4. As a percentage of revenue, operating expenses were 11.4% versus 11.2% last quarter. Total operating margin for the quarter came in at 5.1% compared to 4.9% last quarter. Margin from our products division was 4.2% compared to 3.9% and services margin was 11.5% compared to 12.4% in the prior quarter. The first quarter tax rate came in at 20%, consistent with our expectations. Our mix of earnings between higher and lower tax jurisdictions can cause our rate to fluctuate throughout the year. For 2026, we expect our tax rate to stay in the low 20% range. Based on 46.3 million shares outstanding, earnings per share for the quarter were $0.31 on net income of $14.5 million compared to $0.24 on net income of $10.9 million in the prior quarter. During the quarter, we made the strategic decision to further strengthen our balance sheet and meaningfully reduce our ongoing cost of capital. In February, we priced a $600 million offering of zero-coupon convertible senior notes. We used a portion of the proceeds to fully repay our Term Loan B, reducing our annual cash interest expense by approximately $30 million. Subsequent to quarter end, we refinanced and upsized our revolving credit facility from $150 million to $250 million, reduced the interest margin by 75 basis points and extended the maturity to 2031, further enhancing our liquidity and financial flexibility. Together, these actions are expected to reduce our weighted average borrowing rate from around 6.2% to approximately 1.4%. Turning to the balance sheet. Cash and cash equivalents were $323.5 million compared to $311.8 million at the end of last quarter. Operating cash flow was negative $33.3 million this quarter compared to positive $8.1 million last quarter, driven primarily by higher working capital as we build inventory to meet near-term demand and support future growth. We are seeing broad-based improvements across the semiconductor landscape heading into the second half of this year and beyond, underpinned by sustained industry investment in AI-driven computing. We remain focused on maintaining discipline around margin expansion and driving sustainable shareholder returns over time. Turning to the guidance. For the second quarter, we project total revenue to be between $565 million and $605 million and EPS in the range of $0.44 to $0.60. And with that, I'd like to turn the call over to the operator for questions. Operator: [Operator Instructions] Our first question comes from the line of Charles Shi from Needham. Yu Shi: Maybe the first question, James, what's the WFE outlook you are seeing as of today? And I think in your prepared remarks, there's a line you mentioned you talked about solving the memory bottleneck and the relation to how that increases foundry unit output. And I'm not sure the context of that line. And are you kind of implying maybe the memory WFE growth is pretty high today, maybe some of that strength will transition more to the leading-edge foundry logic? I'm not sure what you meant by that line, but can you elaborate a little bit while you address the WFE outlook question. James Xiao: Thanks, Charles. Yes, so the WFE outlook is really continue to grow bigger than we saw the previous quarter. We see really from our customers, they're quoting $140 billion to $145 billion in 2026. So that's dependent on where you see the '25 number end up with at 18% to 20% year-over-year growth. And we see the similar momentum. The customers are talking about 15% and above for the 2027. So to your question about the memory growth, I think that we kind of see that the AI capacity is somehow gated by the memory capacity in the past 3, 4 quarters. And now we see that all the major memory customers are investing in their greenfield factories and also upgrading their existing fabs to maximize their current footprint. So that actually gave a whole industry an unlock of the constrained capacity. So we see more of the new leading-edge new factory launches in basically all 3 leading customers, TSMC, Intel and Samsung. Yu Shi: Got it. So maybe the second question, James, I understand that the outlook is getting stronger on a week-by-week basis. You gave a special shout out to etch deposition, and I think that's well understood. But is there any part of your end markets that may still be a little bit slow, maybe even on a relative basis? I didn't hear you talk about lithography. I didn't hear you talk about your domestic Chinese customers. So what's going on there in those areas? James Xiao: Yes. I think that, first of all, very good question. If you see the -- really the fast-growing segment in WFE overall, it is really the leading-edge foundry logic and HBM on the memory side and advanced packaging. So those are more an etch and removal intensive in terms of capital intensity. So therefore, relatively, you hear our customers are saying that they see that the first half, the deposition and etch is at mid-30s of the WFE. And in the second half, they see that increase to the high 30s of WFE. So naturally, because this high-growth area are etch and dep intensive, so we see a higher share of dep and etch in overall WFE. The flattish area we see is probably the non-dep and etch segment overall. And the surprising is the trailing node foundry logic are also not going down. They're more like flattish. China, as we discussed before, it was a kind of building inventory safety stock situation in '24 and '25. Therefore, they're really kind of become a bigger portion of worldwide WFE at 35 to 40. Now we're seeing they're back to normal in the low 20s as the portion of the worldwide WFE. So I don't think that's an outlier. It's more back to the normal business situation. Yu Shi: Got it. Maybe the last question from me, if I may. If I understand the typical behavior of your customers correctly, I think this is a year -- I mean this year is when they are competing for basically who can ship tools faster to their customers. How do you assess in this kind of situation, whether the requests are coming from your customers are reasonable, whether -- or if any chance some of the requests you would see unreasonable and potentially at the expense of the growth for your outer years? How do you handle the situation like that and in terms of how you allocate your capacity, grow your capacity, et cetera? Just maybe a little bit of high-level philosophical question from -- I want to understand how you operate in an environment like this. James Xiao: Actually, this is a great question. I think that I really see a very healthy move as an industry. What I mean by that is that we see the customer actually giving us a long-term forecast, so we can do the planning better. And the long-term forecast is actually showing the growth momentum. They gave us a confidence to really kind of utilize our current capacity and also have the confidence to plan for the next step expansion. As I mentioned in my previous earnings call and this one, we really have capacity to really run at $3 billion run rate per year. The current run rate is still $2 billion, $2.2 billion. So we have the runway to really kind of address additional demand. And our brick-and-mortar capacity can handle up to $4 billion. So by minimal capital investment, we can have 6 to 9 months to build that capacity so we can really reach the $4 billion run rate. So in that sense, we're well positioned to address the drop-in demand from our customers. Operator: Our next question comes from the line of Krish Sankar from TD Cowen. Robert Mertens: This is Robert Mertens on the line on behalf of Krish. I guess the first one is just around your domestic China business. Do you have a percentage of sales figure you could share for the March quarter? And just how you sort of expect that portion of your business to trend given that the current semi-cap customers in China have been doing pretty well. James Xiao: Yes. As we previously discussed, the percentage of our China business, domestic China business is less than 5% of our overall revenue. We maintain that kind of range. And what we see is that gradually the domestic Chinese WFE customers will increase their share within the China WFE market. And we see also the growth opportunity as we grow the share with those Chinese customers. Operator: Our next question is from Christian Schwab from Craig-Hallum Capital Group. Christian Schwab: Great. Congrats on the great quarter and outlook. Given the demand is improving week by week, I guess it's kind of crystal clear. But do you -- as you look at the year, do you have an idea of what percentage of revenue will be second half weighted versus the first half? James Xiao: Yes, great question. So we -- as you can see that in our forecast, we're seeing close to double-digit growth quarter-over-quarter from Q1 to Q2. We expect a similar range of growth going forward and for the second half. Christian Schwab: Perfect. And then can you give us -- given $4 billion in revenue driven by increased WFE, but finally seeing a very material increase in wafer starts to drive your services business. When you talk about $4 billion in revenue potential and another $1 billion that could be added given a modest amount of capital and notice to put that online, what would you anticipate would be your mix of revenue at $4 billion that would be service? James Xiao: Yes, I think it's a good question. So as we discussed, we see that the -- our service revenue is really a function of wafer starts and a small portion of that business is also directly correlated to the WFE growth. So in an aggregated base, we expect a double-digit growth for the year on the service side. And going forward, we still see a range of 10% to 12% as our overall revenue percentage. Christian Schwab: Great. And then lastly, historically, if we go back to '20 and '21 as far as the last accelerated WFE spending cycle, you outgrew WFE growth materially. And should we assume the big not only market share gains and certainly your ability to potentially gain share with the ease of adding increased capacity. But as far as outgrowing WFE, there's a lag period between installing fab equipment and wafer starts being finished, which is the driver of the services business, I guess, in aggregate. Is that the way we should be thinking about the primary driver of your growth outperforming WFE? Or do you think this cycle, you're better positioned for market share gains? James Xiao: Yes. So we definitely see that we will grow with the WFE growth and with really the upside potential on both product side and service side. And really, to me, the playbook is always to defend the core, which we are really in a leading position and grow the SAM. So we enter into new modules and new gas panel business as our customers expand their product portfolio. And then finally, win at inflection. So position ourselves with stronger NPI capabilities so we can align with customers' NPI road map and win in the next node inflection. Operator: Our next question is from Edward Yang from Oppenheimer. Edward Yang: Just first question, related to that strong second quarter guide on the revenue side and for the remainder of the year, how should we think about gross margin progression? Sheri Brumm: Yes. Gross margin should start to continue to improve as we move through the year. Obviously, we'll see it being slightly up in Q2 and then continue to grow as we move through the year as the revenue potentially goes up. So obviously, mix and where it's shipping from does play a factor in that and things change as we move through the year, but we truly do see it moving up as we get closer to the Q4 time frame. Edward Yang: And Sheri, if I could dig a little deeper related to mix. I mean you've got a plethora of different products and services. Just focusing on the product side, what are the gross margin differentials between your lowest and highest? And what's your highest margin products and maybe talk some detail around that. Sheri Brumm: Yes. We probably don't publish as much on the specific product margins. But as I've mentioned before, we have a large bell curve of margins, so they can range anywhere between 10% to 50% to 60% depending upon whether it's a component part or it's a module or a gas panel. So it just really depends on the sheer volume of each of those mixes of products that play into our overall gross margin, along with how fast the revenue comes in to us and how fast we can hire labor and other costs associated with that. So those are the key factors that play into our margin as we grow revenue. So again, a large bell curve of margins. There's quite a few different products and different margins within those products as well. So that's why it makes it complicated to detail all of those out. Edward Yang: Got it. And maybe a question for James. Beyond the general uplift in WFE, you mentioned your UCT 3.0 strategy. I know it's a long-term vision, but just interested in the progress around that, the co-innovator and the MPX framework. And just wondering how customer receptivity has been to that? And when can we expect to see specific market share gains or new module wins around that MPX framework? James Xiao: We are -- great question. We are investing in our, I call it, regionalized center of excellence. So basically, we have NPI Center of Excellence in U.S. We further enhance that. And we're actually expanding our NPI capabilities in Asia and also in Europe. So the customer wants to have the engineers co-innovate, define the spec and really design the system and modules close to their core engineering team. That's actually in Europe, in U.S. and expanding to Asia. So we follow customers' need on that. Then we will also transfer that locally by region to our HVM site, also distribute in all the regions, right, U.S. and Europe and Southeast Asia. And that's really well aligned with our customer strategy where they're also moving their global engineering footprint close to their high-value production sites. So well received by customer. We see some early momentum, and that's actually accelerating our NPI engagement with customers. We already have a pretty strong pipeline of NPI engagement with existing customers. This regionalized center of excellence just further enhance our capabilities. Operator: Our next question is from Krish Sankar from TD Cowen. Robert Mertens: I realize I put myself on mute after my first prior question. And my second question was going to be around the margin profile, but you just answered it. So I won't make you repeat yourself. Operator: I'd like to turn the call back over to Sheri Savage for an announcement. Sheri Brumm: Thank you, operator. I have an announcement to make, and I wanted to share it on this call because I personally know many of you here today. After a lot of thought, I've decided to retire from UCT. Being part of UCT's journey over the past 17 years has been an incredible privilege. I'm incredibly proud of what we've built together, and I'm deeply grateful for the trust, partnership and support of our teams, our leadership and our Board. I'm confident that UCT is ideally positioned for continued growth and success in the years ahead. I'll remain fully engaged until we find my successor, looking both internally and externally, and I'll continue behind the scenes to ensure a smooth transition. Thank you for making this journey meaningful and rewarding for me. I really appreciate the support many of you have given to me over the years. And with that, thank you for joining our call today, and we look forward to seeing you when we report our second quarter earnings. Thanks. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the Asbury Automotive Group First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Reeves, Vice President of Finance and Treasurer. Thank you, sir. You may begin. Chris Reeves: Thanks, operator, and good morning. As noted, today's call is being recorded and will be available for replay later this afternoon. Welcome to the Asbury Automotive Group's First Quarter 2026 Earnings Call. The press release detailing Asbury's first quarter results was issued earlier this morning and is posted on our website at investors.asburyauto.com. Participating with me today are David Hult, our President and Chief Executive Officer; Dan Clara, our Chief Operating Officer; and Michael Welch, our Senior Vice President and Chief Financial Officer. At the conclusion of our remarks, we will open up the call for questions and will be available later for any follow-up questions. Before we begin, we must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature, which may include financial projections forecasts and current expectations, each of which are subject to significant uncertainties. For information regarding certain of the risks that may cause actual results to differ materially from these statements, please see our filings with the SEC from time to time, including our Form 10-K for the year ended December 31, 2025, any subsequently filed quarterly reports on Form 10-Q and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on our website. Comparisons will be made on a year-over-year basis unless we indicate otherwise. We have also posted an updated investor presentation on our website, investors asburyauto.comhighlighting our first quarter results. It is my pleasure to now hand the call over to our CEO, David Hult. David? David Hult: Thank you, Chris, and good morning, everyone. Welcome to our first quarter earnings call. Our first quarter results highlighted efforts to transform our business by optimizing our portfolio and successfully migrating to Tekion. Today, over 50% of our stores are running on Tekion. We remain on track and anticipate to be fully converted by the fall of this year. After which time, we expect to begin fully realizing the cost and efficiency benefits enabled by the new technology platform. . The first and second quarter of this year represents a peak in terms of number of stores, making the transition. As a result, costs related to integration and temporary disruption in store operations will also remain elevated as team members become fully acclimated to the new technology. Michael will provide additional color behind the transition and its impact on our financial performance. The first quarter also showcased a number of capital allocation decisions which Asbury -- which position Asbury for future success, while also returning capital to our shareholders. We divested 10 dealerships and a collision center at attractive multiples. -- representing approximately $600 million in annualized revenue. $147 million of the proceeds went towards repurchasing 678,000 shares of our stock, with the rest directed towards reducing our debt. In our view, our trading price undervalues the earning potential of the company, and we took advantage of this price to value dislocation to accelerate our repurchase activity. Moving on to our first quarter 2026 operational performance. Our results reflect the expected decrease in volumes as consumer demand moderated from last year's tariff turbine spike in sales. More challenging weather was also a factor as was the temporary disruption for the stores going through the Tekion conversion. While new vehicle volumes were down, gross profit on a per unit basis held up well. On an all-store basis, new vehicle PVRs were down just $73 sequentially, and 177 on a year-over-year basis. An indication profitability is beginning to approach normalized levels. Similarly, used vehicle PVRs on an all-store basis, was $1,847, which is up sequentially 5% and 16% year-over-year as the team continues to execute our strategy to maximize per unit profitability. Parts and Service had a more challenging quarter, driven by a variety of factors, including weather, a more cautious consumer and temporary disruption from our DMS transition. That said, we still expect fixed operations gross profit to grow at mid-single-digit rates over time. And now for our consolidated results for the first quarter. We generated $4.1 billion in revenue at a gross profit of $727 million, a gross profit margin of 17.7% and an expansion of 22 basis points. We delivered an adjusted operating margin of 5%. Our adjusted earnings per share was $5.37, and our adjusted EBITDA was $207 million. Before I hand the call over to our incoming Chief Executive Officer, Dan Clara, I want to take a moment to thank our team members to helping to make Asbury Automotive the company that it is today. Together, we have transformed our organization from a regional player to one with national scale in highly desirable markets, a balance portfolio and a leader in technology focused investments. It has been an honor and a privilege to serve as a steward of this business for the past 8.5 years. and I know our best days are ahead with Dan running the company. Dan I will hand things over to you to discuss our operational performance in more detail. Dan Clara: Good morning, everyone. Thank you, David, for the kind words. I feel I can speak for everyone here in saying that Asbury would not be as strong as it is today without your vision for growth and seeing the potential in this company. We all wish you the best in your next role as Executive Chairman. And now moving on to the quarter. I would also like to thank the team members for handling the challenges that were thrown at them this quarter. including severe winter weather in nearly all our markets and across multiple weekends. Our teams have been working diligently to make a transition to Tekion a smooth process and we are pleased with the early progress our stores are making. Changing the DMS is a complex endeavor for any dealer group, let alone one of our size, but it is necessary in order to elevate the guest experience and enhance our capabilities for strong operational performance. As an example, we converted the [Koons] dealerships last summer, and they are starting to show the power of the software. For that specific group in March, we saw gross dollars per technician up 21% year-over-year, and average productivity per service advisor up 16%. We are seeing efficiencies extend beyond the service day as support cost in the stores decreased by 5% at the same time. And now I'm going to provide some updates on our same-store performance, which includes leadership in TCA on a year-over-year basis unless stated otherwise. Starting with new vehicles. Same-store revenue year-over-year was down 9%. While we believe the winter weather impacted sales activity, we are also monitoring consumer behavior in light of ongoing geopolitical events. New gross profit per vehicle was $3,061 as luxury maintained GPUs in line with the prior year and import and domestic moderated as expected. On an all-store basis, which includes the positive impact of the Chambers platform, new gross profit per unit was $3,371, only down $177 year-over-year. Across all brands, our same-store new day supply was a healthy 54 days at the end of March, which we believe support resilient gross profit per unit. Turning to used vehicles. First quarter total used gross profit was up 1% sequentially. Used retail gross profit per unit was up 12% at $1,828, a $201 increase over the prior year and a $79 increase over our reported fourth quarter 2025 number. Our efforts in use continue to pay off. This represented our second consecutive quarter of progress in growing GPUs. We have seen sequential increases in GPUs in 6 out of the last 7 quarters, thanks to our teams executing more consistently. We anticipate the pool of used vehicles will increase through the year, aided by lease return activity, which can give us the opportunity to increase volume and maintain this level of. Finally, our same-store used DSI was 30 days at the end of the quarter, down from 35 days at the end of the fourth quarter. Shifting to F&I. We earned an F&I PVR of $2,307. The nonres deferral impact of TCA was $45 a -- so without the year-over-year impact of PVR would have been $2,351. We are on track to implement TCA in the timber stores by year-end, which will complete our rollout across all our platforms. And finally, in the first quarter, our total fund and yield per vehicle was $4,806. On an all-store basis, our front-end yield was up $70 year-over-year at $4,921. Now moving to Parts & service. Our same-store Parts & Service gross profit was down slightly year-over-year due to slowdowns associated with the winter storms. In addition, it is also important to note that when we convert stores to Tekion, there is a short-term effect of adjusting to the new software at the store level. We believe it takes about 4 to 6 months to overcome the muscle memory of the legacy software and start to see efficiencies take hold, like those I mentioned earlier. Now going back to the quarter's results. Customer pay gross profit was up 1% with warranty gross profit higher by 3%. During the month of March, we generated 4% growth for both customer pay and warranty gross, which was encouraging to see. April to date is trending similar to March. Overall, we believe our stores are well positioned for the extended period of growth within parts and service supported by the aging car park and increased vehicle complexity. Before I pass the call to Michael, I want to thank the team again for your hard work to deliver a guest-centric experience and striving for improvement to unlock further performance. And with that, I will now hand the call over to Michael to discuss our financial performance. Michael? Michael Welch: Thank you, Dan, and good morning to our team members, analysts, investors, other participants on the call. Our financial performance in the first quarter, adjusted net income was $102 million. Adjusted EPS was $5.37 for the quarter. In addition, noncash deferral headwind due to TCA this quarter was $0.26 per share. Our adjusted EPS would have been $5.63 without the deferral impact. . Adjusted net income for the first quarter of 2026 excludes net of tax, net gain on divestitures of $94 million, $5 million related to Tekion implementation expenses, $3 million of weather-related losses and $1 million related to the duplicate DMS related expenses. In our consolidated results, we estimate that the weather impacted gross profit by $19 million and EPS of $0.56. As stated in our press release this morning, during the quarter, we divested 10 dealerships and terminated 7 franchises, which included exiting the Alfa Romeo and Maserati brands. Combined, these stores generated an estimated annualized revenue of $625 million. Adjusted SG&A as a percentage of gross profit on a same-store basis came in at 66.9% which includes $2 million related to legal expenses for a specific matter. In March, we saw adjusted same-store SG&A in the low 60s. So we believe the SG&A number would have been more solidly within our expectations for mid-60s range without the severe weather headwinds. As Dan mentioned, there is some frictional costs associated with changing our DMS that will take time to work out. In the short term, the stores are slightly less efficient than the first 2 months of operating in the new DMS. In months 4 to 6, we see the stores become more efficient -- it is encouraging to see our team members lean into the tool and embracing the operational improvement as the new platform can provide. Overall, we believe any short-term headwinds are outweighed by the benefits to come. Before I move on, I will note that the onetime implementation costs at the stores and the cost of duplicate software have been adjusted out of our non-GAAP SG&A numbers as shown in our press release this morning. Next, the adjusted tax rate for the quarter was 25.1%. We also estimate the full year 2026 effective tax rate to be approximately 25%. TCA generated $15 million of pretax income in the first quarter. The negative noncash deferral impact for the quarter was $7 million. We generated $166 million of adjusted operating cash flow during the quarter. Excluding real estate purchases, we spent $46 million on capital expenditures in the first quarter and still anticipate approximately $250 million of CapEx spend for both 2026 and 2027. Adjusted free cash flow was $120 million for the first quarter. We ended the quarter with $1.2 billion of liquidity comprised of floor plan offset accounts, availability on both our used line and revolving credit facility and cash, excluding cash of Total Care Auto. Our transaction adjusted net leverage ratio was 3.2x at the end of the first quarter. As David mentioned, we took opportunities to optimize our portfolio through strategic transactions. Our divestitures in the quarter also reduced our CapEx burden, further allowing us to deploy cash to higher-return options. The proceeds of the divestitures combined with robust cash flow in our business allowed us to balance our capital allocation priorities, both reducing our debt level and repurchasing 678,000 shares. Our diluted share count is approximately 18.6 million shares before adjusting for any future buybacks. And finally, before we open the Q&A, I would like to thank David for his years of valuable leadership. David guided us very -- through a new level of growth and is still the team focused and guest-centric culture that makes Asbury what it is today. And with that, this concludes our prepared remarks. We will now turn the call over to the operator and take your questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Jeff Lick with Stephens. Jeffrey Lick: David, just want to extend my thanks and you'll be missed. Since we've got you, I was wondering if -- look, 1Q was obviously a pretty noisy quarter on a variety of fronts, weather being one of the most. I wonder if you can just give a state of the union of kind of where we are for yourselves and the industry in 2Q. Just thinking about new and then new has some implications for used. And then obviously, service and parts was a little lumpy. I mean you did mention it was up in March. But just kind of where do you think things stand now that the tax refund season is over? And obviously, we're not going to be getting is any more of the rest of this year. David Hult: Sure, Jeff. I'll take a shot and Dan can jump in. January and February were really rough for us from a weather perspective and we go far behind the 8 ball at that point before the weather started hitting in mid-January, we were actually facing well the first half of January. And then once we got hit with all the weather, we kind of didn't recover. March was a good sign for us. Last March and April, were extremely strong with the tariff pre sales for lack of a better term, but we really bounced back. And to Michael's comment, being in the low 60s for SG&A from March was a telltale sign for us. We see the same going into April. Very difficult to predict much beyond that with what's going on with the war in gasoline prices and other things and how long that lingers. One would think the longer that lingers, the more impactful that's going to be on our business. We're definitely feeling the slowdown. It's not all the same by brand, but we're still seeing a slowdown in new car sales into April as well. And just a top level, we were essentially back about 4,300 units or so in the quarter on new on a same-store basis. roughly, you're going to take in 2,300 to 2,500 trade-ins on those 4,000 and you're going to retail 80% of those cars. So there's a chunk of preowned that we normally have internally to sell that we don't have. So it will be a balancing act the next few quarters if new doesn't pop back where we're going to source vehicles. But I think Parts & Services is going to bounce back nicely and continue to grow as the year goes on, it does take us 4 to 6 months with Tekion to get the muscle memory right in the stores. It doesn't matter the market or the brand. It's just human behavior takes time. But once you get tested that 6-month window, you can really start to see some efficiencies as to why we would make this change in the DMS. We do believe it makes our folks more efficient and more productive, while certainly lowering our costs at the same time. I don't know if there's any you want to add. Unknown Executive: I think you covered up all, nothing to add. Jeffrey Lick: And then just a quick follow-up for Dan maybe is you wonder if you could just give us 1 thing with Tekion, where you look at it and say, it manifests itself in financial benefit where you say, you know what, we're making the right decision here yet -- it might be a little noisy for 4 to 6 months, but when you start to look at our P&L a year or 2 years from now, we made the right decision. I was wondering if there's one thing you could highlight. Dan Clara: I think -- Jeff, I think I covered it just 1 example of several that we're seeing earlier today. When you think about the efficiencies to -- that the new software brings. When you look at the gross dollars per technician being up 21% at cons and the average productivity per service adviser -- and then you add the fact that support cost has also decreased. It's a pretty nice mix and aligned with what we expected. And then to put icing on the cake, the guest experience is definitely improved upon by the ease of using the technology, the ability to enhance how fast that guests can be served. So we believe that it definitely gives us a competitive advantage that we need for the future, and it is definitely the right thing to do. Operator: Our next question comes from the line of Rajat Gupta with JPMorgan. Rajat Gupta: Great -- and then David, best of luck and hope to catch up at some point again. I want to just follow up on some of the first quarter results, especially around the new car units and even used car of 11% same-store decline and the 12% in use, is there any way to break up how much of it was weather? How much of it was just the Tekion productivity? And then how much of it was market. Any way to parse that out would be helpful. And I have a quick follow-up on SG&A. Dan Clara: Yes. Raj, this is Dan. I'll start it. On the -- when you look at the weather impact, I'm talking about from a same-store basis, we believe there's no closure in Q1 affected us somewhere in the $500 range and similarly in U.S. core volume. And then when you when you go down to the fixed revenue as well, obviously, that had a tremendous impact somewhere on a same-store basis, somewhere around $13 million impact. So it was a significant impact. And as you know, when we have weather-related issues, it's not just the data we're close. It's the days leading up to with all the media friends that happens and the days after the fact recovering David was in the Northeast of that time. And as you know, the Northeast was hit pretty severely and there were piles and poses now. So it was definitely a big impact. But glad that it's behind us and glad that March showed that we are directionally correct. And glad that April is similar to March so that we continue to build on the momentum. Rajat Gupta: Got it. And how much do you think you lost due to like just the Tekion rollout in 1Q because you'll probably close the store for like a day and like the Monday, I'm curious if that had any meaningful impact on the units. I know it probably impacted services, but anything on the units that you could flag? Dan Clara: So yes, on the -- I don't have the exact number, Michael, I don't know we have not shared that number. But on -- you bring up an excellent point because when we roll out the Tekion stores, we go through the conversion, Saturday and Sunday, and we closed operations on that Monday. So that is definitely a day that we lose from being able to serve our guests. And then Tuesday, we've reopened. But again, that's a competing new system were much lower than what we used to be until we developed that muscle memory that like I explained earlier, it takes between 4 to 6 months to get back to the efficiency levels. Rajat Gupta: Got it. Got it. And just to clarify in Mike's comments on SG&A on the call -- in the prepared remarks, I think you mentioned mid-60s excluding the weather headwinds. I just want to make sure we heard that correctly. Is it mid-60s even excluding some of the productivity losses from the DMS transition? I'm curious, like, what's a good steady-state number both taken. If it did not have weather, if it did not have DMS transition? What would have been a good steady-state SG&A to gross number in the quarter? Michael Welch: Yes. I think based on the March results that we saw that were in the low 60s, I think mid-60s without the weather would have been the right now for the first quarter. So we're still comfortable in that mid-60s range, going forward. And then at some point in the back half of the year as we start to see the Tekion efficiencies come through. I don't know if that's fourth quarter or where that shakes out. But sometimes we'll start seeing an approach toward the mid-60s after we get the Tekion efficiencies running through the system. Rajat Gupta: Got it. Just a final one on buybacks. Given the fact that you're ramping up buybacks here why EBITDA is coming down. I'm curious, is this you taking a view on the benefits of the Tekion rollout and the benefits you might see into 207 and beyond, that's giving you that confidence given like the cyclical backdrop still looks a bit choppy here. Just curious list thinking around the buybacks ramping up. Michael Welch: So a couple of things in there. In the first quarter, we disposed of the stores, and so we used those proceeds to buy additional shares in the quarter. But also as the share price continues to dislocate and get low levels at attractive prices for us. We took a view that we need to take advantage of that stock price. We do think the back half of this year and into 2017, the EBITDA comes up dramatically with the Tekion rollout behind us. And so we're kind of trying to balance the leverage ratio and the share buybacks. And if the share price is low, we're going to lean in a little bit of share buybacks. Operator: [Operator Instructions] Our next question comes from the line of Glenn Chin with Seaport Research. Glenn Chin: Just another follow-on related to Tekion, can you just confirm for us sort of the contour the tuck-on impact throughout the year? Do the cost and inefficiencies from the transition peak in 2Q? Michael Welch: No. So -- if you think about just the stack-up effect, we have first quarter was pretty heavy rollouts. 2Q has a decent amount of rollout and then we go kind of handle the West in 3Q. And so just the stack of all the storage, if you think about that 4- to 6-month window, it will probably peak in 3Q. At some point, call it, sometime in 4Q, we should be able to flip over the -- we have more stores that are past the 4 to 6 months. But I would say that the peak is going to be very late 2Q into 3Q is kind of where the peak will be. Glenn Chin: Okay. Very good. And I understood that you're going to adjust out sort of the explicit costs from Tekion, those time line around those, Michael, is also same? Michael Welch: No, it should be similar. 2Q and 3Q, 2Q pros a few less stores in it and 3Q has a few more. So just from an implementation cost perspective, it will be in a similar ballpark to 1Q, but maybe a little lighter in 1Q and similar to 3Q when you compare to 1Q. . Glenn Chin: Okay. Very good. And then I think Dan, you mentioned in your prepared remarks as well as last quarter, just hesitation around the consumer with respect to parts and service. Can you just -- any further elaboration on that, if you will? Dan Clara: Yes, Glenn. We saw the pullback, as you mentioned in Q4 going into Q1, there's a lot of uncertainties going on out there. So I would say that it is somewhat consistent, but there is -- keep in mind, there's a new award that has started. That is with oil prices at an all-time high is just keeping people on more of the defensive side of it. But again, when I go back into my remarks earlier today, it's encouraging to see what we saw in April, customer pay up and seeing the same trend going into April -- I'm sorry, in March going into April. Glenn Chin: Okay. Very good. That's it for me. David, we'll miss you, good luck with everything and your new position. David Hult: Thank you. Operator: Our next question comes from the line of Alex Perry with Bank of America. Alexander Perry: I guess just first, I wanted to double-click a little bit more on sort of the current stated demand with where gas prices have gone and just the impact of consumer confidence -- on the new vehicle side, when did you start to see the slowdown? Is that more sort of an April comment? And is that just on new? Are you seeing any impact to mix yet in terms of the mix of vehicles that consumers are buying? And what are you sort of seeing unused? Dan Clara: Yes. On the new car, it really goes back to -- I mentioned this on the fourth quarter, there was -- we didn't really get the pop for a lack of a better term that we get in December. January, as David mentioned earlier today, the first half of January before we got hit with the weather, we were facing okay. and then we just never recover from the weather. So from a new car perspective, I will tell you that really after the weather never recovered, February about the same in March the same trend continued. From a mix, typically, when you see gas prices at the levels where we are right now, it usually takes 5 to 6 months for consumers to start really changing their buying habits. We have not seen that. And what I mean by that is a consumer that is going to trade in a Chevy Tahoe for Honda Civic or what have you. We have not seen that, but the longer the war goes, I think the closer we're going to be getting to see a shift in consumer behavior, but we're not there yet. And from a used car standpoint, the demand of used cars is there. especially with the difference in the cost of sale between a new and used car. When you factor in all the items that have gone up, insurance rates, the average cost of maintaining a car. When you look at all that, the demand is definitely there for used cars. We strategically have made the decision to not chase the volume and to maximize the gross profit -- and as we showed in Q4, we were heading gross profit. Q1 when you look at margin, again, even though we were backwards in volume, our gross profit was ahead year-over-year for used cars. So we believe strongly that, that is the right strategy to continue to execute. And as the availability of used cars become readily available as we move throughout the year, then we can pull that lever while still protecting the margins that we have delivered over the last few quarters. Alexander Perry: Got you. Got you. That makes a lot of sense. And then I guess I just wanted to ask a little bit more on the Parts & Service trend. If we think about comps from here, I think you mentioned the rebounding earlier in the call. Is that primarily a factor of just getting past the weather impact? Is there something you're seeing in terms of sort of delayed effect from people that would have came into the first quarter starting to come in? Like can you just maybe talk about how you think about the Parts & Services? And what sort of drives that rebound? Dan Clara: Parts & Service, we've always been saying mid-single digits. We have a -- we've developed a very strategic plan to go and grow our fixed operations, meaning Parts & Service. And no different than what we've done with U.S. cars. It's about the execution -- when you think about -- and you can see it on the IR deck, the average miles coming through our shop or continue to be in the 70,000 mile range. So that gives us a lot of stability that we are retaining the guest and obviously, that we have the opportunity to continue to maintain those cars for those customers. And the last factor that I see tremendous potential is growing the CP count and really focusing on what we call the cycle time, how fast can we serve our guests, which is also one of the benefits that I mentioned earlier of going to Tekion. The faster we get that guest in and out, the higher the retention and the higher propensity for that customer to come back and do business with us and the more throughput that we can push through our service departments. Operator: Our next question comes from the line of John Babcock with Barclays. John Babcock: I guess just first of all, I was wondering if you could talk about Herb Chambers , how the integration is going there and if there's anything new to share on that front? And then also, if you can just remind us when you're pointing on implementing Tekion into that business. Dan Clara: Yes. Herb Chambers integration is going well. We are very happy with the talent, the people. We've got some great team members, great stores and what they have built together is impressive and now is up to all of us to work together as a team to take it to the next level. Tekion rollout at Chamber started last month. We've already converted. I think -- we have -- we need 2 stores, 22 or 24 stores, call it, in the 20% range with the rest of the stores. I think we have 8 more that are going to be converting in the month of May or June, I'm sorry, in the month of June. So by June, chambers will be completely converted to Tekion. David Hult: Okay. And the next question, just on GPUs because you do break it out across luxury imports and also domestic. And it seems like quarter-over-quarter, there was pretty good stability in luxury and imports, but domestic was down a decent bit. Is there anything we should take note of from those trends? Or... Dan Clara: Listen, the biggest impact that I'm seeing on domestic side is we still have the headwind of Stellantis. We are well aware of it. We're focusing on performing better with Stellantis, getting that inventory turn and maximizing the gross profit. But it really -- the biggest impact in the domestic was our Stellantis stores. . John Babcock: Okay. Very helpful. And then just my last question. Just I was wondering if you could share how much, if any, shares you bought back in April? Michael Welch: Yes, any shares we would have bought back in April would have been disclosed as part of the press release. So we did our share buyback early on in the quarter, took advantage of some share prices then. And so all those shares were purchased January through March. Operator: [Operator Instructions] Our next question comes from the line of Bret Jordan with Jefferies. Bret Jordan: On the plants, are you seeing any improvement in the trend? I mean it seems as if maybe they're making some product adjustments or maybe pricing adjustments? Are you seeing any traction there? Or is it pretty much the same? Dan Clara: From a high level, there are changes being made that make total sense, and it is a step in the right direction. -- but it's a double-edged sword because when they make those changes, I'll give you an example, they adjust the pricing for the new models coming in, but we still have the same model that is a year older that is more expensive than the new model coming in. And so that is where there is some pressure to the margins to be able to make sure that we liquidate that old inventory in the old pricing structure to make room for the new decisions that the management team is making. . Bret Jordan: Okay. And then I guess on the parts and service side of the business, you had a pretty hard warranty comp year-over-year. Could you sort of talk about what you're seeing? Are there any major warranty programs that are popping up that might give you some tailwinds in volumes in the balance of this year? Dan Clara: Yes. We had some big warranty comps. I'll tell you 1 of the -- I want to say surprise, but one of the, I guess, obstacles that we faced is 1 of our import OEM not a major decrease in warranty issues last quarter, which obviously more is something that we don't control. So we happily service the customers when they come in. but it's really outside of our control. Moving forward, we've seen some of the domestics that have issued some recalls and some additional warranty work. But it's hard to tell. Like I said, warrant is important to pay attention to it, but I cannot control it. That's why our focus is always on the customer pay. We're just after we serve the guests when the OEMs have any warranty issues. Operator: Our next question comes from the line of Ryan from Craig-Hallum. Matthew Raab: This is Matthew Raab on for Ryan. Just want to go back to the new GPUs, maybe putting a finer point there. We've talked in the past about settling out in that 2,500 to 3,000 range. you're at 3271 feels like inventory is pretty rational, and you're certainly getting the benefit of the Herb Chambers mix. I mean at this point, is there any reason why GPUs can't settle out near the higher end of that range? And if you have any expectation for new GPUs for 26, whether it's a year-end number or quarter-over-quarter decline through the rest of the year, that would be great. Dan Clara: Matt, thank you. Great question. And I agree with you. I think for the last several quarters, we've been talking about 2,500 or 3,000. We believe now that, that number is moderating, and it is closer to about 3,000 range. So to your point, excellent question. Operator: We have no further questions at this time. Mr. Hult, I'd like to turn the floor back over to you for closing comments. David Hult: Thank you, operator. We appreciate everyone joining our first quarter earnings call. And the team here looks forward to discussing our second quarter results in the future. Have a great day. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator: [Operator Instructions] I would now like to turn the conference over to Cathy Yao, Senior Vice President of Investor Relations for T-Mobile US. Please go ahead. Quan Yao: Good afternoon, and welcome to T-Mobile's First Quarter 2026 Earnings Call. Joining me on our call today are Srini Gopalan, our President and CEO; Peter Osvaldik, our CFO; as well as other members of the leadership team. During this call, we will make forward-looking statements, which involve risks and uncertainties that may cause actual results to differ materially. We encourage you to review the risk factors set forth in our SEC filings. Our earnings release, Investor Factbook and other documents related to our results as well as reconciliations between GAAP and non-GAAP results discussed on this call can be found on our Investor Relations website. With that, let me now turn it over to Srini. Srinivasan Gopalan: Thanks, Cathy, and good afternoon, everyone. We're here in Bellevue today ready to discuss another extraordinary quarter for T-Mobile. This quarter is a powerful demonstration that the strategy we outlined for you in February is working. Our strategy is driven by widening differentiation, providing customers with the best network, best value and best experience, all at the same place so that they don't need to make trade-offs anymore. We made strong progress on this strategy this quarter and nothing demonstrates this more succinctly than our NPS score. An industry-leading 45, over 20% higher than that of our next closest competitor. This widening differentiation gives us access to unprecedented growth opportunities, and our industry-leading growth this quarter is a testament to this. One of the largest of these growth opportunities is the 20 million-plus families and businesses who are network seekers not currently with T-Mobile. This is an opportunity with a lot of runway and one where we're making great progress. In fact, this quarter, amongst recent switchers who chose to come to T-Mobile from another carrier, the highest percentage ever said they chose us for one reason, network quality. Similarly, across multiple third-party surveys like HarrisX and from the analyst community, we've seen a strong improvement in the perception of our network. That's what's led us once again to grow our share of postpaid households in each of our cohorts in the top 100 cities. In smaller markets and rural areas where we have only 24% share of households, we continue to accelerate and capture more switching share with word of mouth driving strong momentum. In addition to our tremendous momentum in consumer across network seekers and other underpenetrated cohorts, our low share in T-Mobile for business also continues to give us substantial growth runway. This quarter, we continued to capture share with our network superiority-led value proposition in T-Mobile for Business. Our industry-leading nationwide 5G advanced network continues to allow us to drive TAM creation with advanced network solutions and leveraging that as a thoughtful cross-sell opportunity into traditional voice and broadband offerings. One example of our innovation in action is Major League Baseball's recent rollout of our automated ball-strike system, which uses the T-Mobile network to allow challenges to umpires' calls. Let's now turn to broadband. For yet another quarter, we were the fastest-growing ISP in America, adding over 0.5 million total broadband net additions with 5G broadband net adds accelerating year-over-year. 5G broadband continues to lead the industry in terms of customer experience, topping J.D. Power, Forbes, CNET, Consumer Reports and OpenSignal, just to name a few. Our 5G broadband speeds also continue to lead the peer group at over 50% faster than the next closest competitor. Fiber is tracking great, leveraging the T-Mobile brand to draw strong interest. And I'm excited about our announcement earlier today that we're entering into 2 additional JVs with leading infrastructure partners to acquire GoNetSpeed, Greenlight Networks and i3 Broadband as part of our returns-focused capital-efficient approach. Every piece of the business I've talked about so far helped drive our tremendous postpaid net account additions of 217,000 in Q1, which was up 6% year-over-year. But in addition to volume growth, as I said in February, we also have a double-digit advantage in back book pricing over our leading competitors. In Q1, that translated to a really strong postpaid ARPA growth of 3.9%, a powerful proof point that our unique and durable value prop is resonating as we deepen relationships with customers. T-Ads and financial services, smart and thoughtful adjacencies that piggyback off the success and scale of our brand and ecosystem are also delivering strong incremental growth. Now even as we capitalize on our differentiation to drive growth, we consciously double down on the sources of this differentiation across best network, best value and best customer experiences. Let's start with the network. We're continuing to push the envelope of what's possible. We're excited to be rolling out live translation on beta soon, our first network native AI application that we demoed for you at our February event. Live translation uses language learning models embedded into our core and translates your voice into 1 of 80 different languages anywhere in the world. All you need is just one connected T-Mobile phone. Importantly, this is just the initial step in us building AI capabilities directly into our network core. Longer term, we see a world where our network becomes the connective tissue for physical AI and accommodates inferencing at the edge. As a step towards this, we're delighted to share today that we're connecting our 5G advanced network to Figure AI's F03 humanoid robots, enabling seamless and reliable connectivity from the moment they power on. This partnership, amongst others, will allow us to explore how the T-Mobile 5G advanced network and its capabilities, including assets like the network edge can support the broader evolution of physical AI. This is an important stepping stone towards building an even more capable network of the future with 6G. On value leadership, which we guard zealously, we further strengthened our credentials with the rollout of our better value plan earlier this year, which offers access to our premium wireless experience to even more customers at a great value. Our other key differentiator is our customer experience. T Life is continuing to drive digital interactions with about 25 million monthly active users engaging with the app multiple times a month. T Life will also serve as the unified platform to support growth into considered adjacencies like financial services and advertising. In retail, we're well underway in our journey towards more experienced stores with several hundred already up and running. Our experience stores see higher premium mix, higher NPS scores than our traditional outlets. And over time, our mix shift will lead to fewer doors, but also more meaningful customer experiences. So even as our differentiation drives industry-leading growth, we continue to feed and stoke it so that the gap to competition only widens further. Pulling all this together, this is what drives the industry-leading financial growth we've delivered yet again across all key metrics in Q1. Our postpaid service revenue grew 15% year-over-year. Total service revenue 11%, a rate that's more than 4x that of our next closest competitor. Our core adjusted EBITDA also grew an industry-leading 12% year-over-year, all of this while continuing to deliver industry-leading free cash flow margins of 24%. Alongside this incredible financial growth, we returned $6 billion to shareholders in the form of dividends and share buybacks. I'll end with saying our results speak for themselves. The unique differentiation we have as the Un-carrier continues to lead to best-in-class results. Just look at our NPS score. The best part of all of this is this team's hunger and the incredible passion our people have to truly delight customers means we're only at the beginning. Okay. Peter, over to you, provide an exciting update on our guidance. Peter Osvaldik: All right. Thanks, Srini. As you can see, our growing differentiation not only drove a strong start to the year, but also gives us the confidence to increase our guidance across multiple fronts. Starting with accounts. We are raising our expectation for total postpaid net account additions to be between 950,000 and 1,050,000 on the strength of the underlying momentum in the business. Turning to service revenues. We continue to expect to deliver full year service revenue of approximately $77 billion, representing 8% growth with Q2 expectations of approximately $19 billion or up 9% year-over-year. As part of that service revenue growth, we continue to expect strong postpaid ARPA growth of between 2.5% and 3% for the full year. We are also raising our full year core adjusted EBITDA guide, which is now expected to be between $37.1 billion and $37.5 billion, an increase of $100 million at the lower end of the range. As part of that, we expect Q2 core adjusted EBITDA of approximately $9.4 billion, up 10% year-over-year. Our expectation for full year 2026 cash CapEx remains unchanged at approximately $10 billion as we continue to invest to further differentiate the network. And we now expect adjusted free cash flow to be between $18.1 billion and $18.7 billion for the full year, also an increase of $100 million at the lower end of the range. And finally, last week, we announced we are increasing our 2026 stockholder return authorization by up to $3.6 billion to a total authorization of up to $18.2 billion. And as always, we will continue to follow our disciplined capital allocation philosophy. To sum it all up, we continue to see strong momentum in the business and cannot be more excited for the future. So with that, I'll now turn the call back to Cathy to begin the Q&A. Quan Yao: Thanks, Peter. All right. Let's get to your questions. [Operator Instructions] We will start with a question on the phone. Operator, first question, please. Operator: The first question today comes from Craig Moffett with MoffettNathanson. Craig Moffett: Let me start with the reports that you're considering a merger with Deutsche Telekom. Can you talk about the logic behind that and as well as the logistics, would that require a vote of the majority of the minority among Board members as independents? And exactly how would that work? And would there be any premium for U.S. shareholders? Srinivasan Gopalan: Thanks, Craig. Let me pick that up. As a matter of policy, we don't comment on market rumors or speculation, nor is there anything specific to comment on anyway. However, the article has raised a lot of questions inbound on governance. We've looked into the governance. And what I've been told is hypothetically, if someone were to ever consider such a transaction reported in the article, that would specifically require a separate approval process by disinterested shareholders, what many of you refer to as majority of the minority. Thanks Craig. Operator: The next question comes from Sam McHugh with BNP. Samuel McHugh: On the fiber JV you announced today, I just wonder if you've seen much movement in kind of the bid-ask spread on fiber assets as we started to see maybe fiber ARPUs come under pressure. I don't know if some of the commentary around broadband growth and pricing impacts your appetite for more fiber JV going forward. Srinivasan Gopalan: Thanks, Sam. And as you well know and as I've read in all of your stamp surveys, the reason we're doing fiber is much more because we see an equity value creation opportunity rather than the myth of convergence. And that sort of drives the way we think about these assets. So when you think about things like bid-ask spread or multiples or compression and the rest, each of these assets is a unique case. The way we think about it is, do we believe that this asset has a strong likelihood of giving us our target IRRs and those are in the double-digit level. And we look at each of these very, very specifically because as all of you guys know, each of these assets operates in a specific geography, operates in a specific competitive environment, in a specific pricing environment. So it's really hard to give you an overall sense of our bid-ask spreads changing, our multiples compressing, what's happening with pricing, et cetera, et cetera. What we know so far is our fiber JV, the ones we've launched so far are well on track. They're delivering exactly what we expected. The lift from the T-Mobile brand and our distribution is completely in line with our expectations. And on the new JVs that we've done, we are very confident of our double-digit IRRs. That's kind of the criteria we'll use going forward as well. There is no magic number we're chasing on homes passed because I could kind of put fiber on the street and claim multiple homes passed. We're looking for places where we can create true equity value. And that will drive -- do we have appetite for cases which create true equity value and which tick the box for us in terms of actually being an opportunity that is monetarily sound? Yes. Are we going to chase a homes passed number? Absolutely not. Quan Yao: Thank you. Operator, next question please. Operator: The next question comes from Sean Diffley with Morgan Stanley. Quan Yao: Let's move on to the next one. Operator: The next question comes from John Hodulik with UBS. John Hodulik: Srini, could you comment on the competition you're seeing in the sort of postpaid market? I think both of your competitors have talked about sort of less handset subsidies going forward. And I think Verizon even pointed to what they saw was a sort of less competitive market as they look out. So just any thoughts on that side. And then on the broadband, the greater than 500,000 was a great number. And it sounds like you got some real strength in fixed wireless. How does the runway look there? Do you expect similar growth this year as we saw last year? And any issues sort of constraining the network in terms of your ability to grow that bid? Srinivasan Gopalan: Thanks for that question, John. So first on competition and the broader way we think about competing in this market. I think sometimes we tend to over-rotate on promotions and specific subsidies and how all of that's playing out. In the end, the direction of flow gets driven by differentiation. And this is where our unique position of kind of best network, best value, best experience and therefore, no trade-offs for the customer really drives traffic in our direction. And that's what drove not just the 6% growth in accounts year-on-year, but also the near 4% growth in ARPA. That's the fundamental way we think of competing. Now all of that happened in a quarter where I'd say January was particularly competitive and particularly heavy in one-dimensional competition based on subsidies. I think Feb and March and going into April, we've seen some cooling down of that environment. But through that quarter, we focused very much on what differentiates us, and that differentiator is a much broader set of things than purely subsidy. And the way we think of it, and you saw a lot of our advertising, it was about savings you make every day rather than savings you simply make at the point you get a phone. It was about our network. It was about that more rounded broad proposition. And then we decide how hard and heavy we go based on CLVs, right? That ultimately is the test of how much volume we want in any quarter in the context of our overall guidance. That should give you some sense of the competitive dynamic. But Mike, I don't know if you wanted to add anything specifically on the subsidy section. Michael Katz: Yes. No, I think you've got it exactly right, Srini. I mean the way that we think about this is customers -- we're providing customers the most important technology in their lives that they use every single day. And so how through both best network, best experience and best value, can we prove that to customers every single day, not once every 1,000 days when they're replacing their phone. And so that's where you've really seen us focus is having a great overall value message for our customers where they can save more with T-Mobile than anywhere else. In fact, $3,800 T-Mobile customers save relative to competitors over the last 5 years. And they can get a suite of benefits that they only get because they're T-Mobile customers. And these are benefits that really matter. They're not throwaway benefits, free Netflix subscription, et cetera. So I think the results that you saw in Q4 as well as in Q1 really demonstrate that, that's important to customers, and that's why they're choosing us at the rate that they are. Srinivasan Gopalan: Thanks, Mike. Your question on broadband, let me just touch on the big picture. And André, it would be great if you can talk about some of the stats we're seeing in terms of how many more users and usage. We're very confident on the runway on fixed wireless access. Just to give you a sense of this, right? We said we would get to 15 million customers by 2030 a couple of months ago. Now how did we get to that 15 million? We basically divide the country to almost 36 million hexbins, order of magnitude. And we look at a hexbin level. We forecast the level of wireless traffic. And what is left is really fallow capacity. And then we subject that fallow capacity to saying, yes, we've got that fallow capacity, but let's put a reasonable market share on how much we can get to in fixed wireless access. And then we commit to a number. And that calculation we did for 2030, remember, assumes we buy no further spectrum. It doesn't assume 6G. It doesn't assume any further spectral efficiency improvement. That's the basis on which we got to the 15 million. We're tracking strong to that, and this quarter was another demonstration of it. So we feel very good about it. But André? André Almeida: No. As Srini said, I think, one, we're very confident about the 2030 number. And I think one of the reasons that makes us very comfortable is what we're seeing today in reality. So not just the outstanding commercial performance we've had for many quarters in a row, but also the fact that all the leading indicators in terms of capacity and customer satisfaction continue to go up. We continue to increase our NPS. The average speeds our customers have on our product continue to go up quarter-over-quarter. The new routers we just launched, as we mentioned in February, have even higher speed than the existing routers. And all of this we've done while increasing 80% the number of customers we have on the network in 3 years. So as Srini said, we plan very carefully. We have a very detailed plan for the next 4 to 5 years in terms of the capacity of the business and beyond that time frame to make sure that this is completely sustainable long, long term and we're seeing it come through every day, every quarter for our customers. So very, very confident on the runway we have. Quan Yao: Thanks, John. Alright operator, lets go with the next one. Operator: The next question comes from Michael Rollins with Citi. Michael Rollins: Two topics, please. The first one is I was curious if you can unpack the contributors to the ARPU growth of about 4% year-over-year in terms of price actions, uptiering lines per account, the broadband update. Just some color on what you're seeing there. And then second, I was just curious if you can share what was happening with the postpaid account churn on a year-over-year basis. And given the comments of what you were just describing competitively in the answer to an earlier question, is that something that actually started to get better maybe through the quarter and into the second quarter? Srinivasan Gopalan: Great. Thanks, Mike. Let me pick up the postpaid account churn piece, and I'll hand off to Peter for the ARPA piece. So postpaid account churn is doing exactly what we expected. When you look at the underlying postpaid phone churn, that was pretty stable. It was up about 3 bps. Now there's 2 things that are worth explaining, given this is the first time we're reporting this metric. One, why is account churn higher than line churn? And two, why has account churn gone up more than line churn? The simple answer is basically math. Now there's kind of 2 groups of customers who churn more than the average. One is new customers and the second is broadband-only customers. Now the reality is the weighting of these customers in accounts is higher than the weighting in lines. Now that's obvious when you look at broadband alone customers, but also with newer customers, we just haven't had enough time to grow that relationship. So the lines per account with newer customers tends to be less. So the 2 groups that churn quicker than the average have a higher weighting in accounts than they do in lines. That's why account churn is higher than line churn. Why has it increased more than line churn? Again, it's pure math. It's simply that our fastest-growing business by long distance is broadband, which structurally, and we've talked about this before, has higher churn than wireless. So those -- it's really math that explains the postpaid account churn. Line churn looks great. We're really happy with where we are. Account churn is doing exactly what we thought it would do. Peter. Peter Osvaldik: Yes. Probably just to add to that, I think one of your questions, Mike, was, did it get better in March? Well, I think you've heard some of our competitors kind of cherry pick the -- well, March is better than December. Well, that's every single year. So yes, of course, we saw churn improvement in March -- in the last week -- yes and 2:34 a.m. on Tuesday, was even better. In terms of ARPA growth, it was all the factors, and that's the beauty of this model. Certainly, if you recall back last year, we did a round of rate plan optimizations that impacted particularly Q2 of last year. So you see a little bit of year-over-year impact on the comparatives in Q1 of this year from that. But it's also continually deepening the relationship, so an increase in lines per account, and that's across all product categories, the continued success that we're having with rate plan self-selection up the tiers continues to be at over 60% of new account lines are on our premium tier rate plans, value-add service attached. So it's really every element of the equation that we've been talking about before that's driving the ARPA increase. So again, Q2 will be a little bit different because Q1 didn't have the impact of the rate plan optimizations. But continually, for the full year, we're seeing strength of 2.5% to 3% growth. Remember, that includes the anticipated dilutive impacts of UScellular and the acquisitions of Metronet and Lumos. So the underlying organic growth of ARPA is even stronger than that 2.5% to 3%. Operator: Thanks, Mike. All right. We're going to try Sean Diffley again in the queue. Sean, are you on this time? Sean Diffley: Can you guys hear me? Unknown Executive: Yes. Sean Diffley: Sorry for the delay. So I was hoping you could further elaborate on the inference at the edge opportunity, which you referenced. I think you said you signed a figure AI deal. But maybe just flesh out why T-Mobile is better positioned than peers to capture this? Is it your network architecture, AI RAN, your spectrum position? And how should we think about the business model? Is this something where you'd have to buy GPUs? And how big could this revenue opportunity be? Srinivasan Gopalan: Yes. So let me deal with the second part of the question, and then I'll hand over to Dr. John Saw. We might be here for a while. So just on the -- here's the vision of this, right, from a -- do we need to buy GPUs, et cetera. So we're going to be -- we've already started introducing large amounts of AI into our network. And as we move closer towards AI RAN, in fact, even during things like Winter Storm Fern, you saw AI in our network being a big reason why things like antenna tilt being done automatically, things like optimizing our network, a self-healing network in many ways is not kind of science fiction. It's reality. It's the way our network runs every day. Now as we do more and more AI in our network and as we build for more and more AI in our network, we will be building compute into our network. And just as in FWA, we have the concept of fallow capacity. As we build more AI into our network, we will generate a bunch of fallow compute, especially at the edge. Now the fallow compute plus low latency creates an incredible opportunity. Because if you're thinking of scale automation, it's impossible to do that without low latency. Just think of robots running into each other or even we're still somebody trying to do remote heart surgery without low latency, right? Low latency has to be essential to any form of robotics or automation that you do. So the combination of low latency as well as fallow compute is what makes us excited about the opportunity. It's too early to size TAM. It depends on who you're listening to at any point in time, but all estimates of this market are very large. But John, do you want to talk about architecture and how we're different? John Saw: Sure, Sean. And by the way, we are highly optimistic with the prospects of physical AI just because I think when intelligence moves into the real world, right, you're going to start seeing a shift from generative AI to physical AI. And when objects move that has built an intelligence, we believe that we have a big role to play. So we are more than prepared to take this on, and we saw this coming a while back. So the big advantage we have is our 5G Advanced network that we have built. And we are the only ones that have rolled out 5G advanced nationwide. And with that, we have a bunch of innovations that we have developed with 5G advanced to increase spectral efficiencies and capacity like especially for the uplink, which is really needed for physical AI, like things like uplink transmit switching, higher transmit power and uplink MIMO, right? This is why the latest iPhones and the latest Samsung phones actually perform best on our network. Now we didn't build a 5G advanced network just for faster phones. We actually built it for physical AI and with an eye to the future, right? And now that we have a 5G advanced network we can take on the extra capabilities that is needed to support edge inferencing for physical AI better than anybody else. And we believe that we have a multiyear advantage over the competition for this. Quan Yao: Thanks Sean. Operator, let's go to the next question in the queue, and then we'll probably flip over to Social. Operator: The next question comes from Kannan Venkateshwar with Barclays. Kannan Venkateshwar: So maybe in the broadband business, when we think about the model you guys seem to be adopting, I mean it's obviously a capital-efficient model of joint ventures combined with fixed wireless. But the trade-off, I guess, is there's also some embedded inefficiencies of managing all these JVs. And it's not clear what the economics are if it's symmetrical, but it would be great to get some sense of that as well. But the bigger question is, is there a path here where maybe you look at more scaled deals instead of trying to scale this in bits and pieces across multiple JVs? Srinivasan Gopalan: Yes. Let me pick that up and André, you can add on to it. So I think it's important to understand scale in the context of fiber. Scale in the context of fiber comes from 2 things: a national brand and local scale because scale in fiber is about local zoning, local permitting, local expertise in terms of digging trenches. The fact that you have it in one geography means nothing for the next geography you go into because quite often, zoning and permitting are completely different things. The important thing for us is local scale. We are not chasing a random number of x million spread all over. We're very focused on where we are creating that local scale so that we're meaningful in that community so that we can drive the right economics. To your point on scale deals, I think there's kind of 2 or 3 different cuts to it, right? Are we interested in a scale deal purely for homes passed on fiber? No. Are we interested in mixed ILEC and different deals? No, we want to be first to fiber. And there would be exceptions where we'd look at it where some part of the footprint potentially has some non-first to fiber. But on the whole, we want to focus on first to fiber and driving the economics out of that. And that's really the coherent strategy that we're executing. FWA, of course, is a national product. André, do you want to add anything to that in terms of. André Almeida: Yes. I think just to underpin a couple of things you said, Srini. One, as we said before, we look at all of these partnerships, all of these JVs from a creation of shareholder value perspective. And that also includes making sure we have partners that are experts in deploying fiber, experts in managing this deployment business, but also have strong, as Srini said, local footprint and the ability to build in an efficient manner in each of these geographies. So we're not looking at master plan on having fiber everywhere. We're looking at geographically with each of the partners, where does it make sense to build, where we can create value out of these builds. And the second thing, as Srini said, which is very important for us, is also partners that bring the right technology. So when we looked at each of these assets, it's very important for us that these are pure-play fiber assets. We've done it with the first 2 deals with Lumos and Metronet, and we've done it now with these 2 JVs that we set up. On your other question on just addressing it on inefficiencies, the way we've built this is to make sure that we can take the advantages of scale where that scale is meaningful. And that scale is meaningful in distribution. That scale is meaningful on brand. That's why T-Mobile has taken over all of the retail consumer operations for these assets. That scale is also important in terms of, for example, the way we look at internal processes and IT. And the way we've integrated the JVs is we have a common IT platform that runs across all of the JVs that allows us from the perspective of our customers, our frontline and our processes that these JVs all look like one single operation from our perspective and from our customers' perspective. So we take scale where scale matters, where it's more important to have local knowledge and local scale, we will take that. Thank you. Srinivasan Gopalan: Kannan, it just struck me that your reference to large deals potentially was you asking the question I get asked quite often, which is the cable story. And I think I've said this at least a couple of times before, we're not going to go do scale for scale's sake. Specifically, cable is not something we're interested in. We see our strength as attacking incumbents rather than becoming an incumbent. We see a huge opportunity to attack incumbents across fiber and FWA. That will be our key play. Quan Yao: Thank you, Kannan. We're going to go over to X from [ Walt Piecyk ]. T-Mobile is packaging Starlink as a backup for businesses using 5G Internet, branding it Super Broadband. Good sign for T-Mobile SpaceX relationship. MVNO next. Srinivasan Gopalan: Thanks, Walt. Let me deal with some of that and then hand off to André on some of the pieces on super Broadband. So first, I think it's -- I know everyone around this call gets it, but this is something that gets confused quite often, which is SpaceX, Starlink, are we talking broadband? Are we talking Direct to Cell? We see them as 2 completely different businesses. We see the broadband business as actually a substitution to broadband, especially in the rural areas. We see Direct to Cell very much as a complementary product. And I think if you listen carefully to some of the things SpaceX talked about at MWC as well, they were very clear in positioning it as a complementary product. Let me deal with the MVNO question, and then I can pass on to André on Super Broadband. So first on Direct to Cell as a whole. Look, our partnership with SpaceX is very strong. We've worked closely with them to really invent an entire category, and that's been putting an end to dead zones. We're pleased with that. Most of the usage we're seeing is in national parks. And if anything, courtesy of the great network that Dr. Saw has built, we're seeing a lot less usage than we were originally thinking. But it's a great complementary product. And as you look at the future, we're seeing multiple other space providers show up. And the way this will evolve, we think is as a complementary product, it will become more and more of a standard feature of a whole set of offerings. So in some sense, less differentiated. And we're good with that at the Un-carrier because this is our history. We have go out there, innovate, create a breakthrough, solve a customer problem and then the others follow. And while they're following, we're on to our next big thing. So that's how we see DTC as a whole. On MVNOs, we've got a very clear philosophy or approach to MVNOs. MVNOs make sense for us when it's a TAM expansion. TAM expansion happens because it's a new customer base that we couldn't target earlier. It's a new channel. I mean an example of this is what we did with cable focused on SMB. It's not obvious to me how an MVNO with SpaceX or any other LEO operator fulfills those conditions. André, Super Broadband? André Almeida: Thanks, Srini. On Super Broadband, as Srini said, one, just grounding element. I know as Srini said that most people on the -- all of the people on the call understand this, but just as a grounding element, this is a broadband product. So it's not a Direct to Cell product, and it's B2B only. So we see -- and I'll explain a little bit why we see that this is an opportunity in B2B, but we don't see any translation of this into the consumer space. First, two things. One, this product is only possible because it's anchored on our 5G FWA product and the best network in America. And that's the core, core anchor of the product. Second thing is what we're bringing to the market today, and we announced this morning is anchored on an innovation by T-Mobile, which is our ability to -- within one single device and within one single network policy to be able to aggregate and coordinate between 5G FWA for businesses and the second connection, which in this case, is satellite. And that allows customers to solve 3 problems that businesses feel today. Number one is reliability and redundancy which this product has incorporated by default. Second thing is coverage. Obviously, the reason why we're using satellite and Starlink is that allows us to provide this service nationwide in every single ZIP code in America, which is a challenge we see some of our customers facing. And third is that it's very simple from a customer perspective because this means that to cover all your locations with primary and redundancy, you only need one contract, one provider and one management platform. And so we're very excited about this. If you remember when we talked in February, I said that business Internet was one of the areas where we were looking into, where we thought and believe there was opportunity and that we were going to announce something in a couple of months, and we did so today. Thank you. Quan Yao: Thanks, André. Operator, let's go back to the queue. Operator: The next question from the phone comes from Michael Ng with Goldman Sachs. Michael Ng: Just two, if I could. First, just on cost synergies, how are you progressing against the $3 billion target exiting 2027? And how much have you kind of realized to date in 2026? And where have the key sources of those cost savings come from? And then just as a housekeeping item, on the 2 JVs, anything you could share as it relates to how much you're contributing to the JVs or how much they should contribute to EBITDA on a run rate basis once it closes? Srinivasan Gopalan: Peter, do you want to... Peter Osvaldik: Yes, happy to take it. Let me start with the JVs, much like we did with the last ones. From an investment perspective, we laid out in the press release that it's about $2.7 billion of investment across the 2 JVs when they close. And at the time that they close, we'll certainly give you a more wholesome update as appropriate then around what does it mean from a subscriber perspective, increase in our target fiber households passed figures and all of those things. But it's a little early because they haven't closed. So please hold on that. In terms of the cost synergies, I'm glad you asked just 2 months after we laid it out for you on how is the progress going? And what are you doing out there? And frankly, it's going really well. And remember, what we laid out at Capital Markets Day is the source of synergies are across a number of fronts, inclusive of customer care, retail, but you also have back-office efficiencies from AI and transformation. And we're seeing great progress on that regard. I would say the $2.7 billion that we laid out for you exiting 2027 certainly is on track. I would say most of that will come towards the last part of 2026 and then fully into 2027 and beyond. And by the way, there's a lot more runway and opportunity than $2.7 billion. It's just that's what we see our way to phasing through to '27, leaving more runway into 2028. Probably not a lot of metrics I'll give you in the intervening 2 months that have created a lot of updates, but we are seeing great progress on many of them. And one, for example, is just the use of the chatbot, an AI-powered chatbot that is actually capturing a lot of customer questions and addressing them in a great Un-carrier fashion that you'd expect and actually containing about 60% of those already. So just another proof point on the way as we're going. Quan Yao: Alright operator, next question please. Operator: The next question comes from Peter Supino with Wolfe Research. Peter Supino: A question on the cost of getting new customers. Just running some simple math in your income statement, the cost of equipment sales versus equipment revenue produced a greater loss than a year ago by a few hundred million dollars. And if I look at sort of a rolling 4-quarter average of that number for the last couple of years, it's gradually climbing. And I'm wondering what the underlying trend in the business is that's driving up that loss. And if it's positive ARPA or ARPU growth, I wonder if we should expect that trend to continue. Peter Osvaldik: Yes. There's a number of things there. If you just focus on that one line item, and then I'll step back and kind of give you a view of the business. And that is a few things. One, you just have a larger base. So you'll notice that our upgrade rate was similar. And of course, our acquisitions were even higher as we see more share of switching and flow to T-Mobile. And so in a world where you do have device-centric promotionality that is driving switching as well as upgrades on a smart value-accretive CLV basis. One, you have a larger base, kind of doing the same upgrades, you're capturing more acquisitions. So naturally, you're just going to have a higher dollar amount there that's associated with that. To your point, though, there is an element of we are able -- because remember, we very smartly tend to design our most premium device promotions to be associated with our most premium device plans. And customers see that as a great trade-off, inclusive of all the other value that is incorporated in those premium rate plans. And so you do see ARPA increases as a result of that. In fact, we mentioned that we continue to see over 60% of lines on new accounts taking our premium plans. So you really have to step back and say, okay, not just that one line item, which I think this same dynamic will continue to play out on that one line item. But what is it doing to the totality of the business? And how is that doing? And I know, Peter, you've looked at this more deeply. And I don't think Q1 could have been a better demonstration of the things we've been talking about for a long time now, which is if you invest in what is your product, I've heard others in the industry say, you don't need to invest in your network, it's not important. And I just -- I mean kudos to them if that's what they believe. It's our product. It's what we sell to customers. And the differentiation that we're starting to see with consumer sentiment now following what the actual network progress is, the value that we embed in our plans as well as the experiences mean that it's not just devices that make customers come here. You see us be very thoughtful around the promotions around devices that we do, inclusive of linking them to our top-tier rate plans in most instances. But you see the flow of customers coming to us because it's not the devices, it's these 3 other elements. And not only did you see that in top line KPIs in terms of service revenue of 11%, 4x the next nearest competitor, core EBITDA of 12%, the all-important free cash flow generation, but if you double-click down like you do so often into the next level of KPIs, you see a tremendously stark difference developing in Q1. And it's one of those that is a result of all this investment and differentiation that we've done. I mean if you take a look at what we delivered, 217,000 postpaid account net additions up year-over-year and ARPA growth of 3.9%. That's what delivers the top line service revenue that's so differentiated. If you look at Verizon, for example, they lost 127,000 postpaid net accounts and their ARPU was almost down 2% year-over-year. And so if you -- I know they didn't do this for you, but if you somehow back out what you believe the frontier service revenue contribution was from M&A, their business -- the core business ex Frontier actually declined in service revenue. Mean that's fascinatingly stark to show you, by the way, why accounts and ARPA is such an important metric to focus on in terms of value creation. Similarly, when you look at AT&T, they just delivered the highest, yet again, the highest year-over-year postpaid phone churn increase in the industry, proving that all the convergence talk is just that. It's talk. But also more importantly, they had declines in postpaid phone ARPU sequentially and year-over-year. And if you look at what they just did with contract assets in Q1, where that was a $300 million increase in terms of pulling costs off the P&L and putting them on the balance sheet. If you adjust for that, EBITDA was down year-over-year there. So it just shows you, if you step one level down, you see the formula here that's way more than a device promotionality formula. It is that best network, best value, best experience means customers are choosing to change their whole relationship coming to T-Mobile, deepening that relationship vis-a-vis ARPA and our ability then because of the efficient way that we run to translate that not only into core EBITDA leadership growth, but also that all-important free cash flow growth. I think Q1 started showing you a lot more of what we've promised with this differentiation would come, and that is it's starkly different in terms of financial performance as well. So sorry, let me go off for a little while because it was just not equipment revenue and COGS, you really have to step back and see the broad picture of value creation here. So I appreciate you letting me go on, Peter. Quan Yao: Operator, let's move on to our next question please. Operator: The next question comes from Sebastiano Petti with JPMorgan. Sebastiano Petti: Peter and Srini, I guess, for either of you. Good to see the increase in the capital allocation for the year of $3.6 billion, $18.2 billion. You had the accelerated share repurchase in the first quarter that you announced. I guess, help us think shares have come in here a little bit. How are you thinking about perhaps the appetite for additional share repurchases or an accelerated buyback program here? And then related to the postpaid phone account -- postpaid account metric, great to see the upgrade. Maybe help us think about where you are in the process of integration on the UScellular base and whether that perhaps led to maybe some of that churn increase that you talked about earlier on, the math, Srini, whether or not -- like where are you in that migration or integration of that base? And when should we anticipate churn perhaps converges with the legacy T-Mobile base? Srinivasan Gopalan: Peter, maybe you pick up the first bit and John do an another update on your... Peter Osvaldik: Absolutely. So on shareholder returns, you just saw us execute in Q1 an acceleration and delivered $4.9 billion in share buybacks for a significant cumulative amount of share buyback and dividends that have been returned to date under the program. And you saw us more excitingly, just recently announced that the Board authorized us to increase up to the $3.6 billion. And the way we're going to approach it is the way we've always approached this, which is I'm not going to talk about the daily trading dynamics and what we're thinking about and all of that for obvious reasons. But really importantly, it's -- we're focused on where do we see this company and its discount relative to intrinsic value. And of course, we'll follow our capital allocation philosophy, investing in the core business, investing in value-accretive M&A and then its shareholder returns consisting of this very balanced dividend and share buyback approach. But that's how we're going to approach it. And so I'm not going to be able to say more in terms of what we're thinking about and how and when and trading dynamics there. But I think you saw us execute in Q1 and very smartly and thoughtfully based on where we believe the intrinsic value of the company is and the discount relative to that is going to guide us in a lot of these instances. John Saw: Yes. Then I'll pick up on Sebastiano. I'll pick up on the UScellular integration piece. As you guys know, we closed the UScellular transaction on August 1st of last year. And we stopped promoting UScellular to new customers right before the holidays last year. So we unified everything behind the T-Mobile brand, even in UScellular branded stores, we're acquiring all new accounts under the T-Mobile brand. And to the premise of your question, we're now just now beginning into the final kind of big throes of the customer migration. We've done a lot of the network-oriented migration, that's behind us. And now we're handling the customer migration. It's a relatively small base, 4 million customers or so. And we've got recent experience with this, given that we integrated the Sprint base back in 2020 to 2023. So a lot of learnings that we're applying to this overall customer migration effort in terms of communications and how we're mapping customers over, making sure they're getting all the benefits and understanding the full T-Mobile value proposition. All of that's going extremely well. I could not be more satisfied with how it's going in the UScellular marketplace. So we're going to be working through that over the spring, the summer and the fall. I think we'll substantially have it wrapped up by this year in terms of the overall integration effort. And then, of course, what that's leaving with is an incredibly bolstered network advantage in smaller markets and rural areas where we're continuing to do quite well. You heard Srini talk about where our share position is now in smaller markets and rural areas of 24%. But the other big thing that we're doing in smaller markets and rural areas is continuing to drive that win share in postpaid switching. We're leading now 12 quarters in a row. So when you think about the majority of 2023, 2024, 2025 and so far in '26, continuing to lead that position, enormous runway ahead of us and really fortified by the overall UScellular assets that we've incorporated into the T-Mobile network. Srinivasan Gopalan: Yes. Just one thing, Sebastiano, just to clarify, the math I was laying out about account churn. UScellular is not a contributor to that. So that behaved exactly like we expected it. This was more kind of weighted average math camp. Quan Yao: Let's move on to our next question. Operator: The next question comes from Brandon Nispel with KeyBanc Capital Markets. Brandon Nispel: I think the last couple of quarters, and it was sort of asked, but the last couple of quarters, you guys gave an organic ARPA growth. And I was hoping you guys could give that organic ARPA growth this quarter. And then just looking at the guide for service revenue in 2Q, it seems like the trend on ARPA growth needs to come down something with a 1 -- and I was wondering if I got that right. And then it seems like, again, going -- looking at your guidance to hit $77 billion, we need to reaccelerate that. I want to just confirm that all of that was correct and get your thoughts there. Peter Osvaldik: Yes. I can go on -- you're absolutely right on the ARPA piece. But remember, it's a remnant of the fact that we had rate plan optimizations that benefited Q2 of last year, but not Q1 of last year. So you had that being an impact over the year-over-year. So yes, when you think about Q2, I think you're absolutely right in terms of the numbers, probably near 2% on a year-over-year ARPA basis there simply because of the dynamics of you have the rate plan optimizations and you have, remember, the dilutive effect that was long anticipated around both UScellular as well as Metronet and Lumos, which were taken on and impact Q2 of this year, but not, of course, Q2 of last year. And then we will see an acceleration for the second half of the year back. So this is all just math dynamics here. In terms of ARPA and giving you organic versus inorganic, we moved away from that primarily because I just don't have a great answer for you. It would all be subject to art. So for example, as we brought on a UScellular customer and they expanded their relationship with us post-merger, what do I do there? Is that organic or inorganic? Or when we had fiber-only customers come on board and then expand their relationship and take on phone and other products, how do I allocate that away? And so we're not in the business of creating art here. We want to be very transparent with you. And I think at this point, because of how we've accelerated some of the UScellular elements of it and these nuances, we're really not giving organic or inorganic ARPA for that reason. Quan Yao: Thanks, Brandon. Operator, let's do one last question please. Operator: The last question today comes from Timothy Horan with Oppenheimer. Timothy Horan: With basically the highest quality service out there on almost every metric, you're at a 20% price discount, give or take, versus your peers. I mean, can you get that pricing to parity over time? I mean with the quality service, you might not even impact subscriber growth at all, but how are you thinking about pricing longer term? Srinivasan Gopalan: Yes. I'll take that up. The way we think about pricing power and pricing as a whole is ARPA growth, right? We don't tend to fixate on one number. We love the fact that our back book is actually at a lower price than our front book. Simply put that our existing customers pay less than new. That's rare in an annuity business, and it creates incredible dynamics, right? Because that means as you bring on customers, you're growing ARPU as well as volume. You're growing value as well as volume. And when you have this position of having best network, best experience and best value, that creates a position of no trade-offs. So we are going to protect our position on best value. We're not going to look at it kind of with one variable, which is what is our ARPU versus other people's ARPU or what is our ARPA versus others. We will, from time to time, do thoughtful moves on our pricing. They are typically more-for-more moves where what we end up doing is give our customers more because a lot of the plans, for example, would be outdated. So what we will end up doing is bringing them up to date with newer, better plans, and that may or may not come with a price change. But we don't see a world where we look at a 20% discount and go, let's go whack that pricing up and create a change because we think getting -- titrating the volume and value, making sure that we stay with this position of best network, best value, best experience is what creates long-term shareholder value, long-term customer loyalty. It's what creates the number I love the most, our NPS, 20% ahead of everyone else. Quan Yao: All right. Thanks, Tim, and thanks, everybody, for joining us today. We're looking forward to connecting with you again soon. In the meantime, if you have other questions, please contact the Investor Relations or media departments. Thank you.
Operator: Hello, everyone. Thank you for joining us, and welcome to CareDx, Inc Q1 2026 financial results earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press 1 on your keypad to raise your hand. To withdraw your question, press 1 again. I will now hand the conference over to Caroline Corner, Investor Relations. Caroline, please go ahead. Caroline Corner: Thank you, operator. Good afternoon. Thank you for joining us today. Earlier today, CareDx, Inc released financial results for the first quarter 2026 ending 03/31/2026. The results are currently available on the company's website at caredx.com. Joining me on today's call are John Hanna, President and Chief Executive Officer; Keith S. Kennedy, Chief Operating Officer and Chief Financial Officer; and Doctor Jeffrey Titterberg, Chief Medical Officer. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. Information concerning the risks, uncertainties, and other factors that could cause results to differ from these forward-looking statements is included in our filings with the Securities and Exchange Commission. The information provided in this conference call speaks only to the live broadcast today, 04/28/2026. We disclaim any intention or obligation, except as required by law, to update or revise any information, financial projections, or other forward-looking statements, whether because of new information, future events, or otherwise. This call will also include a discussion of certain non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from GAAP measures. Reconciliations of our non-GAAP financial measures to the most directly comparable GAAP financial measures may be found in today's earnings release, which is posted on our website. With that, I will now turn the call over to John. John Hanna: Thank you, Caroline. Good afternoon, and thank you all for joining today's call. Since I joined CareDx, Inc in 2024, I have been singularly focused on transforming this company into a precision diagnostics market leader. Today, I am going to highlight two portfolio actions we have taken to accelerate our growth strategy, including the divestiture of our Lab Products business we announced on April 15 and the acquisition of Navaris announced today. In my prepared remarks, I am going to briefly review our strategy in solid organ transplant that is propelling the growth in our core business. I will then cover the two portfolio actions in more detail. After that, Keith will walk through the financials and our updated outlook for 2026. At CareDx, Inc, our growth strategy is focused on extending our leadership in precision medicine testing and patient and digital solutions by addressing markets where our core competencies give us the right to win. We are addressing clinical markets where we hold a clear number one position. These markets are characterized by patients with a high cost and burden of disease that warrants repeat molecular testing to inform clinical management. These patients are managed by a concentrated group of subspecialty providers, and we service them through our solution selling approach that integrates digital solutions and pharmacy to support clinical workflows and patient engagement and adherence to our testing services. Our organic growth strategy is anchored on three connected drivers. First is our pipeline programs. Innovation is central to how we maintain leadership and extend our model into new markets and grow our TAM. Q1 marked continued progress across our pipeline, with advancement in both new clinical programs and platform capabilities that extend our core monitoring model over time. In 2026, we are advancing three key pipeline initiatives. First, during the quarter, we advanced our lead cell therapy program, Alaheme, with clinical data from the ACROBAT study. The ACROBAT data have now been presented at both Tandem and EBMT; we anticipate publication submission in the second quarter. In solid organ transplant, we are progressing our program to expand AlloSure into liver transplantation. Liver transplantation is unique in its biology and clinical management, and in our MAPLE trial, we are gathering follow-up data for patients enrolled in the study to validate our solution for this important indication. Strategically, AlloSure liver would extend our core monitoring model into a new organ system, enabling total addressable market expansion while remaining tightly aligned with the same workflow-driven, repeat testing, solutions-based approach that underpins our core business. Additionally, late last year, we announced the launch of HistoMap kidney, which extends molecular insights to the moment of biopsy and complements our existing blood-based kidney monitoring. For example, when a kidney transplant patient undergoes a biopsy, clinicians typically rely only on histology, looking at tissue under a microscope, to assess what may be happening in the graft. HistoMap kidney adds a molecular layer, providing additional biological context that can be evaluated alongside traditional pathology. During the quarter, we continued to make progress toward the planned HistoMap kidney launch, including submission of our second clinical validation manuscript and advancing our CLIA readiness. Together, Alaheme, AlloSure liver, and HistoMap demonstrate how we are innovating on our core platform to extend our leadership into new clinical markets. Second, our go-to-market strategy is focused on building belief in molecular testing as the standard of care in solid organ transplant and simplifying the workflow for health systems to drive operational efficiencies in their practice and adherence to testing protocols, while improving the quality and consistency of how customers experience working with CareDx, Inc. We are executing this through two primary go-to-market initiatives. First is emphasizing the clinical differentiation of our solutions, where we lead with indication-specific strategies tailored to how transplant clinicians make decisions. With HeartCare, our focus is on informing prognosis and treatment decisions, leveraging our SHORE data. In kidney, we are expanding the context of use for AlloSure beyond surveillance with a focus on for-cause testing indications, which currently account for 50% of our kidney testing volume. In lung, we continue to build adoption by promoting early findings from our ALAMO registry. This approach allows us to drive relevance within each indication rather than relying on a single commercial message across markets. The second initiative is driving workflow improvements and ease of use, which is increasingly critical to scale. We are embedding our solutions more deeply into clinical workflows through a combination of center-based software, Epic Aura integrations, and Epic Enterprise LIMS infrastructure. Together, these capabilities are designed to support more consistent ordering, reporting, and cash collection by reducing friction within transplant center workflows. As we look ahead, we are targeting approximately 50% of testing volume through Epic-integrated sites by year end, reflecting our belief that workflow integration is central to sustained adoption. We made continued progress on this strategy during the quarter, with nine centers live and 16 additional integrations underway. While still early, these integrations are showing signs that they reduce friction for care teams and enable increased adherence to center-specific testing protocols. These initiatives are supported by continued investment in sales, medical education, and patient engagement through our CareDx Cares team with a clear emphasis on improving the customer experience. We are deploying resources to accelerate growth, and today, we have over 120 field support team members that assist transplant centers with their workflow and assist patients with blood collection. Overall, our go-to-market approach reflects a clear strategic intent to establish molecular testing as the standard of care by combining clinical differentiation, workflow simplicity, and scalable execution. Our evidence generation strategy is intentionally designed to support how we scale the business and extend our leadership position. The objective is to advance the clinical utility of our on-market products, inform how clinicians use molecular testing over time, and support expansion into new indications in a disciplined way. In solid organ transplant, studies such as ALAMO and HARBOR focus on demonstrating longitudinal utility and monitoring relevance. MERIT is a meaningful step beyond that. MERIT is an interventional study which evaluates how molecular insights can actively inform therapeutic decision-making. Strategically, this is important because it makes molecular testing integral to clinical action, reinforcing its role within routine care pathways. In cell therapy and hem-oncology, we are advancing our Transplant+ strategy starting with ACROBAT, which serves as the foundation for the clinical validation of Alaheme and our entrance into AML and MDS markets. We are also extending that same molecular monitoring model into DLBCL and multiple myeloma in our ACROSS study evaluating CAR T persistence. This work focuses on understanding expansion and persistence kinetics in real-world CAR T care. Strategically, this study helps define where molecular monitoring can add value in a rapidly evolving market, which may become an important part of our future pipeline. We announced in March the launch of Vantics, our AI-enabled clinical insights platform, which adds an intelligence layer to clinical decision-making. In practical terms, consider a kidney transplant patient who is undergoing routine molecular testing as a part of follow-up care. Over time those results, such as serial AlloSure measurements, are generated alongside clinical data already captured in the care workflow. With Vantics, centers can securely aggregate and analyze center-specific molecular and clinical data across cohorts, enabling more consistent interpretation of trends over time. The supporting algorithms are informed by CareDx, Inc's large clinical study databases, including SHORE and KOAR, helping translate real-world longitudinal data into scalable program-level insights. Together, these efforts reflect a consistent strategy to extend molecular monitoring in adjacent clinical settings in a disciplined way, prioritizing evidence, clinical relevance, and timing. Last week, CareDx, Inc's precision medicine testing services were featured in more than 50 abstracts, including 16 oral presentations, at the International Society for Heart and Lung Transplantation's Annual Meeting, drawing on data generated from across approximately 95 transplant centers. This breadth reflects one of the largest coordinated bodies of real-world longitudinal molecular monitoring data presented at a national transplant meeting. The data spanned both heart and lung transplantation and included findings from large prospective registries such as SHORE and ALAMO, as well as early interventional work supporting MERIT. Across these studies, and key features of the highlighted abstracts on this slide, the consistent theme was the clinical relevance of longitudinal molecular signals over time, supporting risk stratification, earlier signal detection, and more informed post-transplant management. The scientific momentum we highlighted at ISHLT reinforces our broader strategy and the growth drivers we have discussed, demonstrating how molecular monitoring is becoming increasingly embedded in clinical practice. Next, I would like to briefly turn to the divestiture of our Lab Products business, an important step in our recent portfolio actions. This transaction simplifies the company to what we do best: precision medicine testing services and digital and patient solutions. The Lab Products business includes manufacturing, regulatory, and commercial operations that are distinct from our U.S.-based testing services platform. By separating these activities, we are streamlining our operating model and allowing each business to move forward with greater focus and alignment. Strategically, this reinforces our testing services and patient and digital solutions core business, which are driving growth. In the first quarter, they delivered 48% and 33% revenue growth, respectively. Financially, the transaction provides upfront cash consideration of $170 million at closing, improving our financial flexibility and supporting our capital allocation strategy. At the same time, the transaction positions the Lab Products business for continued success under Eurobio Scientific, a longstanding partner and global IVD manufacturer with scale and distribution capabilities. Keith will walk through the pro forma financial impacts of the transaction in more detail in his remarks. Now on to the big news. We announced today an agreement to acquire Navaris. This is a thoughtful and deliberate step in our growth strategy. Along with our Alaheme and CAR T organic pipeline in oncology, we are taking a very selective and differentiated approach to solid tumor MRD with a category-defining and indication-leading platform with Navaris. Importantly, this is not a move to broadly pursue MRD as a category. Rather, it is a targeted addition in a specific viral-mediated cancer space where longitudinal molecular monitoring is already reimbursed, embedded in specialty workflows, and aligned with how we operate our core business today. Navaris' platform is built around a tumor-naive blood test used across the care continuum from diagnosis through MRD surveillance. First, I would like to share a little bit about the business at a high level. To date, the company has performed more than 130,000 commercial tests, has approximately 2,000 active ordering physicians, and is operated by a strong U.S.-based team of approximately 100 employees. The testing is currently covered for approximately 100 million lives, including Medicare, and has Advanced Diagnostic Laboratory Test, or ADLT, designation with a $1,800 reimbursement per test. For 2025, the estimated unaudited revenue is $34 million, and we expect it will grow by 30% to 40% or greater over the next three years. The Navaris testing platform uses a proprietary and differentiated tumor tissue-modified viral DNA, or TTMV, approach to detecting tumor-derived viral DNA in a blood sample. The liquid biopsy platform is tumor-naive by design, meaning it does not require access to tumor tissue. As a result, testing can be performed through a simple blood draw, while also differentiating malignant signal from transient or benign HPV infection without reliance on having a tissue sample. The platform is built on an ultra-sensitive digital PCR technology combined with proprietary analytical methods, supporting both strong clinical performance and scalable operations. Multiple indications for Navaris testing are supported by a large and growing body of evidence that now totals 56 peer-reviewed publications. In a large multicenter real-world observational study of 543 cancer patients reflecting use in routine clinical practice, the Navaris test demonstrated strong performance with a negative predictive value of 98% and a positive predictive value of 95% during post-treatment MRD surveillance. As shown in the Kaplan-Meier curve on the right, patients with persistent negative TTMV DNA results during surveillance experienced improved recurrence-free and overall survival compared with those with one or more positive tests, and the median lead time to identify recurrence was four months ahead of standard-of-care methods. Based on these findings, the study authors recommended post-treatment monitoring and guideline-specified routine surveillance intervals. Viral-driven cancers represent a growing specialty oncology market, with HPV playing a central role across multiple solid tumors. According to U.S. population-level data from the CDC, HPV is associated with the majority of cases of several of these tumor types, reaching approximately 80% of head and neck cancers and close to 90% of anal cancers, Navaris' two lead indications. Importantly, the incidence of HPV-associated cancers continues to increase, demonstrated here by the growth in head and neck cancer on the right. The Navaris platform is validated across multiple viral-mediated cancer indications. In aid to diagnosis, Navaris is validated in head and neck, and planned validation in anal cancers. In MRD surveillance, Navaris is clinically validated and Medicare covered in head and neck and anal cancers and has planned validation in gynecologic cancers. And now, I would like to ask our Chief Medical Officer, Doctor Jeffrey Titterberg, to walk us through the patient journey for head and neck cancer diagnosis and molecular MRD monitoring. Doctor Jeffrey Titterberg: Thank you, John. I am excited to join the call and share what we see to be a significant opportunity for a differentiated solution to address an unmet medical need in viral-mediated cancers. Today I am going to focus my comments on head and neck cancer for the Navaris adoption of the greatest and illustrate how Navaris fits into the workflow and management of these patients. Patients with head and neck cancer typically start their journey after being referred to an ENT surgeon, with symptoms that may include chronic sore throat, pain or difficulty swallowing, or a neck mass. The ENT surgeon will first examine the patient, perform laryngoscopy and imaging, and then obtain tissue via biopsy or fine needle aspiration. Importantly, these methods can be inconclusive, and an HPV diagnosis can be missed if tissue samples are inadequate or nondiagnostic. Peer-reviewed evidence has shown that Navaris is highly accurate, aiding in the diagnosis of HPV-positive head and neck cancer. When utilized in conjunction with traditional approaches, more patients are correctly classified as HPV positive, which is important because making an accurate diagnosis of HPV positivity is critical to downstream therapeutic decision-making. HPV-positive patients almost always undergo surgical resection, followed by chemotherapy, radiation, or both, under the care of a multidisciplinary team. Navaris testing may be utilized to inform treatment response through its unique quantitative tumor tissue-modified viral DNA score, which correlates with tumor burden. The TTMV DNA score has the potential to inform both the duration and intensity of therapy, for which studies are ongoing. Following definitive treatment, Navaris molecular testing is positioned as a monitoring tool in this context; serial blood-based monitoring is used to complement routine follow-up, enabling a repeat assessment of the molecular signal over time as part of standard surveillance workflows. The MRD surveillance protocol for Navaris testing aligns with guideline-recommended physician follow-up time points, including quarterly for years one and two, and semiannually for years three, four, and five, for a total of 14 tests per patient over the first five years post treatment, followed by annual testing thereafter. Currently, Navaris is the only Medicare-covered assay for HPV-positive head and neck and anal cancer MRD. Care is delivered by specialists at accredited centers consistent with NCCN- and CAP-aligned practices, where patients are followed closely for multiple years due to risk of recurrence. John Hanna: Thank you, Jeff. With that context on the technology, patient journey, and the reimbursement framework already in place, I want to step back and talk about the size and quality of the opportunity in front of us. HPV-driven solid tumors are a large and growing portion of the overall specialty oncology testing market. Today, we estimate the U.S. total addressable market to be approximately $4.5 billion, split across two distinct clinical applications. The first is molecular residual disease surveillance, which represents roughly $1.5 billion of TAM. This is where Navaris is focused today with clinical validation and Medicare coverage and in the early stages of clinical adoption. The second is aid to diagnosis, representing an additional $3 billion opportunity that has yet to be tapped. In totality, at CareDx, Inc, we are building a differentiated multi-indication precision medicine portfolio to drive growth. In solid organ transplant, we have established leadership across heart, kidney, and lung, with liver progressing from development into validation. In specialty oncology, we are applying our core competencies in high-value indications. That includes viral-mediated cancers and hematologic malignancies like AML and MDS. Importantly, this diversified portfolio approach allows us to continue on our strong growth trajectory by extending our precision medicine testing services and patient and digital solutions into new indications. When taken together, we estimate the total addressable market for solid organ transplant and specialty oncology now exceeds $12 billion. The result is a diversified growth profile across specialty markets. Navaris extends our platform into a large specialty oncology market where our model already applies and where we can lead. It allows us to stay disciplined about where we compete, focusing on indications where molecular monitoring is differentiated and scalable. As we evaluated this opportunity, we were particularly focused on the long-term impact on our growth and returns to shareholders, and we have strong conviction that this investment can deliver both within the framework of our existing operating model. This brings us to the core takeaway: CareDx, Inc is the right company to scale Navaris. We have the proven platform, the operational discipline, and the specialty focus that can turn this expanded portfolio opportunity into durable growth and profitability. I will now turn the call over to Keith to review our Q1 financials and 2026 guidance. Caroline Corner: Keith? Keith S. Kennedy: Thank you, John. I plan to cover our first quarter 2026 financial results and our updated 2026 guidance. You may access our earnings presentation at caredx.com by clicking through to our Investor page. Turning to the financial highlights section of our earnings presentation, for the first quarter 2026, and our year-over-year results: Total revenue increased 39% to $118 million. Testing volume increased 17% to 54,900 tests. Testing services revenue increased 48% to $91 million, or $16.60 per test. Patient and digital solutions revenue increased 33% to $16 million. Lab products revenue declined 4% to $10 million. Our non-GAAP gross margins increased to 73%. Non-GAAP operating expenses of $69 million, or 59% of revenue, included approximately $2 million incremental bonus accrual for performance above plan. Our GAAP net income was $3 million, GAAP net income per basic and diluted share was $0.05, and adjusted EBITDA of $19 million increased 300%+. Cash collections increased 52% to $121 million. Cash flow from operations was $4 million this quarter and $72 million over the last four quarters. We ended the quarter with $198 million in cash and cash equivalents and no debt. In the first quarter, we collected $14 million in excess of December 31 receivables. This out-of-period revenue contributed $260 per reported test. Excluding this revenue, our revenue per test was $14.[inaudible]. Turning to guidance. We are raising 2026 revenue guidance to $447 million to $465 million, representing a 20% increase year over year at the $456 million midpoint of the range, and adjusted EBITDA of $43 million to $57 million, a 58% increase year over year at the $50 million midpoint of the range. Our full-year guidance covers the business in our hands today, including our products business. After I cover our annual guidance, I will provide details for our products business embedded in our annual guidance, which we hope will provide our preliminary insights into the financial carve-out. We applied the following assumptions in modeling our full-year guidance, consistent with non-GAAP measures. We believe testing volume will range between 224,000 and 229,000 tests for the year, representing a 13% increase year over year at the 226,500 midpoint of the range. Based on our experience and seasonality in our business, we expect to see a step up in volume of approximately 1,700 tests from Q1 to Q2, flat from Q2 to Q3, and another step up in volume of 1,800 tests from Q3 to Q4. Our guidance assumes revenue for each line of business calculated on a year-over-year basis at the midpoint of the following ranges: Testing services revenue of $337 million to $351 million, a 25% increase at the $344 million midpoint. Patient and digital revenue of $63 million to $66 million, a 13% increase at the $65 million midpoint. Product revenue of $45 million to $50 million, flat at the $48 million midpoint. For testing services, we included a slide on revenue per test in our earnings presentation. We expect our revenue per test to increase 10% year over year to the midpoint of our guide—7% due to an increase in our average accrual rate and 3% due to the combination of cash collections in excess of receivables offset by our estimate of the LCD price impact. In modeling to the midpoint of our guide, we assume average accrual rate per test to increase from $14.[inaudible] per test in Q1 to $14.60 by year end, out-of-period revenue of $7.5 million in Q2, $5 million in Q3, and none in Q4, and the LCD to negatively impact revenue, not volume, by $7.5 million in 2026. Per quarter, we modeled gross margins in the range of 68% to 71% and operating expenses of $68 million to $70 million, including higher bonus accrual of approximately $2 million per quarter, and we anticipate depreciation recorded in operating expenses to be approximately $9 million for the full year. As mentioned in our April press release, the Board of Directors authorized a common stock repurchase program of up to $100 million of shares over a period of up to 24 months. Turning to our Lab Products divestiture, as John mentioned, we signed a definitive agreement to divest this business, which we expect to close by the end of the third quarter and net approximately $160 million in cash, equal to the $170 million sales price net of $10 million in estimated transaction expenses. As I said earlier, our full-year guidance covers the business in our hands today, including our products business. In 2026, our Products business generated approximately $10 million in revenue and less than $1 million in adjusted EBITDA. To provide context on the carve-out of our Products business, the following slide in our earnings presentation illustrates the following. On the left, we prepared a chart showing our revenue mix by service line for 2025 and the full-year guidance at the midpoint of the range. Our 2026 guidance includes $48 million in lab products revenue, or flat year over year, and $[inaudible] in core business revenue, including testing, patient, and digital services, or 23% growth year over year. The table to the right of this slide provides assumptions built into our 2026 guide for our products business, which is our best estimate at this time, but we expect to vary depending on when the transaction closes, transition services we provide to the buyer, etc. In a perfect world, both parties would like to achieve a clean close at quarter end, or June 30, but we are allowing for slippage into Q3. Our 2026 guidance assumes lab products generates $45 million to $50 million in annual revenue, $26 million to $30 million in gross profit, $21 million to $24 million in operating expenses, approximately $5 million in depreciation, and contributes $3 million to $9 million in EBITDA. We are reviewing our post-close expense structure and will have more to say on the carve-out after we close. For modeling purposes, we provided the quarterly ranges underlying our 2026 guide, which we will update post close. For example, we modeled $5 million to $6 million in quarterly operating expenses for the lab products business. Hopefully, this is helpful detail. I will now turn the call back over to John. John Hanna: Thank you, Keith. In summary, I want to thank all the team here at CareDx, Inc and Navaris and look forward to the path forward. We think these actions, taken together, are advancing our growth strategy as a company, optimizing our portfolio, and extending our leadership in precision medicine diagnostics. Thank you, and I will now turn the call back over to the operator. Operator: Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press 1 on your keypad to raise your hand. To withdraw your question, press 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Tycho Peterson with Jefferies. Tycho, your line is open. Please go ahead. Tycho W. Peterson: Hey, team. This is Lauren on for Tycho. Quick ones for me. First, on the $4.5 billion TAM for MRD, how much of this market right now is immediately accessible to you guys through your existing infrastructure, and what new clinical channels must be established for the 30% to 40% projected annual growth? And then second, on the digital solutions business, as you guys are growing this out in the solution selling strategy, what is the attach rate for digital solutions among your high-volume transplant center customers? Thanks. John Hanna: Yeah. Thanks so much for the question, Lauren. As we outlined in the prepared remarks, $1.5 billion of the TAM is currently in the MRD space and covered in head and neck and anal cancers. From a channel access perspective, the Navaris team has done a great job building a channel into the specialty providers that diagnose and monitor those patients, including ENTs—predominantly in head and neck—and then medical oncologists that they work with. We do not anticipate having to build a net-new channel; Navaris has already built that channel. With CareDx, Inc capabilities in driving repeat testing and building workflow optimization, including Epic integration, we think we can accelerate that revenue and volume growth rate. Your second question on the attachment rate of digital solutions: we said previously that 70% of transplant centers across the U.S. use at least one of the CareDx, Inc patient or digital solutions, and that continues to be true today. As we have shared previously, the more solutions a transplant center has, the more embedded we become into their workflow and, therefore, the more testing we see and revenue generated from those centers. Tycho W. Peterson: Perfect. Thanks so much. John Hanna: Thank you. Operator: Our next question comes from the line of Brandon Couillard from Wells Fargo. Brandon, your line is open. Please go ahead. Brandon Couillard: Hey. Good afternoon. Thanks for the time. John, on Navaris, just curious how long these assets have been on your radar screen. It looks like they also operate two labs, one in Massachusetts, one in North Carolina. Would it be your expectation to keep both? And R&D spend must be pretty lean here. Would this be a type of situation where maybe you could spend an extra $10 million or $20 million and get a lot of juice out of that, be it commercially or with the R&D pipeline? Or would you expect to keep operating this business near breakeven to slightly profitable? John Hanna: On the labs, they operate and have CLIA licenses in both their labs. It is not really that material at this point, and they are in the middle of automating some of their workflows, so we will be spending a lot of time really helping them on their cost per test, continuing to drive that as well as the revenue cycle management over time. We will evaluate the lab strategy. And I think, Brandon, on the R&D spend, the company operates incredibly efficiently. There are a high number of active clinical trials in addition to the 56 publications that have already been published on the products. Right now, there is a focus on the aid-to-diagnosis indication both in head and neck and anal cancer to unlock that larger portion of the TAM, and then development work really around the 14 time points of testing over the first five years post definitive treatment for those patients. That is what we are going to be focused on. That is really the core competency that makes this deal work and why Navaris selected, quite frankly, CareDx, Inc as their partner going forward. Brandon Couillard: Super. And then, John, it would be great to get your macro view on the transplant procedure environment right now. Volume growth is still pretty sluggish here. Curious how much longer you can keep growing your own testing volumes at double digits if this type of environment persists, and to what degree at all does your guidance assume that procedure volumes pick up as we move through the year? John Hanna: Yeah, it is hard to predict, as you know, Brandon. It seems like in the transplant market, the procedure volumes accelerate and then fall back and accelerate and fall back. We saw some acceleration at the end of the first quarter, particularly in kidney. We are monitoring that closely. As you are aware, we are coming toward the end of the first reporting period in the IOTA program, and we keep hearing chatter in the market about a focus on increasing transplant volumes as a result of that program, but we are not seeing it nationwide in terms of total volume growth—that is in select centers. So we are very focused on supporting those centers that are in the IOTA program around hitting their goals as they move into this first reporting cycle. Keith S. Kennedy: As we test patients, our population of unique patients we are testing is growing year over year. Once you get a transplant, you are followed for years in getting testing. So even if the underlying transplant volume is flat, growth rate is going to be significantly higher in surveillance testing. Operator: Thank you. Our next question comes from Mark Massaro at BTIG. Mark, your line is open. Please go ahead. Mark Anthony Massaro: Hey, guys. Congrats on the acquisition of Navaris. I wanted to ask a couple on that deal. So the first one is where is the GYN cancer indication in terms of development, and how quickly do you think that could launch? The second one is, I understand there are 100 employees at the company. How many are in commercial, and did I hear you right that you do not expect to expand their commercial? And then the third one is on the reimbursement. I think the reimbursement rate is $1,800 per test under an ADLT. When do you think that might reset, if ever, and is that locked through the end of this year? How are you thinking about that going forward? John Hanna: Hey, Mark. Thanks for the questions. The GYN indication is still in development. There is greater heterogeneity of HPV-driven proteins in GYN than in the other indications, so that is a development program within the company that will continue, and we do not have a specific timeline around it today. From a commercial channel perspective, what I was saying in response to Lauren’s question is that the channel exists today. We certainly anticipate supporting and expanding that channel. Driving growth requires more reach and frequency with providers and building belief, and so we will do that, but that is part of our model here, and we think it is very doable to maintain the financial profile that we anticipate with the asset. The $1,800 ADLT—as you know, with ADLT status, you report data every year—and that reimbursement rate has been consistent for the company, so we are not expecting any change in that rate. Mark Anthony Massaro: Yep. Understood. And then I figured I would ask an unrelated question to the Navaris acquisition. What is your latest thinking around the timing of the LCD for transplant from the MolDX group? Is that perhaps mid-26? Or I know we are approaching mid-26. So how are you thinking about that? John Hanna: Yeah. It still continues to be mid-26, given that the draft issuance date was July 15, and CMS generally holds themselves to publishing a final or retiring the draft within one year of the draft issuance. So we still anticipate we could see the LCD here sometime at the end of the second quarter or early third quarter. Mark Anthony Massaro: Sounds good. I will keep the questions there. Thanks, guys. John Hanna: Cool. Thanks, Mark. Operator: Our next question comes from the line of Andrew Brackmann from William Blair. Andrew, your line is open. Please go ahead. Andrew Brackmann: Hey, guys. Good afternoon. Thanks for taking the question. I also wanted to ask on Navaris. It certainly checks a lot of the boxes that you outlined with respect to specialty markets that you are concentrating on, both organically and with potential M&A. Can you maybe just unpack the operational learnings from the transplant business that you can apply here? You talked about driving the repeat ordering and the Epic integration. What specifically are the operational learnings that you have found over the last few years here that you can apply to this business? Thanks. John Hanna: Yes. Thanks for the question, Andrew, and I will ask Jeff to jump in here as well. It is not just operational. It is also around provider education and awareness of the data and the use of the products. Do you want to share a little bit? Doctor Jeffrey Titterberg: Yeah. I mean, as people get more familiar and more comfortable with using these noninvasive tests rather than their typical invasive tests or even radiographic tests, they see the utility of this. A lot of times, patients go to physicians and it is hard to diagnose these recurrences by physical exam, and the radiology can be equivocal, particularly right after treatment, when you have things like PET-CT scans lighting up because there is so much metabolic activity from a recent surgery. So there are lots of really good uses for this test. I think people, as they start to use it, will start to see more and more utility. Keith S. Kennedy: Operationally, they are not at scale, so their ability to buy things at scale the way we are able to do that, to deploy automation, have engineers, and things like that—we do believe there is potentially up to a third reduction in the cost per test you can achieve by automation and just price negotiations. We have line of sight that we looked at during the diligence. And then on Epic, obviously, this is too small of a company on their own to invest in something like that, but adding them to our Epic instance and turbocharger is something that we can do quite easily without incremental cost. We are excited about that opportunity, supported by the commercial initiatives and go-to-market strategy. John Hanna: Yeah. And I talked a little bit about our customer service team and the CareDx Cares team and really supporting workflow within a specialty practice or subspecialty practice. Oftentimes, these practices are rate limited by the amount of labor that they have—the amount of support staff—and it becomes overwhelming. Ordering a diagnostic test is not top of mind because they have a slew of patients waiting in the waiting room to get in and see the clinician. Ensuring that there is a very streamlined workflow, that we are supporting them, and that we are engaging patients after the order has been set and pulling through access to the blood is really critical. These are things that we have built expertise on at CareDx, Inc, and we think we can port over to the Navaris business. Andrew Brackmann: Perfect. Appreciate all that color. And then if I could just follow up, obviously I am sure you did a lot of diligence around the competitive environment for this asset. Can you maybe talk about how you are viewing the specific indications that they are in right now, any potential emergence that you have on your radar, and bigger picture, how do you maintain the niche that they have established? Thanks. John Hanna: Yeah. Thanks, Andrew. Certainly, we did diligence on the competitive environment, and we operate in competitive markets today. But Navaris has a differentiated technology, and that technology makes it a preferential tool in the monitoring and diagnosis of these patients with HPV-driven cancers. That made us very comfortable with the transaction, and we think we can sustain that competitive advantage and market-leading position that the company has today. Andrew Brackmann: Great. Thanks, guys. Operator: Our next question comes from the line of Mason Carrico from Stephens Incorporated. Mason, your line is open. Please go ahead. Mason Carrico: Hey, guys. Thanks for taking the questions here. Could you provide a bit more detail on the financials of Navaris—what was the 2025 growth rate off of 2024, maybe how it ramped throughout the year? And then on that 30% to 40% growth rate going forward, how much of that is volume driven versus ASP? Keith S. Kennedy: I am going back to 2024. I have the 2025 in front of me. Of course you guys have 2024. Sorry about that, Mason. Go ahead to John, and I will come back to you on that one. John Hanna: Yeah. I think, Mason, obviously there is a mix of ASP and volume growth, but volume has been the key driver here for the company given that it is relatively early in the adoption cycle in the market. I would say that we feel very comfortable with the 30% to 40% growth rate going forward, and that is why we provided commentary that we anticipate that to persist over the next three years. Keith S. Kennedy: Mason, the growth from 2024 to 2025 was 75% top-line growth. Mason Carrico: Got it. Okay. Yeah. Thanks, Keith. And, John, could you just update us on maybe where you think market penetration stands today for cell-free DNA testing in transplant—maybe your estimate across organ types—and how much growth runway remains ahead of you here? John Hanna: I think that the growth runway remains significant. There are still, as with many of these markets, factions that do not use molecular tests at all. As an organization, dating back to mid-2024, we started to focus on reinstituting surveillance testing in kidney. Over the past several quarters, we have also been focused on for-cause indications in kidney because there are many, and as I shared in my prepared remarks, we are now seeing roughly 50% of that volume be for-cause today. We still think there is substantial runway in kidney. We continue to see growth in HeartCare and, in particular, AlloMap as a product growing sequentially quarter over quarter even after being on the market for over 20 years now, which is incredibly impressive and indicative of the strength of the evidence, data, and utility of the product. In lung, we feel like we are still early days in adoption, and we are eager to see data from ALAMO published such that we can continue to drive adoption even in its limited levels that we see in lung transplant centers today and have that grow into sustained utilization. We have got a lot of work still to do in this space, and we think there is a lot of runway still to go in solid organ transplant. Mason Carrico: Got it. Thanks, guys. John Hanna: Thanks, Mason. Operator: Your next question comes from the line of John Wilkin with Craig Hallum. John, your line is open. Please go ahead. John Wilkin: Hi, guys. Thanks for taking the questions. Just one bigger picture one on Navaris. As you think about any potential needs of a broader portfolio as you go into that channel—do you believe that you need to have that, and if so, how do you get there? John Hanna: Thanks, John. That is a great question. I think today we feel really confident in the portfolio that the company has, and it is the market leader in both head and neck and anal cancers. Certainly, you could foresee having a service that augments it for non-viral-driven cancers, but that is not our focus today. As we go through the close process, integrate the business, and continue to execute on the large opportunity ahead of the company, we will come back and update you if we have different thinking around broadening the portfolio. John Wilkin: Great. And then am I correct in assuming that there is no contribution from Navaris currently included in revenue guidance for the year? John Hanna: Correct. John Wilkin: Okay. Great. Thank you, guys. John Hanna: Thank you. Operator: Our next question comes from the line of Tom DeBorsi with Nephron Research. Tom, your line is open. Please go ahead. Tom DeBorsi: Thanks for taking the questions. I wanted to focus on transplant—specifically the ASP improvements that you are clearly seeing. Keith, you mentioned ASPs moving towards $14.60 by the end of this year. I wanted to understand how much of that is driven by better claims submissions or less rejections versus the push towards getting 50% of volume through Epic Aura. Keith S. Kennedy: Yeah. We do not have any Epic Aura uplift built into our guide, and our cash collections per test are exceeding our revenue per test. As we laid out in July, we started transitioning to shrinking the look-back period in our revenue recognition policies. As we were improving automation and workflows and revenue cycle management—obviously that is driving significant cash, which quarterly is exceeding our expectations. We are really excited about that, but you are going to see that flow into revenue per test as the year goes on. You will see out-of-period revenue, or revenue that comes in reflective of exceeding our AR at the beginning of that quarter, and you will see that start to flow into revenue recognition and AR so that levels out. That is why I am giving you out-of-period revenue forward-looking view so that you know how I am transitioning that. Obviously, that is up higher than it was last quarter because our out-of-period revenue was so high this quarter, and it continues in April. Tom DeBorsi: Understood. And then just as a follow-up question, on hematological malignancies or blood cancer MRD—with Alaheme and potentially AlloSure—I think the existing plan had been to leverage existing transplant center relationships given stem cell transplants and others. Is that still the current plan, or does the addition of Navaris change that sales rep strategy? Thanks. John Hanna: Yeah. Thanks for the question, Tom. The acquisition of Navaris does not change that strategy. We have a very focused strategy around Alaheme, given that it is not yet Medicare covered. 2026 is going to be very focused on clinical education around the product and early adoption and building toward Medicare coverage for the product, and then we will think longer term around what the channel looks like. Operator: Thank you. Caroline Corner: Thank you. Our next question comes from the line of Yi Chen from H. C. Wainwright. Operator: Yi, your line is open. Please go ahead. A reminder to unmute on your device locally. Caroline Corner: He took a break. Operator: We have reached the end of our Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good afternoon, and welcome to the NeoGenomics First Quarter 2026 Financial Results Call. Please be advised that today's conference is being recorded. I will now turn the call over to Priya Vedaraman, Senior Vice President of Finance. Priya Vedaraman: Thank you, Matthew, and good afternoon, everyone. Welcome to NeoGenomics First Quarter 2026 Financial Results Call. With me today to discuss the results are Tony Zook, Chief Executive Officer; Abhishek Jain, Chief Financial Officer; and Warren Stone, President and Chief Operating Officer. Additional members of the management team will be available for the Q&A portion of our call. This call is being simultaneously webcast. You will note that we will be advancing through a brief slide presentation to accompany today's call, and we have also made the presentation available on the Investors tab of our website at ir.neogenomics.com. During this call, we will make forward-looking statements regarding our future financial and business performance, planned future operations and related expectations with respect to timing and performance, future financial position, future revenue, growth potential and expected growth drivers, projected cost and capital expenditures, prospects and plans, estimated market size and position and objectives of management and financial guidance. We caution you that the actual events or results could differ materially from those expressed or implied by the forward-looking statements. The forward-looking statements made during the call speak only as of the original date of this call, and we undertake no obligation to update or revise any of these statements. Please refer to the information disclosed on the safe harbor statement slide in the deck posted on our website as well as the information under the heading Risk Factors in our most recent Forms 10-K, 10-Q, 8-K that we filed with the SEC to identify important risks and other factors that may cause our actual results to differ materially from the forward-looking statements. These documents can be found in the Investors section of our website or on the SEC's website. During this call, we also refer to certain non-GAAP financial measures that involve adjustments to GAAP results. The non-GAAP financial measures presented should not be considered an alternative to the financial measures required by GAAP, should not be considered measures of liquidity and are unlikely to be comparable to non-GAAP financial measures provided by other companies. Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measures in a table available in the press release we issued this afternoon and in the slide deck available in the Investors section of our website. I will now turn the call over to Tony. Anthony Zook: Thank you, Priya, and welcome, everyone. For those of you who are relatively new to the NeoGenomics story, let me review our investment thesis. We're a pure-play oncology solutions company, leveraging our strong heritage in hematology with pathologists and community hospitals, where we enjoy a leading 25% share across diagnostics and therapy selection. We believe we're highly differentiated from large reference labs as well as specialty diagnostic companies in two regards: the depth and breadth of our portfolio and a relentless focus in the community setting. We believe in the power of our portfolio and see it as a point of competitive distinction and advantage. We reentered the MRD space with RaDaR ST, which we will discuss momentarily, allowing us to address a $20 billion market opportunity where we will continue to leverage our ambition to be a partner of choice among community practices. And importantly, we believe we're well poised to deliver consistent double-digit revenue growth. As mentioned, it's our desire to be a partner of choice in the community from diagnosis to recurrence monitoring. Our foundation and strength in hematology and diagnostic testing affords us a strong platform for growth. We have and will continue to be purposeful with our portfolio transformation as evidenced by our product launches, enabling our penetration into the $13 billion therapy selection market. And now with RaDaR ST, we've reentered the $20 billion MRD market, both of which are enjoying robust growth but are still relatively modest in penetration rates. This portfolio transformation is evident in our selling performance. The 5 NGS products we launched in 2023 that we have consistently tracked contributed 25% of our clinical revenue in Q1. So with that, let's highlight some of our key performance metrics for Q1. During the first quarter, we again delivered double-digit revenue growth, reflecting our ability to generate consistent and predictable sales. Total revenue for Q1 was $186.7 million, representing 11% growth year-over-year, exceeding our guidance. Adjusted EBITDA of $9 million increased 27% over the first quarter of 2025, and the adjusted EBITDA margin increased approximately 60 basis points year-over-year. Our clinical business continued its robust growth with revenue increasing 14% year-over-year to $171 million. Clinical performance was driven by effective execution of our commercial strategy, enabling volume growth and share gains in all segments of our business. In this quarter, we again saw an improvement in AUP, which reflected an 8% year-over-year growth and volumes growing 6% year-over-year. Turning to NGS. Revenue grew 26%, well ahead of the NGS market growth rate, driven by strong volume and AUP growth. Our NGS business now represents about 1/3 of our total Clinical revenue. Moving forward, we believe the addition of PanTracer liquid biopsy to the PanTracer Family, combined with ongoing investments in our field force size and capabilities will help us to sustain above-market growth for this part of our portfolio. The momentum with which we exited 2025 continued into the first quarter. As we have shared, we continue to see above-market growth with our non-NGS clinical business, which should continue to grow in the mid-single-digit range as we take share across all modalities. Importantly, and in line with our overall strategy, our NGS business is scaling at a rate that is 3 to 4x faster than our core clinical business. We're often asked, how do we win in the community setting and is the growth sustainable. I'm going to ask Warren to step you through our commercial strategy and give you some insight into our early launch experiences with the PanTracer Family and RaDaR ST. Warren Stone: Thank you, Tony, and good afternoon, everybody. Our primary focus is the community setting where approximately 80% of patients seek treatment so they are close to their support structure. Additionally, most patients live an hour or more from the nearest NCI designated cancer center. To start, we believe that community oncologists prioritize historic patient management and prioritize certainty over possibility. Guidelines drive their decision-making and ensure actionability. With large patient volumes and resource constraints that choose partners that reduce friction and support confidence treatment decisions. Secondly, our leadership in hematology, where we hold greater than a 25% market share provides trusted access and create strong foundation to expand adoption of our broader portfolio. Third, rapid test results directly impact patient outcomes. And our balanced lab network enables industry-leading turnaround times. The Pathline acquisition strengthened our Northeast presence and grew at 1.5x our national average, demonstrating the power of local scale to drive service and growth. Finally, our portfolio spans over 500 tests across diagnosis, therapy selection and MRD, positioning us as a true partner in patient management. We have developed over 330 interfaces, including the recently announced Epic Aura, which for published third-party research could drive a 20% to 30% increase in test adoption per site. This position is also supported by a broad commercial payer network of more than 300 contracts, also minimizing friction for both providers and patients. In summary, we simplify the complexity of oncology diagnostics so physicians can focus on delivering the best possible patient care. Turning now to RaDaR ST, our circulating tumor DNA assay with exceptional sensitivity for early detection of molecular residual disease. In late February, we announced the full clinical launch of RaDaR ST, which has detection as low as 1 ppm. The launch targets 2 approved indications, HPV-negative head and neck cancer and a subset of breast cancer. In addition, we have submitted to MolDX for reimbursement in 2 additional cancer indications, which, if granted, would more than double our market opportunity. Early insights from the RaDaR ST launch to date are very encouraging. Approximately 29% of customers who previously used RaDaR 1.0 have ordered RaDaR ST since launch. Additionally, 34% of RaDaR ST orders received include additional NEO tests. All test results to date have been delivered faster than our published turnaround time. RaDaR ST represents a very important advancement in MRD testing. And with its clinical launch, we now offer a comprehensive solid tumor solution, spanning diagnosis profiling, therapy selection and MRD. Looking ahead, we are focused on targeted R&D investments in whole genome sequencing, including our next-generation MRD assay and whole genome solution for heme. The strengthening of our pipeline increases durability and positions us effectively to address future market needs. Our next-generation MRD platform is progressing well, with data generation expected next year and a potential launch as early as 2028. In parallel, we're advancing our nonclinical portfolio to meet the evolving needs of the pharma. This includes expanding our MRD offering with an off-the-shelf single tube AML flow panel designed for broader applications across CLL, BALL and multiple myeloma as well as enhancing our IHC menu with 5 new CDx relevant markers. Turning to our PanTracer portfolio, our integrated solution for solid tumor therapy selection, designed to combine tissue and liquid testing to deliver confident actionable insights for real-time treatment decisions. PanTracer Liquid is a noninvasive blood-based test that analyzes circulating tumor DNA to identify key genomic alterations that inform treatment decisions in patients with advanced stage tumors. With MolDX reimbursement received, we expect revenue contributions to ramp throughout the year. The expansion of PanTracer Family and PanTracer Pro turns a very fragmented tumor physician -- sorry, tumor physician work into a coordinated and accelerated workflow from a single sample. It fully integrates the therapy selection workflow by combining comprehensive genomic profiling with immunohistochemistry and other auxiliary tests, allowing oncologists to manage the entire cancer diagnostic workflow from a single requisition and sample. This allows for faster test turnaround and a more timely clinical decision-making. Slide 13 illustrates a typical PanTracer workflow. After the test requisition is received, the pathology report is reviewed and an ovarian cancer diagnosis is confirmed. Onco then identifies the guideline relevant add-on tests. In this case, 5 medically necessary assays, including the recently launched PD-L1 22C3 FDA for ovarian carcinomas are included. The slides were prepared and the test is performed. The add-on results reported to the physician by day 4 and the NDA results reported on by day 8. As part of our go-to-market strategy, we have expanded our sales force to increase reach and frequency and accelerate penetration in therapy selection and MRD markets. The commercial expansion, coupled with the only MolDX-approved HPV-negative test currently available positions us to accelerate adoption. We plan to add roughly 25 sales resources by the third quarter of this year to support the launch and penetration of RaDaR ST in 2 new indications, which we have submitted to MolDX. In summary, we are very pleased with our performance, both financially and strategically in the first quarter, and we are excited for the business levers that are available for us to drive improved and accelerated financial performance in the future. With that, I'll hand over to Abhishek to further discuss our results for the quarter. Abhishek Jain: Thank you, Warren, and good afternoon, everyone. In my remarks today, I will discuss our first quarter financial results and revised 2026 guidance. We reported total revenue of $186.7 million, up 11% year-over-year, driven by clinical revenue of $171.2 million, which grew a strong 14%. This performance was driven by healthy underlying demand with volumes up 6% and AUP increasing 8% as compared to the same quarter last year. Same-store revenue, excluding was $167.9 million, representing 12% growth versus the prior year period, driven by a 3% increase in test volumes and a 9% increase in AUP. Importantly, both test volumes and AUP growth performed at the high end of our expectations despite the anticipated impact of strategically exiting high volume, low-value contract. Most encouraging is the ongoing mix shift towards the high-value testing driven by strong performance in our NGS business that was up 26% year-over-year and now represents approximately 1/3 of our Clinical revenue. Our targeted investments in the sales team are tangible results and supporting this continued momentum in our NGS. Further, this favorable mix shift towards high-value testing is also contributing meaningfully to drive AUP growth of 8% year-over-year. AUP increase was also supported by our RP initiatives, including managed care pricing gains and improved pull-through. Turning to our nonclinical business. We reported $15.5 million in revenue, a decline of 15% year-over-year, primarily driven by expected softness in pharma. Our ODS business delivered double-digit growth that helped partially offset the declines in pharma. We believe that we are near the bottom for this business and expect to see sequential growth in the back half of the year. Adjusted gross profit improved by $7 million or 9% over the prior year and adjusted gross margin was 46%, down 80 basis points as compared to last year. As expected, the decline in the gross margin in the first quarter was primarily driven by the dilutive impact of Pathline acquisition and the launch of PanTracer Liquid prior to MolDX approval. Together, these factors represented approximately 150 basis points of headwind in Q1 '26. In addition, we were impacted by higher freight costs and fuel surcharges due to the geopolitical situation. These headwinds were partially offset by the gross margin expansion primarily driven by AUP increase and lab efficiency. Looking ahead, we continue to expect gross margin expansion of approximately 100 basis points year-over-year in 2026, driven by our Lab of the Future initiatives, which includes strategic sourcing, digital pathology, lab automation and platform upgrade. We also expect margin progression to benefit from easier compares in the coming quarters. Total operating expenses in the quarter were $99 million, a decrease of $2 million or 2% from prior year. We plan to make targeted investments in our sales and R&D functions to drive clinical test volumes and higher AUP while continue to improve leverage in G&A, which we expect to continue to decline as a percentage of revenue. Adjusted EBITDA was $9 million, up 27% year-over-year and the adjusted EBITDA margin expanded 60 basis points. This margin expansion was driven by operating leverage in our G&A function that more than offset the headwinds from adjusted gross margin reduction. Cash used in operations was $8.1 million in the quarter, down from approximately $25.3 million in the same quarter last year. We ended the quarter with total cash of $146 million. Our growth continues to be free cash flow positive this year. Turning now to our 2026 guidance. Considering our strong first quarter revenue performance and earlier than assumed MolDX approval of PanTracer Liquid in March, we are increasing our full year revenue guidance to a range of $797 million to $803 million, up from $793 million to $801 million previously. The key assumptions underlying the midpoint of our revenue guidance are as follows: First, no change in RaDaR ST revenue assumption, which remains in the mid-single digit millions. Second, we expect PanTracer Liquid revenue to be mid-single-digit millions following MolDX approval in early March. Third, no change in revenue assumptions for our nonclinical business, which we expect to be down low to mid-single digits year-over-year in 2026. Regarding quarterly cadence, we now suggest modeling approximately 9% year-over-year growth in the second quarter, up from 8% to 9% range previously discussed, followed by 9% to 10% growth in the third quarter and above 10% in the fourth quarter of 2026. Turning to gross margin, no change in our guidance, and we expect approximately 100 basis points of gross margin expansion in 2026 driven by a combination of factors we discussed earlier. We are maintaining and reiterating our full year 2026 adjusted EBITDA guidance of $55 million to $57 million, representing year-over-year growth of approximately 27% to 31%. As discussed previously, adjusted EBITDA was impacted by higher freight costs and fuel surcharges due to geopolitical environment. We have taken actions to offset these pressures while remaining committed to our previously communicated adjusted EBITDA guidance. With that, let me turn the call over to Tony. Anthony Zook: Thanks, Abhishek. Reviewing the significant catalysts for the year, I'm very pleased with our progress to date. We launched RaDaR ST in head and neck in a subset of breast cancers and received MolDX reimbursement for PanTracer Liquid Biopsy, and we continue to drive NGS growth well ahead of market growth rates. Looking out to the remainder of the year, we anticipate MolDX reimbursement decisions for 2 additional R RaDaR ST indications, which, if granted, would double the population of patients eligible for this advanced MRD test. We're also advancing plans to expand our sales force by the third quarter to capture these additional opportunities that are emerging in advanced cancer testing. Taken together, I believe these catalysts form a solid foundation from which to drive future growth. I'll close by outlining how we're driving accelerated financial performance through disciplined execution across our key business leaders. The launch of RaDaR ST and MolDX approval for liquid biopsy have opened up large addressable markets, and we're focused on driving adoption alongside continued expansion into new indications and advancement of our next-generation MRD programs. Commercial initiatives across sales, pricing and payer coverage are improving access and monetization, while ongoing investments in automation, platform upgrades and lab optimization are enhancing efficiency and scalability. Together, these efforts position us well for sustained growth in 2026 and beyond. Thank you for your continued interest in NeoGenomics. And operator, this concludes our prepared remarks. So please open up the line for questions. Operator: [Operator Instructions] Your first question is coming from David Westenberg from Piper Sandler. David Westenberg: Congrats on all the growth. So I want to focus on the positive here. The NGS growth has been robust. You've been tracking in the mid-20s for a long time, but you are facing difficult comps. As we model the durability of the growth algorithm, can you talk about NGS predicated on -- or growth predicated on PanTracer Liquid versus tissue? How should we see that mix growth? Can that help you sustain kind of that 20% range? And then secondly, how do we think about the AUP over the next couple of years as this starts to ramp? And I'll ask one small follow-up. Anthony Zook: Okay, Dave. So thanks for the question. I'll kick us off and then Warren can fill in some color as well. First, on the sustainability of the NGS, I appreciate the question, right? I mean we are showing really good growth in NGS, as we said, 26% revenue growth, and that was driven by 16% volume growth. If you turn back the hands of time, we closed last year, I think 23% in the quarter of Q4, and we did 22% for the year. And at the time, we said we thought that we were able to be able to sustain that at a minimum, if not even beat it with the addition of PanTracer LBx. And so we look at where we sit right now, Dave, we feel very good. The early products that we mentioned before, they were up to 25% of our clinical revenue in the quarter. Early days of PanTracer are showing really good signs for us. Warren can go into a bit more detail on PanTracer LBx. But even PanTracer Pro, which was introduced in the mid of February, we're seeing it now almost cover 10% of PanTracer volume, which is exciting because it's captured 15% of new users. So we absolutely do think that it's sustainable. And with the addition of Liquid Biopsy to the Family, we think it can go even further. And with that, maybe I'll turn it over to Warren to a little bit more color on LBx, and then we'll get to the AUP. Warren Stone: You covered a lot of ground. I'd say this that the PanTracer Family for us, we really look at the category growth overall because the tissue and the liquid get used sort of concurrently or certainly as a reflex to TMP that might take place on tissue or as a stand-alone. So it is really, really versatile. And we are encouraged by the attractive growth that we're seeing from the category overall, including liquid. And if we look to you would have seen a graph in the presentation, which showed 16% volume growth and a 26% revenue growth. And that acceleration in revenue growth is coming because we're moving towards the larger PGP. That's driving the growth, and that's also helping the AUP. So to your question on the sustainability to stay above those sort of the 20% mark, it certainly penetrates the Liquid that penetrates the Family as a whole is going to be a key driver for us. Anthony Zook: Dave, on AUP, again, very, very strong performance there. We were up 8% year-over-year. And I would say that's indicative of the strategy, right? We've been very purposeful saying that we are going to drive growth with that NGS portfolio of ours. And so increasing it as a percentage of our business, which is now up to 1/3 of our business and we're growing it, that's going to have a big contributing factor to AUP. But I would say as well, about half of it is driven by the great work that the team does behind the scenes on the RCM initiatives. So like we talk about the 300 contracts. We look at those contracts all the time, every opportunity we have to increase price there, do direct price increases and all of those initiatives add up. And so we believe the AUP is also sustainable this year. And again, about half of that is driven by mix and the increased volume in NGS and about half is just good work behind the scenes. But maybe one final point just as kind of the icing on the cake with AUP. While NGS is the big driver there, David, and I know that's how you were focused the question. Good news is we're seeing AUP increased contributions across all of the modalities. And so it's not just NGS that's contributing, it's the portfolio. Operator: Your next question is coming from Tycho Peterson from Jefferies. Tycho Peterson: Maybe one for Abhishek, just on the guidance raise. In the past, you've gotten over your skis with raising guidance to cut later. I guess, why not bank to be and de-risk the remainder of the year? Or conversely, can you point to what's trending more positive with the April data points, the new launches, obviously, you've talked to. But maybe get us comfortable that guidance is still conservative and be here? Anthony Zook: Yes, sure. I'd be happy to. And again, I'll let Abhishek jump in on the details. Relative to the guidance, Tycho, you're right, we want to maintain the philosophy that we shared with you, right? And that is when we issue our guide, you asked us to only speak with a high degree of confidence, not just with the center point of that guide and making sure we can get to the upper end of that guide at a minimum. And we've taken those factors into consideration with this guide. What are the positives? What do we look towards? Well, again, 11% revenue, but it was driven by 14% clinical revenue growth. And so that is certainly a driver and the NGS is a driver for us to be certain. And so based on the middle of that guide, where do we see potential opportunity and where is there some risk, I would say the opportunity is certainly with the NGS portfolio with emphasis on PanTracer LBx, getting another quarter of opportunity to drive revenue, getting out in front with commercial payers. If we can plow that field well, we think there is probably upside opportunity associated with the guide relative to PanTracer LBx. We think that there is potential opportunity as well in our nonclinical business. It's way too early despite the footfall there, which is why we still want to be relatively conservative. But we're seeing early signs that, in fact, we're planning and hitting what we said, which would be kind of that low single-digit erosion on the nonclinical side. So there's some risk there, but we think that it's taken into account at this point. I guess the other area of opportunity for us could be even better uptake with RaDaR ST. But again, we're playing this one right down in the middle, Tycho, with single millions in the middle of the guide. And I guess the additional indications were to come on board sooner than we thought, that could represent some upside. And so we do see some potential risk, which would be on the nonclinical side. That's not a new story to you. But we see the rate of decline of that business beginning to slow and activity beginning to pick up. And so on balance, we would say there's probably more opportunity than downside against what we've shared with you today. Does that help? Tycho Peterson: That does. That does. Another question as you lap Pathline next quarter, I guess, how do we think about the volume growth as you lap that? You grew volumes 2.8% ex Pathline. Is that kind of the right run rate for the business? You're rolling off big lab contracts. So how do we think about just lapping Pathline? Anthony Zook: I think the most important element, and I'll ask Abhishek, you can get into the very specific question on the volumes. I've got to the point, Tycho, I probably look less at the actual volumes associated with just pure Pathline because I look at more the Northeast because that was the strategic purpose of having it. And what we have seen is our growth rate in the Northeast region was 1.5x faster than the other regions, and that's a first for us. And so we see the strategic benefit of serving those customers coming through. So our total value associated with Pathline in the Northeast region is absolutely increasing on plan, albeit the actual volumes might be down just a little bit because of the non-oncology. I'll let Abhishek take some of that. Abhishek Jain: Yes. Let me also kind of talk about the overall volume picture there, Tycho, right? Because we basically guided low single digit for the full year, we came in at about 6% growth for the first quarter. And as for the guidance, what we are saying that the second quarter is going to be flattish year-over-year growth standpoint. But what will start to happen from now onwards that we'll start to see a sequential growth in our volume in Q2 onwards. So that's a good part, right? But a lot of the work that the revenue growth is going to come from the AP in our remaining quarters for the year. We are basically trying to kind of absorb exiting this high volume, low-value contract as we kind of look into Q2 and Q3. Q3 '25 was a peak quarter for this procure, and that's the reason we have those headwinds in Q2 and Q3. But overall cases from the overall revenue growth standpoint, as Tony pointed out, on the clinical revenue, we are growing a strong 14% in the current quarter. And our guide basically still keeps us about 11% above growth for our Clinical business for the rest of the year. Tycho Peterson: Okay. last quick one, I'll let you said. Maybe just on the convert, you burned $14 million in cash. You have $146 million in cash and $342 million convert due January 2028. Can you maybe just quickly touch on plans for that and then I'll hop off. Abhishek Jain: Absolutely, Tycho. So we are actually discussing with many of the leading banks on the convert refinancing, and everybody has told me that this has been a good market, 2025 and what we have seen in 2026. We are hearing that there will not be any challenge in terms of refinancing the convert. We are trying to basically make sure that we are able to get the currency of our stock, which we believe is highly underappreciated, kind of come back to a level where we feel that this is the right time for us to kind of do the refinancing. But in any case, our plan is to get the refinancing done in the second half of the year. We do not want to leave this open failure late in the game. Operator: Your next question is coming from Puneet Souda from Leerink. Puneet Souda: So first one, I just wanted to see if there was any weather impact in the quarter and if you're expecting any -- as a result, expecting anything in 2Q for that? And also on the NGS side, how should we think about the ceiling? It's 1/3 of your business. It's growing rapidly in the community setting. Just trying to understand overall NGS, what's the ceiling there? And I assume that NGS is all of the solid tumors. Can you clarify the boundaries of NGS? What includes -- what is included in NGS and what is not? Anthony Zook: Sure. So Warren, you'll take a crack at the NGS one. And on the weather, just to be clear, when we issued the guide, as you rightly pointed out, for the first quarter, we had already indicated what we anticipated to be the weather impact, and it came in pretty much as we expected. And so we don't see any drag or any issues moving forward through Q2. And relative to the NGS question? Warren Stone: Yes. So I mean how we're defining NGS is simply it's NGS for our heme cancers and it's NGS for solid tumor, largely fitting within the therapy selection vertical. At the moment, even though MRD runs on an NGS background, we're probably going to carve that out. So the 26% growth that you see that excludes any MRD. In terms of the outlook, I mean, I'd said we'd be disappointed that in the midterm, this is not north of 40% is sort of how you need to think about that. This is definitely the growth engine of our business. You can see the trajectory since 2022. And the portfolio that we've added in 2023 and continue to add is going to continue to fuel that growth in the sort of 20% mark. Puneet Souda: Got it. And then just a follow-up on -- there's obviously a lot of discussions about repeat use of CGP liquid. There's trials, ad cons, other things are taking center stage. When you think about the setting you're serving, when do you think you can start to see some benefit from that just given sort of the timing it takes for your test to be recognized by the market you're serving? Warren Stone: Yes. So I think interesting enough, we've already seen some repeat testing on liquid biopsy already. So that's encouraging. And I think as the scale continues to grow in the second half of the year, as we outlined, we expect to see some repeat testing here as well, which is encouraging. And we also anticipate that as we put more and more patient programs in place to support RaDaR ST that we can obviously also layer some of those workflows and those applications into liquid biopsy as well. So this is certainly part of that growth assumption that you asked about earlier that will help to continue the momentum. Operator: Your next question is coming from Bill Bonello from Craig-Hallum. William Bonello: I wanted to ask a little bit about the PanTracer Pro program and just kind of how that works and what you're seeing on that front. So am I understanding this right that somebody checks that box and then based on what you see in sort of maybe an AI-driven algorithm along with the pathologists experience, you make a decision about follow-on tests that should be ordered or what complete set of tests should be ordered. And can you give us -- you showed a little illustration where you showed one example, but can you give us a sense of comparison and maybe value when physicians are ordering that option versus when they're just selecting a straight-up panel? Warren Stone: So I think you've outlined the workflow pretty well. But I think coming back to one of the things that we try and do is we try to take friction out of the system. We want to make that sort of ordering experience as easy as possible. And whether you choose to acquisition this through a vial interface a call or paper, it's exactly that. It's a one test, and that's it. And the requisition will arrive in our lab. And again, this is in the therapy selection vertical. So there's typically a diagnosis that's taken place already, that's the past report that gets read and this algorithm then determines based on guidelines and what's medically necessary, this is a key aspect, what additional add-on testing should be performed based on that specific diagnosis. So what add-on testing will vary based on the diagnosis. And the example I shared was ovarian and we add on 5 additional tests, including that new PD-L1 for ovarian carcinomas. So the system does that automatically. We then run -- we cut the slides appropriately because the number of slides that you cut will be dependent on the number of add-on tests. We will do the testing. We report out the results for the add-on testing as soon as that is available, and that's typically before NGS. And the reason why that's valuable is you can get the first indication around what therapies you may want to put somebody on. And then once the NGS is available, which is typically 3 or 4 days thereafter, we'll submit the NGS results to the physician as well so that they have a complete package and they can make a more holistic informed decision from a treatment perspective. So in the past, a physician could have done that themselves. They could have figured out using that ovarian situation. They could have figured out that I want PanTracer tissue and I want these 5 markers. They could have done that manually. But the reality is in the community setting, very few actually have -- they see so many different patients with different indications. They don't know that, that well. So they would typically send PanTracer in and then potentially send that spectrum acquisition at a later stage to do some add-on testing. So that just takes longer. It exhausts more sample. So this really has a lot of efficiencies. And it also does typically result in additional add-on testing, which has a revenue component attached to it. But I want to stress it's only what's driven by guidelines and what's medically necessary. Operator: Your next question is coming from Mason Carrico from Stephens. Mason Carrico: This is Ben on for Mason. Could you help us bridge Q1 reported AUP to the underlying core AUP after adjusting for that low-value contract? I believe some remaining volumes of that contract were expected to flow through in the first quarter here. Abhishek Jain: Yes. I will take that one question, Ben. So we basically grew our AUP by 8 percentage and year-over-year. Excluding Pathline, the number was 9%. And if you were to exclude the impact of the high-volume, low-value contract, then I would say that it did not impact the AUP change as much because the number of tests basically became a smaller number and there was a little bit of growth in the AUP that we have seen as we had moved away as we progress in 2025 from Q1 onwards. So the impact for the high-volume low-value test, about 1 point or so in the overall AUP growth. Our AUP growth was primarily driven by, as Puneet pointed out, because of the high mix of our high-value testing, which has been part of our strategy, the NGS growth as well as the impact of our RCM work that we have done. Mason Carrico: Got it. That makes sense. And then on the 2 additional RaDaR MolDX submissions, has anything changed there in your confidence or the expected timing of when you could get those decisions? Is prior to year-end the right way to think about those? Anthony Zook: It is, yes. And that's been a consistent assumption that we've shared with you. So yes, we submitted at the close of last year. We anticipate those to be available to us by the close of this year, which is why we're gearing up the sales force in anticipation of being able to address those in the second half of the year. Operator: Your next question is coming from Subbu Nambi from Guggenheim. Subhalaxmi Nambi: What percentage of liquid biopsy orders today are Medicare versus commercial? And what's the realistic time line for getting meaningful private payer rates? The reason I ask is the $3,289 fully loaded cost to deliver, how much would it -- is it accretive to gross margins from day 1? Or is there a scale threshold you need to hit first? And I have the same question for RaDaR ST as well, the impact on gross margin from day 1 to like when it ramps? Abhishek Jain: Yes, Subbu, let me take this question. For the liquid because we have not seen all the volumes since our soft launch, I would say, in the second half of the year last year, we are going to basically push on all cylinders to push the volume tissue to provide you that payer mix. So we basically have between the Medicare and the about 40% that you will basically get paid and then about 10 points of Medicare Advantage and the other 50 commercial payers. And to your point, what we believe that we will start to get paid on the 40% that I talked and Medicare. And on the commercial, this is a process, right? As you know, what we have seen how this process plays out, there will be a time which it will take some time as we start to get the coverage and the policy. My sense is that given the fact that we already have contracts with like 300 of these payers, that will definitely give us like a feet on the table and we'll be able to push through this one relatively faster, but this will take some time. Coming to the RaDaR, the mix is slightly different. I would say that Medicare is about 20% to 25% and then you have Medicare Advantage, which will be 10% to 15%, and the rest would be commercial and the Medicaid a little bit of tail there. So that's where this plays out. So the overall payment rate for RaDaR as in any other competitor that has seen this space, they are going to be starting to get paid on the Medicare and then we'll have to start to build the coverage for the commercial payers. Subhalaxmi Nambi: And Abhishek, just to put all the numbers together, the low contracts that you guys had the rationalized volumes, were they largely Pathline volumes or this has got nothing to do with Pathline volumes, these were other contracts? Abhishek Jain: No, not Pathline volumes because what I called out that our overall volumes in 2025, roughly 1.35 million, we basically said that this high volume, low-value contract was about 3% to 4% of the overall volumes. Pathline is much more smaller, right, from that standpoint. So I would -- so this was a different contract. Operator: Your next question is coming from Dan Brennan from TD Cowen. Daniel Brennan: Maybe first one, just on the guide. Could you just speak to a little bit for Q2 and for the year? Just I think for the year, you kind of spoke to it, but just NGS, ex NGS, kind of what are we expecting for Q2? And how does it look for the full year? Abhishek Jain: So what we are guiding for the full year is $800 million at the midpoint. And for Q2, the revenue growth is going to be 9% year-over- as compared to the 8% to 9% that we had guided the last time. We're basically adding more dollars in Q2 because of the MolDX approval for liquid that's the reason the guide goes up for the second quarter. For NGS, we have basically called out, excluding liquid, we are going to be in line with what we have in 2025, which is about 22%. So that's a part of the NGS. Now if I were to step back and what Tony was saying that this is a guide, this basic gives us a high degree of confidence to be able to kind of hit the midpoint of the guide. But at the same time, we believe that we should be able to come in better as compared to the mid-single-digit million from the liquid will be disappointed internally if we don't actually do better there. So there are some upside there as well as I would say on the NGS that we have been growing at 25%, 26% and our guidance basically 22%, 23%. If we are able to kind of see the similar kind of growth on the NGS, then that would be another upside. So again, my takeaway on this one is that from the guide midpoint standpoint, this is prudent, but it gives us the opportunity to be able to kind of come in ahead if what we are anticipating internally were to go on our way. Daniel Brennan: Got it. So 2Q NGS should be 22 just like it is for the full year. Abhishek Jain: I would yes. Daniel Brennan: Okay. Okay. You called out in the prepared remarks about Epic Aura and the upside that other players maybe have seen or I forget how you termed experience the volume uplift. But just remind us where you are, what are you seeing so far? What's baked in? And what would get you to see that kind of uplift like what needs to happen? Warren Stone: We launched -- we went live with our first customer earlier this month. So -- and the beauty of Epic Aura allows for a significantly faster implementation with customers. So we are targeting the Epic Aura implementations for therapy selection and MRD. And we've got a robust pipeline of accounts that we're looking to activate with Epic Aura in quarter 2 all the way through the year. So certainly hoping to expecting to see that uptick as the year progresses. And this is one of the key levers in terms of sustaining this high NGS growth rate that we've been talking about and also will help to drive demand for RaDaR ST as well because the simplified workflow that it will bring. Daniel Brennan: Got it. So some of the benefit is baked into the guide. It's not like there's potentially upside if you're successful with these account activations. Is that the right way to think about it? Warren Stone: I would say that if we're able to accelerate the implementations based on what we put in the guide, there's upside there as well. We also -- if the pull-through is as significant as what was articulated in the independent studies that we've done, I think there's upside there as well. We didn't assume that we would see that radical uplift, but there certainly are studies that point to that. Operator: Your next question is coming from Michael Ryskin from Bank of America. Michael Ryskin: A couple of quick ones. One is maybe as part of your answer to Dan just now, sort of your comments on growth expectations through the year, both in NGS and non-NGS. What's the implicit contribution from some of the sales force expansion? And just maybe wondering if you could comment on the sales force addition more broadly, is that playing a role in the second half? Is that more of a '27 benefit? Just how to think about that? Anthony Zook: Well, I think about the sales force as being actually quite productive for us, Michael. I think if you look at the size of our sales force and the size of our spend, we're probably relatively under-indexed versus many of our competitors. We got the sales and marketing ratio is probably somewhere around 13%. And if we look to just the oncology, the OSS team being in the 50s, that is a relatively low number, but yet they have proven to be quite productive, right? So the share gains that you have seen with the NGS portfolio is driven in large part by that increased penetration into the community oncology space. And so we do see the sales force as one of the levers for us to continue to drive growth. We also see it as an opportunity for us. You take a product like RaDaR ST and you see a relatively low market penetration rates, we think we can contribute there. And so we do see the sales force as an ever-increasing opportunity for us to continue to drive growth. And we will be selective in how we continue to expand and grow that side of the business because we think it is a large revenue driver opportunity for us. What we always have to balance, Michael, is not overly disrupting customer relationships that are established as well. So we tend to take kind of a very thoughtful process as to when we add them and how we add them, but they are clearly a growth driver for us. I don't think we'd be where we are today with the 26% growth had it not been for that investment that was made a year ago. Michael Ryskin: Okay. All right. And for my follow-up, I kind of want to make sure I'm doing the math right. We're kind of calculating like direct Pathline contribution. It continues to step down and kind of step down a little bit more this quarter. I heard what you called out on the call in terms of the benefit in the Northeast and the more broad uplift to the portfolio. But just anything specific to call out there? I mean, do we expect that to continue? Or is that the weather impact in the quarter? I'm just sort of taking the Pathline ASP, Pathline volumes, doing the math right? Anthony Zook: Well, listen, I'll start off and then Warren, Abishek can jump in. Again, it shouldn't be a surprise that there might have been a slight step down in the volumes associated with Pathline because we were exiting some of that non-oncology business. And so that certainly had an effect. And then, of course, we're doing a lot of work here on load balancing. We want to make sure that the tests go not necessarily -- they don't always have to go through Pathline. They can be ordered and can be run down through Fort Myers or AV. And so load balancing comes into play. And that's why, honestly, I don't put a lot of stock into what is directly attributed just to Pathline. It certainly delivered what we expected in its range of revenue, but the growth driver that we see in the Northeast, that is the catalyst. And so Warren can maybe add a little bit more comment on that. Warren Stone: The certain aspect that you didn't touch on is the Northeast was probably the area that was most affected by weather in the first quarter. So that's the third factor. So you've got weather. The non-oncology business that we have no interest in entertaining so we're stepping out of that business. And then the third dynamic is we're leveraging our lab network to provide the best possible turnaround time, but also drive scale where possible. So some of the testing that was historically done in the Ramsay lab, lab has moved to other parts of our network. Overall, we're very pleased with the development we're seeing so far that 1.5x market growth in the Northeast is really encouraging, particularly based on some of the trends we have seen historically. Operator: Our next question comes from Mike Matson from Needham. Michael Matson: So I thought I heard you guys say that in the -- within the NGS business, there is some price benefit. So obviously, I mean, I know that the NGS is growing as a part of the overall mix and driving price. But like is there some positive pricing mix happening within that NGS business and what's driving it? Abhishek Jain: No, absolutely. So on the NGS business, what we have called out that this business grew 26%, 16% of that was driven by volume and the other 10% came from the increase in the AUP. And as we were discussing that AUP increase has been on account of some of the initiatives that we have put in place. But at the same time, we are seeing the increase in the CGP panel in the NGS business as we move from the single gene test. So that is basically kind of moving towards the high-value testing, which is helping us drive the higher. Michael Matson: Okay. And then the $20 billion MRD market, when you get these additional 2 indications covered and you're at 4, and I think you said that would double the available market to you. So what portion of that $20 billion will you be covering? Warren Stone: Based on -- again, this is obviously somewhat subjective, but based on the analysis that we've done will be north of 45% of the market across those indications. Operator: That concludes our Q&A session. I'll now hand the conference back to Tony Zook for closing remarks. Please go ahead. Anthony Zook: Well, first off, I'd just like to thank everybody for joining us on the call. I'd also like to thank our roughly 2,400 teammates at Neo for their continued hard work and unwavering commitment to our mission. With meaningful additions to our therapy selection and MRD test offerings during the first quarter, I'm very excited for the year ahead as well as 2027 and beyond as these high-value tests represent a growing portion of our clinical business. I look forward to our next quarterly update in July when we report our second quarter results. Thank you again and have a great day. Operator: Thank you. Everyone, this concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
Operator: Stand by, your meeting is about to begin. Good afternoon, everyone. Welcome to Ares Capital Corporation's First Quarter Ended March 31, 2026 Earnings Conference Call. As a reminder, this conference is being recorded on Tuesday, 04/28/2026. I will now turn the call over to John Stilmar, Partner of Ares Public Markets Investor Relations. Please go ahead, sir. John Stilmar: Thank you. Good morning, everybody. Let me start with some important reminders. Comments made during the course of this conference call and webcast, as well as the accompanying documents, contain forward-looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, such as core earnings per share or core EPS. The company believes that core EPS provides useful information to investors regarding financial performance because it is one method the company uses to measure its financial condition and results of operation. A reconciliation of GAAP net income per share to the most directly comparable GAAP financial measure to core EPS can be found in the accompanying slide presentation for this call. In addition, the reconciliation of these measures may also be found in our earnings filed this morning with the SEC on Form 8-Ks. Certain information discussed in this conference call and the accompanying slide presentation, including credit ratings and information relating to portfolio companies, was derived from or obtained by third-party sources and has not been independently verified. Accordingly, the company makes no representation or warranties with respect to this information. The company's first quarter ended 03/31/2026 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the First Quarter 2026 Earnings Presentation link on the homepage of the Investor Resources section. Ares Capital Corporation's earnings release and Form 10-Q are also available on the company's website. I would like to now turn the call over to Kort Schnabel, Ares Capital Corporation's Chief Executive Officer. Kort Schnabel? Kort Schnabel: Thanks, John, and hello, everyone, and thank you for joining our earnings call today. I am joined by Jim Miller, our President; Jana Markowitz, our Chief Operating Officer; Scott Lem, our Chief Financial Officer; and other members of the management team who will be available during our Q&A session. Let me start by providing a few thoughts on ARCC's performance, current market conditions, and our positioning in this environment. We believe we are off to a strong start in 2026 with solid earnings and strong fundamental portfolio performance. Our core earnings of $0.47 per share represent an annualized ROE of 9.6% in what has historically been a seasonally slow quarter for originations. Our overall portfolio quality remains healthy with continued low levels of nonaccruing loans and problem assets. We are seeing an improving investment environment as terms and economics are becoming more attractive on new transactions, and we believe our strong balance sheet and available liquidity of approximately $6 billion provide us significant advantages in this environment. Let us now discuss the changes we are seeing in overall market conditions. Heightened capital markets volatility, geopolitical uncertainty, and net outflows from retail products exacerbated an already seasonally slow market period in the first quarter. These factors contributed to not only lower transaction volumes but also diminished competition and improved lending conditions, as lenders more heavily dependent on retail flows have retrenched and the syndicated bank loan market has been uneven with many banks exhibiting diminished risk appetite. As a result, we are seeing a reset underway with wider spreads, lower leverage levels, and more attractive overall deal terms across the market. New transactions today are being discussed at 50 to 75 basis points of enhanced levels of fees and spread, alongside a half to full turn of lower leverage and tighter documentation versus the second half of last year. As risk premiums widened during the first quarter, overall market activity slowed as the market searched for clearing prices during this period. However, over the past three to four weeks, we have seen a noticeable pickup in new deal activity as borrowers recalibrate expectations for economics and terms and continue to pursue their capital needs. One of the key themes we see unfolding is that the ability to provide capital at scale and with certainty is becoming increasingly differentiated. We believe these types of situations are creating greater economic opportunities for the largest and most stable platforms with capital. Our healthy levels of available capital, combined with our connectivity to the broader Ares U.S. Direct Lending platform and its significant dry powder from institutional sources, position us well to capitalize on these market conditions. Our diverse, high-quality portfolio also continues to perform well. Our granular level of diversification further advantages us, as loan concentration is one driver of growing dispersion in results across our market. With investments across 607 companies and an average position size of less than 20 basis points, we believe this level of diversification meaningfully limits idiosyncratic risk to any one position. Our borrowers generated organic weighted average LTM EBITDA growth of approximately 9% through the end of the first quarter, in line with ARCC's ten-year average and more than twice the growth rate of the companies within the broader syndicated loan benchmark. Portfolio fundamentals also remained solid with broadly stable interest coverage and leverage levels, low loan-to-value ratios by historical standards, and revolving credit facility utilization in line with historical norms. Our nonaccruals also remained well below historical average levels. With this as context to the overall health of the portfolio, let me provide some important updates about our views on the specific strength and position of our software investments. As I articulated on our last earnings call, not all software companies carry the same level of AI disruption, and in fact, many are embracing AI and seeing enhanced growth. We believe the most important question is not how much software exposure we have, but what types of companies we have invested in, what staying power, risks, and opportunities our companies have through this latest technological cycle. Nearly all of our software companies are focused on what we view as foundational infrastructure for complex businesses, and this infrastructure often powers customers' core operating systems. These software products generally operate as systems of record in regulated end markets, have high switching costs, and benefit from proprietary data. Importantly, our software investments are supported by large diversified businesses with a weighted average EBITDA of $340 million, strong cash flow, and meaningful equity cushions, even as valuation multiples have come down for most software companies broadly. Most of these companies are also protected by business models with strong contractual cash flows and continue to sign up new customer contracts as they move forward and invest in AI themselves. To pressure test this view of our software investments, we proactively engaged a top-tier global management consulting firm in 2025 to challenge our AI risk assessment across our software-oriented portfolio companies. Prior to engaging this firm, we conducted extensive diligence in 2025 and ultimately selected this firm not only for its deep technical expertise, but also for its reputation as a rigorous and objective evaluator. As part of this independent study, the consulting firm had direct access to each borrower, its financials, and, if relevant, the associated financial sponsors or other key owners of the business. This enabled them to assess whether AI is likely to be additive, whether it could enhance or hurt positioning depending on execution and product evolution, or whether it poses a direct risk to the core business absent significant strategy change. The consultant’s study found the largest differences between higher- and lower-risk companies to be system-of-record positioning, high switching costs, the benefit of regulatory barriers, proprietary data moats, and control of data. The firm also assessed human dependency, data availability, risk of error, and task structure, among other dimensions. Overall, the independent review conducted over the past several months found that the AI-related risk across our software-oriented portfolio is relatively limited. The report indicated that about 85% of our software portfolio at fair value represented low risk, with only a small subset of companies categorized as higher risk. These higher-risk companies represented only 1% of reviewed names by fair value and 2% by count, or only about 0.3% of ARCC's total investment portfolio at fair value. An additional 14% of reviewed companies by fair value and count were classified as medium risk, representing only about 3% of ARCC's total investment portfolio at fair value. Importantly, medium or higher risk classifications do not imply current business impairment. Rather, they reflect the need for continued investment in product evolution, with many of these companies well positioned to adapt within the time necessary. Of the 85% of names categorized as low risk, these companies are well positioned to adapt and, in the majority of cases, benefit from AI-driven enhancements. In these businesses, AI is primarily augmenting existing SaaS platforms through incremental or high-value features layered on top of core software, with existing revenue streams largely maintained and incremental AI upside accruing to incumbent vendors. While we believe we have a solid view of the positioning of our portfolio, we recognize the need to remain vigilant with our portfolio companies on this topic. We also will remain disciplined in allocating new capital to the software sector. As we seek to take advantage of opportunities in the current market, it is critical that we are supported by a conservatively constructed balance sheet and a stable capital base. As Scott Lem will address, our substantial available liquidity of approximately $6 billion and our well-structured liability profile, with minimal near-term maturities, offer us the flexibility to pursue opportunities with both new and existing portfolio companies. Our outlook for relative stability in our earnings leads us to maintain a stable level of quarterly dividends. Importantly, core EPS, taken together with $0.15 per share of net realized gains, was well in excess of the dividend this quarter, providing a strong underlying foundation for current distributions. That foundation is further supported by ample spillover income, modest leverage, a more stable rate environment, and credit performance that aligns with our historical track record. Looking ahead, with spreads widening and turns improving, and given our strong competitive position, we continue to believe that ARCC's current dividend approximates the long-run underlying earnings power of our business. And our significant level of spillover income provides an added degree of flexibility and can serve as a short-term bridge during periods of seasonally slow transaction levels. These factors position us to continue building on our track record of stable or growing regular quarterly dividends for sixteen consecutive years. With that, I will turn the call over to Scott Lem to take us through more details on our financial results and balance sheet. Scott Lem: Thanks, Kort Schnabel. I will begin by reviewing certain key financial metrics from the first quarter, followed by an analysis and discussion of our robust balance sheet and liquidity, and conclude with details of our dividend and the taxable spillover referenced earlier by Kort Schnabel. This morning, we reported GAAP net income per share of $0.13, down from $0.41 in the fourth quarter of 2025 and $0.36 for the same period a year ago. The decline was largely driven by net unrealized losses primarily due to spread widening in private credit markets causing market-driven unrealized depreciation. Core earnings per share were $0.47 in the first quarter of 2026, down from the $0.50 we reported both last quarter and a year ago, primarily due to the impact of a full quarter of current base rates on our interest income, as well as lower capital structuring service fees. The decline in capital structuring service fees is largely due to reduced market activity typical in the first quarter and in addition to softness from the broader credit market volatility that Kort Schnabel mentioned earlier. Now turning to the balance sheet. Our total portfolio at fair value at the end of the first quarter was $29.5 billion, consistent with the end of the fourth quarter and up from $27.1 billion a year ago. Our net asset value ended the quarter at $14.1 billion, or $19.59 per share, which represents a decline of $0.35 per share from a quarter ago and $0.23 per share from a year ago. This decline in the first quarter contrasts with the long-term NAV growth we have generated alongside paying a stable level of dividends. For example, ARCC has delivered NAV growth exceeding 10% over the past five years and more than 30% since inception. Supporting the strength of our balance sheet, we had an active quarter enhancing our liability profile by accessing over $1.25 billion of incremental debt financing to further build on what we believe is a best-in-class balance sheet structure. Reflecting our long-standing strategy of being a consistent issuer in the investment grade notes market, we kicked off the year by issuing $750 million of long five-year unsecured notes at an industry-leading spread of 180 basis points over Treasuries, which we swapped to SOFR plus 172 basis points. During the first quarter, we remained active with our diverse bank capital providers and specifically expanded our SMBC funding facility by $500 million at similar or improved terms, including a five basis point reduction in the spread. On the topic of banks, I would like to take a few minutes to share our perspective on bank financing markets and the stability of banks providing capital to our sector. At ARCC, across our four credit facilities, we maintain relationships with more than 40 banks and lending institutions, many of which have been longstanding supporters of ours. The weighted average length of these relationships exceeds thirteen years, with several dating back more than twenty years to the early days of our company. Over that time, we have continued to broaden and deepen these partnerships, with most of these banks and lenders working with us not only at ARCC but across the Ares platform. We believe these well-established long-term relationships, combined with our scale, capabilities, and performance, provide us with unique and consistent access to capital across multiple markets, especially with our banking and lending partners. Additionally, drawing on our experience successfully navigating the Global Financial Crisis, we view the structure, duration, and diversification of our funding facilities as essential factors in ensuring balance sheet stability. As a reminder, all our credit facilities are fully committed with no maturities before 2030 and no mark-to-market provisions. Unlike pre-crisis facilities, which often involved margin calls and shorter maturities that impacted capital availability and liquidity, our current facilities offer stable access to capital throughout the commitment periods. Our experience through the Global Financial Crisis also reinforced the importance of maintaining diverse funding sources, which has been one of the keys to our success and will remain one of our most important strategic priorities. Reflecting this focus, we are the highest rated BDC across all three major rating agencies, with the longest ratings history—nineteen years with two agencies and sixteen years with the third—and more than fifteen years of experience issuing investment grade and convertible notes. The combination of our ratings and the fact that the vast majority of our assets are funded by unsecured debt and the largest permanent equity capital base in the sector further bolsters our position in the eyes of our banking partners. More recently, in 2024, we further enhanced the diversity of our funding sources and broadened our lender base through the securitization market. By generally issuing only through the AA tranche, we are able to achieve similar advance rates to what we receive on our credit facilities while further advancing our financial goals and benefiting from Ares' strong reputation with investors. Looking forward, while market participants may anticipate tighter credit conditions and reduced access for certain private credit managers, we believe BDCs affiliated with large-scale leading managers who possess long-term proven track records, extensive capabilities, and deep and enduring relationships, such as ourselves, will continue to receive strong support on attractive terms from debt capital stakeholders including investors, banks, and other lending institutions. Overall, our liquidity position remains strong, totaling approximately $6 billion. In terms of our leverage, we ended the first quarter with a debt-to-equity ratio net of available cash of 1.10x versus 1.08x last quarter, leaving us with meaningful headroom to support investing while maintaining ample cushion to absorb potential future volatility. Finally, our first quarter 2026 dividend of $0.48 per share is payable on June 30, 2026 to stockholders of record on June 15, 2026. ARCC has been paying stable or increasing regular quarterly dividends for sixty-seven consecutive quarters. In terms of our taxable income spillover, we currently estimate that we will carry forward $988 million, or $1.38 per share, available for distribution to stockholders in 2026. I will now turn the call over to Jim Miller to walk through our investment activities. Jim Miller: Thank you, Scott Lem. I will start with some additional context on our investment approach in the current environment and then walk through our investment activity, portfolio performance, and overall positioning. We have always viewed ourselves as patient, long-term relative value investors, and we believe that perspective instructs our constructive and opportunistic approach during periods of market volatility. In these environments, capital availability generally decreases, lending terms may improve, and our partnership-oriented solution becomes increasingly pertinent and valuable to our borrowers. Beyond the decades-long positioning of our platform around these principles, there is compelling empirical evidence supporting the resiliency and opportunity within the private credit sector, which we believe remains underappreciated in parts of today’s broader market narrative. Our own Ares Quantitative Research team recently examined twenty-five years of aggregated private credit data to evaluate the association between managers' ability to invest during periods of market-wide volatility and the subsequent levels of returns. In short, this study found that U.S. private credit managers that invested more actively during periods of elevated volatility generated, on average, more than 10% higher levels of annual returns than those managers that were not as active during the same volatile market conditions. While this analysis does not address manager-specific outcomes, current market conditions reinforce the importance of manager selection in this environment and further underpin our strategy of maintaining plenty of flexible capital to invest during these periods. In the first quarter, our team originated over $3.2 billion in new investment commitments, with 70% of transactions coming from existing borrowers. As transaction volume slowed in the second half of the quarter, our strong relationships allowed us to selectively invest in top-performing existing portfolio companies. These opportunities focus on achieving attractive, risk-adjusted returns and reinforced our ability to support our best borrowers and sponsors, particularly during periods of volatility. Our first quarter originations reflected meaningful sector diversification across 22 different industries and 57 sub-industries. As Kort Schnabel noted earlier, the shift in supply-demand dynamics across direct lending is beginning to translate into more favorable pricing and terms. We are beginning to see this come through our new originations, as spreads on first-lien originations in the first quarter increased by approximately 20 basis points quarter over quarter, while leverage levels declined by nearly half a turn of EBITDA. We ended the quarter with a portfolio of $29.5 billion at fair value, which was stable quarter over quarter as new fundings were offset by fair value changes and repayments. Repayments during the quarter, excluding sales to Ivy Hill, totaled approximately 7% of the portfolio at cost and continue to serve as a source of natural liquidity that we can deploy into today's market. As part of this repayment activity, we exited four equity co-investments, which were the primary drivers of our $114 million of net realized gains in excess of losses in this quarter. As a reminder, since inception, Ares Capital has generated more than $1 billion in net realized gains in excess of realized losses across more than $70 billion of exited investments over the last twenty-one years. These latest four exits generated a mid-teens weighted average realized IRR. Importantly, over the last ten years, our equity co-investment portfolio generated an average gross IRR well in excess of the double-digit total return of the S&P 500 Index. As we have discussed previously, these minority equity investments are made selectively, generally alongside loans we originate and underwrite ourselves, allowing us to participate in the equity where we see particularly strong upside cases. Another important component of our repayments this quarter was the collection of PIK income. In the first quarter, our PIK income, net of collections, represented approximately 7% of total interest and dividend income, which is below our historical five-year average. As we have discussed previously, we have selectively used PIK over our history and have been transparent in our PIK reporting, including explicitly disclosing PIK collections in the statement of cash flows. From a portfolio composition standpoint, approximately 90% of our PIK income is structured at origination and is associated with larger, well-performing companies, not reactive amendments. As with all investments, PIK investments are underwritten with the same discipline as cash-pay loans, with a strong focus on structure, leverage, and exit protections. Importantly, over our twenty-one year history, and across more than 190 realized PIK investments, we have generated a return measured by a multiple of our invested capital, or MOIC, of 1.4x. This MOIC is a modest premium to the 1.3x MOIC on all of our exited investments since our inception in 2004. We believe that this demonstrates the selective use of PIK does not create unnecessary levels of risk in our portfolio or correlate to future losses. On the contrary, it has supported our strong returns over the past twenty-one years for our shareholders. Repayments also offer us an opportunity to assess our valuation process over time. We believe the scale we have built in portfolio management is a meaningful competitive advantage. The merits of our large team and time-tested process are reflected in our realized outcomes at exit. Specifically, when comparing realized investments exited over the past two years to their respective fair values one year prior to exit, we found that 99% of fully paid-off U.S. debt investments were realized at valuations in line with or better than their valuations one year prior. We believe these observations underscore the rigor of our valuation process. Turning now to further details on borrower health. The financial position of our portfolio companies remains solid, with interest coverage stable sequentially and improving year over year, and leverage levels broadly stable. Our investments remain well protected by substantial equity cushion beneath us, with an aggregate loan-to-value ratio in the portfolio in the mid-40% range. Supported by these underlying portfolio trends, the credit performance of our portfolio remains solid. Our nonaccruals at cost ended the quarter at 2.1%, a 30 basis point increase from the prior quarter, but still well below our approximately 3% historical average since the Global Financial Crisis and the BDC historical average of approximately 4% over the same timeframe. Our nonaccrual rate at fair value also remained low at 1.2% of the portfolio, stable quarter over quarter and well below our historical levels. Our overall risk ratings remain stable, and the share of our portfolio companies in our higher-risk categories, Grades 1 and 2, remains below our five-year average and notably lower than our portfolio companies in Grade 4, which are outperforming companies. With this backdrop of our portfolio continuing to perform well, we would note that, as we have said several times in the past, we would not be surprised to see credit quality and nonaccruals across the industry revert closer to historical norms from what has been a period of unusually low levels in the industry, particularly given slower economic growth, repercussions from geopolitical issues, and supply chain disruptions. We are already seeing higher levels of manager dispersion, and we believe this trend will continue. Shifting to the second quarter, as Kort Schnabel noted earlier, market activity has remained slow as participants continue to work through price discovery. Through 04/23/2026, total commitments were approximately $200 million. Our backlog was approximately $1.8 billion as of the same date, and our activity levels, as measured by discussions, have increased in recent weeks. Additionally, our current backlog reflects a 35 basis point increase in spreads and a 40 basis point increase in fees as compared to the first quarter for first-lien loans. As a reminder, our backlog contains investments that are subject to approvals and documentation and may not close, or we may sell a portion of these investments post-closing. While we are beginning to see deal flow pick up, we expect this slower start to affect both originations and exits in the second quarter. In summary, we believe ARCC is navigating this period of market transition from a position of strength. The current environment is reinforcing the advantages of scale, balance sheet strength, capital availability, underwriting discipline, and portfolio management. Supported by a well-performing diversified portfolio and significant liquidity at ARCC and across the broader Ares platform, we believe we are well positioned to thrive in this market and continue generating attractive dividends for our shareholders. As always, we appreciate you joining us today, and we look forward to speaking with you next quarter. We will now open the call for questions. Operator, please open the line. Operator: Certainly. Thank you, Mr. Miller. The Investor Relations team will be available to address any further questions at the conclusion of today's call. We will go first to Analyst with JPMorgan. Analyst: Hey, guys. Thanks for taking my questions this morning. Look, it is obviously an interesting time. You have talked about the widening of spreads, and you have talked about better origination fees. I am curious, when we look at some of the other elements of transaction structure, particularly things like covenants and control provisions, if the market is readjusting as well. I think that when we sort of hear what has happened over the last couple of years, that has been one area of concern, and I am curious if that is normalizing also. Kort Schnabel: Yes. Thanks for the question. I can jump in on that one, and if anyone else on the team wants to chime in. I would say yes, those other non-economic terms and documentation provisions are moving more positively in our direction as well as the economic points of fees and spread, as I mentioned in the prepared remarks. Whether it is getting a financial covenant on companies that might have been previously on the margin of getting one, I would say that is tipping in our direction. I do not want to overstate it. Obviously, high-quality borrowers are still able to access deals from the private credit market covenant-light, but at the margin, it is moving in our direction, as well as collateral protection terms and other documentation terms that a lot of people have been talking about certainly of late. So yes, it feels like certainly a better time. Obviously, our market moves a little bit more slowly, so we will continue to watch and see how things change from here. Analyst: Great. If I can just ask one quick follow-up to that. So I think what I am hearing from you is in terms of all of deal structure mean reversion. It is not like we have swung from a wildly bullish market to a wildly bearish market in terms of wider spreads and so on. And given all of the noise and drama we had during the first quarter, is this just a reflection of the continued supply of capital from both the public and private BDCs sort of insulating those moves? Kort Schnabel: I think it is probably a little bit of two things. I think it is, one, supply of capital and the changes that we are seeing in the flows in the retail and wealth channel. But I think it is probably also just part of what Jim Miller said in his prepared remarks, which is that I think people do recognize that the risks out there are a little bit higher now, with the geopolitical developments and slowing economic growth, and that probably is also influencing people's behavior when it comes to pricing new deals. So I think it is a little bit of both of those things. But in terms of your comments around reverting to the mean, I think that is correct. I do not think we are saying we are in an environment today where spreads are blown out super wide. Obviously, we got to a very tight place last year. It is good to see them widening, but like we said, 50 to 75 basis points of kind of total yield improvement between spread and fees does not indicate a blowing out of spreads. Analyst: Got it. Thank you, guys. I really appreciate you taking my questions this morning. Kort Schnabel: Sure. Thanks. Operator: Thank you. We will go next now to Finian O'Shea with Wells Fargo Securities. Finian O'Shea: Hey, everyone. Good morning. Following up on that topic, and Jim Miller, you talked about the benefits of investing in volatility. This sort of activity on the runway does sound like the higher-quality kind of deal that would reprice down when the retail vehicles, say, eventually recover, and that could pressure NOI more. So as you approach book and can raise capital, how aggressive do you want to be in terms of growing into this environment? Thanks. Kort Schnabel: Thanks, Finian O'Shea. I will start by saying that I do not think we are in need of growing the capital base right now with the $6 billion liquidity position that we have. We also do our best, when we are in a market like this, to get call protection on deals so that we can lock in terms when the market is favorable for us like it is today. Certainly, there is some period of time that will pass and you will end up in scenarios where repricings will come back to the market. I think we are seeing that pendulum actually swing both ways. We have opportunities right now to reprice many of the deals in our portfolio as they look for amendments or add-on acquisitions—things like that—and we are doing a lot of that right now. So that is sort of how the market works. It is not as rapid as in the public markets. In the private markets, you will see insulation from those repricings to a certain extent. It is not as rapid; you do not have as much activity, the volatility is not as high, and you just see a little bit more stability, and the bands on either side are tighter. And then, as it relates to raising capital, we will just evaluate that quarter to quarter, month to month as we see what is in the pipeline, the nature of the market at that point in time, and where the stock price is. Finian O'Shea: It is helpful. A follow-up, Scott Lem, I appreciate your comment on the bank side of the funding arena. I think it is fair to say you are a desirable counterparty; you have also done your job in fighting those borrowing spreads down for yourselves. And we have seen banks sort of push back. I think there were a bunch of repricings upward in, say, 2022, 2023. Do you see any of that on the runway as your spreads widen? Will the banks, do you think, fight their spreads back up? Scott Lem: Thanks, Finian O'Shea. Yes, I do think that there is potential for that. We are not seeing it at the moment. As you saw during the quarter, we actually repriced some of our facilities down a little bit. So these things will ebb and flow. I think for us, if it does move, it is not going to be just for us; it would be for the whole sector. If that is happening, that should mean that we would be able to put pressure on the asset side too. So our ability to take increases on our liabilities should be commensurate with increases on the asset side. But it is too early to tell right now. Operator: We will go next now to Arren Cyganovich at Truist Securities. Arren Cyganovich: Thanks. The April-to-date trends were quite low. You highlighted that as borrowers are trying to adjust to the new spread and document environment. You mentioned that things have picked up in recent weeks. Should we expect kind of a similar slowdown that we saw last year due to the tariff stuff we saw in the second quarter? Or do you think that this could actually potentially pick up as you have had these conversations in recent weeks? Kort Schnabel: Yes. I will try to answer that one. It is obviously really hard to predict, and I probably do not want to venture a guess as to how we are going to see transaction activity evolve from here because it just has been very up and down. Obviously, you mentioned last year, kind of similar things—things really slowed down with the tariff noise and then the second half was extremely busy and we posted record volumes. It was really hard to see that coming when we were sitting here in April–May. I guess what I would say about the backlog, or the activity the last few weeks since the end of the quarter: obviously there is a little bit of a lag effect. So the stuff that we are committing to in the first few weeks of April has been sort of teed up and discussed through investment committee for weeks, if not months, prior to that leading up to it. So, a little bit of a lag effect. We are starting to see the comments we had in the prepared remarks—namely that we are starting to see a pickup just in terms of our cadence of deals that we are seeing come through investment committee, I would say, in the last three to four weeks. So we are at the front end of seeing that pickup. We did want to go out and make sure that people are aware we are seeing that. But whether it is sustained or not, I think it depends on a lot of different variables out there—maybe most notably just the geopolitical situation. I think if that can get resolved in a sustainable manner, then I think you could see things really pick back up meaningfully. But that is something that is just really hard to predict. So hopefully that helps a little bit. Arren Cyganovich: Yeah, no, absolutely. It is obviously something that is evolving rapidly. So I appreciate those comments. The other question I had was around the consulting that you hired, and I appreciate all the numbers. It kind of fits with what you have been saying to us publicly in terms of the higher-quality type of well-protected enterprise-type of companies—some small risk from AI, some, I guess, medium risk as you kind of pointed to that. I think the biggest question that people have, and this is going to take quite a while to unfold, is companies are doing well now; they are going to probably continue to do well in the near term. But at some point, they have to be refinanced, and the markets have down, I do not know, 40% or so. What are some of the options if you have a private equity firm that maybe bought a company at 21 times EBITDA and now they are trading at 13 and maybe do not want to exit those, and you probably do not want to hold on to those loans through the next cycle? So maybe you could just talk about the refinancing risk and some of the options that you will have to use whenever you get to that kind of point of refinance whenever that occurs. Kort Schnabel: Yes, sure. Obviously there is a fair amount to unpack on the software topic. I guess, just specifically to the refinancing risk: number one, there already is a market that exists currently, despite the fact that the deal flow is low. We are seeing deals get done in the software space. There have been a couple in the last month or two where the market has been able to finance these transactions. They are for higher-quality borrowers without AI risk. They are coming in at, obviously, a little bit wider spreads, but they are getting done. We actually had one company in our portfolio that we did not think was particularly risky, but sort of on the straddle of low to medium category, and we decided to not extend maturity, and the lender group took us out of that name. So just as one case study of our ability to exit when there is a maturity, if we are not willing to provide an extension. Again, there are so many names in the book it is hard to go granular on a call like this, but I would just remind everyone that our loan-to-values on our software book as a whole still are very healthy and low relative to the broader book. We took a lot of markdowns on the equity values on our software names in our portfolios, and the LTV in our software debt book still stands in the low 40%s, below the LTV of the total book. The EBITDA growth rate of our software companies remains consistent with the growth rate of the rest of the book at 9% year over year. And I would also say, we can spend more time if people want to on the consultant study and the different categories and risk ratings—we obviously have a lot of detail there—but we did actually make an effort to unpack and do a maturity waterfall on the entire software book and compare the maturities in the lower-risk category versus the higher- and medium-risk category. The maturity profile actually for the higher- and medium-risk names is materially shorter—it is 2.4 years versus 3.9 years on the total book. The low-risk names are about 4.2 years. So, when it comes to trying to mitigate technology risk, obviously shorter maturities are better. And to the final specific point of your question, when we get to the point of the maturity and if we are not willing to give an extension, then we are going to have a conversation with the owner of that business. If it is a financial sponsor, then in most cases we are probably going to request that a capital injection is made in order to pay down our debt and derisk us to get a maturity extension. Obviously, it is a case-by-case basis; it is hard to generalize. But we are not unfamiliar with having some difficult conversations with sponsors about underperforming names. We have done it over a long period of time and feel confident we will be able to do that again now. Arren Cyganovich: Thanks. I appreciate it. I know it is a tough question. Operator: Thank you. We will go next now to John Hecht with Jefferies. John Hecht: Maybe a little bit of a tack-on to the prior question. I really appreciate all the context you gave us around your software portfolio and understand you had a highly regarded third-party management consulting firm evaluate your exposures. I am wondering, are you able to give us any, call it, sensitivity analysis around impacts or disruptions to revenue as revenue models shift within the portfolio? And what that did to, call it, leverage calculations during that exercise. Kort Schnabel: I am sorry. So, you are asking about how are the revenue trends changing within the different categories? John Hecht: When you analyzed sensitivity or exposure to AI disruption, did that include an assessment of potential revenue model shifts for the software companies? And if so, can you give us any, call it, materiality of the revenue shift as the industry changes? Kort Schnabel: Sure. Yes, I think I get it. Why do I not just give a little bit of color around the definition of these three categories? I was anticipating people might want to go into this because I think it will help with your question. The first thing I would say is we are not seeing any significant deterioration in the performance of these companies, regardless of whether they are in the low or the medium risk. I should say, in the high-risk category—again, it is only 0.3% of the entire portfolio at fair value, and it actually is only three names in that high-risk category—one of them is Pluralsight, which people know is not performing well. So within that high-risk category, there are performance issues. But in the medium-risk and low-risk categories, this portfolio as a whole continues to perform very, very strongly. So to the prior question, nothing is happening yet in the numbers; it is all about the look-forward into the future that everybody wants to talk about and is focused on. So maybe just on the definitions of these categories: the low-risk names are companies that were identified by the consultants and us, by the way—they validated the work that we have been doing ourselves rating these names for the past six months—as companies that have lots of layers of mitigants to AI risk. We have talked about this before: whether it is system-of-record positioning, proprietary data, regulated end markets, network-based business models—all these things that insulate a company from being disrupted. That low-risk category—these companies have lots and lots of those mitigants, and what I would just kind of say is they do not have to do a lot to prevent disruption, and they actually will likely benefit from AI. The 85% of the companies that are in that low-risk category in our software book are much more poised to benefit from AI than to be disrupted. The medium-risk category, which is 14% of the software portfolio, or 3% of the total portfolio—what I would say about this category is there are still mitigants that exist—some of those mitigants I mentioned before—just fewer than in the low-risk category. And these companies need to execute on their own AI strategy and keep evolving their products in order to stay competitive. So to your point, I do not know if it is a revenue model change; it is just making sure that they are evolving their product suite to incorporate AI so that they can stay competitive and ahead of the curve. That is how I would categorize those names. And really importantly, in this medium-risk category, we are not saying, nor is the consultant saying, there is going to be disruption. In fact, the study specifically states that many of these companies are well positioned to adapt within the time necessary to adapt. But it is just that there are fewer mitigants than the companies in the low-risk category. In the high-risk category, the definition there is these companies really need to transform their business model in order to survive the disruption risk. I do not know if that helps with your question, John Hecht, or not. But hopefully that color helps provide some more insight into the study. John Hecht: That helps a lot. I really appreciate that. My second question is, you talked about the deal environment—it has temporarily been impacted by all the global stuff—but maybe you are seeing some early indications of a renormalization. We have been waiting for a long time for this wave of private equity portfolio maturities and how there is a lot of pressure to liquidate and return capital to LPs. I am wondering, assuming this geopolitical stuff stabilizes, is there anything obstructing that wave of potential activity beyond this? And do you guys have an opinion about when and if that wave might occur? It feels like all the ingredients are still in place if you take out the volatility that is going on in the world and the market right now. Kort Schnabel: The pressures on the private equity firms to return capital are only increasing. The hold periods are lengthening. Again, even though economic growth overall is slowing a little bit, in the sectors that we invest in, growth is still really strong. So I really do not see any other barriers that would prevent us from being able to get back to a really active deal environment. Obviously, noise around software is likely to hamstring volumes within that sector specifically. But other than that, I do not really see any other barriers. Jim Miller: Maybe I will add, Kort Schnabel. There is a fair amount of healthy discussion and dialogue in the sectors and areas that are unaffected—be they geopolitical or software—so I think there is an optimism around deal flow. It is not optimal for a private equity firm to bring their company to market in the midst of the most intense moments. But there is a lot of interest in migrating towards companies and getting invested in companies that are sheltered from some of those issues, and I think there is a lot of optimism there. So I think those will lead the way, probably, and then you will see a more active broader market. If history repeats itself, that is what we should expect to see over the next few quarters. John Hecht: Wonderful. Thank you guys very much. Kort Schnabel: Sure thing. Operator: Thank you. We will go next now to Paul Johnson with KBW. Paul Johnson: Yes. Thanks. Good afternoon. Thanks for taking my questions. Credit is still relatively strong today, but I was wondering, in relation to just the NAV decline this quarter, how much of that would you say is kind of just the broader mark-to-market with spreads this quarter versus credit-specific write-downs? Scott Lem: Yes, happy to take that. More than two-thirds of the marks we have had—around 70%—are mark-to-market related rather than credit related. So the significant majority of it is from mark-to-market. Paul Johnson: Got it. Appreciate that. And then you guys have done—I mean, you have clearly done some extensive analysis on the book. You have provided a lot of transparency on top of that. But I was wondering if I could just ask kind of higher level on marks more specifically on software investments: how do the discount rates move quarter to quarter? And is the assumption that the fundamentals of these companies—because it sounds like a lot of them still have very strong performance—is fundamental performance just strong enough to offset any sort of spread widening that we would have seen in the quarter? Or is it just more of a lag effect that we might expect to see throughout the year if spreads continue to widen out? Jim Miller: Yes. Look, I think everyone would like to try and create a generalization around how to approach the answer to that question, which is just not easy to do. It is probably a good moment in time just to express—and we had said some of it in our prepared remarks—that we have an extraordinarily extensive valuation process that has worked for a really long period of time, and it has proven out to be quite effective. It is really a bottoms-up, company-by-company analysis. And every company is distinctly different. To answer that question, you have to go look at that company. You have to look at the comparables that are very specific to that company. And that is even within software—there are so many categories that exist within software. So broadly speaking, you want to draw a parallel to the broadly syndicated market or to mark-to-market issues there, but it is not something we should do. We should just look at them one-off. So there is not a simple answer to that question. What I will say is there is clearly an impact on EV and it was more pronounced in software for the quarter. So the assumption is fair. But that EV does not just flow directly into mark-to-market on the loan. Once again, the private market—as Kort Schnabel said—is active and still active in software. And so there is some movement, but what we are looking at a lot in the analysis, which is bottoms-up again, is what the private market is doing for these companies and what the indications there are. And so that is a better—one of the more important variables, I should say—that goes into the equation. Kort Schnabel: Maybe I will just add one more bit of color to further illustrate what Jim Miller was talking about—that it is not so simple. Obviously, when spreads widen, that affects the value of the loans and marks should go down, but it is not that simple on a portfolio-wide basis because on each individual name, that might not occur. For instance, if we have a software company that has performed extremely well and delevered, such that the pricing and the spread on that loan is actually somewhat wide relative to the risk, we do not mark that loan above par—we mark it at par. And so when spreads then widen, that loan can stay at par because the performance indicates that the pricing is still appropriate for the risk. So that loan might not get a markdown even in the spread-widening environment, whereas another software name that is more levered might get a markdown in a spread-widening environment. So that is just one example of many of why you have to do it name by name; you cannot do it on a portfolio-wide basis. But obviously, we are paying very close attention to each one of these names. We have got third parties in here validating all of our marks. And as Jim Miller said, about 70% of the write-downs were mark-related. Paul Johnson: Got it. Appreciate that. Very helpful answer. Thanks, Kort Schnabel and Scott Lem there. My last question here was just in terms of Cornerstone software that was marked lower this quarter; Medallia—which you are not an investor, not a lender to—but Medallia getting restructured this quarter; Pluralsight—which you have a very small investment—also, that company is struggling a little bit. I was wondering if you could just kind of tell us broadly for these companies what exactly do you think it is that those companies are lacking in terms of the challenges that they are going through today? Is it lack of a critical system-of-record? That sort of thing? For these companies to be running into trouble today. Kort Schnabel: Yes, I appreciate the question. I really just think we always hesitate to dive into any individual name and really start getting into trends or performance results on individual names, so I do not think I am going to necessarily go there and get into that level of detail. On any portfolio, when you have 600-and-some names and 130 software names, you are going to have some names that are going to underperform. We thankfully only have a few of them. Pluralsight has been underperforming for a while; people understand what is going on there. Some of the other names you mentioned, performance is actually fine—more of just a mark-to-market issue based on how the market is viewing those kinds of credits. Not everything is what it seems. A lot of it is not really performance related. Other than that, I just think it is not appropriate to dive into individual name discussions. Paul Johnson: Okay. Fair enough. Thank you very much. Operator: Thank you. We will go next now to Brian McKenna with Citizens. Brian McKenna: Great, thanks. So one more follow-up on your software exposure. How much of the roughly $1 billion of the more at-risk software investments are sponsor-backed? Then you also have the largest portfolio management platform in the industry, so I am curious how you can leverage that entire team to get out ahead of any potential AI risk and really how you and that team ultimately drive better outcomes within this part of the portfolio. Kort Schnabel: Sure. So again, in that high-risk category, all the names are sponsor-backed actually. There are only three names. We will go back and check, but I believe all three are sponsor-backed. In terms of our portfolio management and our playbook, I am glad you raised it. It is something that we think is differentiating for our platform. It is something we try to highlight a lot. We have an over 50-person portfolio management and restructuring team. We have operated over twenty-one years here through lots of different cycles, including the GFC. We are not afraid to have tough conversations with the owners of businesses. As I already mentioned once on this call before, the first thing we look for is if there is a liquidity problem, the owner of the business has to put in capital to support the liquidity problem. And if the owner of the business is not willing to do that, then we are not afraid to restructure and own the company ourselves. That is never what we want to do; it is never the plan. But we have the expertise and the team in place to own these companies, to be patient with them, to provide additional capital, and to come out the other side. Over our history, we have generated an enormous amount of gains by doing that. Just this year, we posted a big gain on a portfolio company that was a mezzanine investment that we restructured and owned for ten years and posted the gain on it. So there are lots of examples like that over the course of time. It might be harder work and might take more involvement, but we absolutely have the expertise in place to do that. Brian McKenna: Okay, great. That is helpful. And then if you were to mark to market the portfolio today to reflect quarter-to-date trends, how much of the first-quarter markdowns would be reversed? Jim Miller: I am not sure we are in a position to answer that one at this point in time. I think that requires a whole valuation mark process—it is extremely extensive, as you can imagine. So that would be a difficult one to address as a one-off. Kort Schnabel: Yes. Our market does not move as fast as the liquid market does either, so really tricky to say. Brian McKenna: Yep. Thought I would give it a try. Thanks. Operator: Thank you. We will go next now to Kenneth Lee with RBC Capital Markets. Kenneth Lee: Hey, good afternoon, and thanks for taking my question. Just another one on the software loan side. It sounds like the private markets are still originating software loans. But for Ares in particular, I wonder if you could talk a little bit more about some of the more recently originated software loans. What sorts of economics and terms are you seeing? And also, roughly, what are the average LTVs that you are underwriting at? Thanks. Jim Miller: Yes, sure. I appreciate the question. There really have not been a lot. There are just a handful or less in the last few months of deals. Some of them were existing portfolio companies of ours where the sponsor may be looking for a little bit of incremental capital to do a tuck-in acquisition. There have not been any that have come across our transom here that are larger, kind of bellwether-type software names where we can really point to and say, “Here is where the market is.” Smaller deals get priced sometimes a little bit more indiscriminately if we have another lender who might just really want to own that name and can clear the deal. So I think it is a really hard question to answer. I guess I would probably say, the deals that we have seen clear—the spread and fee increase on those transactions—is a little bit wider than the 50 to 75 basis point average that we put out in our prepared remarks. These are higher-quality companies. It is not like if a software company has some kind of material question around AI risk, that type of company is out raising capital right now. So these are the higher-quality companies, and it is a little bit wider than the average is probably what I would say. Kenneth Lee: Got you. Very helpful there. And then one follow-up, if I may. Once again, just on the software side, broadly across the portfolio there, how do you think about potential downside protection for software investments there—especially protection that could potentially put a floor on recoveries? I am thinking about, for example, intangible assets, any sorts of IP. If you could just give us a little bit more color on that. Thanks. Jim Miller: Yes. Look, again, first of all, we are cash flow lenders at our core and always have been. Our underwriting theses are most of the time underpinned by a very high degree of recurring revenues and predictable cash flow conversion through lots of different cycles, as it pertains to software and technological cycles. As we think about downside protection here, I think we will just keep coming back to the fact that the vast majority of our companies—as we have been saying and as third parties have validated—have very high barriers that insulate them from technology and obsolescence risk. The retention rates of the revenues in these companies continue to be very, very high. The cash flow conversion is strong. The EBITDA growth is strong. And the loan-to-value, again, on our software book for our debt investments is 41%, even today after the markdowns we took on the equity values. So we rely on the significant amount of enterprise value cushion and the strategic value of these companies to lots of different acquirers—either strategic acquirers or private equity acquirers—for values that are well in excess of our debt if we needed to sell these companies to recover our principal. Maybe just one additional point. I do not know if this is what you were referencing, but we think we do a pretty good job with documentation. We obviously care a lot about the IP and protect it as part of our documentation. I think we do a better job in private markets than public markets do on that point. Kenneth Lee: Gotcha. No, that is very helpful. Thanks again. Operator: We will go next now to Sean-Paul Adams with B. Riley Securities. Sean-Paul Adams: Hi, good afternoon. While nonaccruals are still relatively within low levels, it seems like there were a couple of outsized markdowns totaling almost $100 million for the quarter—that was across just two names—that are not captured within the nonaccrual figure. I understand not wanting to delve into portfolio-specific names. However, if your headline nonaccrual exposure metrics are not capturing AI-based positions marked below $0.75 on the dollar, how are you trying to really express true exposure for mark-to-market risk in the next couple of quarters? Kort Schnabel: I was following you until the very end when the actual question came out there. I am not sure exactly the point of the question. I get it. The one thing I will say, and then maybe I will have you rephrase it, is obviously in volatile markets like we are in today, we see more dispersion of valuations and marks. We see what the broadly syndicated market is doing to a bunch of names in the software space, and so that is going to be reflected in our marks. We have to mark our portfolio based on where the comps and the market are saying these debt positions should be valued. That mark is independent of our analysis of whether the loan is covered by enterprise value and whether we deem the principal and interest collectible. And so there certainly could be, in a more volatile market, loan valuations that trend lower but where we still feel that the principal and interest are collectible because we are covered by enterprise value. My guess is that would apply to the names that you are citing—again, without getting into individual name discussions. I do not know if that was specifically where you were asking, but I want to make sure that point does come across clearly. Sean-Paul Adams: Right. And so to refine the question, if you are having a position with an exposure of $350 million at cost, and you are having a $50 million difference quarter over quarter—25% of the marks at debt—it is not calling out the full risk to that name. Kort Schnabel: It is valuing the loan at the level that the market today is pricing that loan at. So that is a fair value mark. It is reflected in our NAV, which—these markdowns this quarter—are why we saw NAV decline this quarter for the first time in a pretty long time here at Ares Capital. So it is reflected in the NAV and reflected in the marks. It is not reflected in the nonaccruals if we still deem we are covered by enterprise value. I think that is the point that you are making, and that is accurate. It will be reflected in the nonaccruals when we believe there is risk of impairment and that the full interest and principal are not collectible. Sean-Paul Adams: Okay, perfect. I appreciate the color. Thank you. Operator: We will go next now to Analyst with Barclays. Analyst: Hi, thanks for taking the question, and appreciate all the comments on funding on the call so far. Just wondering if you could talk a little bit more about the mix of funding. Just looking at the ratio of unsecured debt to total debt, it has been gradually declining over the past few quarters and ended March at about 59%. And obviously secured funding is always going to be cheaper for you, especially now given where BDC unsecured spreads are generally. I am wondering if you had a target for the ratio of unsecured debt to total debt or maybe even to total assets, and where we could expect that ratio to go over the next few quarters? Scott Lem: Yes, sure. Hey, thanks for the question. I think we certainly have run at fairly high levels of funded unsecured debt in the past. I think even at the current level you cite, it is still pretty healthy and relative to the rest of the sector. Certainly, early part of this year, post our deal, the spreads gapped out quite a bit in the unsecured market and were fairly unattractive. I would say the past few weeks have been very productive, so it certainly makes it a little better. But I think the point is we know we have a fair amount of liquidity on hand, and we like doing that on purpose to make sure we can be very opportunistic about our issuances. So yes, the way we look at it is if we had to do no issuance for the rest of the year and we know we have a maturity coming up, it still puts us at majority funded with unsecured. So, yes, probably our target is to make sure that the majority of our funded debt is unsecured. We do still have some room to go there. But it is certainly a more productive market than it has been. Analyst: Okay. Thanks very much. Operator: We will go next now to Casey Alexander with Compass Point. Casey Alexander: Good afternoon. I want a badge of honor for being the last question on the longest quarterly conference call in Ares Capital history. And I do have two. First one is, in the last six years, we have heard multiple periods where all of a sudden spreads widened out, and it looked like it was going to be durable and better terms and better documentation, and then almost immediately competition came in and slammed them right back to where they were. So why should we believe that this cycle is different than that and that wider spreads and better terms can be a little bit more durable? Kort Schnabel: Jim Miller and I can maybe tag team on that answer, Casey Alexander. I do not know that we are actually sitting here pounding our chests saying that anybody should expect it to be more durable than in past cycles. I think we are just saying we are seeing it widen. We are watching the factors as to what is creating the widening, which we talked about before. I think it is both flows within private credit and maybe risk premiums in the market. I think the other thing I should say is banks—bank behavior is also driving the widening, and we are seeing banks be less risk-on in terms of new commitments. We have seen the broadly syndicated market widen out as well in terms of their implied spreads and the pricing in that market. So there are lots of different things that are creating it. Every period is different. We did see wider spreads be pretty darn sustained when they started to widen out in mid-2022, and that lasted for eighteen to twenty-four months. We saw spreads peak out at 650 to 700 and fees were two to two and a half points, and that was pretty well sustained. If you are referring to last year, the tariff period, obviously we garnered some premium economics through that—right through the teeth of that period when everything was extremely uncertain. And then things changed immediately when our government decided to do their announcement, and things were right back on track. So it is really hard to predict, and I do not think we are actually predicting whether it is going to be sustained or not. I think time will tell. Casey Alexander: Okay. Thanks for that. My follow-on is Pluralsight, which you were involved in, and Medallia, which you are not involved in—two of the highest-profile sponsors within the space and two very large deals. I am just curious: internally, how has that impacted your thinking in terms of sponsor selection and also sizing of investments going forward? Kort Schnabel: I think we have good relationships with both of those sponsors. I would say on Pluralsight, the way that that deal resolved itself—the sponsor worked consensually with us to effectuate a restructuring and hand over the keys to the lender group. We were not the lead in that lender group. We did not lead those negotiations. We were a smaller holder. But they certainly behaved ultimately in the way that, obviously, we would have liked to see them support the company with capital, but they did work consensually with us. I do not think it is materially changing our view of whether we want to work with those sponsors or not. Not every deal is going to go according to plan, and we did not really—again—see any sort of nefarious behavior on the part of those sponsors. Casey Alexander: Thank you. Operator: We will go next now to Robert Dodd with Raymond James. Robert Dodd: Thank you for taking the question. A question on the management consultant—hiring them—and I apologize for the background noise; less about the output and more about the why. I mean, to your point, a year ago there was the tariff tantrum, etc., and you did not hire a consultant at that point to evaluate embedded tariff risk in the portfolio or anything like that. You did it in-house with your in-house expertise. So my question then is: it feels different this time. You have hired a consultant who might be agreeing with what you said, but was there a level of complexity increase and uncertainty about the capabilities of the in-house expertise, or what motivated the decision to bring in that third party when that has not typically been the pattern in the past when there has been some theme, be it tariffs or something else? Kort Schnabel: Yes. I love the question. So with tariffs, it is a math-based equation pretty much, and we were able to pretty quickly speak to all of our portfolio companies, ask them to break down their cost of goods sold—not all of our portfolio companies, but the ones that actually import products—and break down the cost of goods sold and do a quick analysis as to the impact based on various tariff rates and come up with an exposure. We put that number out with a clear explanation of how we did it, and people seemed satisfied and agreed with the analysis. By the way, then the tariff thing went away, like we said on the prior question. This is a much more complicated situation, it is becoming apparent to us, and it is not exactly numbers-based, is what I would say. Because the numbers continue to be very, very strong in the software portfolio, and yet the concern—really from the outside world, not from the inside world—continues to be present, even as we continue to talk about why we feel good about the software portfolio and the underwriting we have done. I will remind people a couple things. Two years ago, right around now, we had a public investor day in New York and invited anybody who wanted to show up, and we had a whole slide on AI risk and how it might impact the software business and how we felt good about our underwriting and how we have always underwritten against technology risk. That was two years ago—and that was not even the beginning of when we started thinking about that topic. As we said in the prepared remarks, it was the middle of last year that we started to think about bringing in a consultant because we just felt like as we kept talking about the underwriting we have done and the mitigants, the fact that it was not a math-based equation, and the fact that everybody was looking forward and not backward meant that we should probably bring in a third party to help us validate our opinions. Obviously, we feel good about our opinions, but like any prudent investment manager, we want to test our own thesis, and we want to figure out do we have some bias potentially because we are the ones that have been underwriting this portfolio, and we wanted to bring in a third party not only just to help satisfy the external world, but also to test our own thesis. We started interviewing those parties and decided on the consultant at the end of last year. We actually had in our prepared remarks in the October earnings call a lot of comments about AI. Again, that did not seem to satisfy people because in February it seemed like the world woke up and everybody thought all of a sudden there was going to be massive explosions in software and private credit portfolios. So I think just the continued concern by the external world, the lack of math-based formulas, and the desire to test our own thesis were the reasons why we went and did it this time. Hopefully it is helping give people a little more color around the situation. Jim Miller: And if you do not mind, I am just going to clarify and maybe adjust the response a little bit. We often engage third parties to help us evaluate transactions and sectors and white paper new spaces. We utilize third-party work from consultants like this as part of our diligence, as part of our ongoing review of portfolio companies, too. So that part of it is not new. I think the scale of this and maybe the disclosure or the outbound to the community is what is new here. But this is part of our work in a regular way, too. So it is a combination of the circumstances and this being good practice for us—and we do it often. Robert Dodd: Got it. Thank you. As a kind of follow-up—sort of related—you said the medium-risk assets have about a 2.4-year maturity left. From the review, did you get a takeaway on what is the timeline for these AI risks if they happen? If a medium business does get impacted and it is in the next nine months, then the maturity being a year plus further out is one thing. If it is a five-year horizon, then most of these assets are going to be matured and possibly gone before it ever becomes an issue. So can you give us any color on what the outputs were on where the maturities are versus what time horizon the risk actually really exists on? Kort Schnabel: Yes, it is a good question, Robert Dodd. The more facts we disclose, the more questions come up—every time. There was not really a strong part of the study or conclusion that delved into the amount of time that it would take, and I am sure obviously that is very company specific and not something that can necessarily be calculated. Again, this is a very complex topic, and I think it is a great question, but not something that I am really in a position to answer other than to say that the consultant did report—and I already said it once, but I will say it again—the medium-risk companies in our portfolio do have ample time to execute on their own AI strategy in order to avoid being disrupted. So that was the specific commentary, but it did not really talk about the actual specific length of time. Robert Dodd: Got it. Thank you. Operator: Thank you. And ladies and gentlemen, this does conclude our question and answer session. I would like to turn the conference back over to Kort Schnabel for any closing remarks. Kort Schnabel: Great. No closing remarks. Thanks, everybody, for joining today and for your support and engagement, and we look forward to connecting with you on our next quarterly call. Operator: Thank you, Mr. Schnabel. Ladies and gentlemen, this concludes our conference call for today. If you missed any part of today's call, a replay of the call will be available approximately one hour after the end of today's call through 05/28/2026 at 5 PM Eastern Time. You can access the replay for domestic callers by dialing 1-807-276-1189 and international callers, +1 (402) 220-2671. An archived replay will also be available on a webcast link located on the homepage of the Investor Resources section of Ares Capital Corporation’s website. Again, thanks for joining us, everyone, and we wish you all a great day. Operator: Goodbye.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the American Tower First Quarter 2026 Earnings Conference Call. As a reminder, today's conference call is being recorded. [Operator Instructions] I would now like to turn the call over to your host, Spencer Kurn, Senior Vice President of Investor Relations. Please go ahead. Spencer Kurn: Thank you, and good morning. Welcome to our First Quarter 2026 Earnings Call. I'm Spencer Kurn, Head of Investor Relations for American Tower. Joining me on the call today are Steve Vondran, our President and CEO; and Rod Smith, our Executive Vice President, CFO and Treasurer. Following our prepared remarks, we will open the call for your questions. Before we begin, I need to call your attention to our safe harbor statement. It says that some of our comments today may be forward looking. As such, they are subject to risks and uncertainties described in American Tower SEC filings, and results may differ materially. Additional information is available on our Investor Relations website. I'll now turn the call over to Steve. Steve? Steven Vondran: Thanks, Spencer. Good morning, everybody, and thanks for joining the call. I'm extremely pleased with our start to 2026. Our performance through the early part of the year, combined with favorable FX and straight line dynamics, led us to raise our full year outlook. The growth drivers shaping our industry continue to strengthen. Rising wireless data consumption, accelerating cloud adoption, rapidly expanding AI-driven workloads and future generational technology shifts, all point towards sustained investment and high-quality digital infrastructure. These trends are global, structural and long duration in nature, and they play directly to American Tower's core strengths. Over the past several years, we've taken decisive steps to ensure that we're optimally positioned for this next phase of growth. We strengthened our balance sheet, refined our portfolio, shifted our capital to our developed markets and aligned our revenue base with the highest quality carriers in each of our markets. As a result, I believe that American Tower is on its strongest strategic footing in at least a decade. Against that backdrop, I'd like to revisit the 3 strategic priorities for 2026 that I introduced last quarter, which are summarized on Slide 5 of today's presentation. First, driving durable revenue growth, including approximately 4% organic tenant billings growth across our global tower portfolio, but adjusting for onetime disrelated impacts and double-digit growth from our data center business. Our fundamental growth drivers are compounding. Mobile data consumption is growing at a rapid pace, supported by increasing smartphone penetration, continued 5G adoption, fixed wireless access and expanding enterprise use cases. In the U.S., industry analysts project that mobile data traffic will double over the next 5 years, requiring a commensurate increase in network capacity. Notably, those projections don't fully capture the potential incremental upside from the transition to 6G or AI-enabled applications. While still early, the engineering principles guiding 6G point toward denser networks, more distributed compute and materially higher throughput requirements, each of which should translate into increased activity across our tower portfolio. At the same time, AI investment is exploding. History suggests that technological revolutions tend to expand well beyond our initial use cases, and we expect that new AI applications are going to place meaningfully greater demands on wireless networks, both in terms of throughput and complexity. All these trends are inherently supportive macro towers. Terrestrial wireless networks are the only scalable solution capable of meeting this demand, and towers remain the most efficient, economical and flexible means of delivering network capacity, advantages that we believe will only become more pronounced over time. These demand dynamics extend across our international footprint as well. In our European markets, mobile data traffic is expected to more than double by the end of the decade, which is expected to drive significant amendment and colocation activity. There are emerging markets, mobile data traffic is expected to nearly triple by the end of the decade, providing a long runway for growth as these less mature markets develop. Over the long term, we continue to expect our international markets, and our emerging markets in particular, to grow faster than the U.S. These same sector tailwinds will translate into accelerating momentum at CoreSite. Demand is scaling rapidly on top of an already strong foundation, with sustained growth in hybrid and multi-cloud deployments and even sharper ramp in AI-driven workloads, including inferencing. Importantly, this quarter marked a clear inflection in interconnection activity, enhancing both the profitability of the platform and the long-term durability of customer relationships. CoreSite continues to stand apart as a uniquely differentiated digital infrastructure platform. Positioning its convergence of network connectivity, cloud on-ramps and enterprise ecosystems, CoreSite drives resilient leasing demand while capturing a high-margin interconnection revenue stream. This powerful combination delivers structurally higher returns and positions the business to outperform traditional single-tenant hyperscale data center models, especially as demand for interconnected AI-enabled infrastructure continues to grow. After more than 4 years leading CoreSite, my conviction on the platform is stronger than ever. The business has meaningfully exceeded our expectations, and we're increasingly enthusiastic about accelerating CoreSite's expansion as a core driver of long-term value within our portfolio. Our second strategic priority is driving operational efficiency. Operational excellence has long been a core strength of American Tower, and we continue to build on that foundation. In the first quarter, we made progress on reducing direct tower costs, particularly in areas such as land experience, maintenance, sourcing and internal technology platforms, and we remain confident in our ability to deliver 200 to 300 basis points of cash, adjusted EBITDA margin expansion in our tower business by 2030. In parallel, we're evaluating how AI can further accelerate efficiency gains across the organization. We believe this opportunity represents meaningful upside in future years. Our third strategic priority is disciplined capital allocation. We remain in a strong financial position with significant flexibility. During the quarter, we continue to prioritize growth capital toward our [indiscernible] return opportunities in our developed tower markets and at CoreSite, while also allocating capital towards share repurchases. Our capital allocation framework remains unchanged. After funding the dividend, we'll continue to evaluate a full range of options, including M&A, opportunistic share repurchases and further deleveraging, guided by a consistent mandate to generate durable cash flow growth and attractive long-term returns on invested capital. In summary, our first quarter results reflect a company that, throughout heightened industry volatility, has emerged stronger, more focused and better positioned for the future. The long-term opportunities ahead are extraordinary, and few companies are as well positioned as American Tower to support and benefit from the next wave of digital infrastructure investment. I'd like to thank our employees around the world for their execution and commitment, and our customers and shareholders for their continued trust. With that, I'll turn the call over to Rod to walk through the financial results and outlook in more detail. Rod? Rodney Smith: Thanks, Steve, and thank you all for joining the call. As Steve mentioned, we are off to a great start to the year, and our strong performance, coupled with FX and straight-line tailwinds, have led us to raise our full year outlook. I'll start by reviewing our first quarter results, and then I will touch on our revised full year outlook. Slide 7 shows a snapshot of our first quarter highlights. Consolidated property revenue grew approximately 3% year-over-year when excluding noncash straight line revenue and FX impacts. Normalized for the impact of onetime DISH churn, property revenue grew approximately 5% on a cash FX-neutral basis. Our growth was primarily driven by organic tenant billings growth of approximately 2% or 4% normalized for the impact of onetime DISH churn and complemented by data center cash revenue growth of approximately 17%. Adjusted EBITDA grew 1% when excluding net straight line and FX impacts. Normalized for the impact of onetime DISH churn, adjusted EBITDA grew approximately 4% on a cash FX-neutral basis. Cash adjusted EBITDA margins declined approximately 110 basis points year-over-year, primarily due to DISH-related churn, SG&A timing and higher fuel prices in Africa. Attributable AFFO per share declined approximately 1% when excluding FX impacts. Normalized for the impact of one-time DISH churn and excluding the impact of refinancing costs, attributable AFFO per share grew approximately 4% on an FX-neutral basis. Moving to Q1 organic growth and data center growth on Slide 8. We delivered consolidated organic tenant billings growth of approximately 2% or approximately 4% when excluding DISH churn. Across our segments, organic growth was in line with the expectations we laid out earlier this year, driven by solid demand across our global portfolio. In the U.S. and Canada, organic growth was approximately 1% and approximately 5% when excluding DISH churn. In Africa and APAC, organic growth was approximately 11%. As a reminder, churn is expected to be back half weighted, resulting in approximately 10% organic growth in the first half of the year and approximately 7% in the second half of the year. In Europe, organic growth was approximately 4%. And in Latin America, organic growth declined approximately 2%, primarily driven by elevated churn in Brazil. As discussed last quarter, the higher churn in 2026 is driven by a combination of delayed churn initially expected in 2025 and accelerated churn initially expected in 2027. Overall, we are encouraged by the prospects of an earlier-than-expected market repair in Brazil and the forthcoming acceleration in organic growth in 2027. Finally, on the right side of the slide, organic growth in towers was complemented by data center property revenue growth of approximately 17% when excluding noncash straight-line revenue. This double-digit growth was driven by robust demand for hybrid and multi-cloud installations, accelerating AI-related use cases and an inflection in interconnection activity. We believe this inflection marks the beginning of a durable long-term trend that reinforces CoreSite's value proposition while compounding its competitive moat over time. Now let's turn to our revised full year outlook. We are raising guidance across all of our key consolidated financial metrics, primarily due to incremental FX and straight line tailwinds. Starting with property revenue outlook on Slide 9. We are raising our outlook by approximately $145 million at the midpoint, representing a 1% increase to our prior outlook. Our revised outlook now implies approximately 3% year-over-year growth when excluding noncash straight line revenue and FX impacts. Normalized for the impact of onetime DISH-related churn, our outlook implies approximately 5% growth on a cash FX-neutral basis. The entries to outlook was driven by approximately $110 million of FX tailwinds and approximately $35 million of accelerated noncash straight line revenue in Latin America related to Oi. We are reiterating organic growth assumptions across all regions and continue to expect organic tenant billings growth of approximately 1% or approximately 4% when excluding DISH churn and data center growth of approximately 13% year-over-year. Moving to adjusted EBITDA on Slide 10. We are raising our adjusted EBITDA outlook by approximately $105 million at the midpoint, representing a 1% increase to our prior outlook. Our revised outlook now implies approximately 2% growth year-over-year, excluding noncash net straight line and FX impacts. Normalized for the onetime impact of DISH-related churn, our outlook for adjusted EBITDA implies approximately 5% growth on a cash FX-neutral basis. Turning to AFFO on Slide 11. We are raising our attributable AFFO outlook by $0.12 per share, representing a 1% increase to our prior outlook. Our revised outlook now implies growth of approximately 2% year-over-year. Normalized for the impact of onetime DISH-related churn and excluding the impact of refinancing costs, our outlook for attributable AFFO per share growth implies approximately 5% growth on an FX-neutral basis. We expect attributable AFFO per share growth on an FX-neutral basis to be faster in the back half of the year than the front half, primarily due to the timing of maintenance capital and cash taxes compared to the prior year periods. As a reminder, we continue to expect our services business growth and debt refinancings to each represent an approximately 100 basis point headwind to attributable AFFO per share growth this year. We continue to believe that we are well positioned to deliver our goal of industry-leading attributable AFFO per share growth and compelling total shareholder returns over the long term. Turning to capital allocation and our balance sheet on Slide 12, we remain disciplined stewards of capital. Our investment-grade balance sheet is well positioned for a variety of macroeconomic scenarios. As Steve mentioned, over the past few years, we have taken deliberate action to reduce risk in our business. As a result, today, we have the lowest leverage and the highest credit rating across our peer group, positioning us with exceptional financial flexibility going forward. Our capital allocation framework remains focused on maintaining financial flexibility, protecting our investment-grade credit profile and investing prudently to enhance long-term shareholder value. In 2026, our growth capital plan remains consistent with our prior outlook. We continue to expect to spend approximately 85% of our discretionary capital within our developed markets platforms, including over $700 million in success-based investments in our data center portfolio to replenish elevated levels of capacity, purchases of land beneath our tower sites and continued acceleration in European new builds, with over 700 new sites planned. Additionally, we repurchased approximately $184 million of American Tower stock during the first quarter plus an additional $19 million through April 21, bringing our total share repurchases, since we started buying back stock in Q4, to over $565 million. Turning to Slide 13 and in closing, we are off to a strong start in 2026, reflecting the fundamental strength and durability of our business model. Continued growth in mobile data consumption, together with strong demand for our interconnection-rich data center platform, supports a long and attractive runway of growth for American Tower. With our best-in-class portfolio of towers and data centers, combined with a strong balance sheet, we are well positioned to capture these opportunities and deliver on our objective of industry-leading attributable AFFO per share growth. And with that, operator, we can open the line for questions. Operator: [Operator Instructions] and wait for your name to be announced. Our first question comes from the line of Rick Prentiss of Raymond James & Associates. Ric Prentiss: A couple of questions. First, the Spectrum deal between EchoStar DISH and AT&T seems to be going very slowly. It feels to us like there's some issues in Washington. We're hearing that maybe one of the request is that escrow be set up with all the litigation and negotiation between the tower industry and EchoStar DISH. Can you update us on -- is that maybe one of the paths you're taking? And any other updates on what could be interesting process. Steven Vondran: Yes, Rick, this is Steve. We really can't comment on ongoing litigation or anything that's kind of going on in that space today. So we don't really have any updates for you guys on DISH. I'll just reiterate, we believe our contract is enforceable. We're continuing to defend it and core -- the litigation public. And you guys have access to that docket to see what's happening on that front. And we've completely derisked our earnings and our guidance by taking DISH out of our numbers. So anything that happened in that space is incremental upside to the guidance we've put out there. So at this time, there's really not much more we can say about that. Ric Prentiss: Okay. We'll keep monitoring and checking our Washington sources as well. Second question, Rod, you mentioned 700 new builds in Europe, 85% of your CapEx has been developed areas. What's -- because obviously, 9%, I think, inorganic growth in Europe. Walk us through what's happening there in Europe? What kind of -- what's the model there? There's been concern in the U.S. that when we see new builds, some of them have been uneconomic that others have done, not you guys. But walk us through what the opportunity is in Europe, what the contracts kind of look like and what the return profile might be there? Rodney Smith: Yes. I think, Rick, you've heard us say in the past that the European market is outperforming the original business case that we underwrote the Telefonica deal with. So we've been very pleased with the results. We've had upper single-digit growth rates across the region for a couple of years. That has moderated down into the mid-single-digit growth rate, but it's still a very compelling growth rate for such a high-quality set of economies. With the Telefonica deal, you may recall, we also announced at that time that we had a contract to build 3,000 sites of Telefonica over the next 10 years, starting at the beginning of that acquisition, that contract. So we've been executing on that. We've added a few additional build-to-suits with other carriers across the region. So building something in that market, we think, is a pretty compelling thing to do. And of course, the return profile is -- we expect it to be above our weighted average cost of capital in that region by a couple of hundred basis points over time. But the secular trends in Europe are very similar to the U.S., which is technology evolution, rolling out 5G networks, eventually, they'll push into 6G networks. There are new applications coming just like there will be in the U.S. that will drive mobile data consumption growth across the region. So again, we are in some of the greatest economies, not only in Europe but also in the world there with very compelling assets supporting some of the top-tier customers, including Telefonica, in a big way. So continuing to build sites and reinvesting some of the cash flow that we derive out of the Europe market back into the market as build-to-suits, we think is a really compelling thing to do to drive total shareholder return. So the market is solid, like any region across the world that we're in. We will continue to watch the outlook and the growth rates and the political trends, the regulatory trends, the market backdrop, we'll continue to watch that and be prudent every step of the way as we go forward. But at the moment, the market is performing very well and above our original expectations. So we're happy with it. Steven Vondran: Rick, I would just add that we are also winning some things that are outside the contract on very good terms because of our operational excellence. In Europe, a lot of the sites being built are difficult to build. And when they're difficult to build, the carriers value a good operator who can bring things online quickly and get through that kind of regulatory scenario. So we're winning business at healthy returns for us because of our operational excellence there. And again, in the U.S., as you noted, we haven't been building actively. A lot of those sites have been built in areas that aren't as hard to build. And we think that if we get back to where we're building things in hard-to-build areas, we've got advantage back in the U.S. as well. So we're excited about the prospect of building more sites everywhere in our developed markets. Ric Prentiss: And the return hurdles would be a couple of hundred basis points? Or what were you saying about it because obviously, we've seen some others that have stressed the thoughts of what you should build or not build. Rodney Smith: I mean I would say, Rick, from a return hurdle perspective, I don't want to get into the details here, but certainly, being above our weighted average cost of capital by a couple of hundred basis points over a reasonable amount of time, and I'm not going to get into the details in terms of the terms, that really is what we would expect based on just the fundamentals of the market and the investment that we're making. But with that said, longer term, can it be well above that? Absolutely very similar to what we see in the U.S., where we will build an asset -- we don't build a lot at the moment. We have in the past. You may start out at or even slightly below your weighted average cost of capital. In the near term, you get up to that weighted average cost of capital and get above that, which might be in the upper single-digit growth rate. But over time, with compounding results on the escalator and the new business you can get up into the teens in the U.S., we would expect certainly that direction for Europe new builds over the long term. Steven Vondran: Yes. Just to be clear, Rick, I didn't build stuff in bad economics previously. We're not going to start doing that. We're going to build things that make sense over time. Ric Prentiss: Great. Makes sense. We like that third pillar of capital allocation discipline. Operator: Our next question comes from the line of Michael Rollins of Citi. Michael Rollins: Steve, you mentioned that M&A is a possible option for capital allocation. I'm curious if you could describe how you're looking at those opportunities today, whether that's similarly or differently than the way you may have looked at this in the past. And if you could specifically comment on the possibilities of AMT participating in either a public to public or a public to private opportunities in the United States. And then, Rod, if I could just throw in one other question. So on Slide 11, that shows the normalized AFFO per share growth plus some of the specific factors that are weighing on 2026. How should this inform investors after 2026, what the right range of annual AFFO per share expectation should be? Steven Vondran: Sure, Mike. So I'll start with your question on M&A. We have a very disciplined capital allocation formula that we followed for a long time here, and we're not changing the way we think about that. We look at everything through the lens of how do we create the best long-term shareholder value at the best risk-adjusted rates of return that we can get. And so we do some pretty detailed financial modelings on everything that we look at in that space. And as you can imagine, we have an M&A team, they like to buy stuff. So we look at everything. There's not a process out there that we haven't had our toes dip in the water to see what that looks like. And in the past few years, we haven't found compelling opportunities to do that. We're hopeful as we go forward that there are things that would make sense. But for any M&A scenario, you've got to have a willing counterparty, a constructive regulatory environment and the economics have to make sense. And so we'll continue to evaluate all the opportunities in front of us. And that's whether it's in the U.S., in another developed market, in the data center space. Whatever comes available, we'll look at those M&A opportunities. And if we think that we can create shareholder value over time with those, we'll participate. But we're not going to be reactive to specific market trends that are out there. We're not -- we have enough scale in our business today. There's no sort of strategic imperative to overpay for anything. So we're not going to do anything that doesn't make sense economically. But we are hopeful that we're seeing a more active environment and we're hopeful that we can participate in that in some manner, but it may not work out, and it may. We'll just have to see what fits in with our disciplined capital allocation and what's going to create the best long-term shareholder value for you guys. Rodney Smith: Michael, thanks for joining the call. On your AFFO question, on Slide 11, we're showing a revised outlook that's about $10.99. That reflects a 2% reported growth rate year-over-year. Embedded within that is tailwinds of about 200 basis points from FX. It also has about 100 basis points of headwind for net interest, and within that includes 400 basis points of headwind due to the DISH churn. So there's a few pieces in there, a few moving pieces, but I think most of those notes are highlighted right on the slide there. So I would encourage everyone to kind of piece that together. This outlook for 2026 is in line with our longer-term view for AFFO per share growth, which is up in the mid-single digits to better than mid-single digits before you account for the impacts of FX and interest rates, whether those are tailwinds or headwinds, quite frankly. So we will get through the event-driven churn from DISH. And again, that's 400 basis points of churn. So that 200 basis points would go up to about 6% growth just adjusted for the impacts of churn. You take off the 200 basis points of tailwind from FX, that drops you back down to the 4% range. You remove the 1% headwind that we're picking up from interest rates and you get to 5%. So we're right in the -- maybe the lower end of that longer-term range, which is mid-single digits to upper single digit AFFO and AFFO per share growth rate over time. And we really do feel as though we've moved through a number of event-driven headwinds not only in the industry for us specifically, and we are moving into a time where we will benefit from the secular technology trends within the sector, that continuation of mobile data capital investment from the carriers, which we still see very stable, strong in that $30 billion to $35 billion range. The carriers continue to roll out their 5G networks kind of at the tail end of that. They'll move into filling in, densifying, increasing capacity across the network. That will all be good for us. New applications will come down the pike. And some will be driven by AI. And those should all fuel that secular trend of growth, which should be very constructive in terms of supporting us and our business to that mid- to upper single-digit AFFO per share growth. And in addition to all of that, Steve and I and the entire management team continue to stay very focused on cost management, direct costs, SG&A, smart capital allocation, very strong balance sheet management to make sure that all those pieces as well support and contribute to achieving our ambition of mid- to upper single-digit AFFO and AFFO per share growth. Operator: Our next question comes from the line of Eric Luebchow of Wells Fargo. Eric Luebchow: Great. Appreciate it. I just wanted to touch on the CoreSite business. So one of your peers was talking about doing some early exploration on the mobile edge. And given your ownership of CoreSite and this theme that you've been looking at for several years, curious if there's any update you could provide on whether you think there's a real market that could develop there in the next couple of years? And then separately on CoreSite, just curious, given it's a relatively small part of the business today, and data center multiples seem to be very high, demand seems to be off the charts. So do you think longer term, CoreSite makes sense within the American Tower family? Or could there be something strategic that you would do with it to potentially maximize value? Steven Vondran: Yes, thanks for the question. We're really encouraged to hear other people talking about the Edge. It's something that we believe partially in for a period of time now. And we do continue to have projects ongoing. We launched our data center in Raleigh as a little bit of a playground for people to come in and experiment with Edge. We are looking at incremental opportunities in that space to continue to work with ecosystem partners to develop the Edge. And what I'm most excited about is our wireless carriers are now talking about the Edge. They're engaging in discussions with chip makers and some of the cloud companies. So Edge is absolutely something that we think is going to continue to grow. We think it's going to be a material opportunity for us in the future. Timing, I'm not going to predict timing again because I was a little bit off my first time predicting it. But we do see a lot of momentum taking shape in that space. So we're very excited about the opportunities. And we think that we're positioned better than anyone else to provide the basic infrastructure that you need to support Edge in various forms that it may evolve, whether it's AI RAN, whether it's smaller regional data centers that are supporting more inferencing, which is what we're hearing is one of the use cases. We're in a great place to do that when you combine that interconnection ecosystem at CoreSite with our distributed land footprint and our abilities to service massively distributed real estate. So we're excited about the Edge opportunity. We continue to work through it. I don't have a projection for you yet because we're still in the early stages of how this is going to develop. But the momentum is there and all the people that are talking about it really reinforces our original thesis on that. And that's really why CoreSite is a strategically important asset for us. We do think it's a big part of our future, and we think that we're going to realize that synergy between towers and data centers. And in the meantime, we're going to continue to grow that company. It's performing well beyond our expectations when we underwrote that acquisition. And the tailwinds that are underpinning the growth in CoreSite are durable. And AI is one them, but it's not the only tailwind there. This highly interconnected ecosystem that we have there is different from most of the "data center" companies out there. I don't even like calling it a data center, to be honest, because it's really an interconnection hub. People come to us to connect to other people. They put their computer in a CoreSite facility because we give them access to other enterprises, the cloud on-ramps, and now to inferencing instances. So that kind of -- that's a nerve center for this rapidly developing kind of digital ecosystem out there, and it's going to continue to grow. So we're very excited about that as a part of our company. I do think it has a long-term place in our portfolio. And we think that the Edge will kind of finalize the synergies between the 2. But in the meantime, we're going to focus on growing our tower business, which has great tailwinds, as Rod mentioned, and we're going to focus on growing CoreSite and being that interconnection provider of choice as this ecosystem continues to develop. Operator: Our next question comes from the line of Jim Schneider of Goldman Sachs. James Schneider: In light of what you just talked about in terms of the -- some of the attractive growth prospects for emerging markets and overseas developed markets and maybe given some of the recent headwinds you've seen in terms of churn in the U.S., can you maybe kind of give us your latest thoughts about the relative attractiveness of M&A prospects across Europe, U.S. and emerging markets? Just wanted -- an impact, you talked about the U.S. being probably your preference in terms of an any potential skill acquisition. I'm wondering if you still see those pluses and minuses in the same way as you did before? Steven Vondran: Yes. Thanks, Jim. The U.S. continues to be our flagship market, and we love the opportunity to add scale here, again, subject to the right terms and conditions and economics and things like that. So yes, the U.S. will probably always be our primary focus, if there are opportunities there. There haven't been that many recently that met all of our criteria. Europe is a market that we continue to look at. And we've talked in the past about how patient we were to get into that market because of the terms and conditions that were required by us to show long-term growth for our shareholders. We're still not seeing a ton of opportunities there for incremental M&A that meet those criteria. There are things that are happening in Europe, but they're not things that we find long-term attractive at this point. So we'll keep looking at it. Like I said before, we have M&A people, they're looking at everything. And if we found something there, that would be on the table. In the emerging markets, and I just want to reiterate this. While those markets are a key component of our portfolio and they're going to give us outsized growth over time, the strategic decision that we made 2 years ago has not changed. And that is, we think they should be a smaller piece of our overall portfolio than they've been in the past, and we will continue to allocate capital toward developed markets away from those markets, not because we don't believe the growth. We do believe in the growth. They are doing well. They are incremental to our U.S. growth, and we think that's their function in the portfolio. But if they become too large of a part of the portfolio when there are macroeconomic shocks, it just puts a little bit too much volatility into the earnings. So we're not going to change our strategic direction just because some of the short-term dynamics have changed. We still think the best opportunity to create long-term shareholder value is to continue to invest in the U.S. and other developed markets. And we'll continue to see the secular tailwinds driving growth in that business for a long period of time. And then the emerging markets are a complement to that. And I'm so proud of our teams. They've managed through a lot of adversity in there. They're the best operators on both of the continents that we're operating in there. They're getting some great sales results in Africa. The Latin America team has worked through this kind of reset repair, and they're on a great trajectory to get back to growth for us. So I'm very excited about what the teams have been able to do there, but we're not going to change our strategic direction in terms of how we're investing. Operator: Our next question comes from the line of Nick Del Deo of MoffettNathanson. Nicholas Del Deo: I guess first, to build on the domestic new build activity commentary you provided in response to Rick's question earlier, it appears there is this comment that the carriers might be more interested in working with our large public tower company partners to undertake more new construction opportunities. I was wondering if you've had any similar discussions and if you think they might amount to anything? And then second, Steve, you talked about the importance of interconnection a moment ago. Cloud on-ramps have always been a very important part of that, strengthen those ecosystems. Can you talk about any steps you might be taking to proactively land neo cloud on-ramps or other deployments like that, that may be magnetic for AI workloads over the coming years? Steven Vondran: Sure. So when it comes to the kind of the build-to-suit market in the U.S., we're always talking to our customers about that. We have been for years even when the competitive environment was tough. It's a core competency that we've always had and we used to be one of the largest builders of towers in the U.S. So we think that there's an opportunity there as people become more rational on the economics. There's nothing to announce at this point. I will tell you that we're -- my sales team has always been there pitching those, and we're hopeful something comes through. And if and when it does, we'll let you guys know. But until there's -- until a deal is done, it's not done. So I wouldn't prematurely talk about that. When it comes to the interconnection on ramps, one of the things that was a core strength in CoreSite before we bought them, and we think it's gotten even more advanced since we've been working with them, is the ability to curate an ecosystem. And it's not just about the cloud on ramps. It's about making sure that you balance networks, enterprises and those cloud providers. And now you've got this kind of fourth category that you mentioned, which is inferencing hubs, and you've got other ecosystem players like neo cloud that are providing kind of services into that. And so what the team is very skilled at doing and they continue to do is making sure that we're creating an ecosystem where everybody wants to be there. Our problem is not demand. All of those players want to come into our facilities. And the reason that we attract cloud on ramps, the reason we attract inferencing is because we're bringing their customers to them. And we're providing space for their customers to house their data and interconnect natively to those cloud on ramps and those inferencing hubs. And so for us, it's really about keeping that balance and not getting too excited about a trend and not just trying to sell out a building a second that goes online to the highest bidder. It's about curating an ecosystem that gives us this long-term competitive moat around our business. And because of that, the vast majority of our revenue is with providers who are interconnected to 5 or more other people. Now that may have hundreds of interconnections, but 5 or more other people, that makes that whole ecosystem very sticky. It means that if there are downturns and -- in that kind of sector over time, that will be much more inflated than anybody else is for that because of the way we've carried the ecosystem. And so the team is very focused on continuing to build that. The inferencing hubs and the neo clouds are absolutely part of that ecosystem, and they're knocking on our doors. They want to be there. And our team is able to be selective and curate that right customer mix. And I'm confident that we will continue to be a leading interconnection provider and that we will be the provider of choice for all of those use cases over time. Rodney Smith: And Nick, I may add just a quick comment on our services business to complement Steve's answer on the U.S. new business. And just to really remind folks that our services business has been very active in the last several years. We had record-setting levels of service revenue last year at the $340 million range. Over the last several years, we've expanded our end-to-end solutions through acquisitions, owning, permitting and even construction management. We've got over 40 -- almost 43,000 sites across the -- across the U.S. with a very distributed services business and hundreds of people that support that business. And this year, we're going to have our third highest revenue year ever, so that business is still very robust. And there's a lot of capability there that directly translate into our ability to effectively and efficiently do large-scale bills for carriers if and when we get that opportunity. So we're really well positioned from an operational standpoint to move quickly on any kind of an opportunity like that. Steven Vondran: A good point, Rod. I hope our customers are listening to that. Rodney Smith: Yes. Operator: Our next question comes from the line of Madison Rezaei of Bernstein. Madison Rezaei: I just wanted to build on the prior M&A question here with a slightly different angle. Obviously not going to ask you to comment on any of the specifics, but how do you think about private and/or sort of consolidated portfolios in the U.S. shifting any competitive dynamics, if at all? Steven Vondran: I don't think it actually changes the competitive dynamic. There have been a number of privately held scaled tower portfolios in the U.S. for years. And so we haven't seen that affect the competitive dynamic at all in the tower space. It doesn't change the way we operate, hasn't changed our results or our ability to compete. So we don't think that having more private tower companies affects that. I think what it does reflect is that there's a disconnect, and there has been for years, and the multiples that private players will value towers out versus the public markets. And we really think the reason that they value them at a higher multiple and have for a period of time is they're taking a long-term view. They see past some of the short-term noise that's out there. And they see these long-term demand drivers that encourage us about our business. They see that mobile data growth is going to double over the next 5 years in the U.S., and that's going to require more network investment, which translates into new business for towers. They realize that AI is an incremental use case that's not even factored into those projections that could be a catalyst for even more growth and could be pretty substantial growth, depending on how that evolves over time. They're looking at the fact that 6G is just around the corner and that the 6G frequencies are likely to be in the 6 to 7 gigahertz range, which means much more [ DISH ] networks are going to be required. So when I look at kind of what's swirling around out there in the ether, about tower companies in our private world, it's encouraging to me to see that people are seeing the true value of towers and the fact that this is a growing long-term business that will be the backbone of digital infrastructure going forward. And so when I hear the rumors and see what's out there, to me, that just shows that the business model is still the best business model out there. It's still a place to create a lot of long-term value for our shareholders. It's the right place for us to be. Operator: Our next question comes from the line of Cameron McVeigh of Morgan Stanley. Cameron McVeigh: I just wanted to actually follow up on CoreSite. And I'm curious how you're thinking about expanding capacity at CoreSite versus reinvesting in retrofitting some of the current sites. And has your approach to expanding CoreSite capacity changed at all given some of the current supply-demand imbalance dynamics we hear about with regard to power and tight supply chains? Steven Vondran: Sure. A few years ago, we had to start thinking a lot longer term about both land acquisition, power acquisition and actually even ordering the components that go into it. We had some supply chain disruption as a result of COVID. And because of that, the team started taking a longer-term view. And that's put us in a really good position for where we are today. And we've had more construction over the past couple of years than at any time in CoreSite history. Because of the record sales we've had in the past few years, we've also really ramped up our capabilities to build more. So yes, we're being more aggressive. We're out buying more land, and we are looking at some new market entries. Nothing that we want to announce yet because it's premature to do that until you have a good idea about when you're going to break ground on it. But we think there are opportunities there. We've also looked at retrofitting some buildings. We have retrofitted some computer rooms. Sometimes that makes sense and sometimes it doesn't. But with higher density applications coming in, if you have the available power there, it can make sense to retrofit a computer room and take up the density levels in it. So that is something that we've looked at. We have done a little bit of that in the past. And we are designing our new facilities with more flexibility in the future to go higher density with multiple different cooling options in it as well. So we have altered the way that we build new sites and the way that we're looking for it. We've also looked at some existing buildings that have available power. And so you've seen us buy a couple of small ones in that space, and that's something that could be a strategy for us going forward to accelerate some of the development that we'd like to do. But we feel very good about the pipeline we have just kind of organically to build within our existing footprint, and we think there's some opportunities [indiscernible] the market. So overall, again, that business is performing so well. It's some of the highest returns that we can get on invested capital today, and it's continuing to grow rapidly. So we're excited about it, and we're going to continue to invest in it. Rodney Smith: Cameron, I would just add to Steve's comments here as he talks about our investment in land and additional power across our existing campuses, just to put a little bit finer detail on that if the -- last year, we had about 287, 280 megawatts of development held for development, and we've increased that by 200 megawatts. So that's where we're negotiating with power companies, securing that power in certain places, buying land and banking that land for additional development where we can expand campuses. So we are really well positioned to continue to lean into the demand across our footprint. Operator: Our next question comes from the line of Brendan Lynch of Barclays. Brendan Lynch: Rod, I appreciate all the color on the long-term AFFO per share growth outlook. You also mentioned an earlier return to normal in Brazil. Can you give us some color on what that actually looks like in terms of potential coloc and amendment growth and cancellations? Rodney Smith: Yes, absolutely. So I think everyone is familiar with where we are in Latin America. We are experiencing a higher level of churn this year. It's around 8% contribution to our organic tenant billings growth. That -- I'll highlight a couple of things, and I think I said this in my prepared remarks, but probably worth highlighting. That includes delaying some churn from '25 into '26 and also accelerating some churn, particularly on the oil side from '27 into '26. So we do think that the market there is peaking in terms of the churn that we would expect. We also have in -- a couple of hundred basis points of new business across the region. And that's a function of consolidation needing some of the markets that we're in across Latin America have been fragmented, including Brazil in the past, which we've seen the consolidation that we've worked through there. So with all that kind of put together, you end up with negative organic tenant billings growth for 2026. But because we're accelerating some of the churn from '27 into '26 and we've gotten through some of this market repair and consolidation across the region. And most importantly, in Brazil itself, we do expect to get back to accelerated organic tenant billings growth into '27. So moving from a negative OTBG into positive territory in the lower single digit to '27 and returning to kind of the expectation of normalized growth by the time we get out to '28 and beyond. But we do think that it is the beginning seeing much better results across Latin America as there are a rational number of carriers, 3 solid well-capitalized carriers in Brazil, and going forward, kind of the absence of this consolidation churn really sets us up well to get back to normal organic tenant billings growth and a normal new business contribution kind of across that region to organic tenant billings growth. Steven Vondran: Yes. I would just highlight that the 3 carriers in Brazil have all talked about investing more in their networks. We're absolutely seeing an increase in demand across the ecosystem there. So we're seeing the acceleration in new business applications in Brazil. So we're seeing that market repair take place, and we're excited about the prospect of Latin America being accretive to the U.S. growth rates over time, and we believe that we're on track to see that start happening, as Rod said, '28 and beyond. Rodney Smith: Yes. And maybe I would just highlight right there. I mean, Steve talked about the Latin America being accretive to our overall AFFO per share growth rates. I'll just take a step back and remind everyone of our -- the bits and pieces of our longer-term AFFO per share growth rate expectation, which is solid mid-single-digit growth in the U.S. market, probably better than that across the Europe market. That would be driven by a mid-single-digit organic tenant billings growth in the U.S., probably slightly higher in Europe, complemented by good cost controls in managing the expenses down the line. And then CoreSite double-digit growth, that's accretive to those growth rates. You look at the emerging markets, Africa is growing double digits. That's very accretive to the overall growth rates. Returning Latin America to normalized growth will also be accretive there. And that's how you get down to an AFFO and AFFO per share growth rate that will be in the mid-single digits or upper single digits. And of course, complemented by a strong balance buys, very smart capital allocation, whether it is driving the dividend, which I think you all know, we've got 5% growth for Q1 on the dividend. We expect that growth rate to be in line on average with our AFFO per share growth rate. So again, a mid-single-digit growth rate on the dividend, investing $1.5 billion to $2 billion in CapEx. And then looking at accretive M&A from time to time, where we see good opportunities and also balancing paying down debt, reducing our overall leverage further than the 4.9x that we ended this last quarter and also buying back shares. And based on my prepared remarks, I think you all know we bought back about $184 million worth of shares in Q1. That is in addition to what we did in Q4, which you put the 2 together, you're up well over $560 million devoted towards share buybacks. And that helps support that mid- to upper mid-single-digit growth rate on AFFO and AFFO per share going forward. Brendan Lynch: Great. Very helpful. Maybe just one other kind of quick one on the data centers. There are some press reports out there about DC construction being delayed in North Carolina. Seems there's a kind of growing wave of [ nimbyism ] across the country. Can you just talk about how you're kind of handling some of those restrictions? Steven Vondran: Yes. I mean unfortunately, we are seeing an increase in that. And for me, it's very reminiscent of my early days in tower. And one of the things that I did as a [ baby ] lawyer was permitting towers. And so it's a very similar phenomenon to that, and we're attacking it the same way. This is one of those synergies that may not be as apparent between the 2 companies, but we're using our government affairs team from American Tower our and our zoning and permitting team from American Tower to help the CoreSite team deal with that and also to help the data center coalition who's also attacking that from an industry perspective. And so we think we have a long track record of being able to work with communities and finding ways to address those concerns. And we're very confident that our team is able to tackle that as well as anybody in the industry can. But it is certainly something that's taking a little bit of airtime in the news and on social media, and it's something we're very aware of. At this point, it hasn't been an issue for us where we've had the scrap any projects or having significant delays. And so we believe we can navigate through that, but we're going to continue to work with the industry partners and our internal teams to make sure that it doesn't get worse. Operator: Our next question comes from the line of David Barden of New Street Research. David Barden: I guess I'll just ask it, right? What does it mean if SBA gets taken private? And how important is the multiple that they get taken private at? And if it's low, does that mean maybe you stop buying back stock; if it's high, do you start buying back more aggressively? Or do you start thinking about maybe taking parts of your portfolio and taking those private or selling them to private entities? I just -- I think it would be great to have you guys as the biggest tower company in the United States kind of just weigh in on what that means for everybody. And then I guess the second is, last week, SpaceX had a 3-day kind of diligence meeting, I guess the buy-side guys, sell-side guys are there. We're not investment banks, so we don't get involved in that. But some people are walking away from that meeting and the road show that's beginning, and thinking that one of the growth vectors to support a multitrillion dollar valuation is disrupting the terrestrial wireless market. And so give us your perspectives on both of those would be super helpful. Steven Vondran: Sure. On the SBA question, we're not going to comment on the rumors that are out there and any of the valuations that may be rumored to be out there. That's going to be what it's going to be. And we don't run our business based on what other people are doing with their business. When we think about our business and how we create the most long-term shareholder value, we're always looking at portfolio optimization. And the dislocation between public and private multiples is not something that's new. It's something that's been out there before. And you've seen us take decisive action when we think that we can create more value by selling something than by holding it. And we're always evaluating all the different opportunities in the portfolio, and we'll continue to do that. And like I said, we're going to figure out what creates the most long-term shareholder value. We believe that we have a lot of secular tailwinds driving growth in this industry. We believe that our portfolio is going to continue to grow and that we can deliver that mid- to high single-digit AFFO per share growth with our combined portfolio of our -- kind of the whole company here over time, and we believe that, that's going to drive a lot of shareholder value beyond where we are today. And so that's how we look at the industry piece of it. And in terms of our share buyback, we're doing our own calculations on what we think is going to drive value over time on that. And it's not really going to be influenced that much by what other people are doing in this space. We're going to continue to make our decisions based on our business, our growth prospects and what we think the right thing to do is. So like everybody else, we'll watch the market and see what happens, but we're going to continue to kind of the independent thinkers in terms of how we create value over time. In terms of the satellite piece of it -- and look, we've answered this question a bunch of times and I'll just repeat, we have a front row seat to this space. We have a Board seat with [ ASP ]. That's why we made the investment that we made in ASP. Satellites are complementary to terrestrial networks. We said it, other tower companies have said it, the carriers have said it, most of the satellite companies themselves have said it. We don't see anything that changes that. Now in the very ultra rural areas, it may be a better solution. But we don't have towers. We have a tiny, tiny number of towers in those areas. And quite frankly, they're not the top-performing towers in the portfolio. So if it does disintermediate a handful of towers, you're not even going to notice it. So from our business perspective, I don't lose a second fleet worried about satellites. I'm actually encouraged by satellite. It's going to provide ubiquitous coverage. It will enable some of the capabilities that they're talking about for 6G, which is going to continue to give new use cases to our customers, things that you can't do when you have a network that has holes in it. So I think the satellite story is going to play out over time. It's going to be a big positive for our carrier customers. That means it's going to be a big positive for us. And I think the short-term noise that people are hearing about this is just displaced. Operator: This concludes the question-and-answer session. I'd like to thank everyone for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to South Plains Financial, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Steve Crockett, Chief Financial Officer and Treasurer of South Plains Financial. Please go ahead. Steven Crockett: Thank you, operator, and good afternoon, everyone. We appreciate you joining our earnings conference call. The related earnings press release and earnings slide deck presentation issued today are available on the SEC's website as well as the News and Events section of our website, spfi.bank. Please refer to Slide 2 of the presentation for our safe harbor statements regarding forward-looking statements. All comments expressed or implied made during today's call are made only as of today's date and are subject to the safe harbor statements in the presentation and earnings release. In addition, please refer to Slide 2 of the presentation for our disclaimer regarding the use of non-GAAP financial measures. A reconciliation of these measures to the most comparable GAAP financial measures can be found in our presentation and earnings release. I'm joined here today by Curtis Griffith, our Chairman and CEO; Cory Newsom, our President; and Brent Bates, City Bank's Chief Credit Officer. Curtis, let me hand it over to you. Curtis Griffith: Thank you, Steve, and good afternoon. We delivered solid first quarter results, highlighted by strong profitability, continued improvement in credit quality and disciplined balance sheet management, as can be seen on Slide 4. While the market backdrop has been uncertain, we have continued to execute our strategy designed to enhance the earning power of City Bank. Our strategy remains focused on expanding our lending team across our high-growth Texas markets while also pursuing accretive M&A. We have a meaningful organic growth opportunity as we expand our lending team across our key Texas markets. We continue to selectively add experienced lenders who fit our culture and can bring long-term customer relationships to the Bank. While we remain cautious and conservative given the uncertain macroeconomic backdrop, we are excited by the opportunities that we see to further expand our team and drive sustainable organic loan growth over time. Turning to our M&A strategy and the Bank of Houston. We were pleased to complete our merger on April 1, and officially welcome the BOH team to City Bank. We've spent a significant amount of time on the integration since announcing the merger in December to ensure that our new employees are welcomed into the Bank and positioned for success. We continue to be impressed with the BOH team, the dedication they have to delivering strong results in the Houston market and the similarities in our cultures. From an operational perspective, things are going according to plan. We expect the core conversion to be completed in early May and continue to see opportunities to reduce BOH's cost of funds over time. In fact, steps have already been taken to optimize the balance sheet as there has been a reduction in broker deposits and Federal Home Loan Bank borrowings starting in Q1. Overall, we believe BOH is a good strategic fit with low execution risk, and we continue to expect the merger to be 11% accretive to our earnings in 2027 with a tangible book value earn-back of less than 3 years, which remains compelling. Now that the BOH acquisition is completed, we will continue to explore additional M&A opportunities. However, our approach has not changed. We remain highly disciplined and patient. And to date, we have not identified another transaction that meets our strict criteria. As we've said many times in the past, we're not interested in growth for growth's sake. Any potential partner must align with our culture, credit discipline and community banking focus while also making strategic and financial sense for our shareholders. Turning to the market backdrop. We remain cautious over the near term as inflationary pressures appear to be resurfacing, driven in part by elevated energy prices related to the ongoing conflict in the Middle East. These dynamics may limit the Federal Reserve's ability to further reduce interest rates and could act as a headwind to economic activity and loan growth as we move through the year. This could also limit our ability to further reduce our cost of funds. While the near-term outlook is uncertain, we continue to be positive on the longer-term potential of the Texas economy, especially compared to the broader United States. Corporations continue to move their operations and headquarters to Texas, attracted by the state's pro-business environment, favorable demographics and ongoing population growth, which provides a constructive backdrop for economic growth and relationship-based banking. To conclude, we believe that we're in a strong capital position that will allow us to execute our growth strategy and benefit from the many opportunities that we have in front of us. Given our capital position, we remain focused on both growing City Bank while also returning a steady stream of income to our shareholders through our quarterly dividend and keeping a share buyback program in place. To that end, our Board of Directors authorized a $0.17 per share quarterly dividend on April 16, which will be our 28th consecutive dividend. Now let me turn the call over to Cory. Cory Newsom: Thanks, Curtis, and hello, everyone. Starting on Slide 5, our loans held for investment decreased by $41 million to $3.1 billion in the first quarter as compared to the linked quarter. The decrease was primarily due to the expected early payoff of a $30 million multifamily loan, which we discussed on our fourth quarter call, and $24 million of seasonal net paydowns of agricultural loans. Importantly, we experienced strong unfunded loan commitment growth during the quarter, driven in part by our new hires, which was notable. These commitments are largely in construction and will fund through the year. Our yield on loans was 6.83% in the first quarter as compared to 6.79% in the linked quarter. Excluding problem loan interest and fee recoveries noted on Slide 5, our yield on loans has held relatively steady over the last 4 quarters. While we have not experienced a material impact on our loan yields from the FOMC's most recent 25 basis point reductions in their target interest rate in September and December, we do expect our loan yields to moderate in the quarters ahead. As Steve will touch on, our goal is to maintain our margin as we grow our balance sheet in order to drive earnings growth and returns. Turning to Slide 7. Our loans held for investment in our major metropolitan markets of Dallas, Houston and El Paso declined by $23 million to $1 billion as compared to the linked quarter, largely due to the expected early payoff of the multifamily loan that I just mentioned. Looking ahead, we also expect another early payoff of approximately $34 million multifamily loan as some large payoffs will continue to be a headwind to loan growth. Importantly, our loan pipeline remains healthy, and we remain confident in delivering our loan growth guidance for the full year, albeit towards the lower end of our mid- to high single-digit range. We will also continue to execute our organic growth strategy as we look for lenders who fit our culture and can bring deep local market knowledge and long-term customer relationships to the Bank. We continue to benefit from the consolidation that the Texas banking industry continues to undergo as large regional and out-of-state institutions continue to acquire Texas-based franchises. Additionally, South Plains remain committed to being a Texas-focused community bank with experienced local bankers empowered to serve their markets. As competitors integrate acquisitions or streamline operations, we continue to attract both customers and talented bankers, reflecting the strength of our culture and conservative operating philosophy. Importantly, South Plains occupies an unique position in our market, offering the product breadth and capabilities that smaller banks cannot match while delivering the personalized service larger banks often struggle to provide. We believe this balance provides a durable competitive advantage as we move through 2026 and beyond. Since launching our recent organic growth strategy, we have completed about 50% of our expected hiring occurring across our Dallas, Houston and Midland markets. I continue to be pleased with the quality of bankers that we are speaking to and remain optimistic on our ability to recruit exceptional talent to the Bank through the balance of the year now that we have cleared the first quarter, which is typically a slower time for hiring. Skipping ahead to Slide 11, we generated $11.3 million of noninterest income in the first quarter compared to $10.9 million in the linked quarter. The increase from the fourth quarter of 2025 was primarily due to an increase of $1.5 million in mortgage banking revenues, partially offset by a loss of approximately $800,000 in an SBIC investment. Mortgage revenues grew mainly as a result of the quarter-over-quarter change of $915,000 in the MSR fair value adjustment as can be seen on Slide 12. Overall, we continue to be pleased with how our mortgage business is performing in this low transaction and interest rate environment, and we believe we are well positioned for the eventual upturn in volumes. For the first quarter, noninterest income was 21% of Bank revenues, essentially flat with the linked quarter. Continuing to grow our noninterest income remains a focus of our team. I would now like to turn the call over to Steve. Steven Crockett: Thanks, Cory. For the first quarter, diluted earnings per share were $0.85 compared to $0.90 from the linked quarter. This decrease was primarily due to acquisition-related expenses, which I'll touch on in a moment, and the SBIC investment loss, partially offset by a lower provision for credit losses. Starting on Slide 14, net interest income was $43 million for the first quarter, in line with the fourth quarter's result. Our net interest margin on a tax equivalent basis was 4.04% in the first quarter as compared to 4% in the linked quarter. Our first quarter NIM was positively impacted by 5 basis points due to $545,000 of nonaccrual loan interest recovery. Excluding the problem loan interest and fee recoveries noted on this slide, we have delivered steady NIM expansion through 2025 and which has started to moderate. As a result, our goal is to maintain our profitability at current levels while growing our balance sheet, which will drive earnings and returns. As outlined on Slide 15, deposits increased by $154 million or 4% from the linked quarter to $4.03 billion. During the quarter, we experienced strong organic growth across retail, commercial and public fund deposits. As in prior years, we expect a portion of the public funds to flow back out of the Bank and for other depositors to see outflows in the second quarter as customers make their annual tax payments. As a result, we would expect deposit growth to be flat to down in the second quarter before returning to growth in the second half of 2026 before you factor in acquisition deposits. Noninterest-bearing deposits modestly increased by $11 million in the first quarter and represents 25.7% of total deposits at the end of that quarter as compared to 26.4% at the end of the linked quarter. Our cost of deposits decreased by 4 basis points to 1.97% compared to the linked quarter as we have continued to reprice our deposit base lower following the FOMC's most recent 25 basis point reduction in December. Looking forward, we expect our cost of funds to hold steady in the second quarter, absent further rate reductions by the Fed and before we factor in the cost of the acquisition deposits. Turning to Slide 17, our ratio of allowance for credit losses to total loans held for investment was 1.44% at the end of the first quarter, stable from the prior quarter end. We recorded a $260,000 provision for credit losses, which are related to unfunded loan commitments in the first quarter, which compares to $1.8 million in the linked quarter. The decrease in provision expense was largely attributable to the decrease in loan balances, combined with a decrease of $4.8 million in nonperforming loans and a $460,000 decrease in loan net charge-offs. Skipping ahead to Slide 19, our noninterest expense increased $2.5 million to $35.5 million in the first quarter as compared to the linked quarter. We had a $1.8 million increase in personnel expenses, mainly due to annual salary adjustments and higher incentive-based compensation. We also had a $542,000 increase in professional services expenses. There was approximately $1.5 million in acquisition-related expenses in the first quarter of 2026, of which $1.2 million was for professional services as compared to approximately $500,000 in the fourth quarter of 2025, all of which was for professional services. I'll touch on our expectations for the second quarter in a moment. Moving to Slide 21, we remain well capitalized with tangible common equity to tangible assets of 10.48% at the end of the first quarter, representing a modest decline from the end of the fourth quarter. Tangible book value per share increased to $29.65 as of March 31, 2026, compared to $29.05 as of December 31, 2025. The increase was primarily driven by $11.8 million in net income after dividends paid. Turning to Slide 23, we provided high-level financials for BOH as well as spot metrics for key financial metrics for the pro forma combined bank at March 31, 2026, to help you with your modeling of South Plains looking to the second quarter of 2026. At or as of the first quarter ended March 31, 2026, consolidated BOH had approximately $632 million of loans with a portfolio loan yield of 6.94% and $596 million of deposits, where noninterest-bearing deposits represented 16% of that total and interest-bearing deposits had a cost of 342 basis points. BOH had $15 million in borrowings and their NIM was 3.9%. BOH had $226,000 of noninterest income and their noninterest expense was $4 million for the first quarter, excluding transaction-related expenses. Pro forma for the deal for the first quarter, the combined bank's cost of deposits was 210 basis points, and the NIM was 4.02%. This concludes our prepared remarks. I will now turn the call back to the operator to open the line for any questions. Operator? Operator: [Operator Instructions] Our first question is from Wood Lay with KBW. Wood Lay: The pro forma slide deck, Slide 23, is super helpful. Thanks for providing that. You mentioned that you went through some balance sheet repositioning of BOH and it looks like the balance sheet shrink a little bit. Could you just sort of walk through the repositioning went through? And it sounds like despite the smaller balance sheet, it doesn't impact the EPS accretion outlook. Steven Crockett: Yes. Woody, this is Steve. I would just say -- there were not a lot of big changes during the quarter for them, but it did start changing as they moved on. Some of the -- they were able to tighten up a little bit on liquidity from where they've been knowing where the deal was headed. Some of the Federal Home Loan Bank borrowings had dropped from where they had been, some of the brokered -- time broker deposits did not get redone. So a little bit of back and forth on some of that with us working with them. So that started. We'll continue looking to optimize the balance sheet and seeing what -- the borrowings would be pretty easy when those come up, they're all short term on that. We'll continue to look at the noncore funding where we can and pare that back. So -- but again, overall, like you said, there's not a huge impact to the net interest margin. It's -- their net interest margin for the whole quarter was 3.90%. I mean, as you got closer to the end of the quarter, if you were just looking at it for the month of March or the end there, it would have been a little bit higher than that. Cory Newsom: We've just been -- I mean, Steve and I had tons of conversations about this. And as he always likes to remind me, this is a bit more of a marathon than a sprint. We're trying to be very, very thoughtful on how we manage the balance sheet and knowing that there may even be things on our balance sheet that we can eliminate as a result of stuff that sit here with us as they bring across. We just think it blends nicely with what we've done, what we have, but there's definitely room for improvement as we move forward. Wood Lay: Yes. That's helpful color. And as you just mentioned, you think there could be room for improvement, especially maybe repricing some of the higher costing deposits. How realistic of an opportunity is that in the near term? And do you think that could still lead to some NIM expansion going forward? Steven Crockett: I mean the opportunity is real. It's just, again, trying to balance the overall liquidity position we're at, what loan expectations -- loan growth expectations are, all of that. And just finding which -- who -- we don't want to run off -- we're not looking to lose customers. We're looking at the noncore type stuff. And the stuff that's easier, we will certainly do, but it's just going to be part of the overall plan. We want to do the best that we can and improve it if we can, but also knowing, as we said, it's not about what our number looks like next quarter, it's about where we end up the year and next year and just trying to do it in a thoughtful manner. But there's definitely some noncore sources that we can look at doing something with. Cory Newsom: But the other thing that you've got to kind of keep in mind, they do a good job of pricing the loans on the other side. And -- what we're really trying to factor in is being prepared for the kind of demand that they kind of had to keep down just a little bit getting up to this because, I mean, look, there's no question, the liquidity kept getting tighter and tighter and it made it a bit of a challenge on some of the funding opportunities. That's one of the things that we think we bring to the table and how we can go help them where we can be very beneficial with the purchase of this bank that we bought. What we have not wanted to do was go buy a bank and then screw it up from all the benefits that we thought we could bring across with it. So there is no question that we think there's room to improve on the deposit cost. But I can tell you unequivocally, our ultimate focus is trying to look at what our core NIM was before this acquisition and make sure that we do not diminish that in any form or fashion if we can help it. Curtis Griffith: Woody, this is Curtis. And I just tell you in our last ALCO meeting, they already put together the list of the -- some of the broker deposits and other noncore funding sources and some of those are non-maturity as well. And essentially, as all of the higher cost stuff hits maturity and payoff dates, we're fortunate right now that we've got a lot of on-hand liquidity. And we want to grow core deposits in the Houston market. Now I'll be very clear about that. But as some of these higher cost things that are not core hit the dates we can, we'll just pay them off. So yes, we'll get some benefit, but don't lose sight of the fact that overall, this is still a fairly small piece of our overall balance sheet. So it's not going to be a radical improvement in overall deposit costs for us. But if you look at it on a BOH stand-alone basis of what they were formally, yes, we can make a pretty significant improvement in that. Wood Lay: I appreciate all the color there. Maybe just last for me, sticking on the NIM and looking at your sort of core loan yields for stand-alone for South Plains. If I adjust for the interest recovery, it still looks like loan yields were up quarter-over-quarter. Just was curious on the dynamic driving some of that loan yield expansion. Steven Crockett: Yes, I'll start, and then I'll let Brent jump in. I mean, obviously, we have seen some of the loans that have repriced down with what the Fed did in the fourth quarter. But again, we still have -- continue to have loans that have been in the -- on the lower part that the fixed rate stuff from 3 to 5 years ago, that will -- that is continuing to help mitigate some of that. So that's been beneficial to us. Brent Bates: Yes. Woody, this is Brent. A little bit of that is the mix inside the portfolio, too. Some of those -- some loan types are yielding better than others, and that mix does kind of influence that. But I'd say overall, yields are holding pretty well. Cory Newsom: Woody, just go back on both sides of the balance sheet. As we said on every call that we do, we're still using exception-based pricing all the way through it. I mean, our first and foremost is to get all you can get on the loan side. But we're still not going to -- I mean, there are some opportunities out there that we can be as competitive as we need to be at the same time, and we're going to do that if we think the credit warrants what we need to do. So like I said, it's -- we are very focused on this on how this comes together, but really looking at the NIM more than anything. Operator: Our next question is from Brett Rabatin with StoneX. Brett Rabatin: I wanted to just talk about the loan pipeline and you've added some more lenders and you're going to be over $5 billion bank here in 2Q. And just wanted to see, are any of these new lenders that you're adding in what you call specialized lines of business? And is that something that you guys are thinking about maybe as you get a little bigger, doing some things that might be a little more specialized as opposed to the traditional community banking subset? Cory Newsom: Let me go first, and I want to be very, very clear about this. We are -- of all the lenders we've hired, there's not a single one that we've hired that's going to put us into something that we don't think we have good expertise in doing or gets us out of the fairway that we like to stay in. So there's -- so no, we're not getting into anything that's specialized that could ever, I think, lead to some issues. Now if you want to talk about the quality of these lenders, very, very good. And they blend nicely with the quality of the team that we already had in place. But yes, we're -- the thing that we like is it's bringing us opportunities to have new relationships that we would not have had, had we not done these hires that have come along. But these are -- I mean, we're very, very fortunate with the ones that we've done. But please note, we're not getting outside of our skis by any stretch. Brett Rabatin: Okay. That's helpful. And then just back on the cost of interest-bearing funds for Bank of Houston. I was looking at the regulatory data and saw that the cost was down like 12 basis points linked quarter to 3.46%. And that's obviously, I think, one of the key opportunities for the margin from here. Just competitively in Houston, what are you guys seeing on rate competition on deposits? And how much can you lower that over the coming quarters? Cory Newsom: I think it's very, very competitive. One thing that Bank of Houston adds nicely to the other Houston business that we have, they do a better job with deposit relationships than we've been able to do on our own, and that's okay. I think -- but I think the fact that we can manage liquidity that they're not facing the same constraints they've had in the past, I think we have the ability to improve the cost of funds that are actually there. So I mean, we do see the benefits that are going to come with this. There's definitely room to improve the cost of funding in that portion of the portfolio. Brett Rabatin: Okay. And then maybe just lastly for me on mortgage banking. Obviously, a little noise with the servicing asset, but better than I would have expected given seasonality in 1Q and some higher interest rates. And I know mortgage is tough to predict, but maybe, Brent, any thoughts on what you see mortgage from here? And just -- it's obviously been a business you like, but it was down last year. Can it get back to '24 levels or better? Or just any thoughts on production and gain on sale margins? Brent Bates: Yes. This is Brent. I mean, look, mortgage is good business. We like it. But right now it's kind of the same song second or third, fourth, first quarter-over-quarter. We're doing well. We're not losing money at it. We're making money, but it's not the days you're talking about this robust. I think rates probably have to drop quite a bit to make a meaningful difference there. Cory Newsom: So Brett, here's the thing -- we got to look at mortgage. Do we think we're setting the world higher? Absolutely not. Here's the thing that we're proud of. And I know that -- there's others that have been successful like we are. And when I talk about success, we've kept the nucleus of this business together, and we're not losing any money. And it's one we've been very, very focused on. We're also very focused on hiring in this portion of the industry as well, but we're trying to be very thoughtful about how we go about that. We are trying to advance the ball with the hiring aspect of that. But more than anything, what we look at on the mortgage is that we can offer this service to our clients without referring them to a competitor and be able to turn the spigot back on when rates improve and the demand comes back like it should. I don't know that if you sit here and look over the last 3 or 4 years, if we sit here have been losing money every quarter on this, I don't know that we'd still be doing it. But we know how to run this and keep it from -- keep it in the black and keep it very efficient. And I think our guys have done a very, very good job with it, and we're very proud to be in this business because it's something that we want to be able to offer our clients. Operator: Our next question is from Stephen Scouten with Piper Sandler. Stephen Scouten: I wanted to just follow back around on kind of the loan growth commentary, if I could. I think as you said, Cory, you guys had talked about the multifamily payoff last quarter. Just kind of wondering if the incremental payoff that you spoke of the $30 million plus was already anticipated in your guide? Or kind of if not, what changed in terms of loan growth demand or dynamics overall? Cory Newsom: I don't think there's anything that we're seeing like that, that wasn't just kind of in the normal course of business. A lot of these that kind of just run their cycle of life. I mean, from the time that we have them go out there and finance them, whether they're going to try to get it stabilized with whatever. We've never been in a position that we're the long-term holder of some of these multi-families in most of these situations. Brent, I mean, am I describing that correctly? I mean... Brent Bates: Yes, Stephen, we anticipated this. This is what we talked about in the fourth quarter. It was kind of baked in. And we think there's probably maybe one more that is stabilized. And these are credits that are looking for long-term fixed rate financing that we're just not going to do. But like the credit that they're performing, and this was kind of the plan all along from -- back from origination. So I'd say it's fully expected. Cory Newsom: I would say most of these -- when we come into something like a multifamily or something of this caliber, I mean, we're usually a 5-year player in one of these deals where it goes out, they can usually get some nonrecourse funding from some other arm that's out there that's not necessarily as traditional as what we are. We kind of think we fit that role pretty well. And I don't know that we're really prepared to start being the long-term holder on some of this stuff. What we try to make sure is that we're ready to turn around and find something to replace it if those things continue to cycle. And it's typically -- we're using some of the same relationships that are cycling some of this stuff on multiple occasions. So I mean -- and we're going to be careful with our whole limit. I mean we'd like to see this fall off and the next one come back on and just keep going. Brent Bates: Yes. And to Cory's point, just adding on, I mean, to your comment, that's really where some of our unfunded growth came from replacing with same clients that were successful achieving their long-term fixed rate goal. Stephen Scouten: Got it. Okay. Makes sense. So I mean, if I think about the reduction in loans on an end-of-period basis this quarter, I mean, that would seem to imply if you think you can still hit the guide, there's maybe $200 million of incremental organic growth for the rest of the year, a pretty significant pace. Is that -- am I thinking about that correctly for the rest of the year? Cory Newsom: We're still very comfortable with our -- the guidance that we put out. I mean it's -- we're not sitting here trying to convince everybody that we're going to be high single digits. But I mean, low to mid-single-digit growth, we're still very comfortable where we think we are. Stephen Scouten: Okay. Helpful. And then maybe lastly, I know it's still very early days here, but just in terms of BOH and the extraction of the synergies, kind of how has that progressed? Do you feel good about the realization of all those cost saves and kind of any change in terms of the timing of when you'd anticipate those coming through? Cory Newsom: Here's what I see. This is kind of what we're really proud of. And this is what we've been very, very focused on is trying to make sure that we're efficient in the process of trying to do an acquisition because I think it's going to impact how people look at us on the next acquisition that we want to do. If you look at how this one came together, we closed, we have converted and integrated everything about this inside of a quarter. And that's -- I mean, like we're going to do a conversion May 8. And our team has been very, very thoughtful. I mean we've had -- I mean, from [ project lead ] all the way through trying to make sure that we take this from cradle to grave all the way in the right fashion. The other side of that is we've tried to make sure that we maintain very good communication and trying to onboard these people so that we can be successful. Well, the last thing we want to do is come in here and not be successful in retaining the business that we have -- that they have that we really like. I mean if you look back through when we did due diligence, I mean, we were past 65% of the portfolio looking at it. We liked what we saw, and we don't want to lose it. So we've had to really be thoughtful in trying to make sure that we're prepared to do this in a way that we could find success instead of the way you see some transactions have gone where you kind of have a big runoff after the fact. I don't see that coming for us. I'm really intent where we are. I don't think any one of us would sit here and tell you that -- I don't think you could find buyers regret at any point in time with us right now at all. Curtis Griffith: Stephen, this is Curtis. And to be clear, this is not in the projections, everything that we put out. But we felt all along and in talking and working with the team there, I think we're even more convinced of it that they have some real good opportunities. They were becoming, as we've said a few times now, pretty constrained by liquidity. And now that's not a problem. I mean, I guess, ultimately, everybody, we've got to maintain good liquidity. We're not going to get stretched. But it's going to be transformative to their ability to go back out to their customers and customers they wanted to get and start bringing those loans in. That's not going to happen overnight. I don't look for huge increases in Q2. But I do think that we will hit some targets in Q3, Q4 overall for the year because I think the business is there, and I think this team can go get it. Cory Newsom: I mean, look, we like what Bank of Houston brings to us, but I think it's fair to say they like what we bring to them. And I think we just expand a little bit of an opportunity with some of the scale that we've had the ability to probably do that it's been a little more challenging for them. And so yes, I do feel really good about it right now. But we're not taking anything for granted. We're very, very focused on it. Stephen Scouten: And what are you hearing -- last thing for me really, what are you hearing from your customers maybe in West Texas and kind of throughout your footprint around the price of oil and kind of the macro impacts from the Iranian conflict and kind of if that extends -- if the price of oil extends here around $100 for a longer period of time, would that have a kind of pronounced impact on those markets and potentially the loan growth targets? Cory Newsom: I think there's a lot of them that are taking advantage of price oil if they're on that side of the deal. Nobody is going out there and trying to make long-term commitments on the price of oil being at that level. We're not seeing any of that with our customer base. They're pretty much -- everybody we talk to, they're all saying things like getting a less, and we're not going to get ourselves back to a corner on it. And Brent, you talked about -- I mean, from the deck of your underwriting, I mean, you don't factor that in at all. Brent Bates: Yes, we don't. We don't factor in. And I mean, on the consumer side, we haven't seen any impact on that side either from the consumer side of that at this stage. Cory Newsom: I don't think we really have much of our customer base that's in a position where they get hurt by it in some big fashion. Operator: [Operator Instructions] Our next question is from Joe Yanchunis with Raymond James. Joseph Yanchunis: I want to beat the horse one more time and ask about the NIM here. It sounds like you're optimistic you can keep the NIM relatively steady. And I understand there's a lot of moving parts. So in your deck, you call it a pro forma NIM of 4.02%. Does that pro forma NIM back out the onetime loan interest recovery you received in the March quarter? I'm just trying to understand what the jumping off point is. Steven Crockett: No, that is just using our gross NIM. Just pushing the... Joseph Yanchunis: And then shifting over to loans. So can you talk about just a little more about your energy portfolio and what the exposure is on a pro forma basis? And what does loan demand look like in that vertical in the quarter? Brent Bates: Yes. Joe, most of our energy portfolio is really on the C&I servicing side. That's small business clients that we know well have been in the business and survived cycles in the past. And so really, we don't have a whole lot of exposure in that segment to upstream lending. Joseph Yanchunis: Okay. So pretty steady then for -- on a pro forma basis. I think last update you gave, I think it was around 4%. Brent Bates: Yes. We're still under 5% of the portfolio. Joseph Yanchunis: And then what about the -- it looks like the major metro kind of market loan balances appear to be on a downward trajectory. And I assume that's a function of payoffs. Can you talk about your pipeline that exists in these markets, especially given the backdrop of your kind of aggressive lender hire approach? Brent Bates: Joe, the pipeline is really -- I'm pleased with it, particularly on a combined basis, it's strong. I think what you're seeing there is the effect of the decline in multifamily over the last really 4 quarters, which is exactly what we experienced this quarter, loans going into the permanent market for long-term fixed rates. So I think that's really the effect that you're seeing there in the metro markets. A lot of those loans were in our metro markets, but our pipelines are very strong, particularly on a combined basis. Cory Newsom: Joe, I think if you go back and look over the last year, we had identified a handful of credits that we wanted to exit a relationship with. We had -- I mean we didn't had it in any form or fashion. We don't have that right now. I mean we feel pretty good about the portfolio. And I don't really know of anything -- of any significance that we've got identified that we need to separate from. And so I think we accomplished what we wanted to. We've identified the ones that we felt like that probably weren't prepared to move into higher rates from the cheaper stuff that they -- the way they got into it originally. I think we're kind of past that. I mean we're stressing the portfolio ever which way you can imagine, and we feel really good about it. I do -- that's why we still feel confident about the guidance we gave out on loan growth. Joseph Yanchunis: Okay. Then last one for me here. So I mean, it sounds like the kind of year-over-year decline in multifamily portfolio loans could reverse with some of the unfunded commitments that you have. Just kind of wondering where are you seeing the best risk-adjusted returns across your portfolios right now? Brent Bates: Sorry, I couldn't hear you. Joe, what was your question? Joseph Yanchunis: The best risk-adjusted returns that you're seeing from a lending perspective? Steven Crockett: Feeling secured. Cory Newsom: I mean if you look at the -- I mean, the owner-occupied stuff, I mean, there's a variety of things that -- I mean, it's like we said earlier, we're not getting out there doing a lot of stuff that is a little bit edgy in any stretch. Brent? Brent Bates: I agree. And -- to Cory's point, I mean, on our residential sides, we've got pretty good risk-adjusted yields there as well as the ag. Production still actually has good yields on the funded balances as it funds throughout the year. Operator: We have reached the end of our question-and-answer session. I would like to turn the conference back over to Curtis Griffith for closing remarks. Curtis Griffith: Thank you, operator, and thanks to everyone joining us on today's call. We are pleased with our first quarter performance reflects strong profitability, improving credit quality and continued discipline across our balance sheet. We've also successfully completed the Bank of Houston acquisition, a transaction that meaningfully enhances our presence in a highly attractive market and aligns well with our long-term strategy. We believe we've laid the foundation to continue building a larger, more capable community bank that includes investments in our people, technology, operating infrastructure that support both organic growth and disciplined M&A. While the near-term environment remains uncertain, we are confident in our strategy, our capital position and our ability to execute. Most importantly, we remain focused on creating long-term value for our shareholders while continuing to serve our customers and communities. I'd also like to take a moment to thank our employees across City Bank, including our newest team from Bank of Houston for their hard work, commitment and professionalism, particularly during a period of ongoing change. Their dedication to our customers and communities continues to be a key driver of our success. Thank you again for your time and interest in South Plains Financial. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
John Campbell: Good afternoon, and thank you for participating in Porch Group's First Quarter 2026 Conference Call. Earlier today, we issued our earnings release and filed our related Form 8-K with SEC. The earnings release and today's presentation are available on our Investor Relations website at ir.porchgroup.com. Before we begin, I'd like to review the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995, which provides important cautions regarding forward-looking statements. Today's discussion, including responses to your questions, reflects management's views as of today, April 28, 2026. We undertake no obligation to update or revise these remarks. We will make forward-looking statements that involve risks and uncertainties, and actual results may differ materially. Please refer to the information on this slide and our SEC filings for additional detail. We will also reference certain non-GAAP financial measures. Reconciliations are included in today's earnings release. And also, a replay of this webcast is going to be available shortly after the call on our Investor Relations site. So joining me here today are Matt Ehrlichman, Porch's CEO, Chairman and Founder; Shawn Tabak, Porch's CFO; and Matthew Neagle, Porch's COO. With that, I'll turn the call over to Matt for his key updates. Matt Ehrlichman: Thank you, John. Good afternoon, everyone. We are pleased to report a strong start to 2026. Q1 results exceeded expectations, and we're raising our full year guidance for Porch shareholder interest revenue, gross profit and adjusted EBITDA. Porch has been a vas simpler, higher-margin fee and commission-based business, one that's built to compound premium and cash flow over time without the earnings volatility, often associated with risk-bearing insurance carriers. Last year, we proved out the profitability of our business model. 2026 is the first year with tangible year-over-year comparables for Porch shareholder interest results, and we demonstrated significant and sustainable growth, especially in Insurance Services, which delivered 50% year-over-year revenue growth in the quarter. From here, our strategy is straightforward, scale rapidly and with discipline and continue to invest in the differentiated assets that strengthen our moat, our data advantage, our underwriting and pricing capabilities and our differentiated products for consumers. Okay. So for the first quarter, we delivered results for Porch shareholder interest that reflected continued strength in Insurance Services and continued discipline across the business. Specifically, you can see here, reciprocal written premium, or RWP, was $114 million, up 18% year-over-year. Revenue was $109 million, up 29% year-over-year. Q1 gross profit was $91 million, resulting in an 83% gross margin. Q1 adjusted EBITDA was $20 million, an 18% margin. Earlier, I said, we intend to scale rapidly and with discipline. The clearest way to see that is through our insurance growth engine, capacity, top-of-funnel and conversion as well as the latest underwriting results. Over the next 4 slides, you'll see the progress we've made. And importantly, after seeing these drivers in sequence, I think it becomes clear why we're confident in continued RWP growth acceleration. So first, here, capacity. Statutory surplus is the key guidepost and you can see the progress over the last year, growth of 59% and $61 million year-over-year. The takeaway is that the capital foundation is far stronger today and supports our growth plans not just this year but well into the future. Q1 statutory surplus of $165 million supports north of $800 million in premiums, well above our $600 million RWP target for this year. When including incremental non-admitted assets of a little north of $100 million, the reciprocal -- then has the ability to support more than $1.25 billion of premium. The Reciprocal's reinsurance program is in place to protect this capital across cycles. On April 1st, the reciprocal wrapped up a very successful renewal of its reinsurance program. Similar to prior years, this included a panel of 40-plus A-rated partners, offering catastrophic weather protection. We're happy to report that the reciprocal will benefit from an approximately 20% decline in costs for excess of loss reinsurance, driven by strong underwriting results and improved risk performance which further bolsters its surplus and overall margin in the system. To have capacity in place, the next driver is distribution, and this starts with agency growth. Think of this as a land and expand strategy. We're growing our agency footprint and expanding production across our existing partners' locations. That's why we highlight producing agency branch locations. It's a metric we use internally to gauge distribution depth as we expand our reach in existing agencies, this translates to quote volumes. For Q1, you can see here producing agency branch locations increased 181% year-over-year, while quote volumes grew 69% year-over-year and improved on an absolute basis for the sixth straight quarter. All in, the funnel is expanding, and we're increasing the pool of potential new customers. Moving down the funnel, conversion is the lever that turns quote volumes into new customers and premium. The Reciprocal's stellar pricing and underwriting results means we have more margin in the system than other carriers. Given that and our understanding of the elasticity of the conversion rate curve, we can take targeted actions like those we started in November to bring in more low-risk consumers and grow premium at our targeted rates while maintaining the Reciprocal's exceptional underwriting outcomes and profitability. In the chart here, you can see the clear step-up in conversion that began in Q4 following the activation actions. That improvement continued into Q1 and year-over-year conversion rates have almost doubled. Note that we've only seen a 5% year-over-year decline in premium per new customer, while producing these Q1 gains. At the start of 2026, we launched Porch Insurance in Texas. Over time, Porch Insurance will serve as another tailwind for conversion as its product differentiation helps open us up to new segments of consumers. All right. So now the results. And this is probably the most important message today, when capacity top-of-funnel and conversion improved together, it shows up in new customer growth. As this chart shows, RWP, from new customers stepped up meaningfully, approximately tripling year-over-year, which is the clearest proof that the growth engine is working. We're certainly excited about continuing this momentum. We've reached an inflection point for growth. But what's notable is the way we are driving this growth. In Q1, total policies written across new and renewal grew 33% year-over-year, another clear proof point that the growth engine is on track. Matthew will cover this in more detail later in the call. All right. So we just walked through the premium drivers and now -- and how the system is designed to deliver rapid growth, and now we move into the discipline and sustainability side of it, which you can see through the Reciprocal's underwriting results. These charts depict the 2025 AM Best Annual Market Share data. The takeaway is simple. The Reciprocal continues to perform among the best in its peer set, top quartile nationally and in Texas for the combined ratios. Here's what's so exciting about these combined ratios. This includes all of the margin paid via fees to Porch Group as part of the Reciprocal's expenses. In 2025, Porch Insurance Services segment saw a margin of adjusted EBITDA to RWP of 21%. So you can do the math. If you were to reduce the expenses, and thus the combined ratio, by this amount, it truly is exceptional combined ratio results. Putting all this together, our goal is simple. We aim to drive compounded Porch shareholder interest earnings growth while maintaining strong health at The Reciprocal. As we deliver on those two key objectives, we can scale this business rapidly and profitably for decades to come. With that, I'll turn it over to Shawn to cover the financials and guidance. Shawn Tabak: Thank you, Matt. Good afternoon, everyone. I'll start off with a high-level summary of our financials. Overall, we're pleased with our first quarter results. which exceeded expectations across Reciprocal written premium, revenue, gross profit and adjusted EBITDA. We raised our outlook for the year, driven by our Insurance Services segment. Insurance Services delivered strong Q1 results, particularly in RWP, driven by new customer additions. The team continues to add agencies and quotes and we saw higher quote-to-bind conversion rates, as Matt noted. Two quick housekeeping items before we dive deeper into the results. First, as a reminder, we launched the Reciprocal on January 1, 2025, and we updated our segment reporting at that time. As a result, this Q1 2026 represents the first period with tangible year-over-year comps for RWP, as well as port shareholder interest and insurance services financials. And second, related to that, Q1 2025 was the final quarter of the legacy captive reinsurance terms that benefited the prior year quarter by $16 million. So while adjusted EBITDA still grew nicely this quarter, Q1 2025 is our last tough comp. Okay. Similar to Matt's remarks, my comments focus on Porch shareholder interest since generating cash for shareholders remains our ultimate objective. Under GAAP, we consolidate the Reciprocal exchange financials, which are included in the press release and our 10-Q. Q1 2026 Porch shareholder interest revenue was $109 million. Insurance Services contributed 68%, software and data 20% with the remainder from Consumer Services. Associated gross profit was $91 million with an 83% gross margin, driven by Insurance Services 85% gross margin. Adjusted EBITDA was $20 million, ahead of expectations with Insurance Services, delivering a 37% adjusted EBITDA margin. Okay, now let's move a little deeper into the segment results, starting with Insurance Services. Insurance Services revenue was $75 million, growth of 50% over the prior year and exceeding expectations, driven by higher fee-based revenue with higher RWP volume and new customer additions. As Matt highlighted, premium from new customers almost tripled year-over-year, and we saw a 33% increase in total reciprocal policies written. Gross profit was $64 million, delivering a strong 85% gross margin. Adjusted EBITDA was $27 million, or a 37% margin. While we continue to see strong incremental EBITDA margins from revenue growth, particularly the fee revenue that has a relatively fixed cost base, the year-over-year margin decline simply reflects the changes to our captive reinsurance terms that I mentioned. Overall adjusted EBITDA as a percentage of RWP, was 24% in Q1, reflecting a strong margin as we scale RWP, and continued operating leverage in insurance services. On a trailing 12-month basis, adjusted EBITDA as a percentage of RWP, was 20%. Okay, shifting to software and data. As a reminder, most of our Vertical Software businesses charge per transaction. So results do remain tied to U.S. housing activity, which continues to be at near cyclical trough levels. And we do expect tailwinds as housing recovers. In the first quarter of 2026, results were relatively flat year-over-year. Software and data revenue was $22 million. Gross profit was $17 million with a 75% gross margin. Adjusted EBITDA was $4.6 million. Consumer Services also reflects softer housing conditions. Segment revenue was $15 million, increasing slightly over the prior year. Gross profit was $13 million, an 87% gross margin and up 390 basis points year-over-year, driven by mix shift to higher quality revenue. And finally, adjusted EBITDA was approximately breakeven. Moving now to the balance sheet. We ended Q1 with cash plus investments of $134 million, up $13 million from December 31, 2025. Porch shareholder interest cash flow from operations was $20 million in the quarter. As a reminder, cash flow timing is seasonal, we pay interest on our notes in the second and fourth quarters of each year. In March, we exhausted the share repurchase authorized by the Board and repurchased 334,000 shares for $2.5 million or an average of $7.48 per share. And as a reminder, this was the maximum amount allowed by our 2028 notes indenture. Our 2026 notes have a remaining balance of $7.8 million, which we expect to settle at maturity on September 15, 2026, with cash from the balance sheet. Okay. And shifting to our 2026 guidance for Porch shareholder interest. Our 2026 target of $600 million organic RWP represents 25% year-over-year growth. Given the strong start to the year, we are raising our guidance for revenue, gross profit and adjusted EBITDA. We are raising our revenue guidance to a range of $495 million to $507 million, representing 20% year-over-year growth at the midpoint, up 400 basis points versus prior guidance. We are raising our gross profit guidance to a range of $401 million to $413 million, still with an 81% gross margin at the midpoint. We are raising our adjusted EBITDA guidance to a range of $103 million to $109 million, still a 21% adjusted EBITDA margin at the midpoint. From a modeling perspective, we continue to expect trough-like U.S. housing conditions and thus, flattish year-over-year results in Software and Data and Consumer Services, with the guidance increase attributable to strength in insurance services. And I'll now hand over to Matthew to provide a strategic update and the KPI review. Matthew Neagle: Thank you, Shawn. I'll start by giving a brief business update, and then dig into our KPIs. I first want to touch briefly on AI, both how we're using it and why we believe it strengthens rather than threatens our position. Across Porch, AI is meaningfully improving our engineering velocity and our operations. Our engineers are shipping faster and with higher quality, and we are seeing productivity gains that are fundamentally changing how we build software. In customer support, AI is now handling a significant share of initial customer contacts, reducing costs and improving response times. We are seeing real productivity gains across the business. On the disruption question, let me be clear. In insurance, AI does not change the fundamental nature of what we do. Insurance is a balance sheet promise. It is regulated, capital-intensive and requires real financial backing. AI will make underwriting claims and customer interaction more efficient, and we are investing aggressively to lead there, but it does not alter the structure of the industry or eliminate the need for the product. We think we are well positioned here. So why do we think our Vertical Software businesses are well positioned in an AI world? Well, these are systems of records built on decades of real transaction data inside regulated industries where compliance audit trails and security are nonnegotiable. They are the bones of a home purchase or a refinance transaction and are not optional tools. Our customers rely on them deeply, which shows up in high NPS scores, and we wrap meaningful services around the software itself. For inspectors, that includes payment processing, warranties, recall check monitoring and a call center, making us much harder to displace in a stand-alone SaaS product, and we are not standing still. We are investing and innovating faster than we ever have. In our inspection software, we're using AI to improve report quality and speed, defect detection, narrative assistance embedded directly into the workflow inspectors already use. In Rynoh, our title insurance software, we're applying AI to high-stakes workflows like reconciliation, verification and fraud monitoring, where accuracy and auditability are everything. In Floify, our mortgage point-of-sale platform, we're moving towards letting a borrower generate a preapproval letter from their phone in just a few clicks. Lender customers are expressing real excitement and willingness to pay for this as a premium feature. Finally, we believe AI will disproportionately benefit companies with unique data assets like ours. Underlying our entire business is our data platform with proprietary data covering approximately 90% of U.S. residential properties and early insight into 90% of homebuyers each month. Simply put, AI is additive to Porch's long-term position. Let's move to Q1 insurance KPIs. Reciprocal written premium was $114 million, ahead of expectations, and up 18% versus prior year. Reciprocal policies written was nearly 48,000 policies, up 33% year-over-year and continuing the momentum we saw in Q4. RWP per policy written was $2,386. This was down on a year-over-year basis, but I want to be clear on what's driving this. It is largely a function of mix shift, not competition or price. The premium per new customer is always less than premium per renewing customer. As new customer growth has accelerated, they represent a larger share of the mix, which pulls the average down. To put a number on it, premium per new customer was only 5% lower on a year-over-year basis, meaning that we have been able to increase conversion rates without meaningful decreases in price or profitability. In total, when you pair the top-of-funnel strength, with the conversion rate improvements we've put in place, you arrive at a very strong outcome in new customer RWP, which was 3x higher versus the prior year. Moving to Software and Data. The housing market remains challenging, but that's not slowing our pace of innovations. At the start of the new year, we launched Rynoh product hub, the new central home for all Rynoh products and services. In March, Floify released Dynamic Apps 2.0 to allow mortgage teams to tailor borrower applications. We continue to see strong interest in home factors and compelling new data customers, and we'll share more here when we are able to. In terms of Software and Data KPIs. In Q1, we served approximately 22,000 companies with annualized revenue per company of $3,918. As a reminder, as part of our strategy to focus on larger customers, we sunset certain legacy software products that serve very small contractors, which is expected to lead to a few million dollar revenue headwind, but a slight positive effect to segment profitability. For Q1, the wind-down resulted in roughly 1,800 less companies in the quarter, however, as you can see from the 8% year-over-year increase in annualized average revenue per company, there was a fairly limited effect on segment revenue. In Consumer Services, our moving group focus is twofold: drive better monetization per move today and build a scalable demand engine for the next leg of growth. In Q1, moving group's upsell and cross-sell efforts drove a 9% year-over-year increase in average revenue per move. On the demand side, we're investing in exciting new partnerships, direct-to-consumer expansion and the moving Place platform. Like Software and Data, we feel our targeted investments and lean cost structure positions us well for when the housing cycle turns. As for the KPIs, in Q1, we had 69,000 monetized services with annualized revenue per monetized service of $220. I'll now pass it back to Matt to wrap us up. Matt Ehrlichman: Thank you, Matthew. For closing the call, I do want to comment briefly on the macro environment. It's useful to re-anchor on why the homeowners insurance industry remains durable across cycles and why our operating model is built for the long term. First, demand is structurally embedded. The majority of U.S. households have a mortgage where homeowners insurance is required by the lender, regardless of the economy. More broadly, homeowners insurance is carried by nearly 90% of U.S. homes on an annual basis, not surprising, given the home is often a family's largest financial asset. Second, the homeowners insurance premium pool has grown through cycles. You can see on the chart on the left, it makes it clear, and it has natural tailwinds. Inflation tends to scale premiums over time. And if the weather gets worse, it only means the homeowners' insurance industry will grow faster. In the current environment, there's talk of a softening market and competition, but we're really not seeing that in any meaningful way in our Q1 results and strengthening funnel demonstrate that. Third, what's important for Porch is our model. We're able to participate in that growing industry premium pool, while separating Porch's financial results and profitability from weather volatility and risk. And lastly, like Matthew just talked about, we don't see AI disruption risk as it relates to the foundational elements of the insurance industry. Again, insurance is a balance sheet promise, not a workflow while regulation and capital requirements create real moats. We see AI enhancing the advantages for companies with unique data, and we've built our entire business around our data platform. I want to wrap up by briefly reinforcing the most important messages from today. First, we're off to a strong start in 2026. There's no doubt. Second, we've raised our outlook meaningfully for the year. Third, we're seeing momentum because the insurance growth engine is working. Capacity, distribution, conversion are all moving in concert and in the right direction. Overall policy count is growing rapidly as is premium from new customers, and we're accomplishing this while maintaining some of the top underwriting results in the entire homeowners insurance industry. This creates differentiated margins and as a result, a stronger growth engine as we look ahead. Thanks, everybody, for your time today. I just want to thank, in particular, my fellow shareholders for their support and belief in our organization. We can't control market volatility, but we can -- we will control our focus, strategy and execution. In just a little over a year, we've transformed Porch into a simpler high-margin cash-generative business. We've built the foundation, and now we scale profitably and fast. With that, John, please open the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Dan Kurnos with StoneX. Daniel Kurnos: The results obviously speak for themselves, guys. It's a hell of a quarter. I guess the kind of question, I just want to anchor to, Matt, a little bit either Matt or Matthew, is there any thoughts on kind of the RWP guide for the year? Is that a little bit higher now just given the increase in revenue and given what you guys put up in Q1? And to sort of unpack what you guys are talking about, and I appreciate the color on the premium per new policy written. Obviously, we've all been excited for Porch Insurance to kind of get launched into the market. But if your blended policy, premium per policy is down because of mix and Porch Insurance is kind of a higher price point, and obviously, you guys can correct me if I'm wrong on that. Do we think that like the initial start to this year is actually driven by real strength in the legacy products even across agents as you turn them back on and Porch Insurance is then going to be incrementally on top of that, and we should see the premium per policy start to blend up as that comes into the market, or am I thinking about that wrong? Matt Ehrlichman: Yes, I'll just take the second one first. It's a good question. Porch Insurance will make a bigger, bigger impact as we go throughout the year and it is ongoing as we have more and more agencies activated and turned on using it. I do think as you look forward, yes, the Porch Insurance products designed to be, give or take, 10% higher all-up price than the homeowners of America product and that includes a lot more value for the consumer, right? The warranty, the moving services, and then actually higher commission as well for the agencies to have additional incentive. And so -- and as an aside, it does also create more margin. So you're right, as Porch insurance becomes -- just continues really through its journey, and we're very excited about what's ahead there. Yes, I think that can create tailwinds to your question, Dan, on the premium per new policy. Overall, though, obviously, you heard us emphasize it, we are very pleased with the gains in conversion rates, and how we've been able to just drive premium growth without meaningful decreases in the premium per new customer, that's a big deal. And again, it just emphasizes that we're going to be able to continue to grow margin across the system in really attractive ways, second question. On the first one, Shawn, maybe you can take the RWP guide question. Shawn Tabak: Yes. I mean, I'd say a couple of things. First of all, Dan, thanks for the remarks. I'd say a couple of things. One, it's early in the year, so I'll just note that. Two, I'd say we were quite pleased with the funnel performance in the first quarter. I think as we talked about throughout each of the metrics, agents, quotes, conversion, we saw outperformance. And so that gives us confidence. Now we did today, increase the revenue guidance 4 percentage points of growth at the midpoint. So now the revenue guidance is a 20% year-over-year growth. And again, that's all driven by just adding -- continuing to add in new customers and the increased confidence that we see there. And sorry, maybe I'll just leave it there. And... Matt Ehrlichman: Thanks, Dan. Daniel Kurnos: That's fine, Shawn. Thanks. Yes. I appreciate it. And Matt, I think the point I was trying to make is that you guys did this without really Porch Insurance filtering into the market yet. So obviously, stellar results at the start of the year. Operator: Our next question comes from the line of Jason Kreyer with Craig-Hallum Capital Group. Jason Kreyer: And I'll echo congrats on an excellent quarter here. Wondering if you could talk about loss ratios or combined ratio trends for Q1, and just how that compares to historic quarters? Matt Ehrlichman: Yes. I mean, we continue just to perform exceptionally well. Gross loss ratios in Q1 was 24%. Attritional loss ratios, which, as a reminder, for those on the call, is losses not including catastrophic weather. That was 19%. And -- so just exceptional results. Actually, the team have gone looked, we're in the top handful across the country and Texas in terms of top performers as it relates to loss ratios. Actually a little titbit, Jason, that was interesting to us. Some of the areas carries attractive loss ratios, and then we'll have really bad loss ratios the next year as it bounced around with some volatility. We are the only company in the homeowners insurance industry that's been in the top handful each of the last several years. We think that's really telling. Just there's that consistency of having just exceptional loss ratio and attritional loss ratio results. Jason Kreyer: Impressive stuff. When you look at the levers that you can pull, just in terms of price and promotion, agency commission, and stuff like that. I wanted to ask about those levers in terms of existing customers. Any changes to the strategy of the existing customer base and any changes to the trend as far as retention or attrition rates. Matthew Neagle: I can speak to that. We've taken a number of steps across our distribution strategy and our product strategy to position ourselves for growth. And as Matt said in his remarks, we think we have a growth engine built and now it's time to scale. We are still early in building out our distribution when you consider the number of agents that we have and the number of agents that are available. We always have the lever to tweak price to drive up conversion rate. And I do think there is room there when you look at our cost and our margin structure. We haven't had to be that aggressive so far to be able to hit our growth numbers. And then as Dan mentioned earlier, we are excited about what Porch Insurance could do. So in terms of the biggest product strategy, being able to have a premium product in the market that has higher commissions that has the wraparound value of a warranty and moving services and other things to the consumer, we think gives us another lever to drive growth. Matt Ehrlichman: Let me just layer one thing on just to make sure that it landed clearly just on this topic. Fundamentally, what the whole advantage comes down to is that we have more margin across the entire system than other carriers do. And it's because we have unique insights about properties, which allow us to be able to win more low-risk customers and not win higher-risk customers, they're going to have lots of losses. Fundamentally, those insights allow us to create more margin. And you can see that showing up in both the private margins at Porch Group plus how much surplus is growing at the Reciprocal because the margin is the combination of those two things. And that's a big deal because like Matthew just noted, because you have more margin in the system, if we wanted to, we could tweak pricing down, still create tremendous margin and be able to grow conversion rate and premium faster. Right now, we're very pleased with the outputs that we're seeing in terms of premium growth, but it is certainly nice to be in that position and have those controls. Operator: Our next question comes from the line of Jason Helfstein with Oppenheimer. Jason Helfstein: I guess two questions. Just when -- to start with the less exciting one. But -- so like the Reciprocal looks like you burned, I guess, cash flow from operations like about $7 million in the quarter. How do you think about like where that comment potentially shakes out, I guess, annually? And just like broadly, I guess the point is like over time, right? Obviously, you have a cushion, but that should number become positive over time? And then any update on home factors, we kind of haven't really heard you talk about it in a little while. Is it still a business opportunity, or are you more focused on using the data for first-party underwriting? Matt Ehrlichman: Why don't, Shawn, you take the first one, and Matthew, maybe the second? Shawn Tabak: Yes, cash flow timing for the Reciprocal is just seasonal. It's just working capital inflows and outflows. The thing I would point to there is the statutory surplus at the Reciprocal increased $10 million from the end of Q4 to the end of Q1. And that's with the value of the Porch shares coming down. So the operating profit from the Reciprocal was in the mid-teens there in terms of millions of dollars. That's a big deal in Q1 for the Reciprocal. Typically, we're a little -- we're around breakeven in the first quarter. And then obviously, Q2 is when many of the claims come. So to generate incremental statutory surplus in Q1 is a great result for the Reciprocal. It means that the statutory surplus is even stronger to support growth in future years. And so we feel well positioned from that perspective. As a reminder, since I'm talking about the Reciprocal surplus, Q2 is typically when we see most of the weather, just as a reminder, and that results in more claims and put some pressure on statutory. We do expect that, and we plan for it. And if it doesn't come, that's great. But we do diligently plan for it and expect that. Matt Ehrlichman: Ongoing, I'd be more focused on that, the stat surplus and there's lots of cash in the Reciprocal. But really, we are focused on that stat surplus number that Shawn is noting there. Shawn Tabak: Yes, over $300 million of cash and investments at the Reciprocals. So it's definitely cash, I would say. Matthew Neagle: And then on home factors, you pointed out two opportunities for us. One is how we leverage it internally, and then be able to commercialize it externally. Just firstly on internally, we are using it and do see a significant impact, and you're seeing that showing up in our results. And we are bullish on the midterm opportunity. The thing that I would point to that gives us confidence we have a very active and increasing pipeline of carriers, who are in the testing process. And the test results are showing in ROI. And I think what we're seeing, which is what we expected is just that the sales cycle because you have to go through testing and procurement in some of these carriers that it will take time to be able to bring those into a formal contract and revenue. With all that said, we remain optimistic that we can build up a business, tied to home factors. What we've said in the past remains true, which is we do expect modest early-stage revenue contribution in 2026 back on track, and then we expect it to build over time. The last thing that I would just mention is there are faster ways we could go to market, so we could partner with certain providers in the space. We've intentionally chosen not to take that route because we're convicted in the long-term opportunity of being able to go direct, and we want to make sure we maintain kind of control over how the data is distributed in the market. Operator: Our next question comes from the line of Adam Hotchkiss with Goldman Sachs. Adam Hotchkiss: Matt or Shawn, I would love to just go back to price. Matt, I know you took some pricing action, I think, late last year and possibly again in the beginning of this year. Obviously, the conversion rates have improved. Could you maybe parse out for us how much of the conversion rate improvement was things like agency branch location increases in the 181% year-over-year increase that you showed versus the pricing action? And maybe just any learnings from the pricing action itself and in the sort of visibility that gives you to the conversion curve. That would be helpful. Matt Ehrlichman: Yes. I mean the growth in agencies really doesn't impact the conversion rate. I mean, certainly, as you build and deepen your relationships with those agencies, yes, they will lead with you more or -- and so it does have influence, but I would say the largest impact in terms of conversion rate is being able to take certain actions to be able to be more attractive for the right customers. And that's really the key is through our data, and through our insights into where the conversion rate curve is steep, and where are those attractive sets of customers. You can be surgical with being able to increase conversion rate for the right customers that we want and you saw the results, which is -- and we can do that without having meaningful changes in the price per new customer overall. Again, like you highlight, it's a big deal because the system is going to be very, very healthy, very, very profitable, and we doubled conversion rate year-over-year. But yes, those actions that we've taken have been the primary drivers, I would say, tied to conversion rate, but all the work that the distribution team has done with agencies certainly has been a tailwind in health there. Adam Hotchkiss: Okay. Yes, that's really helpful color. And then, Shawn, just on RWP seasonality, I think the $600 million does imply that things do accelerate a bit year-over-year into the last three quarters, sort of what gives you confidence there? And then when we think about just premium seasonality through the last three quarters. Should we expect that curve to look a lot like last year, or any changes that you would expect? I appreciate it. Shawn Tabak: Yes. The seasonality of RWP, some of that is -- a lot of that was driven by when customer homeowners buy their homes and therefore, either buy homeowners insurance or in subsequent years, renew their homeowners insurance. And so obviously, most folks are buying their homes, therefore, owners insurance and renewals in Q2 and in Q3. And then I'd say from there, probably Q4, and then lease them out in Q1, actually. So I guess, seasonally adjusted, this is the lowest quarter Q1 is. What gives us confidence in the ramp is the funnel. We talked about in Q1, we were pleased that really, we exceeded expectations -- our own expectations even throughout each metric in the funnel. So we -- agency additions was really strong, not driving quotes and the conversion. And so all of those things also bolster future quarters, RWP. And so that's the key thing that we saw in Q1. Operator: Our next question comes from the line of Ryan Tomasello with KBW. Unknown Analyst: This is Juan on for Ryan. Congrats again on the print. Thanks for walking through the productivity gains from AI earlier, and how the insurance itself is insulated from AI disruption. But what do you think about that potential top-of-funnel disruption from AI on the insurance side. On the one hand, these tools could affect that great high-intent funnel that you have at closing. But on the other, it also could expand distribution to a broader audience. So do you see Porch is like a net AI beneficiary here? Matt Ehrlichman: So yes, for us, it doesn't really matter where the consumer is buying homeowners insurance. We want to be plugged into those channels. And so if digital agencies or our existing agency partners as they will get integrated into the various AI systems, that's great. We're just one of the options that's there for the consumers and because we have more insights about that consumer's home. If it's a lower-risk consumer, we're going to be a very attractive option for them. And so we are focused on partnering with all of these different great agencies that are out there, having really deep relationships and partnerships with them being a great partner for them in helping these agencies to grow their business. And we believe insurance as a product that is a complex product to buy and that consumers need and want a licensed agent to work with them. And if consumer behavior changes, we're going to be where those consumers are, whether it's digital agencies or other. But being the actual insurance product for us in this role is a great place to be and being an insurance product that has differentiated data and therefore, differentiated pricing is a really great place to be because at the end of the day, insurance -- consumers need insurance, and we're going to be a really good option for them. Unknown Analyst: Got it. Yes, that makes a lot of sense. And are there any changes in your appetite to deploy the excess surplus at the Reciprocal for M&A? Matt Ehrlichman: Perhaps. I mean, we mentioned last quarter that -- actually, we really mentioned several quarters ago that we're turning on the M&A engine and starting to build the pipeline. And so certainly, we're executing against that part of the strategy. We do expect over time that when there is the right opportunity, that we will take advantage of it. Certainly, the capital exists, as we talked about today, at the Reciprocal to be able to execute against the right opportunities. We're excited about that. We're excited about our capabilities to do some really good things there. But we're going to be very disciplined and pragmatic about it and make sure that the first things we do are right down the middle of the fairway. So but yes, I do -- it's certainly an opportunity, and we'll share more when it's the right time. Operator: Our next question comes from the line of Timothy D'Agostino with B. Riley Securities. Timothy D'Agostino: Congrats on the quarter. Do you want to touch back on the rollout of the Porch Insurance product? And you all have provided really helpful commentary. But I guess, at the start of 2Q, so in the sample time line, compared to January when it originally rolled out, could you maybe provide some more color to us on are you seeing more agents interact with it? Are you getting better feedback just overall just color, as we enter the second quarter with this product, what agents are saying and maybe what homeowners you're saying? That would be great color. Matthew Neagle: Sure. We remain excited about the Porch Insurance offering that we just rolled out here a little while ago to agents. And what I would say is, there's a lot of excitement from the agents. We're learning a lot from having the product in market. And we do expect it to ramp over time, both as we get new policies in, and then we get renewal policies there. Some of what agents are excited about, it is the only product in the market that has a warranty attached to it. It is also a product that is designed for home buyers, in that we provide free moving services and a moving concierge. Agents are also excited about the premium commission that we can afford to pay as part of the Porch Insurance product. And so all of that has generated energy and excitement in the industry. And I think it will just take time as we build up our book. The HOA book, we've built up over 15 years now. And so we're going to start building and that has already started to happen. Timothy D'Agostino: Okay. Great. And then I just wanted to turn to software and data and consumer services. I know there was some color about kind of the go-forward plan there. But I guess, when we do start to see an unthawing in the housing market, should we expect like the annualized average revenue per company and revenue per monetized transaction to continue to increase? Just kind of getting a better understanding of how we should think about these KPIs when we get to a point when the housing market starts to unfold a little bit. Matthew Neagle: Sure. The -- so I'll separate from software and data KPIs versus consumer services. The software and data is more closely tied to transaction volumes in the housing market. As Shawn mentioned in the comments, most of those software services are priced on a per-transaction basis. And so we do expect that as housing market activity picks up, you would see an increase in the average revenue per company because each of those -- on average, those companies will do more transactions. We have taken steps over the last couple of years as the market has been slow to position those companies for growth. And so we've invested in innovation. We've invested in pricing. And so we do believe that as the marketing -- or the housing activity picks up, we will see top line growth and that most of that top line growth can flow to the bottom. On the consumer services side, there are some parts of that business that are tied to housing market activity, most notably our moving group. And so you would see some tailwind in moving as housing activity picks up? And we see that in a number of transactions, not necessarily in the revenue per transaction. Operator: Our next question comes from the line of Matt VanVliet with Cantor. Matthew VanVliet: Maybe I wanted to narrow in on the forward trajectory of the metric around agency branch locations. I know that was a big driver over the last several quarters to build that number, but where are we in terms of saturation in your key markets? How much more room does that have to grow as a near-term driver? Matthew Neagle: Yes. So the -- I'll take that, and Matt, you can add on if there's anything there. I would say we're still relatively early. We have invested in building out the distribution team. It's only been fairly recently that we've been at kind of the full capacity as we've built up that team. We've also invested in senior leadership there. And we can foresee several years of runway with the team that we have. Some of that is still in our core market of Texas, but there's a lot of room in the geographies outside Texas. And then you also have to think that over time, we can expand into additional geographies beyond the ones where we are today. And so I don't see any near-term constraints on our ability to grow agent distribution. Matt Ehrlichman: I'm going to just delve down on the last point to make sure it stuck, which is Texas, our largest most mature market, still has a long way to go, like we have just a fraction of the total agencies. The other states that are newer as very early in the number of agencies versus the total. And then like Matthew just talked about, there's lots of other states we want to expand into. And we're getting to that point where we can start to be able to reopen more states, and that will be an exciting time, certainly for us because that just opens up big new pools of opportunities. But there's give or take, almost 40,000, I think it is independent agents. And so there's a lot of opportunity out there. Matthew VanVliet: All right. Very helpful. And you drove very nice growth in the conversion rates, and it sounds like that was a big driver in the quarter, but you mentioned to one of the questions earlier that you really haven't necessarily used some of the levers you have there to drive maybe even greater quote, and then conversion rates. So what would you want to see in the market? What would you want to hear from maybe the agents to start using that lever a little bit more aggressively, whether that's through commission rates or just pure pricing or policies? Curious on what you're watching and when or if that might be a greater lever to pull? Matt Ehrlichman: Yes. I mean, I think, the key thing there -- it's a really good question. The key thing there is that we and just personally me, I just want to do this for a long, long time. This is the last thing I'm going to do. And so to your question, it's a good one. Could we grow much, much faster this year? Yes. I mean there's plenty of capital, there's plenty of quote volume, plenty of margin in the system. We could grow much faster this year. But we really want to be able to stack year after year after year after year of really attractive growth, expanding margins each year at Porch Group for shareholders, and then also continuing to grow statutory surplus. And so for us to be able to grow like we are, while also growing statutory surplus and seeing the margin expansion that we're going to be demonstrating here this year, that combination, we believe, if you just stack those years, it becomes really, really valuable here over time, and we'll just prove through the results, that we're able to go and deliver that. But for us, we think that turns into a really exceptional and very sustainable outcome over time. And so that's really what we're trying to solve to. Yes, we could grow much faster. Yes, there may be opportunities in the market where we would pull that lever harder. But right now, I mean, you can see we're certainly pleased with kind of the type of growth. Without really having to move the price per new customer that much and be able to get the kind of results that we are. Operator: And at this time, we have no further questions. That concludes our Q&A session. I will now turn the call back over to Matt Ehrlichman, for closing remarks. Matt Ehrlichman: I'll just say I appreciate first of all the questions. Thank you all. I appreciate those that are along in this journey with us. This is an exciting time for the company. The feel of the company is fantastic. The energy is great. I do think the teams are executing really well and are excited about where we're going. It's clear to us these next several years are going to be really fun years, and I appreciate those that are with us on that ride. Have a great day, everybody. Talk to you soon. Operator: This concludes today's conference call. You may now disconnect your lines. Have a pleasant day.
Operator: Greetings, and welcome to the Incyte First Quarter 2026 Earnings Conference Call Webcast. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions] It's now my pleasure to turn the call over to Alexis Smith, Vice President, Head of Investor Relations. Please go ahead, Alexis. Alexis Smith: Thank you. Good morning, and welcome to Incyte's First Quarter 2026 Earnings Conference Call. Before we begin, I encourage everyone to go to the Investors section of our website to find the press release, related financial tables and slides that follow today's discussion. On today's call, I'm joined by Bill, Pablo and Tom, who will deliver our prepared remarks. Steven, Dave and Mohamed will also be available for the Q&A portion of today's call. I would like to point out that we will be making forward-looking statements, which are based on our current expectations and beliefs. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to consult the risk factors discussed in our SEC filings for additional detail. I will now hand the call over to Bill. William Meury: Thank you, Alexis, and good morning, everyone. We're off to a strong start in 2026 with net sales up 20% year-over-year, driven by strong demand across our entire portfolio. In parallel, we advanced the pipeline with key regulatory and clinical milestones. We view '26 as a year of strategic progress as we transition Incyte beyond a single cornerstone product toward a high-quality, growth-oriented portfolio across hematology, oncology and immunology. This progress will come from multiple sources, the continued organic growth from our commercial portfolio, the execution of life cycle launches of key brands, the advancement of a broad increasingly late-stage pipeline and a focused approach to business development. The sequencing and pace of execution here matters as these efforts are intended to lay the foundation for a future beyond Jakafi. During the quarter, the FDA accepted our regulatory application for povorcitinib in patients with moderate to severe HS. The application was submitted ahead of schedule and is supported by a robust high-quality data set across both pre- and post-biologic patient populations. If approved, we believe povo should be a significant growth driver for Incyte as the first FDA-approved oral anti-inflammatory treatment for HS, a disease which affects more than 300,000 people in the United States. We also remain on track for several regulatory decisions this year, including Jakafi XR, which has the potential to generate meaningful sales and serve as an important sales bridge and Opzelura for moderate atopic dermatitis in Europe, a key future growth opportunity for the brand and our international business. Finally, we expect global submissions from Monjuvi in the first-line DLBCL in the first half of the year with approval and launch anticipated in early 2027. Across the pipeline, we continue to advance novel compounds that support our broader transition to a hem/onc I&I company. The pipeline reflects a deliberate balance of risk and reward, combining programs with the potential for outsized returns alongside opportunities that can deliver incremental but highly reliable growth. This work is backed by an experienced clinical development and clinical operations team and consistent execution across trials. In hematology, we had a positive end of phase meeting with the FDA in the first quarter and are on track to initiate our Phase III study in evaluating our mutant CALR antibody 989 in previously treated CALR positive patients with ET by midyear. This represents an important step as we continue to build a portfolio of molecularly targeted therapies, which Pablo will discuss in more detail shortly. In oncology, we now have 4 pivotal trials underway across colorectal, ovarian and pancreatic cancers, including the recent initiation of our G12D program in first-line pancreatic cancer earlier this month. These programs target areas of significant unmet need and represent meaningful long-term growth opportunities for the company. In immunology, we are advancing registration programs in mild to moderate HS for Opzelura and moderate to severe HS, vitiligo and PN for povorcitinib. In addition to the regulatory acceptance for povo and HS mentioned earlier, today, we announced positive results from both Phase III registration studies in adults with nonsegmental vitiligo. These results will support a regulatory application in nonsegmental vitiligo expected in the first half of 2027. Over time, we believe the I&I portfolio at Incyte has the potential to become a significant contributor to the business, representing approximately 1/3 of total revenue by 2030. Finally, I want to take a moment to talk about management. At this stage of the company, our results depend largely on the strength of our management team. Experience, judgment, decision-making and the ability to execute strategic plans. With that context, we have made several executive appointments. This morning, we announced the appointment of Suky Upadhyay as Chief Financial Officer. Suky brings deep experience leading large finance organizations, most recently Zimmer Biomet and Bristol-Myers Squibb. We also announced the appointment of Pablo Cagnoni as President, Incyte and Global Head of Research and Development; and Steven Stein as Executive Vice President and Chief Medical Officer and Head of Late-stage Development. Additionally, Mohamed Issa was appointed as Executive Vice President and Head of U.S. Commercial, coinciding with the integration of our U.S. commercial operations into a single organization. Mohamed is an experienced executive with a track record of new product launch planning and operations. The new structure is intended to establish consistent standards and enterprise-level capabilities across analytics, market access, sales operations and patient services, creating a launch-ready organization in 2026. These capabilities can be leveraged across the portfolio to maximize the return on our commercial investments. Taken together, these appointments give us the management experience and operational oversight for the next phase of the company. Now turning to the quarter. Total revenue in the first quarter of '26 was $1.27 billion, up 21% over prior year. Net sales in the first quarter totaled $1.1 billion, representing 20% growth year-over-year. Sales increased for every marketed product, both in the United States and internationally, and was driven by strong prescription and volume demand across the portfolio. Jakafi sales in the first quarter were $758 million, up 7% year-over-year. Prescription demand increased 6% with broad-based growth across all indications, MF, PV and GVHD. New patient starts remain strong. The prescriber base is stable and a formulary coverage is broad, providing an important foundation for the Jakafi XR launch. We anticipate the approval and launch of XR in the middle of the year. Our immediate focus will be on securing adequate formulary coverage for XR over the next 12 months post launch. We estimate that XR can achieve 10% to 30% of Jakafi's business by 2029. We'll provide more insights on the launch in future quarters. Sales for our core business, excluding Jakafi, were up 63% year-over-year, with contributions across hematology, oncology and immunology. This business will be supported by 4 new product launches over the next 12 months including Jakafi XR, Opzelura for moderate AD dermatitis in Europe, Monjuvi in first-line DLBCL and povorcitinib in HS. As we've discussed, our core business ex Jakafi has the potential to approach $3 billion to $4 billion by 2030, reflecting the strength of the portfolio and continued execution. It is becoming an increasingly important part of how we transition the company for long-term growth. Opzelura continues to be the largest single contributor to the core business ex Jakafi with sales of $143 million, up 20% versus prior year. In the U.S., sales were $106 million, an increase of 12% versus the first quarter of '25. The underlying prescription demand for this business is strong, up 17% year-over-year, which is supported by the continued adoption of nonsteroidal topical therapies. Internationally, growth remains robust in vitiligo where we see strong uptake across markets. In the first quarter, sales totaled $37 million, up 56% year-over-year. Internationally, growth remains robust in Vitiligo, where we see strong uptake across markets. As a reminder, Opzelura is under review by European regulators for moderate AD, and we expect approval and launch in the second half of the year. The moderate AD indication has the potential to contribute meaningfully to top line revenue beginning later this year. For full year '26, we anticipate that roughly 80% of revenue will come from the U.S. and 20% from international markets. In Hematology and Oncology, net sales grew 116% to $204 million. Niktimvo, Monjuvi and Zynyz were the largest contributors to growth in the quarter. Niktimvo has now entered its second year following its launch in the first quarter of '25. Net sales were $55 million in the first quarter of '26, reflecting a strong consistent new patient start profile and solid persistency. We've built a broad growing prescriber base with virtually every BMT center in the United States using Niktimvo with all becoming repeat customers. Within 12 months, Niktimvo has captured 32% of the third line plus market. Finally, formulary and payer coverage remains strong for the brand. Monjuvi sales were $49 million in the first quarter, up 67% year-over-year. Growth was primarily driven by uptake in follicular lymphoma following approvals in the U.S. and international markets. Looking ahead, the potential U.S. approval in first-line DLBCL represents an incremental growth opportunity starting in 2027. Finally, Zynyz sales were $41 million in the first quarter with rapid and robust adoption in SCAC. Now I'll turn the call over to Pablo. Pablo Cagnoni: Thank you, Bill, and good morning, everyone. We have made strong progress year-to-date across our hematology, oncology and immunology franchises, delivering key regulatory and clinical accomplishments. Turning to hematology. We achieved several important milestones for 989, our mutant CALR monoclonal antibody, where pivotal development efforts continue to advance. Most notably, this includes the positive end-of-phase meeting with the FDA in the first quarter. As a result, we're on track to initiate the Phase III study evaluating 989 in patients with previously treated essential thrombocythemia midyear, a key inflection point for this program. Our JAK2 V617F inhibitor program, 058, continues to progress. During the first quarter, we initiated our Phase I dose escalation study evaluating the ASD formulation of 058 in MPN patients with a JAK2 mutation. Preliminary data in a modest number of patients anticipated by year-end, which we expect will provide early evidence of clinical efficacy as well as an increased understanding of the viability of the ASD formulation for future development efforts. In parallel, we're progressing our next-generation compounds through preclinical studies. We remain confident in the underlying thesis that the inhibition of V617F will lead to positive clinical outcomes in patients with MPNs that harbor this mutation. Lastly, in addition to the previously announced positive top line data for tafasitamab in first-line DLBCL, we plan to present the full data set during a featured oral presentation at the upcoming ASCO Annual Meeting in June. This data supports global regulatory submissions for tafasitamab in first-line DLBCL with approval and launch anticipated early next year. Turning to oncology. During the quarter, Zynyz was approved by the European Commission for patients who previously untreated squamous cell anal carcinoma, adding a second indication for Zynyz in Europe. In our pipeline, this month, we initiated a Phase III study evaluating our KRAS G12D inhibitor, 734 in combination with chemotherapy in first-line pancreatic ductal adenocarcinoma or PDAC patients. This marks a significant step for the program as it enters late-stage development in a setting with substantial medical need. Finally, in immunology, we have made meaningful regulatory and clinical progress advancing our late-stage portfolio. Notably, this includes the new drug application acceptance by the FDA for povorcitinib in moderate to severe hidradenitis suppurativa as well as the positive results of our Phase III registrational program evaluating povorcitinib in patients with nonsegmental vitiligo. I will now turn to 989. In the first quarter, we had a positive end of face meeting with the FDA on the development program in ET. The Phase III trial will evaluate 989 compared to best available therapy in both type 1 and nontype 1 mutant CALR positive patients with ET who are resistant or intolerant to at least one prior cytoreductive therapy. The trial will utilize a flexible dosing schedule starting with 750 milligrams IV every 2 weeks, with a single dose escalation option built in to allow for appropriate optimization based on early platelet response. The primary endpoint is durable complete hematologic response or DCHR at week 24. The reduction of mutant CALR VAF from baseline will be evaluated as a key secondary input in the trial, further underscoring the unique mutation-specific and potentially disease modifying profile of 989. We're encouraged by a dialogue with the FDA and have a clear and executable path towards forward Incyte second-line ET with a Phase III study on track to initiate midyear. In parallel to ET, we're progressing our development efforts in myelofibrosis, or MF, where we are evaluating 989 as the first and second line treatment option. Data from our ongoing Phase I program will be shared throughout the year. We remain on track to initiate a Phase III trial evaluating 989 as a second-line treatment in mutant CALR policy patients with MF in the second half of 2026, pending alignment with the FDA in the middle of the year. The Phase I cohort evaluating 989 as a single agent and in combination with ruxolitinib in patients with previously untreated MF is enrolling well. Finally, we initiated and completed a Phase I study evaluating a subcutaneous formulation of 989 in healthy volunteers, supporting our strategy to expand utility and improve convenience for patients. These results enable the initiation of a Phase I study in mutant CALR positive patients in the second quarter. I will now turn to our oncology portfolio. Starting with 734, a KRAS G12D inhibitor, which is emerging as a very important pipeline opportunity for Incyte. The Phase III trial evaluating 734 in combination with standard of care chemotherapy, gemcitabine plus nab-paclitaxel or modified FOLFIRINOX in first-line PDAC is underway. More than 200,000 patients are diagnosed with PDAC with G12D being the most common driver mutation impacting 40% of patients. Today, there are no molecular targeted therapies for patients with pancreatic cancer and chemotherapy has been the foundation of care for decades. What we believe is particularly important is the combination profile of 734 with standard of care chemotherapy. To date, 734 has demonstrated a manageable tolerability profile we combined with either gemcitabine plus nab-paclitaxel or modified FOLFIRINOX without compromising chemotherapy dose intensity. Given how PDAC is treated in practice, especially in the first-line setting, that ability to combine effectively with both full dose chemotherapy regimens is critical. This is reflected in our Phase III development program. Our maturing Phase I data reinforces our conviction in this opportunity, which we view as increasingly derisked. We plan to share efficacy and safety data from the Phase I study in combination with modified FOLFIRINOX and gem/nab in first-line PDAC patients in the second half of the year. The distinguishing feature of our development approach is the scale and depth of our Phase I clinical program where roughly 400 patients have been treated with 734 across PDAC, colorectal, non-small cell lung and other 12D mutated cancers. This has allowed us to build a robust and comprehensive understanding of both clinical activity, safety and tolerability across tumor types and treatment settings, which is informing our development efforts. With a strong early clinical foundation and Phase III development now underway, our focus remains on execution as we advance this program that has the potential to become the first KRAS G12D specific inhibitor approved in first-line PDAC. In parallel, we continue to evaluate expansion opportunities in additional G12D-driven tumors, and we plan to share more about our efforts later this year. Oncology portfolio has reached an important inflection point with each of our core programs now in registrational development and actively enrolling patients. Pivotal efforts for A90, a TGF-beta receptor 2 by PD-1 bispecific are underway. The Phase III trial evaluating A90 in combination with FOLFIRINOX bevacizumab in first-line MSS colorectal cancer patients is ongoing. In the second half of the year, we anticipate sharing additional data from the Phase I study in combination with FOLFIRINOX, in first-line colorectal patients as well as a combination with bevacizumab in previously treated patients with colorectal cancer. 667, our CDK2 inhibitors in pivotal development in patients with platinum-resistant ovarian cancer Cyclin E1 over expression, a biomarker-defined population with significant medical need. The MAESTRO clinical program consists of 3 studies, 2 ongoing trials, a Phase II single arm study and a Phase III versus investigator's choice chemotherapy and a planned Phase III study in the first-line maintenance setting, which we expect to initiate in the second half of 2026. Finally, in immunology, we have made significant progress advancing our late-stage development efforts for povorcitinib, our oral JAK1 small molecule inhibitor. This includes the NDA acceptance in HS and as announced today, the positive results from our Phase II/III registrational program in nonsegmental vitiligo. In HS, last month, at the American Academy of Dermatology Annual Meeting, we presented late-breaking 54-week data from our Phase III STOP-HS program, which reinforced both the durability and the breadth of response associated with long-term povorcitinib treatment. Continuous improvements in clinical outcomes were observed at week 54 and with up to 71% and 57% of patients achieving HiSCR50 and HiSCR75 respectively. Further, up to 29% of patients achieved HiSCR100, the most stringent end point in HS which represents a 100% reduction in abscess and inflammatory nodules count with no increase in draining tunnels. Up to 20% of patients achieved complete clearance of draining tunnels and nodules at week 54. Clinically meaningful improvements in skin pain, fatigue and quality of life measures, outcomes that are highly relevant to patients and clinicians managing this chronic disease were also observed. Finally, from a safety perspective, both 45 and 75 milligram doses were generally well tolerated throughout the study, supporting the profile for chronic use in HS. This data supports the potential for povorcitinib to deliver symptom control and durable disease improvement in patients with moderate to severe HS, both before and after biologic therapy. With the regulatory application accepted, we look forward to working with the FDA towards a potential approval and launch in early 2027. Today, we also announced positive results from our Phase III program evaluating povorcitinib in adults with nonsegmental vitiligo. Our Phase III program is evaluating the efficacy, safety and tolerability of povorcitinib compared to placebo in patients with nonsegmental vitiligo across 2 identical Phase III studies, STOP-V1 and STOP-V2 for 52 weeks. The program enrolled over 900 patients including 456 patients who received a 30-milligram dose of povorcitinib. In both trials, povorcitinib achieved the primary endpoint of greater than or equal to 75% reduction in facial vitiligo area scoring index, F-VASI, from baseline to week 52, demonstrating statistically significant and clinically meaningful reductions in facial vitiligo compared to placebo. Statistically significant improvements were also observed in key secondary endpoint measures including total vitiligo scoring index 50 or T-VASI 50 at week 52. The 30-milligram dose of povorcitinib was well tolerated. The overall safety profile for 52 weeks is consistent with prior studies with no new safety signals observed. Across both studies, rates of treatment-emergent adverse events of special interest were low between 2% and 3% and similar between the povorcitinib and placebo treatment groups. There were no major adverse cardiovascular events. Only one TEAE of VTE was observed in the povorcitinib treatment group in a patient with multiple confounding risk factors, including smoking history, high BMI and intercurrent pneumonia. These results provide a clear and compelling path towards registration planned for the first half of 2027 and underscore the opportunity to add an oral alternative treatment for patients with vitiligo to our portfolio. We plan to share additional data from the trials in the second half of 2026. Povorcitinib continues to produce compelling data in immune-mediated dermatological conditions. We have seen success in translating early Phase II findings into larger registrational programs with now 4 post Phase III trials across HS and vitiligo. As we look ahead, we expect data from our third indication for prurigo nodularis by end of year. In addition to povorcitinib, we are evaluating Opzelura in a Phase III registrational program for the treatment of mild to moderate HS with top line results expected end of year. If positive, this result would support a supplemental new drug application in 2027. And if approved, Opzelura would provide the first topical treatment option for patients with HS. Our JAK/ANKO franchise is well positioned to provide topical to oral solutions across mild to severe immune-mediated dermatological conditions, and we look forward to providing more updates this year. To close, we have a catalyst-rich year ahead with multiple late-stage data readouts, regulatory milestones and pivotal trial initiations across our 3 core franchises, underscoring the breadth, depth and maturity of our pipeline. With that, I'll turn it over to Tom for a financial update on the quarter. Thomas Tray: Thanks, Pablo. As Bill mentioned earlier, our total revenues and net sales for the first quarter were $1.27 billion and $1.10 billion, respectively, increasing 21% and 20% from the prior year. Our GAAP R&D expenses were $516 million for the quarter, increasing 18% from the prior year, driven by continued investment in our late-stage development assets including our mutant CALR, G12D and CDK 2 programs. Moving to SG&A. GAAP SG&A expenses were $328 million for the quarter, increasing 1% year-over-year. Ongoing operating expenses for the first quarter of 2026 increased 14% year-over-year compared to a 19% increase in ongoing revenues during the same period, leading to a continued increase in operating leverage and margins. We reaffirm our full year 2026 total net sales, R&D and SG&A operating expense guidance. Total net sales guidance for the full year 2026 is $4.77 billion to $4.94 billion representing a 10% to 13% increase from the prior year. This includes net sales expectations for Jakafi of $3.22 billion to $3.27 billion, Opzelura of $750 million the $790 million and hematology and oncology products of $800 million to $880 million. Total GAAP R&D and SG&A operating expenses are expected to be $3.495 billion to $3.675 billion for the full year. Finally, we anticipate cost of sales to remain relatively stable, representing approximately 9% of net sales. I'll now turn the call back over to Bill. William Meury: Thanks, Tom. In closing, we're off to a strong start to the year. Our core business continues to deliver durable growth. Our pipeline is advancing with multiple catalysts ahead, and we've strengthened our leadership team to support the next phase of execution. As we look ahead, we see 2026 as a year of execution with multiple inflection points across the business that we believe will further strengthen both our near-term performance and long-term growth trajectory. And with that, I'll turn the call over to the operator for Q&A. Operator: [Operator Instructions] Our first question today is coming from Tazeen Ahmad from Bank of America. Tazeen Ahmad: Congrats on the positive data for povo for the nonsegmental vitiligo. I wanted to ask what your thoughts are as you prepared the next step, how do you see this coexisting with Opzelura in the commercial space? What's been your experience with marketing and this indication so far? And do you think that each of these drugs could be appealing for a different segment of vitiligo? William Meury: Yes. Thanks for the question, Tazeen. I'll make a few comments and then ask Mohamed, our U.S. commercial head, to also expand on how we're thinking about vitiligo. I think there's a real opportunity here with the FDA approvals of oral treatments to essentially unlock the vitiligo market in the same way that advanced systemic therapies unlocked AD and psoriasis. I think that these approvals will create awareness that vitiligo is a chronic inflammatory disorder. And I think that is important for everybody that's going to be in the market. This is definitely about medicalizing the condition. Frankly, I think Incyte does have an advantage in that we have a topical to oral solution. There is a natural sequencing that sets up in the vitiligo market and we're able to cover sort of the waterfront with both Opzelura as well as with povorcitinib. And that's ultimately going to be, I think, the key to success here -- we have the advantage of incumbency. We have direct ties to the providers. We know how they think about this condition. We understand the education that's required to increase the treatment rate -- and we, of course, have interactions with payers on this front, too. And so I think it's going to be an important contributor to povo being 1 of the 3 indications that we're pursuing right now. Mohamed, do you have anything to add? Mohamed Issa: Really well said, Bill. Look, maybe just some context to the indications. We have obviously reason to believe there's 1.5 million people living with vitiligo in the U.S. and only 20% to 30% seek treatment, like Bill mentioned, a good portion of those patients, about 35% of them have a BSA less than 5. Those are going to be really good patient segments for Opzelura. You even have a patient segment between 5 and 10 BSA. That's also a target patient population for Opzelura. And then for patients with BSA greater than 10, where systemic therapy is most likely we estimate that total addressable market to be about $1.5 billion to $2 billion, which gives povo a great opportunity to address that need as well. And like Bill mentioned, having a topical to oral continuum for vitiligo and even HS if both products get approved, puts us in a really unique position as Incyte to satisfy that patient journey from the beginning all the way to advanced treatment. Operator: Next question today is coming from James Shin from Deutsche Bank. James Shin: I appreciate all the color on 989. But I just wanted to check in, will 989's EHA update be mostly a check-the-box kind of update? Or will there be some new wrinkles to glean? And just if I could sneak one in. I don't know if Suky is on the call, but Bill, I know you guys mentioned previously having expense discipline, but what changes, if any, will Suky brings? William Meury: Great. James, you snuck in a second question, so there may be a penalty after the call. I'll let Pablo answer the first question. Pablo Cagnoni: Thank you for the question. So the update at EHA it's going to be pretty substantial. We have continued to enroll in these studies. We have longer follow-up and we have continued to deepen our translational understanding of the effects of 989 in patients with both ET and MF. So you should expect continued growth in number of patients. In ET, we'll have approximately 100 patients enrolled and we'll report data in those. For MF in terms of the second line, we'll have about 45 patients, 45 patients, single agent and about 15 to 16 patients in combination with ruxolitinib. And I think, first of all, the data has continued to evolve well. We think the durability is an important point. We think the continued tolerability of 989 in this patient population is very important. And we do think that continue to see how the translational part of the story continues to evolve with clear evidence of disease eradication disease modification by 989 in patients with MPN is very important. So you should expect to see a lot more of that at EHA. William Meury: Yes. And as it relates to Suky, look, he has extensive experience at both large and small companies. We have a very strong finance department at the company. He's going to focus on the things that a CFO needs to focus on. both strategically and operationally. You want to make sure that your budget planning process is efficient and sharp. You want to make sure that capital allocation decisions are made intelligently. There's, of course, a role in terms of setting up the right systems so that we can scale the company and we're really glad to have him. So thanks, James. Operator: Next question is coming from Stephen Willey from Stifel. Stephen Willey: So I guess, congrats on securing the 24-week CHR endpoint in the pivotal ET trial. But just wondering if you can provide some more detail around the mechanics of dose escalation just in terms of the platelet response criteria that will be used to trigger that and then just how that works from a timing perspective. And then just as a follow-up, just given some of the flexibility here that you were given from the agency around the EP around the ET end point, just curious how you think this now kind of reads into your ability to secure additional flexibility from the agency in the pivotal second-line MF trial? William Meury: Go ahead, Pablo. Pablo Cagnoni: Certainly, so let me start with your last point there because I think it's very important. We had a very constructive set of interactions with FDA. So we're very, very happy how these conversations are going. And I think they recognize 989 is a fundamentally different way to treat patients with MPN. It's truly not only molecular targeted therapy but has the potential for disease modification, and that needs to be contemplated as we implement Phase III trials and as we select endpoint for these Phase III trials. So in terms of the conversations on MF, we believe, as you alluded to, that this will allow us to have a conversation with FDA about defining endpoints in MF that truly reflect the effects of 989 in terms of normalizing hematopoiesis, which we think it's a critical difference compared with existing therapies for patients with MF. So we'll provide more updates on this later in the year, but we think that dialogue is going to be very constructive as it was in ET. In terms of your specific question about ET, if you remember the data we presented last year, with 989 does in patients with ET is a very rapid normalization in platelet count that happens very soon after the first dose. And by the end of the first cycle, it's about a month, most of the patients that will normalize plates have done so. So we believe that an early dose escalation at that point for patients that are not early responders is the right approach here to take into account the heterogeneity that we see sometimes in the response. So we believe that by this, we'll be able to cover patients with all kinds of mutations and have a treatment effect across the board in patients with ET. Operator: Our next question today is coming from Etzer Darout from Barclays. Etzer Darout: Great. Thanks for today's earnings update. So we noticed the updated guidance for ruxolitinib now in the second half versus early 2027 for first-line GVHD. Just -- maybe if you could talk about your expectation for that study? And given sort of the move up in time line, potential to maybe accelerate the pivotal program in combo with ruxolitinib? William Meury: I just want to -- I want to make sure your question is related to Niktimvo and the Phase III study with Jakafi? Etzer Darout: Yes. The movement in the second half out versus early 2027 that you had previously guided to? William Meury: Go ahead, Pablo. Pablo Cagnoni: So let me take that. So the study -- the randomized Phase II study combining Niktimvo with rux and comparing that with rux and steroids, accrued very quickly, well ahead of schedule. As a result of that, we'll have data before the end of this year, and that will help us define the rest of the regulatory strategy to bring Niktimvo to first-line chronic graft versus host disease patients. Operator: The next question today is coming from Ash Verma from UBS. Ashwani Verma: So just on 989, trying to understand the implications of this flexible dose escalation in ET pivotal trial design for the MF indication. So I mean how do you think that plays out? Like could this be a challenge if you have to titrate patients and some don't get the benefit of the efficacy unless you get the 2500 mg dose? And especially like how would that be relevant if you're pursuing the first line MF indication? Pablo Cagnoni: When you look at the data that we presented twice last year, a substantial percentage of patients with ET respond by normalizing platelet count at doses well below the dose escalation of 2,500. Based on that, we think that the starting dose of 750 milligrams IV every other week, is the right way to start because a lot of the patients with normalized platelet count with that. And that alone will support achieving the primary endpoint of the study, which is durable complete hematologic response at 24 weeks. Now there's a percentage of patients like it tends to happen molecular targeted therapies that are less sensitive to 989. And for those patients, we thought one step up to 2,500 should cover the efficacy in that patient population. So we basically designed the study to try to cover the heterogeneity in this population. We believe that the early dose escalation step is the right way to do it. We believe that the rapid effect of 989 normalizing platelets in patients that will do so, will allow us to very quickly make that determination. And obviously, as I mentioned at the beginning, we had a very constructive discussion with FDA, and we reached an agreement on this. Operator: Next question is coming from Michael Schmidt from Guggenheim. Michael Schmidt: I had one on 734, the KRAS G12D program. So nice to see the chemo combo study now up and running in PDAC. Pablo, just curious how you think about either potentially pursuing other registration opportunities in PDA perhaps with investigational therapies such as pan-RAS inhibitors? Or -- and then how do you think about addressing other tumor types such as lung and colorectal cancers? Pablo Cagnoni: Thank you for the question, Michael. So first of all, let me just say, we are very pleased how this -- the data are evolving. We'll have an update for all of you later in the year, but the combination with chemotherapy, which we showed the ability earlier this year at the ASCO GI meeting, but now the response rate data is coming in, and we'll have that as well as more durability data later in the year, and we're very pleased with the progress of this program and the implementation of the Phase III pivotal trial in first line. In parallel with that, we've done a lot of work in other contexts. First of all, in pancreatic cancer, we have a strong interest in adjuvant and we're trying to decide the right design there. You'll hear more about that in the second half of the year. We're also then in combination with Erbitux, which I think one of the really important advantage of 734 in this competitive landscape is the absence of rash. And so the combination with EGFR inhibitors is key, and it will be key, we believe, to develop these therapies in colorectal cancer. So you'll hear more about that later in the year, which could be both in combination with Erbitux alone or Erbitux plus chemotherapy in different lines of therapy in colorectal cancer. And finally, we have enrolled a cohort of patients with non-small cell lung cancer. We'll have data on that in the second half of the year. All this gives you an idea how we're going to potentially expand this program later in the year, and we'll give you a comprehensive update when we present the updated data. Operator: Next question is coming from Matt Phipps from William Blair. Matthew Phipps: I'll follow up on 734. I just wanted to confirm that all studies have resumed enrollment following that temporary pause a month or so ago to review those pneumonitis events? And I guess, is a history of pneumonitis and going to be an exclusion criteria for DAWN-303 Phase II study? Pablo Cagnoni: So let me recap on what happened here because it's important to have clarity. We had the event of pneumonitis. We reported -- we did a full program review that encounter 4 cases of pneumonitis in more than 350 patients treated. Importantly, 3 of those patients were receiving 734 in combination with chemotherapy. And 2 of the patients had concurrent infections. And an in-depth review of the data concluded there was no signal that about the incidence of 734 producing pneumonitis in these patients. But it's very important to remember. Now the Phase III study was never put in pause. We -- what we did is in order to amend consent forms and investigator brochure, Europe, it's an administrative reason, they put enrollment on hold in the Phase I study. So that -- those have been amended now. It will reopen. Nothing ever stopped in the U.S. We have continued to enroll patients. The implementation of the Phase III study continues apace without any interruptions. Operator: The next question is coming from Judah Frommer from Morgan Stanley. Judah Frommer: Just curious on Opzelura. If you could comment on competition, within the nonsteroidal topical market. Is that still a growing pie? Are you fighting for share just within the market kind of ex steroids? And then just curious on -- in terms of the long-term guide for Opzelura doubling, how important is it to have povo approved in those indications for those multiple tools within the tool bag for those indications? William Meury: Yes, Judah, thanks for the question. I'll start with the second question that you asked and then double back on the first. When you think about this business over the next 5 years, there's essentially 3 components to growth. And I do believe Opzelura has the potential to grow it, let's call it, a 10% to 15% CAGR over this period of time. First component is organic growth, which is what you're talking about, continued penetration of the AD and vitiligo markets. The second component of growth is the launch of the HS indication for Opzelura and mild to moderate HS. And then there's the launch of Opzelura in Europe for atopic dermatitis, which could throw off $200 million to $300 million in incremental sales. And it doesn't require any heroic math to forecast at Opzelura can approach $1 billion -- let's call it $1.3 billion roughly by 2030. Now as it relates to competition in the United States, I'm not so much focused on these modest market share shifts that you can see between products on a monthly basis. A few points here. In the first quarter, our share of new patient starts in the United States was 46%. And new patient starts, as you know, our NBRx is sort of the future, it's growth. TRx is tell you a lot about the base in the past. But when you're really monitoring and managing a business, you're focused on that NBRx number. NBRx volume or new patient start volume in the first quarter was up over 30% year-over-year and was at a higher rate than the market. And we had 2 to 4x more new patient starts in the first quarter than any of the other branded topicals. I think the real key here, and this is true for us as well as anybody else that has a topical is that the use TCIs of is starting to moderate, and there is a shift from TCIs and steroids to these nonsteroidal branded topicals. And you see that month-to-month and quarter-to-quarter. I think the benefit we have is Opzelura is superior in terms of skin clearance and itch relief relative to a TCI. And it is a better long-term option than steroid. I think the product is set up perfectly over the next 5 years, and we're in a very, very strong position, and you have the benefit of operating in a market where there's a real tailwind, and that is the move away from steroids and TCIs. I think that probably covers it. I think as it relates to Povo, I think that's upside. The fact that we are able in both vitiligo and in potentially HS to offer a complete treatment solution topical to oral, that's how I think about it. Thanks for the question. Operator: Next question today is coming from Ren Benjamin from Citizens. Reni Benjamin: Congrats on the quarter. My question is on 058 in the Phase I with the new ASD formulation. Can you talk to us a little bit more about how we should be evaluating those results? And when we see it in the second half, what you're looking for and how we view this and will the deal you made with Prelude and that molecule for which you have an option. When do you guys ultimately make a decision between the 2 and how? Pablo Cagnoni: Thank you for the question. So as I mentioned during my prepared remarks, we are now in the clinic with the new formulation, and we're going to have an update for you before the end of the year. What we would love to see here is that with the new formulation, if we achieve the right exposures that our preclinical data predicted were necessary to see an effect that then we will be able to confirm our conviction that inhibiting VC617F in this way with pseudokinase inhibitor, will deliver positive clinical outcomes of patients with MPNs. So that's basically the goal of the program for this year to deliver enough exposures with the new formulation to achieve concentrations that will hit the target hard enough to show clinical outcomes that matter. Now when it comes to Prelude, we see that as a next-generation program potentially for us. We have internal next-generation programs, and we have an external next generation program, which is a Prelude 1. That's a time-based option. We'll have to make a decision at some point in time. And that data will be compared with the data from our internal programs as well as the data from the LEAD 058, and then we'll make a decision which once we move forward. Operator: Our next question is coming from Mitchell Kapoor from H.C. Wainwright. Unknown Analyst: This is [indiscernible] on for Mitchell Kapoor. Congratulations again on the data. I was curious about povorcitinib in HP. So where do you expect to be earliest uptake to take place? Would you say in biologic naive patients post biologic failures or patients with specific disease features such as like draining tunnels pain or a high inflammatory burden? William Meury: Yes, Mitchell, thanks for the -- or excuse me, [indiscernible] thanks for the question. I'll make a few comments and then Mohamed will add. First of all, I would just step back and say that I think the HS market is tailor-made for an oral. This market is set up for sequencing oral to injectables. And that's something that's been missing. Think about all the value that's been ascribed to orals in the obesity market and povo has the potential to be the first oral anti-inflammatory. We expect to have a broad label, both in the pre- and post-biologic setting, which I think is a real advantage. 70% of our clinical data is in prebiologic patients. As it relates to early uptake, you certainly could envision that patients who are on a biologic right now, 1 of the 17s are TNF who have active disease or aren't achieving pain relief or have some injection fatigue could be an early source of utilization. And if you think about the size of the biologic market, there's a range out there in terms of the estimates, it's 50,000 to 75,000 patients. If povorcitinib was to get 10% of 50,000 on an annualized basis, you'd have a couple of hundred million dollars in revenue. But I think the most important point here is we expect that we will capture patients at 2 distinct inflection points after an antibiotic before a biologic. And then after a biologic, whether it's a 17 or TNF alpha. And Mohamed right now is working on preparing that launch. So it is completely wired for success. Mohamed, do you want to add anything? Mohamed Issa: Yes. Look, I mean, HS, as we know, is a large and growing market and has a significant unmet need. The disease is debilitating. It's characterized by chronic pain, drainage and flares and obviously, highly heterogeneous, right, with multiple cytokines. So when you think about the market, as Bill just described in terms of its size, 300,000 patients in the U.S., 200,000 actively seeking treatment and yet only 50,000 of them are in advanced therapy. So povo is positioned to address this market as the first and only oral treatment with biologic-like efficacy across all of the treatment parameters that are quite debilitating and by competing, like Bill mentioned, in both the pre- and post-biologic setting, povo has the potential to be somewhere between $500 million to $1 billion in peak sales. And I think at launch, you can expect an opportunity to capture patients on both sides of that inflection point. Operator: Our next question today is coming from Srikripa Devarakonda from Truist. Srikripa Devarakonda: And congrats on the most recent clinical data as well with povo. I have a question on the rux mutant CALR combo with the first-line data that is expected year-end. Can you remind us of data that suggests any synergistic benefit? And given how well ka is entrenched in the myelofibrosis market, if CALR mutant patients are doing well on Jakafi, where do you envision mutant CALR fitting, like is it a combo? Is it -- could it be a switch add-on? Pablo Cagnoni: Thank you for the question. So let me offer a couple of points. So let's start with the first part of your question about synergy. Preclinically, we saw additive to synergistic effects combining 989 with Jakafi and CALR mutated models. And I think what's important to remember is, first of all, Jakafi as well as it works and as important as a step forward, it has been in patients with MPNs as particularly in CALR mutated patients, very little, if any, disease modification potential. It controls the symptoms, some of the symptoms of the disease. Obviously, it leads to spleen responses. All those effects are much less in patients with CALR mutations. In fact, if you look at the control arms of the COMFORT study or the MANIFEST study, the SVR35 and Jakafi in CALR-mutated patients is approximately 20%. That's in previously untreated patients. So obviously, there's a need for something better for CALR mutated patients even in first-line MF. The second part of the question is Jakafi does have a package, which is obviously produces a fair amount of anemia and thrombocytopenia. So what we're looking to do with 989 is fundamentally different. We're looking to restore normal hematopoesis. We're looking to eliminate malignant megakaryocytes from the bone marrow. We're looking to eliminate CD34 positive mutant CALR positive cells from peripheral blood. And as a result of that shift back to normal hematopoiesis, which as we've seen already, translates into improvements in anemia as well as spleen responses and symptom improvement. So when we put this whole package together, we'll show you the data by the end of the year in a larger group of first-line patients, we will have for you a regulatory strategy for 989 in first-line MF. But we think that the effect of 989 and Jakafi are fundamentally different in this patient population. Operator: The next question is coming from Brian Abrahams from RBC Capital Markets. Brian Abrahams: Sounds like you've made a lot of progress with the 989 subcu form, having completed the healthy volunteer study. So I guess I was wondering if you could maybe tell us about the observations there. And then the scope and dose range that you're going to be testing in this ongoing Phase I study in patients and whether that in and of itself could potentially be bridging or whether you'll need integration of the subcu form into the Phase III? William Meury: Thanks for the question, Brian. Pablo? Pablo Cagnoni: So the data from the healthy volunteer study, as I mentioned in my remarks, has allowed us now to move very quickly into patients. We're going to test a very broad range of doses. Let me just assure you that they will cover all the potential doses that we're using in Phase III in ET and that we could conceivably use in Phase III in patients with MF. So we will have that covered. In terms of implementing this in Phase III studies, this is a question of timing, Brian. Speed is really important here. We need to bring this medicine to market for patients with ET and MF as quickly as possible. We will not slow down the AD study. We're probably not going to slow down the second-line MF study to incorporate the subcu, and we'll have a bridging strategy at the back end -- our goal is to incorporate a subcu formulation in the first line MF study. And right now, the plan allows us to do that. We'll provide an update on both before the end of the year. Operator: Our next question today is coming from Jessica Fye from Morgan Stanley. Jessica Fye: I had another one on 989. I was hoping you could touch on the potential translatability of the ET design to MF as it relates to starting dose. And I guess really more specifically the potential for an up-titration approach particularly in the context of a potential 6-month primary endpoint where we're presumably going to be looking at SVR35 and TSS50 versus looking for an early platelet response like in ET? Pablo Cagnoni: Thank you for the question, Jess. So the journey in MF is just a little bit earlier. We need to spend a little bit more time with FDA discussing the design of the second-line MF study. So I'm going to be a little bit let's open about answering the question in detail. Now I think that the fact that we have an agreement on the potential for -- the potential on the step-up escalation in ET certainly can build -- we can build the framework around that in MF. I think the more important thing in MF to be honest, is to have a constructive dialogue with the agency on the primary endpoint of the study, which we intend to do and for which we have a lot of supporting data. As I mentioned in an answer to a previous question, 989 is a fundamentally different type of medicine for patients with MF. This is about normalizing hematopoiesis not just a nonspecific inhibition of JAK that leads to some symptom improvement and spleen response. It's about normalizing hematopoiesis. We think that needs to be contemplated into the primary endpoint for the study in MF, and we intend to have that conversation with FDA. Conceivably, we could have the same to address the heterogeneity across the population, we could have a dose escalation step as well. In this case, it could take a little bit longer, but we'll have that conversation with the FDA as at the right time. Thanks, Jess. Congratulations on the move to Morgan Stanley. Operator: Our next question today -- actually our final question today will be coming from Derek Archila from Wells Fargo. Derek Archila: Congrats on the progress. This one is for Pablo. If you frame the setup for EHA and the update there earlier, but I guess, is the expectation we should see deepening responses in these MF cohorts at the update I just wanted to reconcile the eradication comment that you made. Pablo Cagnoni: So it's always -- look, we will have data that continues to show the effect of 989 as a disease-modifying therapy. And that consistently will show that we can continue to eliminate -- dramatically reduce in some patients close to eliminate the malignant population of megakaryocytes in the bone marrow and in peripheral blood. And you should see more of the translational data at EHA. Operator: We reached the end of our question-and-answer session. Ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good afternoon, everyone, and welcome to the Sensata Technologies Q1 2026 Earnings Call. [Operator Instructions]. Please also note, today's event is being recorded. I would now like to turn the conference call over to Mr. James Entwistle, Senior Director of Investor Relations. Please go ahead. James Entwistle: Thank you, operator, and good afternoon, everyone. I'm James Entwistle, Senior Director of Investor Relations for Sensata, and I'd like to welcome you to Sensata's First Quarter 2026 Earnings Conference Call. Joining me on today's call are Stephan Von Schuckmann, Sensata's Chief Executive Officer; and Andrew Lynch, Sensata's Chief Financial Officer. In addition to the financial results press release we issued earlier today, we will be referencing a slide presentation during today's conference call. A PDF of this presentation can be downloaded from Sensata's Investor Relations website. This conference call is being recorded, and we will post a replay on our Investor Relations website shortly after the conclusion of today's call. As we begin, I would like to reference Sensata's safe harbor statement on Slide 2. During this conference call, we will make forward-looking statements regarding future events or the financial performance of the company that involve certain risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in our Forms 10-Q and 10-K as well as other filings with the SEC. We encourage you to review our GAAP financial statements in addition to today's presentation. Much of the information that we will discuss during today's earnings call will relate to non-GAAP financial measures. Our GAAP and non-GAAP financials, including reconciliations are included in our earnings release, in the appendices of our presentation materials and in our SEC filings. Stephan will begin the call today with comments on the overall business. Andrew will then cover our detailed results for the first quarter of 2026 and our financial outlook for the second quarter of 2026 Stephan will then return for closing remarks. After that, we will take your questions. Now I would like to turn the call over to Sensata's Chief Executive Officer, Stephan Von Schuckmann. Stephan Von Schuckmann: Thank you, James, and good afternoon, everyone. Let's begin on Slide 3. As I typically do at the start of our earnings calls, I'd like to begin today with an update on Sensata's transformation journey. When we talk about transformation at Sensata, what we mean is that we have embarked on a journey to unlock untapped potential across our organization. We are encouraged that the market has taken notice of the progress we're making. However, what I find even more exciting is the vast opportunity ahead of us. Tapping into that opportunity means maximizing value for our shareholders, sustainably over the short and long term. We'd like to think of this as a pursuit of excellence over multiple phases, and that we are still early in this journey. The initial phase which we completed last year was to define what exit looks like and systematically built into the foundation of our business. Our next phase is one of acceleration, expanding on the foundation by delivering incrementally better performance and increasing focus on strategic initiatives in pursuit of our aspiration to be best-in-class. And finally, transformation maturity means achieving and sustaining best-in-class performance and market leadership. Last year, as we embarked on the first phase of our journey, we define what extent looks like for us. And we deployed a key pillars framework designed to maximize value creation. As we built up a systematic around those pillars, we focused on consistency of execution, sequentially improving each quarter and creating value for our shareholders. When updated during February on our year-end call, I shared that this framework is now foundational to everything that we do and is deeply ingrained in our business. As we advance to the next phase of our journey, our priorities framework is, first, to retain the consistency of execution and margin resilience that we installed in the business over the past year. Second, to continuously compound value by delivering year-over-year growth and margin expansion, not only in aggregate but now also at segment level. And third, to fulfill our growth mandate by delivering on our near-term growth targets while also importantly, prior our future growth engine as we work on the strategic growth initiatives we laid out for each of our segments. In this phase of our transformation, these priorities are all equally important. Balancing strategy, growth and executing effectively is the standard to which we hold ourselves. Just as we did last year, each quarter, we will update you with proof points of our progress. Before we get to the first quarter proof points, allow me to set the stage but where we have made progress these last few months. Our new leadership team is gaining meaningful momentum in their respective areas. Nicolas, and our operations team are making progress on inventory reduction and supplier payment terms optimization, which is evident in our first quarter cash conversion. Similarly, with improved focus on factory performance, productivity is accelerating, which is demonstrated in our first quarter margin expansion. Marcus, Elis and Brian have hit the ground running in their respective roles, and I will share more color on this as I provide segment updates in just a few moments. Before we get to the segments, let's turn to Slide 4, and I will briefly cover our strong first quarter results, which clearly demonstrate the continued and consistent progress that we are making. We delivered revenue and adjusted operating income at the high end of our guidance range, and we exceeded our expectations on adjusted EPS and free cash flow. Free cash flow of $105 million was again a bright spot and this represented 83% conversion, outpacing the first quarter of 2025, which is particularly noteworthy as 2025 was a record year for Sensata. With our improved free cash flow, we progressed further on our deleveraging journey. The results of the quarter are indicative of the progress we are making on our transformation journey and demonstrate that our strategy is creating value for shareholders. This is evident by any in the quarterly results, but also in the sustained improvement in return on invested capital, which has continuously increased and now stands at 10.8%. Last year, I spoke a lot about margin resilience, which requires operating our business with an inherent understanding that headwinds will arise. To prepare for this, we continuously make structural improvements, which increase our underlying earnings power. Biogen resilience not only positions us to manage through headwinds, it also ensures we maximize the benefit from tailwinds. Our Q1 results are an example of margin resilience in action. Despite multiple headwinds, including precious metal and inflation of over 100%, our first quarter adjusted operating margins improved by 30 basis points year-over-year to [ 18.6p ]. The stand in sharp contrast to the first quarter of 2025 when our results decreased 40 basis points from the prior year. While I'm pleased with our consolidated results for the first quarter, I'm even more excited by the performance we are seeing in our segments with our reorganized business. Growth in our clear strategic focus and our Q1 results are indicative of the progress that we are making as we delivered organic growth in each of our segments. Let's turn to Slide 5, and I will take you through a few highlights for each of our segments. In our Automotive business, we again delivered market outgrowth, demonstrating our ability to grow regardless of powertrain mix. As you may recall, we returned to market outgrowth in the back half of 2025 after several challenging quarters. Our growth accelerated to 4% in the first quarter as we are gaining traction on multiple fronts. For example, in Europe, we are outgrowing production as our content per EV continues to improve. In the U.S., we're outgrowing production as our portfolio benefits from the resurgence of truck and SUV production. We're also securing future growth stacking electrification wins with innovative new products, such as our high-efficiency contactor, or HEC and our [ Folta ] contactor where we have secured meaningful new business wins in both Europe and the U.S. For example, in Europe, we secured a design win on an EV platform at a large German automotive OEM leveraging our heck to enable switching between 400 and 800-volt charging architectures. In China, our local contactor volume continues to ramp as we expand our business with key local OEMs, and we are now gaining traction with battery and battery systems manufacturers. Japan and Korea continue to be growth accelerators for us as we enjoy our highest content per vehicle in Korea, and we continue to grow our market share with leading OEMs in Japan. We're also seeing green shoots of our next wave of growth in automotive with our performance in India. We are significantly outgrowing production in this fast-growing market, and our revenue with a key OEM more than doubled year-over-year. Andrew will cover our detailed Q2 guidance and the full year outlook in these remarks. But as I speak about automotive, I want to take the opportunity to assure you that while we are thrilled with our first quarter results and excited about our second quarter outlook, we are also clearly aware of some of the end market demand risks that are posed by geopolitical events and the effect on oil prices. In the spirit of margin resilience, we have developed plans for a number of scenarios and we are prepared to act swiftly to preserve our margins in event that automotive end markets deteriorate. Our Aerospace, Defense and Commercial Equipment segment was a star performer in the quarter with double-digit organic growth. Our truck production remains soft, particularly in North America, we're seeing an increased demand for build slots in the back half of the year. Given the longer lead times for these vehicles, we're now entering replenishment cycle. We also observed an increase in demand from our diesel engine and power generation customers as they are benefiting from the demand for generator sets tied to data center construction. Aerospace and defense continues to experience steady mid-single-digit growth driven by both strong commercial backlog and increased military spending. In addition to ramping up to supply the market-driven growth, we are focused on securing our share of well-time near-term content growth opportunities in defense applications. We recently secured a circuit breaker win from a German manufacturer of armored ground transport vehicles for a defense application in Europe, and we have similar opportunities in Europe in our pipeline. We're also closely monitoring recently publicized developments around the U.S. government asking traditional automotive OEMs to support defense production. It's still too early to quantify any impact, but we will update you should opportunities materialize. Our industrials business continues to experience end market softness particularly in HVAC, for unit shipments in the North America market decreased in the first quarter. Nonetheless, we delivered modest organic growth primarily through share gain. We booked 2 additional HL leak detection wins in the first quarter, further expanding our market leadership position as this product line continues to be a growth accelerator in North America. We remain focused on expanding this product offering into Europe and Asia. In the near term, European heat pump demand has returned to growth, supported by innovated fossil fuel prices alongside policy incentives, energy security concerns and improving cost economics. We expect this combination to be a positive demand driver for us over time. Let's turn to Slide 6. As I'd like to elaborate on the data center opportunities in our industrial business. We have increased conviction around our right to win in data centers, building on our existing data center business. I'd like to provide more color on the opportunity and general time frame for growth acceleration. Inside the data center, electrical protection sockets and power distribution units and sensing sockets in quant distribution units create demand for our products. Outside the data center, there are meaningful opportunities for our Dynapower product in uninterrupted power supply or UPS systems and HVAC demand grows with recruiting needs for each data center. We are incumbent in data centers today with both low voltage AC electrical protection as well as with sensing and HVAC applications. With this incumbency, we are already benefiting from secular growth. As we look at the technological road map for data centers, we see a major inflection point in the data center ecosystem. The opportunity for Sensata is significant and our right to win is compelling. This inflection point is driven by the rapid evolution of GPU platforms and the associated changes in power and thermal management requirements. Allow me to elaborate. Today, most deployed data centers rely on low voltage AC electrical architectures where air cooling meets current thermo requirements. Industry road maps from leading GPU manufacturers point towards higher Baltic DC power systems, including 800-volt DC which drives substantially higher reg densities and accelerate the need for liquid cooling solutions. These transitions increased demand for high-voltage contactors and for pressure, temperature and flow sensors. These application areas are closely in line with our portfolio where our performance, reliability and application expertise supports a strong competitive position. In parallel with our EPC and distribution partnerships, we're engaging earlier in the design cycle with hyperscalers and ODMs to support upfront specifications. This approach strengthens downstream pull-through by enabling EPC's internal partners to deliver against predefined customer requirements. Since our last update, the strategy has resulted in our products being specked by 2 hyperscale and our new flow center product has advanced from development to customer validation. From a timing perspective, industry road maps indicate that adoption of liquid cooling is expected to accelerate beginning around mid-2027, particularly in high density, AI and high-performance computing deployments. And this system scale, leading GPU and infrastructure suppliers anticipate a subsequent shift towards higher voltage power architectures. While the revenue opportunity is medium term, the time to get spec-ed in is not, and that's exactly where our focus is. This is what -- as well, and it is the call to our automotive legacy. In parallel, our diner power business is actively bidding on several lot programs with an extensive opportunity pipeline for UPS projects. The highlights I just shared are just a peak into the growth engine that we are priming at Sensata. I have even more conviction in our growth prospects than I did just a quarter ago. With our new segmentation, Marcus, Alice and Brian each have clear growth mandates for their respective businesses. They, along with their strong teams, are bringing the end market focus that is required to deliver on a growth mandate. With that, I would like to extend my gratitude to teams -- for their collective commitment to our transformation and consistency of execution. Now let me turn the call over to Andrew to provide greater detail on the first quarter and our thoughts around the second quarter and full year. Andrew Lynch: Thank you, Stephan. Let's turn to Slide 8. For clarity, unless otherwise specified, amongst are referenced in millions of U.S. dollars and growth percentages are approximate. We delivered first quarter revenue, adjusted operating income and adjusted earnings per share at or above the high end of our expectations despite volatility in our end markets. As Stephan noted, this demonstrates a continuation of the momentum and consistency of execution that we achieved last year. We reported first quarter revenue of $935 million, an increase of $24 million or 3% from $911 million in the first quarter prior year. On an organic basis, Revenue grew 4% year-over-year as we had a $34 million inorganic revenue headwind from divestitures, which was partially offset by a $20 million revenue tailwind from FX. This was the final quarter of meaningful revenue impacts from the initiatives we began in 2024 to exit $200 million of annual revenues related to underperforming products. Adjusted operating income was $174 million and adjusted operating margin was 18.6%, compared with $167 million and a margin of 18.3% in the prior year quarter. This year-over-year improvement of 30 basis points was attributable to stronger revenues and improved productivity. Margin benefits from the divestiture of underperforming products approximately offset headwinds for tariffs on a year-over-year basis. Adjusted earnings per share was $0.86, an increase of $0.08 year-over-year, exceeding the high end of our first quarter guidance range by $0.01. We delivered $105 million of free cash flow in the quarter, which was an increase of $18 million or 21% year-over-year. Our free cash flow conversion rate was 83% of adjusted net income an increase of 9 percentage points compared to 74% in the prior year period. This was an encouraging start to the year in what is typically our most challenging quarter for free cash flow as we have timing-related headwinds attributable to interest and variable compensation payments the latter of which was a $20 million headwind year-over-year. Let's move to Slide 9 to unpack this further. Free cash flow of $105 million not only exceeded our expectations, it was a record first quarter result for Sensata. This outperformance was driven by the momentum we are gaining on working capital efficiency with our initiatives to reduce inventory and optimize supplier payment terms. We are thrilled to have such a strong start to the year particularly after the record full year results that we delivered last year. As we move to Slide 10, I will discuss capital deployment. We returned $43 million of capital to shareholders in the quarter. In addition to our quarterly dividend, we repurchased $25 million of shares to offset the impact of share-based compensation. Our net leverage ratio at the end of the first quarter was 2.65x trailing 12 months adjusted EBITDA compared to 3.06x for the prior year quarter. Deleveraging will continue to be our capital allocation priority. We have conviction in this approach, and we are pleased with the improvements we are delivering in return on invested capital, which improved by 70 basis points to 10.8% for the 12 months ended March 31, 2026, compared to 10.1% for the 12 months ended March 31, 2025. Earlier this month, we announced our second quarter dividend of $0.12 per share payable on May 27 to shareholders of record as of May 13. Now let's turn to Slide 11 to discuss our segments. All 3 of our segments delivered organic revenue growth and operating margin expansion in the first quarter. We see this as an encouraging proof point for the traction we are gaining from our reorganization. Our Automotive segment delivered $525 million of revenue in the quarter, a decrease of 1% year-over-year on a reported basis. On an organic basis, we delivered 1% growth year-over-year and 4% outgrowth against the market that decreased by 3%. our market outgrowth was driven by both content gains and production mix as our versatile portfolio of ICE, EV and powertrain agnostic products continues to perform in a market with uneven powertrain adoption rates. Automotive segment operating margin was 23.5% in the quarter, a year-over-year increase of 70 basis points from 22.8% driven by both productivity and portfolio optimization measures. Our Industrial segment delivered $184 million of revenue in the quarter, which was a year-over-year decrease of approximately 1% on a reported basis and a year-over-year increase of 1% on an organic basis. Organic growth was enabled by share gains despite ongoing softness in U.S. residential and construction markets. Industrial's operating margin was 27.1% in the first quarter, a year-over-year increase of 100 basis points from 26.1%, primarily due to productivity gains. Aerospace, Defense and Commercial Equipment segment delivered $226 million of revenue in the quarter, an increase of 15% year-over-year or approximately 17% on an organic basis. we had revenue growth across every market vertical, including aerospace, defense, on-road trucks and off-highway equipment. Segment operating margin was 28.1%, a year-over-year increase of 260 basis points from 25.5% as we gained operating leverage from strong volume growth. Adjusted corporate operating expenses were $63 million, an increase of $10 million year-over-year primarily due to higher variable compensation expense, which was supported by stronger underlying performance. Now let's turn to Slide 12 to discuss what we are seeing in our end markets. Global auto production decreased by approximately 3% in the first quarter. For the full year, third-party forecasters are expecting a production decrease of approximately 2%. Recent downward revisions to third-party forecasts are primarily attributable to China and the Middle East and we do not expect these revisions to have a meaningful impact on our business. In our industrial end markets, U.S. residential and construction markets remained soft in the first quarter, which was evident in the year-over-year decrease in U.S. residential HVAC shipments. We expect HVAC shipments to stabilize in the second quarter and returned to growth in the second half of 2026. In aerospace, defense and commercial equipment, commercial aircraft backlogs are strong, Defense spending is accelerating and on-highway trucks are starting to show signs of recovery. In the first quarter, although North American truck build rates did not improve, our order book increased. We are optimistic that this is a leading indicator for a replenishment cycle in the second half of 2026 as lead times generally result in our revenue growth preceding truck build rates. With that backdrop, let's move to Slide 13, and I will share our guidance for the second quarter of 2026 and some color on our outlook for the year. For the second quarter, we expect revenue of $950 million to $980 million, adjusted operating income of $182 million to $190 million. adjusted operating margin of 19.2% to 19.4%; adjusted net income of $131 million to $139 million and adjusted earnings per share of $0.89 to $0.95. Our second quarter guidance includes approximately $8 million in tariff costs and associated pass-through revenues. This is approximately $4 million lower than our prior run rate due to recent changes in U.S. tariff rates. Our tariff expectations are based on trade policies in effect as of April 27, 2026. Our second quarter guidance does not include any potential tariff refunds related to the recent EPA tariff ruling nor does it reflect any possible pass-through of such refunds. Due to geopolitical uncertainty and end market volatility, we are continuing our practice of providing guidance one quarter at a time. That said, we do want to share our view that current consensus estimates for adjusted operating margin expansion of approximately 30 basis points per quarter in the back half are consistent with our view, provided that end market demand holds up. Should end market demand deteriorate materially, we are prepared to take reasonable measures to defend the 19% annual margin floor that we committed to last year. Now I'd like to turn the call back to Stephan for closing remarks. Stephan Von Schuckmann: Thank you, Andrew. Before we move to Q&A, I would like to leave you with some closing thoughts. As we progress through 2026, we do not expect our path ahead to be free of challenges, it really is. Sensata's prepared. The operational principles we brought into the organization have proven effective over the last 5 quarters. Just as we did last year, we will operate our business in a manner to overcome challenges and perform line with the expectations we set and to deliver margin expansion for the year. And do so, the underlying earnings power in our business will continue to strengthen, and we are primed for accelerated earnings expansion as market cycles turn more favorable. We are proud of what we have accomplished so far, and I have conviction that our business is primed for excellence. We have an outstanding leadership team and a committed organization that is running behind them. We have achieved organization-wide operational discipline, our productivity engine is delivering. Our strategic initiatives are accelerating and our growth opportunities are robust. I will now turn the call back over to James. James Entwistle: Thank you, Stephan and Andrew. We will now begin Q&A. Operator, please introduce the first question. Operator: [Operator Instructions]. And our first question today comes from Wamsi Mohan from Bank of America. Unknown Analyst: This is Ryan Show on for Wamsi. Two questions for me. One, on auto content outgrowth of 4% in the quarter. Stephan, I know you gave some details earlier in the call, but can you share any further color about the region? And as our production declines 2% year-over-year, is that the right outgrowth to think about? Stephan Von Schuckmann: So thanks for the question. Let me start a bit broader. By starting with the IHS prediction or forecast which is roughly 91 million vehicles for the year of 2026. That's around 2% down from what we saw in 2025. I think it's important to mention there are 2 factors that need to be considered that can substantially influence these -- the IHS forecast. The first one geopolitical tensions and obviously, they're being related to the oil price. And the second factor that's important are test car subsidies in China. And as we know, these were in place in quarter 3, quarter 4 of 2025, which led to a strong demand. But since quarter 1 of 2026 subsidy policies have changed, and this has obviously resulted in a weak demand. Nevertheless, the automotive segment and the segment leads around Marcus and the team and also our China President, Jackie, they have a very clear and accountable growth mandate. And to get to your question around regions, they are winning meaningful business in each and every region. So in China with contactors, in Southeast Asia, for example, in Japan, we made good progress on winning new business, as we've mentioned in the call. And so we're in South Korea. We've been winning in all types of powertrain platforms from ICE to battery electric vehicles. And I think it's also important to mention that -- we've been winning in the regions, and we've been making good progress. But we've also been winning in automotive with new products. The 2 products that I mentioned in the call, the high efficiency contactor which was the fifth win for this new product with a German OEM and also the business mentioned around the full break contactor. And then there's additional opportunities in China with battery system manufacturers that I feel we're gaining good momentum and making good progress. So overall, I'd say we've got strong conviction that the team will outgrow the market in 2026. So I hope that fully answers your question around automotive. Unknown Analyst: Got it. Yes, very helpful. And last question for me. the 60 to 80 bps of operating margin expansion sequentially seems pretty high than prior quarters. Can you give us a bridge of the drivers that's leading this? Unknown Executive: Yes. So operating margins did not expand sequentially. They contract sequentially on typical Q4 to Q1 timing-related items, but we've seen less contraction than what we've typically seen in past years as we've gotten a head start on productivity compared to compared to what we've seen in past years. So a stronger start to the year and really encouraged by that and certainly a head start on our targets for the year. If your questions relating to Q2, step-up in margins from Q1 to Q2, it's again the same themes. It's that the head start on the year, stronger productivity earlier in the year gives us a stronger lift as we move into the second quarter and volume certainly helping. Operator: Our next question comes from Mark Delaney from Goldman Sachs. Mark Delaney: I had 1 to start also on the margin topic. The company mentioned that it expects margin improvement of about 30 bps year-over-year in the back half provided that market conditions don't meaningfully deteriorate. Given all the supply chain and geopolitical volatility that's occurred over the last 90 days and pressure on input costs. Can you speak more on the actions that Sensata is already taking to navigate this environment and the company and our extension to expand margins in the back half? Stephan Von Schuckmann: So let me start with that, Mark. And I think it's important to say that despite all challenges that we have, we have a clear playbook to respond, and we've been working through that pay book throughout 2025 and we use that same playbook for 2026. So what I'm saying is Sensata is prepared. What we do is we think in scenarios and that prepares us for current or existing but also future headwinds like material inflation, tariffs and everything else. Equally important to mention is that we are designed into mission-critical application, which obviously gives us a position of leverage. And that -- saying that society can -- defend its margins. And I think that pretty much differentiates us from us. I don't know, Andrew, if you want to add something to that, but. Unknown Executive: Yes. I think thematically, those are exactly the factors that give us leverage and confidence in our ability to execute. And then I would say it's the same margin cadence that we observed last year where we see sequential improvement each quarter. Q2 tends to normalize to where we exited the back half of the prior year, and then we see sequential improvement each quarter thereafter as our productivity engine kicks in. And certainly, there's headwinds and challenges associated with input costs, but that's no different than the headwinds or challenges we saw last year on tariffs and the playbook around offsetting those is exactly the same. Mark Delaney: That's helpful context. And then, Stephan, you spoke about a number of areas where you're seeing some progress in the data center market. And based on all these engagements that are underway, are you able to give more context of how much incremental revenue this market could add in 2027 and the types of margins investors can anticipate as that center revenue grows? Stephan Von Schuckmann: Allow me to answer that question a little bit broader. So look, I think you're probably all aware of that, but I still want to mention this. I lead -- to more data processing and demand for high-performance computing. And this will lead to a change in Rec architecture to high-voltage 800-volt with liquid cooling. And that obviously means that Sensata has sensing and electrical sensing and electrical protection portfolio to serve these do mining application. And this shift purposes the industry right into the center of Sensata's expertise, which is serving these mission-critical applications with automotive-grade reliability. We're meeting robust performance specification harsh environment really matters. So I really feel we have the right to win here, and we'll share more progress once we go through the individual earnings calls going forward. Andrew Lynch: And Mark, I would maybe just add to that. Although we're not at a point where we're providing a dollar revenue forecast or specific timing. The other side of that is that we're not seeing a significant need to invest to intersect this trend. So if you look at a typical automotive product portfolio and design cycle, we're often designing to a customer specification. And so that requires investing in the program ahead of revenue. With the data center pole, what we're expecting is to get spec-ed in with products that we have today and technologies that we have today. And so the growth is real, and we're excited about it. But the other side of that is that we're not finding ourselves having to invest significantly to pursue and win these applications. And so with that frame what's important to us is the demand is there and that the revenue will come, but less concern over the precise timing of when. Operator: Our next question comes from Christopher Glynn from Oppenheimer. Christopher Glynn: Just wanted to follow up on that in terms of the timing of you being able to speak with a lot more specificity about some of the data center opportunities in cooling and UPS. There is an element of the next-gen architecture is playing more tubes also an element of -- the timing of your posture to be more purposeful about what your going after. So I'm wondering how much of this is kind of catch-up versus maybe in the current gen data center architectures, it's just not as much opportunity. Andrew Lynch: Well, as we just -- as I explained, in Ecodata set concepts, the opportunities not as strong or somewhat limited in comparison to liquid cold data center concepts. And break that down into a product level and we can also maybe add a bit to timing. On the air core data center concept, it's about temperature sensors and circuit breakers, where we're gaining momentum. But as soon as we go to the high-voltage liquid called data center concepts around 800 volts that expands our product portfolio to pressure sensors, flow sensors, temperature sensors, circuit breakers and contactors. And that is basically the add-on opportunity if you compare the 2 concepts to each other. And what we're seeing out there in the market is, first of all, the concept being placed into the market and our task the last couple of months has been to get specked into these concepts. And our expectation is that these data centers or these new data centers that are based on high-voltage 800-volt architectures will be we'll start showing revenue growth for Sensata around mid-2027. So just over a year from now from a timing point of view. Christopher Glynn: Appreciate the deeper dev. And to what extent did the products get represented as an integrated solution or a co-package solution for you guys for independent design wins into the liquid cooling and other targeted applications? Andrew Lynch: Yes. It's more technology oriented. So the wins on the electrical protection products will tend to be grouped in the wins on the thermal management products. We'll tend to be driven by different decision makers and in different applications. But I would expect that those will scale at relatively the same rate because they're interconnected. Operator: Our next question comes from Joe Giordano from TD Cowen. Joseph Giordano: Want to start on China automotive. I'm just curious, just given like the improvements you've made on the ground in terms of getting your content with local large players and -- if I think about the comps over the last couple of years, right, like you had mix -- dramatic mix shift away from like incumbents multinational incumbents. So what's the like the opportunity set for you as you add first time ever content on these new customers, like what magnitude should you be outgrowing that market? It seems like it should be like very large just given where you're coming from and adding for the first time. Stephan Von Schuckmann: First of all, let me frame what the business opportunity looks like and then we can speak about growth numbers. So as you know, Joe, we were focused a lot on international OEMs in the past and basically pretty much strongly shifted away from international OEMs more to local OEMs. And we've won a lot of business with them, be it on the contactor side, but also about our classic applications and products that we've been offering in the market. But predominantly, it's been on electrification and on the contactor side. that's the one side of it. And actually, it was just in our factory in a couple of weeks ago, and we're busy wrapping up this contacted business, and it's quite a significant volume that will place us to be in a good third position within the market in China. The second thing is, and this is something that's starting to grow is that we're seeing opportunities with battery with factory systems. So we're seeing further opportunities. It's also related to contactors. And this is business slowly, but certainly emerging, and we're gaining traction with them. That's the next level of opportunity that we see. So yes, we have a strong base business with legacy products and incumbent, and that's pretty much stable, I would say, but we're very much growing on or strongly growing on the electrification side of the business where we've gained a lot of traction. And maybe one last word to that. there are not that many suppliers on contactors that can deliver at scale but can also deliver it on a high-quality level. And that's where Sensata comes in. We know how to deliver at scale, and we know how to deliver it on a high-quality level, and that has sort of allowed us to position ourselves within that market in China with growth... Andrew Lynch: Yes. And then, Joe, on the outgrowth question. So if you think about our bodies on a global basis first, you're typically looking at a price down framework of low single digits, kind of 1% to 2% a year depending on the year, which means that to deliver low single digits outgrowth requires underlying content growth more in the mid-single digits range. And so that's what we expect on a global basis. If you do that same math in China, the pricing pressure is higher price tends to be mid-single digits in price downs year-on-year. And so to outgrow that market requires underlying content growth in the high single-digit range. That's exactly what we saw last year, and we expect to continue to outgrow that market. But with where the pricing dynamic is right now, I wouldn't expect the net out growth to be materially different to what it is for our global business. The underlying content growth, I would expect to be stronger to your point. Joseph Giordano: Last quarter, you started talking about drones a little bit. Just curious, you saw the aerospace business grew significantly over market here. I'm just curious how much of that was attributable to some of those faster growing, newer areas for you? Andrew Lynch: Yes. I'd say the growth that we're seeing right now is primarily attributable to our core business. and just acceleration of defense demand and consistent with what we were seeing in our order book as we put out our guide earlier this year. the opportunity beyond that is probably more medium term, but we're seeing traction on that in terms of opportunity to bid on and that type of business. Stephan Von Schuckmann: I mean we've been active, Joe, as I mentioned in the call, we just had a recent doing with circuit breakers for German manufacturer of armed ground transportation vehicles, which is, I think, an important one with the product in that case in Germany or in Europe, which is not as strong as our defense business that we have in North America. And we see similar opportunities in the pipeline. So we're gaining traction there and starting to build our order book, which is -- looks promising. Operator: Our next question comes from Guy Hardwick from Barclays. Guy Drummond Hardwick: Question on the HVAC side. I think you said in your prepared remarks that your HVAC revenues are down, but obviously, the market expect was down double digits in Q1. And I think it's expected to be down double digits again in Q2. And then I think you said it should return to growth in the second half. And I think that's kind of consistent with the sell-side AHRI forecast. So just the question is, how much do you think you outperformed in Q1? And is that kind of -- I imagine it was a considerable margin. And is that something we could extrapolate through the sector Q2 or was implicit in Q2 guidance? And what about outperformance continue when the market kind of stabilizes in the second half? Stephan Von Schuckmann: Yes. So the HVAC business is about 25% or so of our overall industrial business. And so with 1/4 of our business down, the end market demand down double digits and the net organic growth of 1%. There was certainly some outgrowth there. That was primarily driven by the new content that we launched last year with our AI product. But moving forward, we expect to continue to outgrow the market with our new content and then participate in market growth as the market recovers. And so certainly, if we get recovery in the back half, that would be a growth accelerator for us. At the same time, as we communicated at the start of the year, we recognize and understand the risk in this market. And so we built an operating plan that was -- that does not rely on market growth for us to deliver on our margin expansion aspirations. So we'd be encouraged to see it. The channel has been soft for some time, and it looks like there will be a replenishment cycle in the back half, but we're not super dependent on it either. Guy Drummond Hardwick: And just my follow-up question is hopefully, incremental margins sort of were excellent in DC&E and margins moved up in industrial quite nicely even though revenues were flattish. So was there any positive mix effects in those 2 segments, which could have led to that those margins? Stephan Von Schuckmann: Yes. Well, so on aerospace, defense and commercial equipment, with the growth that we're seeing in Aero, which is our highest margin end market, there's meaningful variable contribution margin from that. And then just more broadly, when we see that level of growth, 15% year-on-year, the operating leverage that we get from that is sharper than what you get from low or mid-single digits growth. And so that was certainly a contributor as well. And then -- sorry, I may have missed the second part of your question there. Guy Drummond Hardwick: I think your answer is stretch ready is that were there any businesses, I mean you partly answered that, which had positive mix other than arrow. Stephan Von Schuckmann: Got it. No, the mix was generally consistent across most of the commercial equipment space. And so again, just the growth in this business and particularly at these high growth rates tends to come with a higher variable contribution margin, and we benefit from that. Operator: Our next question comes from Amit Daryani from Evercore ISI. Irvin Liu: This is Irvin Liu on for Amit. I had a financial question for Andrew. It's good to see free cash flow conversion higher than what we have seen historically for Q1 is at 83%. Though CapEx was lower than what we've seen historically. Can you just give us a sense on how CapEx should trend through the year, especially given the lower-than-expected CapEx in Q1? Andrew Lynch: Yes. We're still targeting CapEx in the 3% to 3.5% range. That's the general framework for where we think we need to operate our business. the demands have been lower, largely because of acceleration of factory automation that we worked on last year. and more flexible line concepts. And so as a result of that, we're seeing just a little bit softer need for capital in the short term, but we still expect it will normalize to that 3% to 3.5% range. And to the extent that we run lower, that will continue to benefit free cash flow. But we don't expect it to be structurally below 3%. Stephan Von Schuckmann: And let me add to that. We've been systematically working on optimizing our CapEx. And let me give you 2 examples where we've been doing that. So on optimization is around CapEx that used for machine and equipment, where we've started to expand our focus around purchasing machines and equipment out of Southeast Asia or even China, which is substantially cheaper than equipment brought from Europe or North America, and that has allowed us to optimize our CapEx on the one hand. And then everything that's required around CapEx to maintain our factories around the world. What we call called CapEx to keep the life side, we've been optimizing that as well. So those have been 2 opportunities where we've reduced CapEx, and that has helped us in the end to reduce it overall. And to be able to deploy it for other topics like small automation. Irvin Liu: Got it. If I can tack on another data center related question. It's great to see products specked by 2 hyperscalers. But can you give us a sense on what the total TAM or perhaps what per megawatt TAM could look like for you all across electrical and sensing products that you're selling into for data centers and center adjacent opportunities? Stephan Von Schuckmann: Look, I think that's a question we'll take with us for the next call. Operator: Our next question comes from Joseph Spak from UBS. Joseph Spak: Andrew, just a couple questions on tariffs. I guess 2 flavors. One is, I know in the past, you said you source 70% from Mexico, I think 80% of that was USMCA compliant. There was a change on Section 232 metal tariffs, wondering if there's any impact you there. And then EPA, I know you said the guidance doesn't include any repayments, but have you filed for any reimbursements? Or do you plan for any? And like, can you give us a sense as to how big that can be, if it is true. Andrew Lynch: Yes. So on the first part of the question, so we're not seeing any meaningful direct impact from the changes in metal tariffs. Obviously, we're monitoring the impact on end market demand, but it's not directly impacting us in any material way in terms of the metals or commodities that we source. And we expect that with the current tariff rates in place and with the cancellation of the EPA tariffs, that our run rate moving forward would be approximately $8 million per quarter, which is about 1/3 lower than the $12-ish million run rate that we had previously. On the question of refunds. So we're certainly following the government prescribed process and when we have more to share we'll share that. But at this time, we're not going to speculate on the size or magnitude of potential recovery. Joseph Spak: Okay. Can you -- can you remind us how much do you think you paid last year? Andrew Lynch: Yes. We paid a little over $40 million in tariffs last year and the vast majority of that was EPA more than 2/3. Joseph Spak: Perfect. I just wanted to back on the business head turn our attention back to CE because the market, you said it was down 1, you were up 16. And I know you sort of talked about some potential improvement and more order books being filled there. But I guess I just want to understand whether you're lining up with that future builds and like maybe there's some inventory being built or like there's something else going on that's really causing that strong outperformance that we saw this quarter. And I guess, as we see builds improve over the course of the year, would you then expect that outgrowth to come in a little bit? Or is there something sustainable what we saw this quarter? Andrew Lynch: Yes. So let me just start with -- so when we talk about that segment in aggregate, aerospace, defense and commercial equipment, about 1/4 of it is in the aerospace end market. and about 3/4 of it is in the commercial equipment end markets. So the growth rate that we shared, the 15% or 17% organic is for the total segment. And certainly, there was market growth in aerospace. On the commercial equipment side, yes, we believe the market in total down about 1%, and we saw outgrowth to that market, primarily driven by what we believe was an inventory replenishment ahead of an expected production acceleration in the back half. We do not expect that, that is indicative of what the go-forward growth or outgrowth would be if this end market actually recover as production normalizes in the back half. There's always an inventory build that happens as you get into a replenishment cycle, especially with the production having been significantly suppressed for the last 8 quarters. So I'd expect to continue to grow and to outgrow, but likely not at that same clip. Joseph Spak: Okay. Sorry. Just 1 quick clarification. Just I was just looking at the 16% commercial equipment in the back of your slide, I think, on '19, but you're saying that's not just truck, that's not just truck. Is that what you're looking at? Andrew Lynch: Yes, that's right. If you're looking at that end market at the back end of the slide then, yes, that is the growth that we experienced in the end market as well. Joseph Spak: Okay. So it was strong, but some of that was also construction and... Andrew Lynch: For example, we're seeing pull-through in diesel demand related to generator sets for data center. So there's more than just the truck replenishment cycle. Operator: Our next question comes from Konstandinos Tasoulis from Wells Fargo. Konstandinos Tasoulis: I want to ask about the 100% precious metal inflation you saw in the quarter. You're still able to get 30 basis points of margin expansion. Can you maybe frame the puts and takes of that impact, like what the headwind was and what the offsets were? Andrew Lynch: So lots of challenges we worked through in the first quarter. Let me just start with not only did we have a significant precious metal challenge. We also had about a 40 basis point headwind from from FX. We had about $20 million of lift on FX on the top line and effectively drop through on the bottom line. So we were really pleased with the margin expansion we were able to deliver year-on-year with those 2 challenges. And I think that points to just the continued improvement in underlying earnings power in the business, independent of these challenges. With respect to metals, so we have roughly $40 million of annual precious metals buy. And on those precious metals in the first quarter from a year-on-year perspective, rates are up approximately 100%. We have, through the first half of the year, about 80% hedge coverage on these metals which gives us some mitigation, but more importantly, it gives us time to execute the more permanent and structural mitigation that we're working through in our business. So with that, maybe I'll turn it over to Stephan and let him share a little color on how we're thinking about structurally mitigating this. Stephan Von Schuckmann: Thanks, Andrew, let me add to that. So basically, how we manage the impact, especially on metals inflation is very different when you look at the different types of businesses we have. So I think overall, in the commonality of businesses is that we're in strong negotiations with our supply base when it gets to pushing on metal inflation impacts towards Sensata Equally important, but that differs depending on the product that we have and which metals are designed into the individual products, what we're doing our VAV activities, the so-called design activities, too, I think it designed the metal content of the product. In our industrial business, that's quite a big task to design, for example, silver out of our products, which is deep content the product of silver, so that once the hedging period runs out, that we have limited impact or literally no impact with our products going forward related to metals. And then, of course, I think the last lever is to discuss any impact directly with our customers and speak about compensation, which we're in continuous discussions with them, and we see our openness for that as well. Konstandinos Tasoulis: Okay. And then let me just talk about winning business. I mean, I think with the drones. I think a lot of that is just customer access, right? It's like an emerging technology, you get customer access. You're in the designing phase with them, you can grow that business. How can you apply maybe some of those learnings to getting more business in the data center opportunity? Stephan Von Schuckmann: Okay, first of all, if I think you got a bit more depth on the drone business of the support APs. We see overall, we see a double-digit CAGR, which is I think there's a lot of opportunity there, especially around military drones. On the other hand, we're designing with different applications and products, is -- position sensing, all different types of products. We presented that in the last earnings call. Can you just repeat your question related to data centers? Konstandinos Tasoulis: Yes. So you guys were able to get in on those design-ins with the drones. That's quite spectacular. What, I guess, strategy can you use from getting on those business to getting on more data center business? Any learnings from that, that you can apply to any data center business? Stephan Von Schuckmann: Well, look, it's pretty similar in and like I say, if you take products that the existing products that we got designed in the drone business like temperature centers, precious sensors, worth coal actuators, high-efficiency motors. Those products were ultimately not designed for drone applications. But because of the fast design cycles of drones, we've managed to get designed into these applications. And eventually, we'll be delivering for these drones. On the data center, it's pretty similar. So we're in -- the products that we've carried over from our automotive business, be it from electrical protection be it sensing products, those are products that we've carried over and designed into data centers now, as mentioned, into hyperscaler concepts. So very similar in the style of business and how we manage our business -- existing products that we provide into those applications. Operator: Our next question comes from Luke Junk from Baird. Luke Junk: So maybe I'll just ask one, and it's a little bigger picture. Stephan, just would be great to get your perspective on market structure within the data center business, specifically. How do you think about the need to take share in data center with these reference designs and if you're doing so, do you think you're taking share from? And just market share is factor in this data center story? How important is it? Or are these more jump-ball dynamics, especially thinking about the 800-volt opportunity that you? Andrew Lynch: Well, thanks for the question. Maybe I'll start and let Stephan chime in here. I think the beauty with some of the new content opportunity that we've laid out in data center, particularly with the architecture change, is that it's not shared that we need to take or win. It's fundamentally new sockets. So today, you're dealing with AC power architecture, moving towards high-voltage DC and that creates a fundamentally different electrical protection design, moving from fuses and circuit breakers towards high-voltage contactors. And so it's not that we need to take share. It's that we need to have a product that meets the spec and then go and get specked in, and that's exactly what we're focused on. And that's part of the reason why we have so much conviction in our right to win in this space is that as Stephan mentioned on the call, as the architectures change, it's moving right into our wheelhouse in terms of our technology set, the products we offer, our ability to meet the spec and perform in robust high-performance applications. Stephan Von Schuckmann: I think they may add some technical aspects to that. So if you look at the data center concepts today, I think I mentioned it earlier, they're based on their airport. And the products that we deliver into those concepts today are basically temperature sensors and circuit breakers. And then these new concepts coming on, so it's not basically -- it's not taking market share from in the new -- they have a whole different product range because of the liquid cooling that they required because of the increased computing power. And that obviously gives us the opportunities, again, to take existing products like pressure sensors, flow sensors, temperature centers, existing circuit breakers and contactors and designing those into the data center concept together with hyperscalers and then giving us potential revenue, as I stated, from mid-2027 onwards. So not taking share from any 1 away, it's getting into those hyperscaler concept designs and placing our products in there, that is the task. Operator: Our next question comes from Shreyas Patil from Wolfe Research. Shreyas Patil: Just 1 question for me as well. Just wondering if you could provide some color on the segment outgrowth expectations. I guess if you're doing on the core point -- state double-digit organic in aero and commercial I guess, shouldn't organic growth in Q2 be above that 1% to 4% that you're guiding? Andrew Lynch: So look, I think, let me frame that generally. And I think it's important to mention with all the examples that we've given that Sensata has multiple growth factors. And I've mentioned many examples where we've won business and where we're in. And I think it's equally important that our segment leaders around Ellis, Marcus and Brian, they're very clear and accountable growth mandates as well. And as you can recall, we've returned some fiber back to growth, and that's not so long ago, and that's in the second half of and we've actually accelerated that growth in the quarter -- in quarter 1 of 2026. So of course, 1 question is is that growth momentum is enough, but we always need to see where we come from. And I think we've -- the team has done a fantastic job in accelerating that growth. And we're not even showing growth over all segments in all areas with all different types of products, be new products and so on. So I feel -- we've made good progress. Stephan Von Schuckmann: Yes. And just to maybe hone in on the outgrowth topics. So Third-party forecasters are projecting auto production down a couple percent again in the second quarter. And so if we were to deliver similar outgrowth, that would put out on an absolute basis, organic growth in the kind of 1% to 2% range for the quarter. And then if you look at the other 2 segments, we certainly don't expect that we're going to grow at 15% in aerospace, defense and commercial equipment, that likely moderates to sort of mid- to high single digits. And then industrial is not going to get back into a growth cycle until the back half of the year. So with that trend, I think that puts us squarely in the 1% to 4% revenue growth guide for the second quarter. Operator: And with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to James Entwistle for closing remarks. James Entwistle: Thanks, Jamie, and thanks to everyone who joined us on today's call. Before we conclude, I'd just like to announce some upcoming conferences that we'll be attending during the second quarter. We will be at the Oppenheimer Industrial Growth Conference on Tuesday, May 5, which is virtual. The TD Cowen Technology, Media and Telecom Conference on Wednesday, May 27 in New York City. And the Wells Fargo Industrials Conference on Wednesday, June 10 in Chicago. We look forward to connecting with many of you at those conferences in the coming months. Jamie, you may now conclude the call. Operator: And with that, ladies and gentlemen, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bloom Energy First Quarter 2026 Conference Call. [Operator Instructions] And I would now like to turn the conference over to Michael Tierney, Vice President, Investor Relations. You may begin. Michael Tierney: Thank you, and good afternoon, everybody. Thank you for joining us for Bloom Energy's First Quarter 2026 Earnings Call. To supplement this conference call, we furnished our first quarter 2026 earnings press release and supplemental financial information with the SEC on Form 8-K and have posted these materials, which we will reference throughout this call to our Investor Relations website. During this conference call, both in our prepared remarks and in answers to your questions, we may make forward-looking statements that represent our expectations regarding future events and our future financial performance. These include statements about the company's business results, products, technology, customers, new markets, strategy, financial and competitive position, investments, liquidity and full year outlook for 2026. These statements, which relate to matters including time to both power and market with standard for on-site power cost efficiency, capacity expansion, innovation, affordability and community acceptance as we look to keep pace with the rapid evolution of our markets are predictions based upon our expectations, estimates and assumptions. However, as these statements deal with future events, they are subject to numerous known and unknown risks and uncertainties, as discussed in detail in our documents filed with the SEC, including our most recently filed Forms 10-K and 10-Q. We assume no obligation to revise any forward-looking statements made on today's call. During this call and in our first quarter 2026 earnings press release and supplemental financial information, we refer to GAAP and non-GAAP financial measures. The non-GAAP financial measures are not prepared in accordance with U.S. generally accepted accounting principles and are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between the GAAP and non-GAAP financial measures is included in these materials, which are available on our Investor Relations website. Joining me today are K.R. Sridhar, Founder, Chairman and Chief Executive Officer; and Simon Edwards, our Chief Financial Officer. K.R. will begin with an overview of our progress, and then Simon will review financial highlights for the quarter. After our prepared remarks, we will have time to take your questions. I now turn the call over to K.R. K. Sridhar: Good afternoon, and thank you for joining us today. Bloom delivered a record first quarter. Revenue, gross margin and operating income all came in materially above our prior outlook based on what we are seeing across the business, we are also raising our full year guidance and raising it materially. We will walk through the numbers in a few minutes but first, I want to talk about what is happening in our market because the headline numbers as strong as they are, are a lagging indicator and don't convey the whole story. Fee at Bloom are ushering in the era of digital power for the digital age. Now the marketplace is recognizing and embracing our proposition of clean, reliable on-site power that is community-friendly and deployed at the speed of AI. Bloom is rapidly becoming the standard and go-to choice for on-site power. Last night, Oracle announced a new power paradigm for Project Jupiter, a multi-gigawatt AI factory to be built in New Mexico. We are thrilled to partner with Oracle and applaud them for their visionary leadership. This up to 2.45 gigawatt power block will replace Project Jupiter's previously planned gas turbines and backup diesel generators with Bloom Energy Servers. It will be 100% bloom. When completed, it will be one of the largest islanded microgrid power facilities in the world. Oracle pivoted to Bloom only solution for 2 main reasons: first, be a responsible corporate citizen and partner by being responsive to resident concerns about air quality, water use, noise and increasing electricity rates. Second, to stand up their grid independent and clean AI factory with even greater reliability and speed. Bloom is the cleanest commercially available on-site power generation option for such data centers and the most water efficient. Even Blooms community-friendly attributes, Oracle should be able to energize the campus materially faster than any other available alternative solution in the market. At a time where every quarter of delay translates into hundreds of millions in foregone AI revenue and loss of competitive advantage. Speed of powered infrastructure development is the difference between leading and following. Becoming the sole power provider for Project Jupiter is a milestone for Bloom, but it's not going to be a one-off project, where Oracle is going is where the broader market is headed. On our Q3 call, I described our playbook for becoming the standard. In each vertical, we established credibility with the lighthouse customer then build on that success with other Tier 1 customers. 2 quarters later, that's exactly what's happening across the AI ecosystem. Oracle is rightfully getting headline attention today. But well more than half of our current data center backlog comes from other hyperscalers, neo clouds and colocation providers. just like the Oracle Jupiter project, these microgrid installations will use no grid, no dirty diesel generators for backup. No battery banks for load following. No engines, no turbines, just bloom and Bloom alone. We are continuing to engage with more hyperscalers and new clouds by signing new contracts and slot reservations and working with them to evaluate many new opportunities. Our pipeline today is diverse and robust in the AI segment. Parenthetically, let me also remind you that this is a recent repeat of our C&I business playbook. That segment is also experiencing strong demand is diverse and continuing to grow. I want to give you a perspective on why we are experiencing the hyper growth because it will shape how you think of Bloom going forward? For over 25 years, we built this company around the conviction that clean, reliable, affordable on-site power would become essential to a digital world. The market is now validating that vision at scale and AI power demand is simply accelerating it. Time to power has gone from a procurement consideration to an existential necessity. The company is driving the AI transformation are raising against each other on the one hand. And on the other, bumping into the bottlenecks comment to building conventional infrastructure such as permissions, permits and community acceptance. The winner will be the one who can grow and deploy faster and on the schedule, the market demands. You see that's a different game than the one the legacy power industry is set up to play. Their model is industrial. Long cycle times, capital heavy capacity additions, product improvement measured over decades rather than quarters, our model is different at every layer we innovate and improve continuously, be it in our technology, in our product in how we manufacture in our capital intensity in how we deploy in how we operate and service our systems and in time to market. That is what allows us to deliver double-digit cost reductions year after year expand capacity with materially less capital than industrial era players and meet our customers' schedule needs. Our differentiated and unique operating rhythm and mindset will be obvious to you if you visited our factory floor. It's a state-of-the-art production facility a busy construction zone and a buzzing innovation hub. We are manufacturing product on schedule to meet customer needs, adding lines and expanding capacity to meet growing demand and innovating to reduce cycle times, space needs and costs. Product manufacturing, capacity expansions and innovation, all occurring concurrently all the time, all under the same roof and all with factory floor team members and engineers working as 1 team for 1 common purpose. To be better tomorrow than we are today and keep marching towards the north star of maximum entitlement. This is an example of our operating model. We call it the Bloom way. As a result of this approach, the contrast and outcomes is simple. Their supply to current orders arrive only in 2029 or later, irrespective of the customers' needs. Hours arrived this year or the next or whenever the customer is ready. Based on demand profile, we have now shifted to adding capacity continuously. Hundreds of megawatts a quarter as opposed to lumpy one-off additions to be completed in a year's time. How we think about and execute on capacity addition is one of the clearest ways to see what makes Bloom different. The traditional power industry has been the past 2 years, celebrating its backlog that is 4 and 5 years out. Backlog at that scale and time frame in the age of AI is a result of their constrained supply. At Bloom, we see it differently. Our ability to expand capacity is our competitive advantage. We want to rapidly build capacity, build product help build productive AI factories to help build commercial and industrial facilities and help build our economy, not just be satisfied with simply building backlog. Our current manufacturing footprint will allow us to deliver 5 gigawatts of product annually. We will expand to that capacity and meet the delivery dates needed by our customers. In other words, today, we are not order constrained and not capacity constrained. The pace of our revenue growth is decided by how fast our customers can build their greenfield sites, not how fast we can power them. We will never be a bottleneck to our customers. We built our business around that promise. Going beyond the 5 gigawatt capacity, our supply chain and manufacturing strategy and planning allows us to build that capacity significantly faster than any other option in the market using our copy exact model. We will strive to bring power to our customers faster than they can stand up their greenfield facilities. We were able to make that promise because we invested deliberately ahead of demand. We expanded manufacturing capacity, built inventory, diversified our supply chain, strengthened our balance sheet and assembled an ecosystem of long-term supply partners that scales with us. Given our low capital intensity, those investments carried materially lower risk for shareholders than they would have for an industrial or a supplier. They were disciplined decisions made with conviction that this market shift was coming. While our new orders that we are telling you today are news to you, we have advanced visibility and anticipated such wins for months. So we planned out our capacity expansions accordingly. Our strategy and judicious investments have positioned us to become the standard for both on-site power and time to power. Beyond speed, our architecture creates real flexibility for our customers. Our modular copy exact systems are portable and fungible and meet air quality requirements in virtually all jurisdictions. If a customer needs to shift deployment from 1 site to another, our master services agreement is structured to enable that. With the master service agreement, our hyperscale customers have the geographic flexibility to move a bloom deployment from 1 site to another based on a speed up at 1 site or a delay in another. Bloom moves with the customer to the location where the GPUs are ready to convert the power to tokens of intelligence and revenue dollars. Unlike a traditional power plant, our platform is also a different kind of neighbor in a community. We are community friendly. As more on-site generation gets deployed to support AI and industrial growth, communities care deeply about what kind of infrastructure shows up next door. Bloom preserves local air quality, we do not combust and pollute the air like conventional technologies. We use minimal water edge startup and none during normal operations. we acquired compact and efficient with land use. We integrate well with environments rather than disrupt them and become an ISR. As permits and permissions become the gating factor for AI infrastructure, community acceptance matters increasingly. Our fully landed grid-independent one-stop full stack power solution does not raise the monthly electricity bill for community residents and brings them economic development without compromises. The cost equation has also shifted in our favor. We have spent years driving down product cost while improving performance. That work is meeting the market at exactly the right time. our energy servers are now cost competitive with grid power in most U.S. markets and with off-grid alternatives in nearly all markets. With over a decade of double-digit cost reductions, we remain the only on-site generation solution with a sustained downward sloping cost curve. As affordability of power becomes a national issue, we expect to become the solution of choice from that perspective also. Bloom delivers a value proposition built on the principle of and not all, customers can have the power that is clean and reliable and fast and affordable. Now to our outlook for the year. To say that the commercial landscape is fluid and dynamic would be a massive understatement. The strength of the quarter and the commercial momentum we see across the board gives us conviction and confidence to raise guidance materially. We are raising 2026 revenue guidance of $3.1 billion to $3.3 billion to $3.4 billion to $3.8 billion. At the midpoint, that takes growth from 60% year-over-year to 80%. We are also raising our gross margin outlook from 32% to 34% barring any global shock or exogenous factors. You can see, we are prioritizing growth and profitability in equal measure. Now I want to introduce Simon Edwards, who recently joined Bloom as our Chief Financial Officer. Over the past year, we have been deliberate in our search. It was important to us that we not only find the right CFO for Bloom today, but the right leader and business partner to help bloom scale for the future. Simon brings a rare combination of capabilities. With the systems engineering background, he has built disciplined operating models and scaled manufacturing operations for complex systems as CFO of leading software franchises, he has applied a digitally native approach to building businesses, leveraging data and analytics as competitive advantage and employed automation for speed and efficiency. His time at Grok has given him a front-row seat to the explosive growth occurring across AI. All of that translates directly to where Bloom is headed. I also want to thank [indiscernible] and the finance team for their outstanding work in supporting the business without missing a beat during last year. Their performance speaks to the depth of the bloom talent at all levels. I'm proud. Finally, to the Bloom team, thank you. What you've built over more than 2 decades is meeting the market at exactly the right moment. You believed and always knew that an inflection point would come. None of what we see today would be possible, but for your faith, dedication, diligence and discipline, much gratitude. With that, Simon, a very warm welcome, and the mic is yours. Simon Edwards: Thank you, K.R. I appreciate the kind words today and the warm welcome that I've received here at Bloom over the past couple of weeks. I'm excited to be part of the Bloom team and to be speaking for the first time on a Bloom earnings call. I chose to join Bloom for a few reasons. First, K.R. talked about the architectural shift driving a large TAM with increasing momentum. Having seen the powerful tailwinds around AI infrastructure and electrification, I recognize very real bottlenecks in power availability. Bloom is uniquely positioned to address that challenge with a long-term opportunity that extends well beyond AI. Second, Bloom is a Silicon Valley innovator, solving an industrial problem. I was drawn to balloons visionary leadership and the depth and quality of the leadership team. There is a clear strategy, strong alignment and a mindset focused on building something enduring that starts with K.R. and permeate through the entire organization. And third, this is a chance to help build a truly generational company, one that can capitalize on long runway for growth and create long-term value for customers and shareholders. Since joining 2 weeks ago, I have already been impressed by what I have seen. The team is highly engaged and motivated. The demand environment and pipeline are exceptionally strong, and there is a clear bias towards the results. turning that demand into delivered systems, cash flow and sustainable performance. In addition, the sense of mission is clearly apparent among Bloom's employees. Many of our employees have been here for 10 to 15 years, long before AI was a common phrase. These employees stayed here because they believe in the Bloom mission. To make clean, reliable energy affordable for everyone in the world. This is a driving force behind everything we do here at Bloom and the mission I'm excited to be part of. Moving to our numbers. I will discuss our Q1 financial performance and make a few comments about what we expect in 2026. Highlights include record Q1 revenue with year-over-year growth of more than 100%, continued year-over-year gross margin expansion and record Q1 cash flow. As a reminder, I will focus my discussion on non-GAAP adjusted financial metrics. For a reconciliation of GAAP to non-GAAP, please see our press release and the supplemental deck on our website. Revenue for the quarter was $751.1 million up 13.4% year-over-year. This is the first quarter of greater than 100% year-over-year growth in Bloom's history as a public company. Product revenue was up both year-over-year and sequentially. The reaching an all-time high of $653.3 million for the quarter. Service revenue for the quarter was $61.9 million, up 15.6% year-over-year. Gross margin for the quarter was 31.5%, up approximately 280 basis points versus last year. Product margins were 35.3%, up 22 basis points from Q1 last year. As we grow, we should see incremental progress on product margins through scale, better absorption of manufacturing overhead and from the continued cost-out efforts across engineering and supply chain. Services margins were 18%, up 13 points from Q1 last year, achieving a double-digit gross margin for the fourth consecutive quarter and profitability for the ninth consecutive quarter. We expect margins for the services business to continue to benefit from both growth and scale and field performance improvements. Operating income for the quarter was $129.7 million, compared to $13.2 million last year, an increase of $116.5 million with operating margins reaching 17.3%, up more than 1,300 basis points year-over-year. Adjusted EBITDA for the quarter was $143 million compared to $25.2 million last year, an increase of $117.8 million with EBITDA margin expanding by more than 1,100 basis points to approximately 19%. This margin expansion highlights the significant operating leverage in the model as revenue growth continues to outpace cost growth. Non-GAAP fully diluted EPS for the quarter was $0.44 versus $0.03 a year ago. While we will continue to invest to support the growth ahead of us, I'm impressed so far with Bloom's ability to deliver at an increasing scale while managing costs through both operational efficiency and gaining leverage through technology adoption. As K.R. mentioned earlier, we are rapidly expanding capacity through our innovative manufacturing model, which allows us to scale in months, not years. That growth requires upfront working capital to support higher production and deliveries. Even with those investments, cash flow from operating activities was an inflow of $73.6 million, positive for the first time in the first quarter of the year, which is typically a seasonally weaker period. This was driven by a step change in profitability, strong collections and customer prepayments to reserve capacity. We ended Q1 with $2.52 billion in total cash on the balance sheet. Turning to guidance. After a strong start to the year, and anticipating that Q2 revenue should be at least as good as Q1, we are raising our fiscal 2026 guidance to new levels. We are increasing our revenue projections from the previous range of $3.1 billion to $3.3 billion up to a range of $3.4 billion to $3.8 billion, with the lower end of the updated range sitting above the upper bound of the prior range. This updated guidance represents 80% year-over-year growth at the midpoint and reflects the progress we have made in adding manufacturing capacity, the strength and velocity of our pipeline and the opportunity to continue to prosecute a healthy backlog. We now expect our non-GAAP gross margin to increase from 30% in 2025 to approximately 34% in 2026. We representing about a 4-point improvement year-over-year to 2 points above our original guidance as we realized the impact of ongoing cost optimization and productivity initiatives. Our non-GAAP operating income expectation is now $600 million to $750 million, acknowledging the higher revenue and margin flow through, but also recognizing that we plan to invest to support the growth for this year and the future. Our non-GAAP fully diluted EPS expectation is now $1.85 to $2.25. To conclude, we delivered record Q1 financial results, and we are optimistic in our full year 2026 financials being the best in Bloom history. I'm looking forward to working with KR and the entire Bloom team and spending time with our analysts and shareholders. Operator, we are now happy to take questions Operator: [Operator Instructions] And our first question comes from the line of Mark Strouse with JPMorgan. Mark W. Strouse: Maybe starting with Simon. So first of all, congrats on the new role, and welcome to the fray here. You mentioned kind of how you're impressed with the operating leverage in the business. I'm just curious, I fully appreciate you haven't been there very long, but kind of your initial take... K. Sridhar: Go-to-market. There's a number of growth factors that we're exploring. Obviously, from a technology standpoint, growth is highly innovative, and we're investing in innovative areas. And then on top of all of that, I think KR has mentioned in the past, cost reduction is in the DNA of Bloom. And so I think really what we're focused on is, a, how do we execute on the projects in the plan right now that deliver on the gross margin expansion that we've highlighted. Second is, as you look at our updated guide, you'll see there's incremental operating margin expansion baked into the revised guidance. And then finally, as it relates to longer-term guidance here, I don't think that's something we'll provide right now, but continuing to execute on these vectors is something that I know everyone here is very focused on. Mark W. Strouse: Got it. If I could ask one more follow-up to K.R. Clearly, your orders are accelerating here. I'm curious if you can comment on what you're seeing with your service contracts, particularly the duration of those contracts is I think in the past, you've said some of these data center contracts have been somewhere around 6 or 7 years in duration. I'm curious if you're seeing any change there potentially longer than 10 years or so somewhat similar to your C&I business. K. Sridhar: Mark, thank you. And look, I think it's important because some people may be coming in new into the story, we have a 100% attach rate between our product sales and our service. That's the first place to start. There is not a single deal that we do without an attach rate to our service. Even with the data center opportunities, on average, it's 10 to 15 years, somewhere in that range. And so it's a tremendous source of annuity revenue that we see. And you can see us executing on the margin targets that we have provided. So it's going to be a phenomenally great business for us going forward, along with our product business. Operator: And our next question comes from the line of David Arcaro with Morgan Stanley. David Arcaro: Congratulations on the results here, and a warm welcome to Simon as well from me. But maybe I was wondering if you could touch on the pricing backdrop that you're seeing. I'm wondering if you're seeing opportunities to hold pricing or potentially seeing projects with increased price opportunities in the current environment just where we're seeing -- it seems like all other alternatives are increasing cost to the customer. K. Sridhar: So we completely distinguish and think differently about this. at the end of the day, we don't compare our pricing with engines and turbines. It's apples and oranges. We are creating a completely different value for our customer. be it 800 old DC being eliminating all the paraphernalia, the Band-Aids as I've called them to a mechanical solution going to a digital age, be it the amount of overbuild that you need to have when it comes to getting the reliability that you need because it's very obvious, these big projects are not going to have grid backing it up. . The local rate payer is not going to be providing that reliability for free. And so you bake all that in, we just always focus not on cost, not on price. Obviously, we are going to create margin for the business. And as the first question was asked to Simon, we will focus on that. But at the end of the day, we're going to build our business with our partners. By creating value for them and creating value for us. So we don't look at anybody else's pricing and what they do. Thank you. David Arcaro: Understood. Yes, that's helpful. I appreciate you characterizing that. And I was wondering as you look to ramp up your scale significantly here, could you also speak to how you're seeing the supply chain and its ability to ramp with you? We've seen labor as an example, become a constraint elsewhere. I'm wondering pressure there or in upstream materials? K. Sridhar: That's a great question, David. Thanks for asking. And because that's a significant distinguisher between what we do and what other people do. So if you had come to our factory and seen the few hundred people that we have manufacturing our stacks than we were doing 200 megawatts a year. And if you came at the end of this year when we will be doing almost 10x that amount, the number of employees on the shop store will be the same not almost equal, will be the same. And that is the innovation we bring into the field, knowing that for us, automation and figuring out how to train our existing employees, upskill them as they grow. And by the way, most of them happen to be the same employees, too. They are upskilled from doing that manual labor to automation. That's why with their hub, as you heard in my script, in the shop floor, we don't talk in harsh stones about bringing automation to remove a particular manual process out because our team members are actively involved in it. And this is the same philosophy with which we are approaching our supply, we have approached our supply chain and are approaching our supply chain because these were custom suppliers built for us in whom we expected that same Bloom way mentality, and we're enforcing it. So the ramps you're talking about are [ pre-seed ] brands. Can you hit some speed bumps along the way, maybe, but are we worried about it or lose sleep or think that we cannot get over those bumps? Absolutely not. We are confident in being able to deliver the promises we make to our customers, not just because we have a very good manufacturing shop. For us, that manufacturing extends to our supply chain partners, and they adopt the same philosophy. Thank you. Operator: Our next question comes from the line of Chris Dendrinos with RBC Capital Markets. Christopher Dendrinos: Just echoing the congratulations on the strong quarter and welcome to Simon. I guess my question here is, if I go back last quarter, you had talked about scaling capacity as your customers call in to order that. Now you're talking about continuous capacity increases. So I'm just wondering if you could provide a bit more color sort of on what's changed here in the past months that changes that approach? And what are you seeing from your conversations with customers to give you confidence to continue to expand here? K. Sridhar: Chris, thank you for that question. Look, to say that business is accelerating as an understatement. Okay? We are very, very clearly seeing that demand. And we just don't look at the demand is coming to us at any point in time in isolation. VRA power company embedded in Silicon Valley, and we understand the end-user technology extremely well. We can get into the basics of what is happening in the field of AI and understand why that demand is going to be there and I can tell you, this is a secular demand that's going to last for many, many years to come. It is with that conviction when we draw to that conviction and we understand. We talked -- if you remember a couple of calls ago, about people just grasping on the crumbs of utility capacity being available. Those comps have been eaten up. So we clearly see where this is going to go. And we see what we fundamentally see is the following: the amount of demand that is being generated and the rate at which that's growing is significantly faster than what alternative providers of power can create. That creates a beautiful opportunity for us that we see over many, many years, and it gives us the confidence to be able to say we are now going to continuously grow. So think of Bloom's capacity increase as an analog dial that constantly keep increasing as opposed to some digital step function that happens once in a while. Christopher Dendrinos: Got it. And I guess maybe just as a follow-up to that, and that step function comment. I mean is there a step function between going to 5 gigawatts and then maybe going beyond 5 gigawatts. Do you need to see something different from like a customer commitment schedule to add physical footprint? Or do you think about absolutely adding an extra facility the same way. K. Sridhar: Yes. That's a valid question. Absolutely. So the answer would be the following, right? As we said there, whenever we made that statement to you, their existing facility was 5 gigawatts. In my script, I talked about we are constantly innovating. I don't know how much more we can milk out of it. But no matter what we do, we are going to need new factories as we go forward. Bloom was built on the vision of lighting up the planet. Okay? 5 gigawatts a year or 6 gigawatts a year is not going to light up the planet. So we are going to build factories as needed. And that's just going to be a normal course of operation for us and the step functions at which we grow will purely depend on where the market is and where the market needs us. Operator: And our next question comes from the line of Nick Amicucci with Evercore ISI. Nicholas Amicucci: Great. and welcome, Simon, look forward to working with you in the future. Quick question for you, K.R. Just kind of piggybacking on Chris' question. So when we're kind of seeing that -- seeing demand and it's not coming through an isolation. Is it fair to say, too, that the vast majority, if not all, of the backlog currently is probably tethered towards your towards like AI training. And then there's conceivably an incremental leg of growth when we kind of think about inference and just the lack of need for air permits and kind of the ease of siting and permitting and so on? K. Sridhar: You're absolutely right. Let me tweak your statement in the following way. influence is going to be much bigger than training in terms of total gigawatt need. But it is going to be not concentrated in the multi-gigawatt data centers that you're looking at. And think about this influence by definition, is at the edge, a lot closer to highly dense populations of people and processes. If you're seeing the resistance you're seeing today to a conventional power plant being built in the backyard of a large training data center that happens to be in a small remote town. Just think about what that resistance would be in a city if you don't have clean solutions. Let me put this in perspective for you, okay? You just heard about the Oracle announcement of up to 2.45 gigawatts. I'm going to use that as an example, not that particular site, take that number. think about a 2.5 gigawatt power block that needs to power a large training data center somewhere. The obvious example that you would go to would be a large CCGT, a bunch of large CCGT with gas to be able to provide the power. To put it in perspective for the people listening on this call, that is the capacity of the state of Rhode Island in one single data center. And that happens to be, if you use CCGT you will use all the water that all residents used to shower a day in Rhode Island just to power that power plant close to 1 million showers a day. And it will create not from it, air pollution that is the equivalent of all the cars in Rhode Island almost in that one location. So even in a remote town, you can understand why there's a pushback and why clean is going to be important. If that's how important it is for a large data center, Imagine now for influence where it's going to go. So we see that as a huge opportunity coming our way as we go forward. Nicholas Amicucci: Great. No, that's definitely helpful. And then , as we think about -- obviously, there are certain kind of other, I guess, product on competitors kind of coming out with kind of solutions that are more of a bridge power type of solution. Are there any conversations that you guys are having with kind of your hyperscaler customers or the neo class where it's kind of -- we want to leverage the fuel cell to get up and running speed to power is paramount, but ultimately still feel the need to be grid tied or just given the reliability attributes of your fuel cell offering, is that kind of a moot point? K. Sridhar: Earlier in this conversation, they used to bring up the concept of Bridge power with us. And I would smile and always say we're happy to sell you a bridge to a bridge because Superman coming, okay? So today, that conversation is nonexisting. Operator: And our next question comes from the line of Manav Gupta with UBS. Manav Gupta: Had somewhat of 2 technical questions and ask them together. While there are other solutions, but they do depend very heavily on battery packs, for load balancing and backup, batteries are expensive, they decay they take place and they generate heat. Your solution with ultracapacitor and high reliability needs minimal battery backup. In some cases, no battery backup. So can you talk about that? And the second question is, as it is getting clear that cyber and Rubin are the future those building those hyperscalers are looking for conversion parts that can help them go from you have [ 415-volt DC ] to 800-volt DC. Now based on the channel checks we have done, large power transformers, medium board switch gears, centralized rectifiers are all seeing long queues and delays in shipment again, your solution avoids those costs and those delays. So can you talk a little about these 2 factors? K. Sridhar: Manav, thank you. Do you want to come work for us? You're making a very good sales pitch here for Bloom. Obviously. Look, this is what you're saying is very true. Here are the 2 things. Number 1 we are purpose-built and purpose designed to provide digital part or digital age. . Now it is fully understandable as I see it for large data centers to be extremely cautious about introducing any new technology, until it's proven out because the stakes are very high for them. So we had to pay our deals and slowly get in and become a pull the solution out, using AC, using all their backup generation, everything. But today and the most important point I want to highlight to you from like today's script that you saw from me. It's not just the deal we did with Orca, but we talked about several other projects we're working on, where there is no grid connectivity. There is no diesel backup generators. There are no turbines and there are no occasions. And like you correctly pointed out, there are no batteries because 100% bloom one-stop solution can solve that for them in our combined solution between our fuel cells and our ultra cats, okay? So that has to start resonating and it started resonating. Now the next step is for them to go straight to that 800-volt DC. It is -- as I see it, it's self-evident to me that, that is going to come. It's inevitable that they're going to switch to that. because the world does not have enough copper like you pointed out, the world does not have enough transformers. So necessity is going to force them there. And once they try it, they will not go back on it. Operator: And our next question comes from the line of Ben Kallo with Baird. Ben Kallo: Congrats and welcome, Simon. K.R., I wanted to talk just maybe on the demand front and just the different channels, we saw your largest utility deal, and you've had utility deals before. . Now, obviously, with Oracle and hyperscalers you have repeat customers there. How do you think it evolves where the growth comes from additional hyperscalers? Is there a new channel like midstream gas companies, something like that? And then how do we think about the international side of the business? Like is that kind of a delayed growth area, just kind of lagging what the U.S. is doing here? And then I have a follow-up. K. Sridhar: Great questions. So let me be quick and answer those questions in the following way. You're absolutely right. What we are doing in AI right now is truly a rinse and repeat of what we have done in the commercial and industrial space, right? Work hard, get a pilot with a lighthouse customer delight them, scale out with them. use them as a reference, sign on brand-new customers and continue to build and 70% to 80% of our business kept coming from repeat customers who are very, very happy. . That's exactly what we set out to do in AI, and we are doing this. Now with the utility scale customers, for the first time, I think they are seeing favorable regulation that allows them to rate base and offer better solutions to their customers. So we see a strong interest coming from both gas utilities and electric utilities to say in the face of that favorable regulatory and price design, rate design environment, can we partner with you. We're always happy to partner with them. right? And our commercial industrial business is robust, strong and growing just the size of these big AI deals make us focus there. But trust me, we have a very active group prosecuting these orders. And think about the reshoring of big factories to America. How are they going to get the power -- we see that as a huge opportunity for us. So we are fully engaged in it. Our team is fully engaged in it. We just don't seem to talk more about it because of the size and scale of the AI opportunity right now. On the international front, look, it's very similar to what you're seeing everywhere else. -- on an 80-20 rule, pretty much the action today on AI and therefore, the huge power needs seem to be in the U.S., and that's what us and everybody else is focused on. However, we will continue to develop them. We are continuing to develop them. And we believe that there will be a pause before it takes off very clearly what happened with Russia and Europe with natural gas followed up with what's now happening with Qatar and natural gas. Those things have an impact of slowing down development in those other countries. But we all know it's not if it will happen, when it will happen. So there is going to be a delay, and we are going to be prepared for it when that opportunity comes. Thank you. Ben Kallo: And just my follow-up is on the cost front. With everything you have going on just with demand, could you just talk to us about your focus and kind of what you've done and what you plan to do on the stack life and just the total cost of the systems and kind of your pathway forward. K. Sridhar: Ben, thank you. If you walk around the floors of gloom, there will be one thing anybody and everybody will tell you, gloom is about the genius of and. It's not about or, okay? So we don't accept false choices. It's not about growing demand only. It's not just about increasing capacity. It's not just about reducing cost -- it's not about continuously not only about continuously innovating. It's about all of the above all the time. And people are sick of hearing me talk about the Genius of end. But that is really what's -- how we think or it's not in our recovery. So -- are we continuing to do that? Absolutely. Should you expect a double-digit cost reduction like we have over the last decade, answer is absolutely yes. We will still focus on that. And in terms of field performance, we continue to improve field performance, and that's the reason you're seeing our service margins to what they are. I'm very proud of our dedicated team. Thank you. Operator: [Operator Instructions] our next question comes from the line of Colin Rusch with Oppenheimer. Colin Rusch: Could you talk about the cadence of your installation times and how we should think about that trending into the balance of the year? And then just a little bit about the potential to leverage some of your available capacity into participation in project level economics for some of your customers? K. Sridhar: Yes, that's a great question. So look, we have because we saw this [indiscernible] of demand coming our way and we understood that the primary driver there is going to be time to power. And we also understood that these large data centers prosecute on multiple projects. . Just like any construction project, some are going to get delayed, some are going to be on do, some may speed up and they need that total flexibility. For all those reasons, we shifted from a have somebody big dirt for concrete, lay the conduits, get the trades people to come there and do all the work to a solution on a skid. That will just show up and get connected with the least amount of work that can happen. What is the result of that? We have closed an order of magnitude reduction in the field time that it takes for us to be able to install our systems. That's a huge innovation. We have not talked about it at all. now that you're bringing it up, I'm just mentioning it to you. But that's again the genes of and. We just continue to innovate on every single area every single day. So that's what we see. So I can assure you that we can get a 100-megawatt project up and running faster and with the least amount of field hours than any competing technology out there. So this is this is innovation and all. So thank you for asking that question. Operator: Our next question comes from the line of Maheep Mandloi with Mizuho Securities. Maheep Mandloi: And maybe just quick to first. First, just on the operating leverage. How should we think about that with the volumes to 5 gigawatts here? And separately on the service mix, how much of that 5 gigawatt would be for the service needs in the future here. K. Sridhar: Thank you. I'm going to be very quick with that answer. The answer is very simple. We only talk about commercial product capacity. We always bake in our service requirements on its own that skip separately. So when we give you a number that is our commercial product revenue capacity. Operator: And our final question comes from the line of Vikram Bagri with Citi. Vikram Bagri: Good evening, everyone, and welcome Simon to the team. We clearly are a better stock because that a lot of us on Wall Street. The first question I had here was you highlighted the culture of continuous innovation and improvement that leads to double-digit cost reduction which appears to be a significant advantage, as you highlighted throughout the call versus the competition. I wanted to ask if there is price elasticity to demand. And I understand you benchmark our pricing against competition, it's apples and oranges, fully understand the benefits of the technology, whether it's speed to power, air quality, water backup and so forth. We're still seeing premium being paid for CCGT, pricing being up 10% to 20% year-to-date this year. Is pricing something that if it goes down over time, we'll see more pronounced market share gains for Bloom from CCGT and the premium for CCGT getting eroded over time. better understanding of the product? Is it seeing the product work at a significantly larger scale at Toreo [indiscernible] of like leads to more market share gains I'm just trying to understand what's the tipping point where you see pronounced market share gains from CCGT and that premium sort of like getting eroded over time. K. Sridhar: Thanks, Vikram. You're absolutely right on the cost reduction part. I'm going to indulge you and try to see if you would think about this differently. You're talking about some future tipping point. The rate of our growth is faster than what any energy technology ever has done in the past, and that's what we see in our pathway. So this is -- for us, it's not a tipping point. Gone are the days , if you just go back to the traditional energy analysts from even a decade ago, just dedicated to 2015, 2016, the utility industries [indiscernible] Institute and all you analysts were talking about a downward spiral for electricity. This is not a zero-sum game. We don't care about what anybody else in the business does and who buys what from anybody else. We are going to make sure that we are continuously improving our product to offer the best value to our customers, the best neighborly solution to our communities where they operate and create new demand and capture new demand because that new demand is going to be significantly larger than the industrial age demand. The digital age demand is going to be significantly larger, and we are the digital solution to that digital demand. So we don't think about price. We don't think about cost. We don't think about elasticity. We think about meeting the needs and making sure that we win the AI race. We don't -- or doesn't become an impediment to reassuring factories. Power doesn't become an impediment to electrification or doesn't become an impediment to digitization first in the United States and then use that model across the world, the power of the planet. That is really what this company is about, and I'm going to use your question as also my closing remarks since we are on the hour and simply state that what Hopefully, what you all understand is the following. Let me make a few statements and ask you to think about would you agree with it or not okay? The use of AI and the amount of power that AI is going to use is going to go up and up over the next few years. The rate at which that growth has happened is not going to be met just by transmission and distribution upgrades. That means on-site power is absolutely essential. If on-site power is absolutely essential, in no neighborhood, would a community willingly want a power plant in their backyard that pollutes noisy and an is. Bloom offers a no-compromise solution to both the digital customer and any community and neighborhood. If you bet against any one of the statements that I made you can bet against loan. Otherwise, you've got a great ride with us. Thank you for your attention. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to PACCAR Inc's first quarter 2026 earnings conference call. All lines will be in a listen-only mode until the question and answer session. Today's call is being recorded. If anyone has an objection, they should disconnect at this time. I would now like to introduce Ken Hastings, PACCAR Inc's director of investor relations. Ken, please go ahead. Ken Hastings: Good morning, and welcome, everyone. My name is Ken Hastings, PACCAR Inc's director of investor relations, and joining me this morning are Preston Feight, Chief Executive Officer; Kevin D. Baney, President; and Brice J. Poplawski, Senior Vice President and Chief Financial Officer. As with prior conference calls, we ask that any members of the media on the line participate in a listen-only mode. Certain information presented today will be forward-looking and involve risks and uncertainties that may affect expected results. For additional information, please see our SEC filings at the Investor Relations page of PACCAR Inc. I would now like to introduce Preston Feight. Preston Feight: Hey. Thanks, Ken. Good morning, everyone. In the first quarter, PACCAR Inc's outstanding employees did an excellent job providing our customers with the highest quality trucks and transportation solutions in the industry. I really appreciate their hard work, high performance, and dedication as we increase build rates in our factories all around the world. PACCAR Inc achieved revenues of $6.8 billion and net income of $605 million in the quarter. These results were generated by strong PACCAR Parts and Financial Services results, as well as solid growth in the truck businesses. PACCAR Parts achieved quarterly revenues of $1.7 billion and quarterly pretax income of $402 million. PACCAR Financial had a strong quarter, achieving pretax income of $116 million. Looking at this year's U.S. and Canadian truck market, we estimate it to be in a range of 230 thousand to 270 thousand units. The market is strengthening as driver and fleet capacity becomes limited and customers begin to realize higher freight rates. This is somewhat moderated by fuel and other operating cost volatility. In the first quarter, Kenworth launched a new C 580 heavy-duty vocational truck. This large multi-axle model was introduced at the CONEXPO trade show and is a unique super heavy-duty truck used in severe service applications around the world. We project the 2026 European above-16-ton market size to be in a range of 280 thousand to 320 thousand. DAF’s premium aerodynamic trucks provide customers with the latest technology and best operating efficiency. As mentioned on the January earnings call, the DAF XF and XD electric vehicles won the International Truck of the Year 2026 honor. In the first quarter, DAF extended its EV leadership by introducing new flagship XG and XG+ electric vehicles. In addition, the XF Electric earned another award, the 2026 Eco-Friendly Truck of the Year in Spain. This year's South American above-16-ton market, where DAF trucks are desired by customers for their durability and advanced technology, is expected to be in a range of 100 thousand to 110 thousand vehicles. In the first quarter, PACCAR Inc delivered 33 thousand 1 trucks. In the second quarter, we will deliver an estimated 37 thousand to 38 thousand vehicles. PACCAR Inc's truck, parts, and other gross margins increased from 12% to 13.1% in the first quarter due to improved truck segment performance. Second quarter margins are forecast to expand to around 13.5% as global production volumes increase. We anticipate continued performance improvements in the second half of the year as our customers benefit from our local-for-local manufacturing strategy, experience better operating conditions, and purchase trucks in front of the coming 2027 emissions change. PACCAR Inc's exceptional range of trucks, compelling parts business, industry-leading financial services, and advanced technology strategy position the company well for an excellent future. Kevin will now provide an update on PACCAR Parts, Financial Services, and other business highlights. Kevin? Kevin D. Baney: Thanks, Preston. PACCAR Parts achieved first quarter revenues of $1.7 billion and profits of $402 million. Gross margins were 29.6%. We estimate parts sales to grow by about 3% in the second quarter and be in the range of 3% to 6% for the full year. PACCAR Parts has 21 parts distribution centers worldwide and has plans to expand its global distribution network and TRP stores. As mentioned in our recent Analyst Day, we continue to see great opportunities for broad-based parts growth and look forward to realizing that opportunity in partnership with our outstanding dealer network. PACCAR Financial Services pretax income was a robust $116 million. The continued strong performance is a result of solid asset growth, improving margins, and the used truck market that is beginning to strengthen. This year, we are planning capital investments in the range of $725 million to $775 million and R&D expenses in the range of $450 million to $500 million as we continue to invest in key technology and innovation projects. These include advanced flexible manufacturing technologies, next-generation powertrains, PACCAR Inc's autonomous vehicle platform, and integrated connected vehicle services. We are excited for the growth PACCAR Inc will experience in the coming quarters and years. We are now pleased to answer your questions. Operator: We will now begin the question and answer session. If you would like to ask a question, please press 1 to raise your hand. To withdraw your question, press 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Michael J. Feniger of Bank of America. Your line is open. Please go ahead. Michael J. Feniger: Thanks, everyone. Just on the parts guidance, what did you see in the quarter? It feels like a slower start. I would love if we could just start there with what you are seeing on the parts side, how we are looking so far through Q2, and how we should think about that in the back half with orders starting to pick up and be better than expected. And just on the gross margin, the pickup to 13.5% versus 13.1% in Q1—should we still think that gross margins sequentially walk up through the year as build rates recover? Is there a pricing expectation that could also get better as well, given your comments that the U.S. markets continue to strengthen? Just kind of curious how we should think about as we build through the year and what number we might be exiting the year as we are starting to see some strength in freight rates even excluding fuel right now. Thank you. Preston Feight: Hey, Michael. Thanks for the question. It is good to talk to you. We do see increasing volumes and are really pleased with how the factories have been able to create this local-for-local manufacturing capability in America. We see the volumes increasing, as we said, to 37 thousand to 38 thousand in the second quarter. That is on the basis of build rates that we have already put in place, so teams have done a really good job of that. We see some of that margin growth coming from that volume, partially offset a little bit by the price of energy, steel, aluminum, and other raw material pricing. I am not quite sure customers have seen the full effect of tariffs yet, but we feel really good about the cadence throughout the year as the market and our customers get healthy, and we see accelerating sequentially. Hey, Miriam. Let us go to the next question. Operator: Next question comes from the line of Jerry David Revich of Wells Fargo. Your line is open. Please go ahead. Jerry David Revich: Yes. Hi. Good morning, everyone. I am wondering if we could just talk about the really strong profit per truck that you folks delivered in the quarter. With lower parts contribution, you still exceeded the guidance ranges, so it looks like your profit per truck was up to about $5.3 thousand from $2.9 thousand last quarter. Can we unpack that—how much of that was better cost execution versus mix and any other moving pieces as we think about the profile heading into the rest of the year? And as we look at the backlog, how much more favorable is price/cost based on what is in backlog versus what we saw in the first quarter? And one last one to calibrate expectations on orders over the balance of the year—we are hearing that there is a limited number of build slots available that might hamper orders over the next couple of quarters versus underlying demand. Is that the case for your business? What proportion of your build slots are already spoken for for the next three quarters? Preston Feight: Jerry, thanks for the comments. We did have price/cost advantage in the quarter sequentially, so we saw ourselves up over a percent in price/cost, which is good. I think the teams are doing a really good job of focusing on the market we are in, being careful on pricing to make sure that we get our percentage of the market. In fact, we saw that in terms of our percentage of market build—31.8% in the first quarter—which is very favorable. So we are balancing that growth with price/cost favorability. Looking forward into the second quarter, we think we will have favorability. We are full through the second quarter, and we have good visibility into the third and the fourth quarter. As for build slots, we are full in Q2 and a majority full in Q3 and Q4. I am not sure I recognize the commentary about people not having slots; that sounds more like a marketing scheme. Tami Zakaria: Hey. Good morning, and thank you so much. My first question is on the simplified metal tariffs that went into effect in early April. Does that change your view on what would be the tariff impact, especially for aftermarket parts versus the last time you spoke? Or does it not change the tariff headwind that you expected? And based on third-party data, orders have been very strong year-to-date. You kept your U.S./Canada outlook unchanged. Does this outlook include the year-to-date strength in orders—meaning do you expect orders to moderate as we go through the year as we get close to the next timeline—or is your view shaped by supply chain rather than demand? Preston Feight: Hey, Tami. It is good to hear from you. It does not really have a lot of impact for us because the truck-specific 232 has specific offsets, and it applies mostly to those materials. So there is some moderate impact, but not significant. Kevin D. Baney: Same on the parts side, Tami. Preston Feight: On the outlook, our view is shaped by the fact that the first quarter really did not have a high cadence to it. If the first quarter ran at something around or a little under 200 thousand, then in order for it to come to the midpoint at 250 thousand, there is going to have to be a rapid acceleration. We have a great supply base, but they also need to be able to spin up their operations. So the rate of increase quarter over quarter is what probably informs the total market size. Rob Wertheimer: Thanks. Is there any visible impact of the war in the Middle East on confidence or demand or orders in Europe? And the rise of electric trucks in China has been very sharp. Could you talk about your own experience? Do you see strong demand from customers? Is there a crossover on total cost of ownership yet on some size classes or models? How do you see that shape at present? Preston Feight: On confidence and demand, people are paying attention and trying to discern what it might mean for the general economy, of course. From a demand standpoint, we have seen less impact. We have seen continued good order intake throughout the last couple of months. On electric trucks, Kevin, why do you not share some thoughts? Kevin D. Baney: In Europe, geopolitical factors have had an impact on fuel prices, and the cost of diesel is a bigger percent of operating cost for customers. So there has been a lot more discussion about battery electric trucks in Europe. As we said, DAF just won International Truck of the Year with the DAF XF and XD Electric. They just expanded their product range, so we are in a really good position to address the growing customer questions and demand about battery electric trucks in Europe, and we are well positioned against the competition. Preston Feight: I have to say I had a chance to drive that XD Truck of the Year—it is amazing. It is a really wonderful truck to be in. For the U.S. market, without subsidies, widespread adoption is probably less likely. There can be markets where it makes sense—certainly in urban environments. We just launched a couple of new medium-duty models for Kenworth and Peterbilt, so we have those regional delivery EVs, which is where the market makes the most sense in America. David Raso: Hi. Thank you. Question relates to trying to understand your operating performance in the truck business, particularly. It looks like you can back into the gross margin for truck at around 6.9% in the first quarter. Sequentially, the truck revenues went up $11 million, but your gross profit went up $73 million. Was there anything in the first quarter about reversal of old tariffs that you could take the benefit with AIPA gone? I know we already had truck 232 in, but just making sure that is a clean quarter. I appreciate U.S./Canada as a percent of the shipments was a lot bigger this quarter than last. Can you walk us through that gross margin improvement in truck on really no revenue increase? And then for next quarter, where your truck revenue could be up, call it, $600 million, you would think the gross margin impact could be more significant than going up only 40 bps at the company level. I think earlier you mentioned parts gross margins for 2Q. I do not think you called out anything particularly negative for it. Again, I am just trying to understand that impressive performance 4Q to 1Q, but then 1Q to 2Q seems a lot more muted despite this being the quarter you get a bigger revenue move. Preston Feight: David, you always do such a good job with your analysis, and you continue to do that. We had somewhere above 7% for our truck margin, and that came largely because the teams did a really good job selling these best-in-class products. The leverage we got off of the volume helped us as well, and the price/cost advantages contributed to that. We also had favorable product mix, selling more of the Kenworth and Peterbilt brand at year-end being lower because of the holiday shutdown season, and then, of course, DAF at the end of the year usually has a few units that they are getting done on their fleets that they hold in inventory. So a little bit of a favorable mix effect on where we are selling the trucks helped us. We did not record any increase for IEPA related to AIPA. So, in summary, it was a very clean quarter—nothing to put in or take out of it. For Q2, we gave you 13.5% as our midpoint guidance for our margin. We do see volume being a good thing. Our build percentage has increased in the market in North America to 31.8%. Pricing remains competitive as our customers are just beginning to experience acceleration in their end markets, so there is a competitive price point out there. One other comment worth making: when we guided 3% growth in parts, obviously the truck volume will be much greater than 3%, going up by 6 thousand to 7 thousand trucks. So you have a negative, if you want to call it, price/mix effect that also dampens the total margin percent. Chad Dillard: Hey. Good morning, guys. How do you think about the prebuy likely to hit later this year? What are your plans for the number of shifts or build slots compared to where you are today or a year-on-year basis? How quickly could you ramp that up versus where you are today if you got a little more visibility into the durability of demand? And can you talk about how industry pricing behavior has changed versus the start of the year? Are some of the nondomestic producers starting to price for tariffs? Preston Feight: We have great operations teams—they have demonstrated that not just in the past year, but over the decades—and they continue to be able to move up quickly. It is more about what the supply base and order board look like and how quickly they have visibility to it. The hiring cadence across the industry will probably inform how quickly it can go up. I feel very confident in our team’s ability to add the people and the capacity we need to support the market in any market size. As for pricing behavior, you would have to ask others about their pricing scheme. We do see a competitive market right now. Our customers are just starting to see improvement. Raw material pricing is high, so those factors are still in play. We are at the beginning of what feels like an acceleration, considering that the first quarter build was just under 200 thousand and last year was low. If you think about the average market being 267 thousand units, there is going to be some replacement demand and strengthening financial performance, both of which are good for us in the near and midterm. Stephen Edward Volkmann: Thanks. Good morning. You are good at managing supply chains—probably the best at that. We have a big ramp in the second half this year, and we are starting to hear some early signs that there might be constraints in things like memory chips and maybe even aluminum supply. Is there anything on your radar that could actually constrain the second half build? And can you comment about the mix you are seeing relative to vocational versus over-the-road as the second half ramps up? Preston Feight: Great question. The thing informing supply chain right now is how much energy-related exposure suppliers have to materials and what that might do to their costs. The second factor is the hiring cadence—getting people trained up to speed in a sustainable manner for suppliers to be ready for the ramp. Nothing specific is standing out yet. On mix, it has been pretty uniform. We have seen over-the-road companies getting their recovery now with spot rates up double-digit, even up to 20%. We have seen contract rates improving, helping our truckload carriers. The vocational market continues to be solid, as well as LTL. We are seeing orders coming in from all sides as people want to make sure that they have their fleet in the right spot for this year and next year. Kyle David Menges: Thank you. I wanted to go back to your gross margin comments. It sounds like you are expecting improvement quarter over quarter as we move through the rest of the year. I understand volume is a big piece of that, but how are you thinking about pricing momentum as we get to the second quarter and into the second half? And how are you thinking about price/cost for the rest of the year? Also, we are getting pretty close now to the new EPA mandate. How is the new engine performing in the market, and will it be ready in time? Preston Feight: The year is a long way off, so for this discussion we really focus on the next quarter. We expect to have price/cost favorability in the quarter. How that gets informed is based upon what the market asks for and how raw material pricing finishes up for us. We will watch carefully how raw material pricing moves through the year—there is volatility—and that will have consequences, but we do expect favorability throughout the year. On the EPA mandate, PACCAR Inc’s team does a great job of having the right engines for our customers. We are really pleased with the engine development programs that are ongoing for us, and we are watching how it is going with our partner Cummins. We look forward to seeing how the implementation rolls through for everyone, and I feel great confidence in our teams and what we will deliver. Jamie Lyn Cook: Hi. Good morning, and congrats on a nice quarter. First, as we think through the second half of the year and throughout the cycle, what is the setup for PACCAR Inc in terms of incremental margins? Last cycle, you delivered above-average incrementals with a lot of new product launches. This cycle, we have the Section 232 benefit and market share opportunity. How will you balance the two? Should we think of normalized incremental margins at 15% to 20% or above that? Second, can you talk to channel inventory—where PACCAR Inc is sitting versus its peers—and whether peers have made any progress on destocking inflated inventory in the channel? Preston Feight: On inventory, we feel it is in very good shape at just under three months—2.8 months—and that compares to 2.2 months back in December. We have been able to get a little bit of inventory back into the market, which feels healthy. The industry overall has a higher percentage of inventory—over four months. PACCAR Inc feels like we are in really good shape there. Dealers have been able to get a few trucks on the lot and get ready to go. Inventory for us is affected by our higher percentage of vocational share—people getting bodies put on trucks is an influencing factor. On incrementals, we see margin being favorable, and our build percentage at 31.8% in the first quarter is good for our performance and good for our customers who will get trucks from us. Being full in the second quarter, we feel good about our position. Steven Michael Fisher: Thanks. Good morning. I wanted to clarify the parts acceleration you expect in the second half. You mentioned clients starting to get healthier, and fuel had an impact in Q1. What will drive the acceleration? Do you still need to see freight rates continue to rise? Do you need to see fuel costs falling? Is it about getting more trucks on the road or freight shipments picking up? Kevin D. Baney: It is a little bit of all of that. As we see the increase of truck orders, more trucks are on the road, and as our customers’ business improves, we see that on the parts side. Increased fuel and operating cost volatility leads customers to focus on required maintenance and delay optional parts purchases. We see both volume and mix improving, and that leads to acceleration through the year. As the truck market improves, the parts market follows. Steven Michael Fisher: To what extent have you had discussions with customers about 2027 planning? How are you characterizing the expected pickup in the second half of this year—prebuy or just buy? Preston Feight: There is a little bit of both going on. There is “buy” because customers are getting healthy and want fleet age to come back to where they want it. On the “prebuy” side, there is a cost impact to a 35 milligram engine, and customers are sensitive to that, so some are putting orders in front of it. Looking into 2027, we will see how the year fills out—full-year retail and build will inform what 2027 will look like. Kevin D. Baney: The second half of the year is pretty well balanced in terms of the fill between the third and fourth quarter. If it was more weighted to a prebuy, we would see demand higher at the end of the year, but we see a nice balance in both quarters. Angel Castillo: Hi. Good morning, and thanks for taking my question. The EPA formalized the low NOx emissions rule communicated at the end of last year. Does that have any bearing on the ability of the industry to launch and move forward with engines that meet the latest low NOx standard? Any implications on customers’ ability to move forward with orders or a potential prebuy? If we do not have formalized releases there, any insights as to when we might get that? Also, could you give the deliveries guidance for 2Q by region—specifically, how much you expect for U.S. and Canada versus Europe? And revisiting the 13.5% gross margin, beyond truck mix being a slight drag, are there any other factors keeping it from being a more material step up quarter over quarter? Preston Feight: The formalized release is that it will be a 35 milligram standard come 2027—that is the law. There is not any modification expected to that in terms of the standard for new engines in 2027. The parameters around that are being contemplated based on customer and market feedback. On deliveries, we expect Q2 volumes to be up around the world—build rate increases everywhere are driving the increase in volume. On the 13.5% margin, it is volume-based improvement with slight price/cost favorability, with pressure on pricing in the market as tariffs may not have been fully rolled through yet, and PACCAR Inc performing really well in terms of share of build. Analyst: Good morning, everyone. Thank you for taking my questions. We have heard about customers potentially pushing back their delivery dates for trucks. Are you seeing any evidence of this occurring? And on the tariffs topic, can we get your latest understanding on when we could expect the previously announced 3.75% NSRP credit to be applied? Preston Feight: We have not seen that in our backlog. On the 3.75% NSRP credit, it is fairly well defined for the truck side of the 232, and now it is about when we can apply for them and get them back. We would expect that to be in the not distant future. Scott H. Group: Hey. Thanks. Good morning. On the prebuy versus buy discussion from earlier, do you have a sense on the buy part of it—how much is fleet growth plans versus pent-up replacement? And to the extent there is more replacement, as we start replacing more after aging fleets, does that naturally pressure parts growth? Also, orders have doubled year to date versus a year ago, and you are still talking about a competitive pricing environment. Why are we not seeing a bigger or faster improvement in pricing? Preston Feight: On buy versus replacement, there has been a tough little run for some of our customers, and now as financial performance improves, they can allocate capital to trucks. Keeping fleet age reasonable is good for them and their operating costs—when they buy Kenworth, Peterbilt, or DAF trucks, they are getting highly efficient trucks, replacing older units with lower fuel economy. It is tied to their financial performance and the truck replacement cycle. On pricing, orders can be around multi-year items and projections; orders are not the cleanest thing to measure. A cleaner indicator is build. If you look at build and retail—build it, you will retail it. Orders do not necessarily come through the same way for everyone. With our 31.8% build in Q1, we feel good about the position, and there are still some orders left in the second half to be had. Stephen Edward Volkmann: Thank you. I figured it out this time. Just a quick follow-up. I know you give average prices in the 10-Q. Do you have those available for truck and parts, or should we wait for the Q? Brice J. Poplawski: For the first quarter compared to the first quarter last year, you will see truck price up 2%, and you will see our cost, unfortunately, up higher than that, so that made our margins down on the truck segment. Price on the parts side was up 6%. Preston Feight: Sequentially, you would see truck price roughly flat and cost down more than a percent per truck. Sequentially for parts, price was up a couple percent and cost was only up a percent. Timothy Thein: Great. Thank you. First question is on the customer mix within the backlog and how that may or may not be influencing truck margins. On-highway in North America, you have skewed more toward small and midsized fleets historically, and fluctuations in diesel costs can hit smaller carriers harder. Is there a mix shift between large mega fleets versus your historical small fleet base? Also, relating to lease and rental customers, sometimes they can be a canary in the coal mine when truckload markets inflect. Looking at the PacLease fleet—which has been declining quite a bit over the past few years—are you starting to see any change in utilization or aspirations to reverse that and start expanding? Any clues you are picking up from that cohort? Preston Feight: It is an interesting concept, but I do not think it is significant. We have a broad mix of customers buying trucks right now. Fuel surcharges may be more cash impactful to smaller customers, but I do not think it is informing what is going on. We are seeing the beginning of a market recovery—things are starting to improve for most of our customers. They are starting to get better rates and buy more trucks, which positions PACCAR Inc well for the next quarter and beyond. On lease and rental, we are seeing a little bit of an increase in utilization. Another indicator is the used truck market, where we are seeing price, utilization, and volume demand starting to strengthen as well. Those are indications that we are starting to see the market improve. Operator: There are no other questions in the queue at this time. Are there any additional remarks from the company? Ken Hastings: We would like to thank everyone for joining the call, and thank you, Miriam. Operator: Ladies and gentlemen, this concludes PACCAR Inc's earnings call. Thank you for participating. You may now disconnect.
Operator: Good afternoon, and welcome to the Edison First Quarter 2026 Financial Teleconference. My name is Michelle, and I will be your operator today. [Operator Instructions] Today's call is being recorded. I would now like to turn the call over to Mr. Sam Ramraj, Vice President of Investor Relations. Mr. Ramraj, you may begin your conference. Sam Ramraj: Thank you, Michelle, and welcome, everyone. Our speakers today are President and Chief Executive Officer, Pedro Pizarro; and Executive Vice President and Chief Financial Officer, Maria Rigatti. Also on the call are other members of the management team. Materials supporting today's call are available at www.edisoninvestor.com. These include a Form 10-Q, prepared remarks from Pedro and Maria, and the teleconference presentation. Tomorrow, we will distribute our regular business update presentation. During this call, we will make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read these carefully. The presentation includes certain outlook assumptions as well as reconciliation of the non-GAAP measures to the nearest GAAP measure. During the question-and-answer session, please limit yourself to one question and one follow-up. I will now turn the call over to Pedro. Pedro Pizarro: Thanks a lot, Sam, and good afternoon, everyone. Let me start by acknowledging that last week, we announced Maria's retirement plans. So this is our last earnings call that we're partnering on together. I'll come back to this at the end of my remarks because if I start now, I may not make it to my comments. But before moving on, I'd like to welcome Susan Hardwick to our Board. She brings over 35 years of leadership experience in the electric and water utilities, including as CEO of American Water, with deep strength in operations, finance and regulatory oversight. We are pleased with our start to the year and the momentum across our business. Edison International's first quarter 2026 core earnings per share was $1.42. Our continued performance reflects disciplined execution, steady operational progress and a clear focus on the priorities that matter most to our customers, communities and capital providers. Importantly, we are reaffirming our 2026 core EPS guidance and other financial targets, including our 5% to 7% core EPS growth over the long term. Our targets are supported by strong visibility into the capital plan, SCE's regulatory outlook and a sustained focus on safety and risk management. Today, I will focus on 3 areas: first, our continued work to make communities safer and more resilient, including wildfire mitigation and rebuilding efforts; second, key legislative developments; and finally, our confidence in the financial outlook, which Maria will expand on in her remarks. Beginning with wildfire mitigation and grid reliability, safety and community protection continue to guide SCE decisions and investments. Over the past several years, the utility has made substantial progress, strengthening the grid, improving situational awareness and reducing wildfire risk across its service area. The planned physical hardening work on the distribution system in high fire risk areas is now about 93% complete, reflecting years of sustained investment in covered conductor and targeted undergrounding. SCE continues to evolve its Public Safety Power Shutoff, or PSPS, protocols, which include enhancing its analysis of on-the-ground conditions, enabled by its vast network of weather stations and overall system visibility. These measures plus the grid hardening work I mentioned earlier, are keeping SCE customers and communities safe. Importantly, in March, the Office of Energy & Infrastructure Safety approved SCE's annual safety certification after its independent assessment of the utility's WMP and SCE's continued progress implementing its plan. SCE's wildfire mitigation plan includes new and expanded tools to improve safety, reliability and efficiency across its network. Let me share some tangible examples. SCE is using AI models to improve grid inspections and identify maintenance needs with faster and more accurate diagnostics and enhance quality control. Since 2023, SCE has developed and deployed AI and machine learning models that are collectively capable of detecting nearly 100 unique object classes and dozens of defect conditions. SCE is also using LiDAR and satellite imagery to support precise proactive vegetation management to help prevent ignitions. The utility is also expanding its deployment of early fault detection tools that identify abnormal grid conditions, enabling earlier awareness and faster response to potential equipment issues or ignition risk. Capabilities like these are increasingly integrated into how SCE monitors conditions, anticipates risk and deploys resources in real time. Turning to the Wildfire Recovery Compensation Program, or WRCP, SCE continues to make progress. SCE has now extended over 1,500 offers totaling over $500 million to community members impacted by the Eaton fire, helping families and individuals move forward more quickly without the delays and uncertainty of traditional litigation. SCE remains committed to administering the program in a transparent way that is responsive to community needs with fast and fair payments. On the legislative front, earlier this month, the California Earthquake Authority released its study. It reinforces that addressing California's growing wildfire risk requires a whole-of-society approach and that the status quo is not working for customers, policyholders or wildfire-impacted communities, who ultimately bear the real and increasing costs of inaction. It presents options for policymaker consideration, including 3 nonexclusive pathways, a defined set of strategies, and more than 2 dozen specific policy choices for reforming California's wildfire, insurance and utility systems. We have provided a summary on Page 3. There is urgency for legislative action, and we remain actively engaged with policymakers and key stakeholders to help shape solutions that support safety, affordability and long-term resilience for California communities. Our team is also fully engaged on the various pieces of proposed legislation pertaining to utilities, with affordability a critical focus. A common goal across wildfire reform and affordability is to build the right whole-of-society approach, allocating wildfire risk equitably across the economy and attracting capital at a reasonable cost on customer bills. This will benefit both customers and capital providers. Operational excellence is a core Edison value as SCE aims to maintain its cost leadership position with the lowest system average rate among the large IOUs in the state. I have shared on prior earnings calls examples of operational excellence in practice, including SCE's use of AI in areas like grid inspections, vegetation management and wildfire situational awareness, including the award-winning AWARE grid monitoring platform. The team continues to explore new AI-enabled process improvements across the entire value chain. Let me share another recent example. All utilities have instances where electricity usage can occur at a location before it is fully linked to an active customer billing record. In the past, identifying those situations required periodic manual checks and often occurred after the fact. Through SCE's internal innovation program and in only a handful of development hours, frontline teams developed an initial proof of concept of an AI-driven approach that continuously monitors for these situations and brings them to the surface earlier with clearer and more actionable insights. Once implemented, we anticipate this approach could yield roughly $25 million in potential unbilled revenue savings over a 3- to 6-month period. It's a good illustration of how smarter systems and disciplined execution translate directly into stronger financial controls and support long-term affordability. Let me now turn briefly to the financial outlook. We remain confident in the company's financial position and long-term trajectory. Major SCE regulatory decisions like the 2025 GRC, cost of capital and legacy wildfire cost recoveries are successfully resolved, providing clear visibility to 2028 earnings. Combined with our operational progress and disciplined capital execution, this all supports our confidence in our long-term targets, including 5% to 7% core EPS growth with no new equity needs. Before I turn it over to Maria, we announced that she will retire on September 1 after transitioning the Edison International CFO role on July 3 to Aaron Moss, who is here in the room with us today. Maria will focus her final months on critical policy priorities, including the SB 254 process and supporting Aaron's transition. This is really bittersweet because Maria and I have partnered continuously for over 15 years across our Edison Mission Energy, SCE and EIX gigs. Our Board, our team and I are grateful for the outstanding leadership she has provided across multiple challenges that many of our investors will remember well, including the EME restructuring, helping our communities recover after tragic wildfires, a global pandemic, 4 SCE GRCs, and shepherding the investment and operational improvement opportunities created by the clean energy transition, historic load growth and the rapid ascendance of AI. Throughout it all, she has shown great financial skill, unflappable balance, a deep commitment to engaging with our investors, some might say a lot of patience dealing with me and a real passion for developing our people, including Aaron. Aaron, Maria and I worked closely together through the EME restructuring, and we kept on going as Aaron took on the EIX and SCE controller roles and most recently as SCE's Chief Financial Officer. He has been a key leader of SCE's operational excellence efforts over the past several years, and many of you know him well already from his extensive investor interactions. I'm excited about and confident in our new chapter together. So Aaron, welcome to this role. Maria, thank you for your partnership. Thank you for your friendship. And now it's time for your 39th and final earnings call remarks. So waiting for you to drop the mic here. Maria Rigatti: I appreciate that, Pedro, and would like to extend my thanks as well. Over the years, I've spent with Edison, I have had the privilege to work with dedicated people who are focused on delivering on the commitments we have made to our customers, communities and investors. I thank the team for their focus and innovation. I also want to thank all our investors for your engagement and feedback through the opportunities and challenges that Edison has managed. And I know that Pedro, Aaron and the entire team will continue to benefit from your support. Now let's move on to the quarter and the financial outlook. I'll cover first quarter 2026 results, our capital and rate base outlook, regulatory updates and our earnings guidance. EIX reported first quarter core EPS of $1.42. Page 4 provides the year-over-year quarterly variance analysis. Core earnings increased by $0.05, primarily due to the adoption of the GRC decision last year, partially offset by the absence of about $0.30 recorded in Q1 2025 related to the TKM cost recovery approval. Parent and other core loss was $0.01 lower, driven primarily by lower financing costs following the redemption of preferred stock. Overall, the quarter reflects benefits from solid execution and SCE having strong regulatory visibility with no major proceedings driving this year's results. Importantly, it also reflects the quality and durability of our earnings profile, while keeping our focus squarely on delivering safe, reliable and affordable service for customers. Our first quarter results reinforce our confidence in the underlying business and our ability to deliver consistent performance through the year. Building on first quarter performance, I'll turn to SCE's capital and rate base outlook shown on Pages 5 and 6, which is unchanged from last quarter. Our capital plan of $38 billion to $41 billion from 2026 through 2030 is driven by essential investments in the grid to meet customer needs and support California's clean energy objectives. We are executing this plan with an unwavering focus on affordability and cost discipline. I want to reinforce Pedro's earlier comments on execution and line of sight into our financial projections. With an approved GRC covering the bulk of SCE's capital plan through 2028, we have a high degree of confidence in our ability to execute and deliver on this plan in a way that meets customer needs and regulatory expectations. That confidence is further bolstered by long-term fundamentals as we ensure the grid is ready for the economy-wide electrification ahead. Customer demand for an increasingly reliable and resilient grid continues to grow, making the need for sustained grid investment clear. As shown on Page 6, we expect SCE rate base compound annual growth of approximately 7% from 2025 to 2030, reflecting both near-term visibility and the long-term case for grid investment. SCE is focused on executing the work authorized under its current GRC, which provides clarity for most of its operations through 2028. In addition to the approved GRC, SCE has 2 significant stand-alone applications underway. The first is the NextGen ERP program, which we've discussed in prior quarters. The second is SCE's AMI 2.0 application, which was filed in March and requests approximately $3.1 billion of capital investment through 2033. As we have previously disclosed, the capital associated with both programs is already incorporated in our capital plan. AMI 2.0 represents a comprehensive modernization effort with benefits across the system. It supports grid resilience and operational efficiency, enables more advanced customer services and provides the data foundation needed to support electrification, distributed energy resources and more dynamic system management. Looking ahead to the next GRC cycle, SCE will take the first step next month by filing its Risk Assessment and Mitigation Phase, or RAMP application. This filing informs the next GRC and outlines the risk mitigations that guide proposed investments across wildfire risk, transmission and distribution reliability, cybersecurity, climate adaptation and other safety-related measures. As in prior cycles, this process provides a clear safety and risk-driven framework for evaluating capital needs and supports consistent engagement with regulators and stakeholders on safety and risk priorities. I will highlight that following the resolution of several major proceedings last year, 2026 represents a cleaner regulatory slate, meaning fewer open proceedings and greater visibility into capital recovery, which further supports our confidence in the utility's ability to execute the long-term plan reflected in our capital and rate base outlook. I want to underscore an important differentiator in our financial strategy. We plan to deliver this growth without issuing new common equity for at least the next 5 years through 2030. This builds on our track record of cost-effectively managing our credit metrics, and having issued only about $400 million of common equity over the last 5 years. We will continue to finance the business efficiently and remain committed to our 15% to 17% FFO-to-debt framework. We expect to be within this range in the forecast window, and EIX has one of the strongest consolidated FFO-to-debt ratios projected by S&P. These data points demonstrate the strength of our balance sheet and cash flow profile. This diligence allows us to fund critical infrastructure investment, maintain financial flexibility and create value for both customers and shareholders. Moving to earnings guidance. We are affirming our 2026 core EPS range of $5.90 to $6.20. We are also affirming our previously provided core EPS targets for 2027, 2028 and 2030 as well as our long-term EPS growth rate. With a strong start to the year, we remain confident in our ability to deliver on these commitments for customers and capital providers. That confidence is grounded in disciplined execution. We continue to maintain a strong focus on capital prioritization, operating efficiency and cost management. Investments are evaluated through a risk-based framework with a clear line of sight to recovery. This rigor reinforces our ability to deliver on our long-term financial targets, while continuing to advance safety, reliability and resilience for the customers and communities we serve. That concludes my remarks. Back over to Sam. Sam Ramraj: Michelle, please open the call for questions. As a reminder, we request you to limit yourself to one question and one follow-up so everyone in line has the opportunity to ask questions. Operator: [Operator Instructions] Nick Campanella with Barclays. Nicholas Campanella: Congrats to Maria and Aaron here. Always a pleasure, both of you. So you brought up in your prepared remarks the wildfire legislation and the SB 254 study. And I guess a lot was thrown out there in terms of the recommendations. But ultimately, I guess, what is Edison kind of advocating for in the 3 paths? Where is the threshold in your mind for shareholder contribution just kind of keeping in mind what played out last year? And then I guess, as we move forward here, when do you expect the actual CEA report to go in front of the legislature, if there's any timing that you can kind of talk to? I know that's a few questions of one. Pedro Pizarro: Yes. That's pretty good, Nick. Appreciate it. All right. So first on what we think is important here. Look, broad strokes, right? We appreciate that the CEA report really touches on all of these. It's important that we, as the broad California economy, not just utilities, but the whole society, see broad risk reduction incentives and programs, right, to reduce the physical risk across our entire state. It's important that when -- in spite of everybody's best efforts, the catastrophe strikes that there'll be process for recovering quickly and having a fair process for that, one that's predictable, where there's good accountability, where there's transparent enforcement and tying that to conduct with the various parties involved. And you saw that the joint submissions that the utilities made talked about some examples from other jurisdictions on the mechanisms for how you think about addressing safety insurance components and the like. So broad strokes, you asked about shareholder piece here. We said before, we think it's really important that the state return to an investor-owned utility cost of service model, right? The model that we've had across the country where investors can know that there's a good opportunity to recover their capital investment, both return of and on that if the utility has been prudent and where further shareholder contributions would take place if utilities management had -- was not demonstrated to have been prudent. So to me, that's the base piece here. Now we also recognize that there could be a lot of different ins and outs and ideas that folks throw out. So we will continue to engage with all the stakeholders and evaluate any and all packages on their merits at the time. And then finally, you asked about timing. And I think the one solid piece of timing guidance I can give you is that the legislative session ends August 31 and that bills have to be in print by August 28, 72 hours prior. I know I've seen some chatter about, well, is it sooner? Is it later? This is complex legislation in a year that's full of complex topics. There's a discussion about wildfire, but it, in itself, really touches on affordability for the state broadly, right? Because as you saw in the CEA report, doing the right thing in terms of the wildfire framework will indeed help affordability for the state. And so I wouldn't expect that, that gets solved in the first week of the legislators being back, really can't predict when it happens. And if it takes the whole session, it takes a whole session. Most important is to make sure that we do our part to help them do the right thing for our economy. I think I covered all 3 parts, and then some. Operator: Our next question comes from Richard Sunderland with Truist Securities. Richard Sunderland: Congratulations as well to both Maria and Aaron. Picking up on the sort of legislative discussion from earlier, I realize, Pedro, it looked like you didn't want to speak to timing much, and I get that. But I guess just procedurally, this go around versus last year or a few years back, how do you think that will differ in terms of the engagement given we have the CEA report out? Do you see more of a public bent to all of this given the high-profile public nature of the report? I guess any other thoughts there would be helpful. Pedro Pizarro: Yes. Sure. I mean it's a good question. And I think part of the answer is the CEA process itself, right? We had -- prior to the legislative session reopening, you had, frankly, a group that was a very professional group at the CEA, go through a methodical process, engage a broad range of stakeholders. So a lot of different voices are appropriately represented in the options that the CEA laid out in their report. So I -- it is me speculating a little bit here, but I think it's probably fair to say that this gives the legislature a much more robust platform from which to enter their debate and one that already reflects stakeholder voices. Given that so many stakeholders contributed to the development of the CEA report, I would expect to see a broad group of folks also engage in the legislature, and that's a good thing. This can't be just about utilities. This can't be just about insurance. It can't just be about building codes and standards. You really need all of these things to come together to make the system work for the world's fifth largest economy. In terms of procedure, maybe the other thing I would offer is that, I'd say, typically, when you see these kind of complex topics, it's probably not surprising to expect some continued engagement from the governor's office, their leadership. You saw the governor say early on in his initial press release after SB 254 that the state would benefit from the continued engagement of, for example, Ann Patterson, now at Stanford, right? So good brains being applied to this. In the legislature, I would imagine and expect that the leaders of some of the relevant committees are being personally engaged. In the past, sometimes you've seen working groups get assembled, designated by leadership. I haven't heard that's going to happen, but I wouldn't be shocked if we saw something similar because you really need a core group of policymakers to be able to dive into the details as they craft potential legislation. So some thoughts. Maria, I don't know if you have anything to add there? Richard Sunderland: That's helpful context. And then I guess sticking with this theme, I think if I followed the script correctly, you've talked about some broader legislative engagement and mentioned affordability is a critical focus. Could you just expand on that a little bit more? Are you talking kind of outside of the wildfire reform efforts? And any other context for what you're, I guess, focused on and promoting there would be helpful. Pedro Pizarro: Yes. Look, just acknowledging, you've seen a number of bills introduced already that hit in some way on affordability for the [indiscernible]. And I think going into that, it's really important that Southern California Edison is proud of the affordability trajectory that it's been on. And I think we mentioned it briefly in my remarks, but the hard work that Steve and Aaron and the whole team have been doing over multiple years to manage costs, be as affordable as possible, that will continue. But that's an important fact that we go into all this. But I was just acknowledging that you've seen a number of bill introductions that hit on affordability. It's clearly a theme in the gubernatorial primary. And so I know that's on people's minds and the wildfire piece will be an important part of managing affordability for the state. Maria Rigatti: And maybe just, Rich, Pedro is right, the wildfire legislation itself is about affordability. It is inherently an affordability bill. The other affordability bills, they really do cover a wide range of things, everything ranging from looking at rates and rate structures and how to manage those down potentially to things that are just around the reporting and how the utilities would disclose the work that they do, how things are audited. So it really covers a pretty wide spectrum of things that fall into that affordability category. Pedro Pizarro: And Maria, I think it's fair to say you're also seeing affordability discussions around the insurance market. And I'm sure as folks think about risk reduction in physical space, you'll see affordability considerations there. So yes, it's an important theme for the state. And by the way, one thing that the CEA report pointed out is that wildfire, well, that's the main focus here in this discussion and then what you were asking about, it is one of a range of other natural impacts that California needs to deal with. And I thought there was a table in the CEA report that was instructive where you look at the -- what is needed in the state in terms of earthquake hardening, for example, probably has an extra 0 compared to the wildfire. So I think lawmakers will be thinking about affordability writ large, putting everything in that context. Operator: Our next caller is Gregg Orrill with UBS. Gregg Orrill: What's your anticipation? Or is it too early to know what the scale will be of the Wildfire Recovery Compensation Program? Pedro Pizarro: You mean the SCE's WRCP? Gregg Orrill: Yes. Pedro Pizarro: So yes, we don't know ultimately what the participation rate will be. What I can tell you is that I mentioned we've had around 1,500 offers that have been made already. There's over 3,100 claims that have been filed. But to put that in scale, we've also seen claims brought forth by something like 30,000 plaintiffs so far. We know that in the program itself, there are around 18,000 properties that qualify for the program in the zones that -- for eligibility. And any given property could have multiple claimants. And so that says to us that the 3,100-plus claims so far, the 1,500 or so offers so far are very early stage here, but we really can't forecast what that ultimate number might be. Operator: Our next caller is Anthony Crowdell with Mizuho. Anthony Crowdell: Congrats to Maria and Aaron. Just -- I think it's off of Gregg's question, and maybe you just answered it. Obviously, the claimants grew about 3x from the update you provided in February over $500 million now. At what point or clarity on maybe the pace of settlements give you enough visibility to provide a loss estimate? Pedro Pizarro: Yes. And we still -- sorry, Anthony, I know this is going to sound familiar from prior quarters, but it's really hard to estimate even when we will be able to provide an estimate. I think we will need to see not only a large enough volume of claims go through the program, but also, I'm not sure this is the right word, some stability or lack of volatility in terms of the types of claims that we're seeing where we could then somehow extrapolate that we have a really good beat on what the rest of the exposure might look like. You might remember, frankly, I think we all learned lessons together as we went through the exposures and the other heartbreaking instances, TKM and Woolsey, where we saw that there were new facts that came out and such a variety of different types of claims that I think we learned from that. It is very difficult to come up with the best estimate or even at this stage, a low end of the estimable range. So that was a long-winded way of saying not sure when we would be in a position to do that, Anthony. Anthony Crowdell: Great. And just a quick follow-up. I believe in the first quarter, you stated you filed the AMI 2.0 application. Just any timing of a decision there or expected time line of the CPUC decision? Pedro Pizarro: Let me turn it over to Aaron for that. Aaron D. Moss: Yes. So we just filed in March. We'll have -- that's a $3 billion, a little bit more than $3 billion capital program that we filed for, replacing the smart meters that we deployed nearly 20 years ago. About half of that capital is in our current capital forecast, about half of it extends beyond the 2030 time frame. So we're at the front stages of our process with the application just being filed. I believe, somebody could correct me, that intervenors would provide comments later in the summertime of July and then the decision follows along after that, Anthony. Operator: Our next caller is Carly Davenport with Goldman Sachs. Carly Davenport: Maybe just to follow up on some of the SB 254 questions. There's still, I think, robust debate around if there will, in fact, be legislation passed this session or if you maybe see this pushed into 2027. So I guess, could you just provide some thoughts on kind of the course of action in the event that legislation has not passed this session or maybe isn't as comprehensive as you might have hoped? I guess, should we expect any changes to the strategic focus areas or the current plan on the back of that? Pedro Pizarro: Yes. Thanks, Carly. Look, let me be very clear, our singular focus today is on 2026. And as you heard in my prepared remarks, one of the real strengths or the strongest messages in the CEA report was the deep cost of inaction. And so that was a real call for action. It was a sense of urgency that the CEA communicated and that I think you're already starting to see reflected in maybe some of the early comments on the legislature. That said, we can't guarantee that we'd see action in 2026. We think that the table is very much set for that and that there is a need for the economy to see that. I would also add that frankly, as a resident of California, put aside my CEO of Edison hat, I worry about this from a broad state perspective, the world's fifth largest economy, we're going to see -- we don't see legislation this year. I think it's quite likely we would see, for example, credit rating impacts not only for utilities or for insurance companies, but you could see it in other sectors in the state, you could see it for the state's own financing authority. And so part of our job will be to make sure that we and others are telling -- providing the message, providing that fact-based to legislators and policymakers that this really requires action this year. And without action this year, I think we're going to see some real dire financial consequences across multiple sectors of the economy, not just the utility. If, in spite of all that, there isn't sufficient action in 2026, then we will plan for what we would do in future cycles. We would also need to take a look and see what happens with, for example, our cost of capital. And does that lead to then us having to think differently about our capital allocation. But we're not there today, and our, again, singular focus is on 2026. Carly Davenport: Got it. I appreciate the thought... Pedro Pizarro: Maria, do you want to add anything to that? Maria Rigatti: Yes. Carly, maybe I'll just underscore, Pedro is right that the process is progressing right now as it was intended to and as it was outlined under the legislation. We have a lot of visibility into our capital plan because we have knocked out a lot of the regulatory proceedings in 2025. So there's a lot of certainty as to the plan, how we execute the plan and what the plan costs. We have no need for new equity for the next 5 years. And as you know, we have a commitment to the dividend that we -- that the Board has been declaring and increased, in fact, by 5%, 6% in December. So we have a lot of the groundwork laid and a lot of the visibility laid. And when we look at the future, we have a lot of confidence in the scenarios and the conservatism that we've built in. I think as Pedro said, as we continue to think about the cost and benefits if the cost of capital goes up, our customers would pay more if the cost of capital goes up, and we would have to consider that in the future when we develop new capital plans. And that's why a predictable framework under legislation that supports reasonably priced capital is really most helpful to our customers. Carly Davenport: Got it. Okay. That's really helpful. And I guess just picking up maybe on that last piece in terms of what's in the best interest of your customers. There's obviously been a lot of focus on affordability, in particular, in kind of some of the rhetoric around the upcoming gubernatorial election and there's been some recent changes in kind of the polling there. So I guess maybe just if you could talk a little bit about how you're positioning some of the rate decreases that you've seen this year and Edison's overall strategy on affordability with policymakers in response to some of the noise on affordability related to the election. Pedro Pizarro: Yes. And Carly, I think your -- the last word you used there, you noise is appropriate because it is an election and there's a lot of stuff flying around. Obviously, we -- ultimately, we will work with and work well with whomever the people of the state elect. But we are very focused on making sure that we are clear in what the facts really are around the affordability trajectory. The fact that Southern California Edison has had up until the 2019 to '24 period had rate increases that on average were at or below inflation. We had a period there, 5 years, where we went beyond inflation for reasons we've explained, external impacts from weather and power market costs because of the wildfire, about 1/3 of it was kind of normal load growth sort of impacts. But importantly, the commitment we've been able to make that Steve and Aaron and the team are steering SCE to be delivering rate increases that are once again at or below inflation through 2030, that's an important message that needs to be out there, and we're making sure we're communicating. So we'll continue to engage with candidates and their campaigns, continue to educate our policymakers and our customers. And most importantly, we'll continue the hard -- the real work on operational excellence and continuous operational improvement. Operator: Our next caller is Aidan Kelly with JPMorgan. Aidan Kelly: Just one question on my end. I want to hone in on the Eaton fire process, if I could. It seems there's been some recent media headlines pushing back on the information flow in court proceedings. I guess just curious if you could share some thoughts on Edison's dissemination of information to the state. And do you kind of see this pushback as normal give-and-take or maybe like a touch higher than what you'd expect typically? Pedro Pizarro: Yes. Aidan, I think you're probably referring to an article that was posted by the LA Times over the weekend that made that argument. As you probably saw in the article, I actually sat down with the reporter and make sure that -- I tried my best to make sure that the reporter understood the facts here. I think the article had a slant to it that lacked appropriate balance. The core of that, that she was describing in the article, she was making the argument that because some of the information in the case is privileged that somehow that meant Edison is withholding information. And that is just simply not an appropriate take on the process. It starts with the commitment that I made on behalf of the company, and we continue to make as a company to be as transparent as possible with our public and with you, our investors. And we've continued to do that throughout the process. However, there is information in litigation that is privileged, not just on the Edison side, but there's privileged information on the plaintiff side. And that's one of the items that I emphasized, and I'm not sure it got quite captured us strongly in the article. There's a balancing act here. And both sides develop privileged information. It's important for their litigation strategies. It is litigation, right? And so it's appropriate to protect privileged information. By the way, not only did she focus on privilege in logs, but also the fact that there is some information that is protected by confidentiality orders in the case. And so I explained to her, and I think this piece may have made into the article a little bit. Some of that information may have nothing to do with the Eaton fire case itself. So for example, in sweeping up discovery, et cetera, that might include, if you're asking for -- hypothetical here, asking for information about the network or about meters on the network. Well, they might sweep up information around our network map topology that the federal government wants us to keep under wraps because to put it out there, would provide a road map for agents, terrorists and others who do not mean well, right? They mean harm to the system. Similarly, some of the information might include specific customer information that we need to protect, keep confidential. The other side, plaintiffs' attorneys can see some of that information under protective orders, but it's not released to the public. So those are the categories of information that I think she's referring to and was trying to support a thesis that somehow we're not being as transparent as possible. That is simply not true, and we will continue to stress what fact is and what fact is not here. Operator: Our next caller is Ryan Levine with Citi. Ryan Levine: Congrats to Maria and Aaron. In terms of the sizing of how much -- is there a way you could size how much cost-cutting initiatives AI could enable or unlock and how the AMI 2.0 and ERP systems could impact that opportunity? Pedro Pizarro: I'll turn it over to Steve and Aaron here. Steve, do you want to take it? Steven Powell: So I think it's still really early to get at a full sizing of what the potential with AI is. Pedro listed out in his opening remarks, a number of areas that we're leveraging AI. They span from things that we've already done in our customer operations. And so helping out our call center agents more quickly respond to customers and shorten the length of those calls. We're doing things like identifying trends around customer issues and frankly, flagging them before they happen, and we can get ahead with proactive communications to customers to deal with some of their challenges. There's a lot of emerging opportunity on the grid. It's developing tools that will automatically do designs of infrastructure. We're starting with the basics of like-for-like replacement to changes to how you dispatch your resources, changes to how you optimize your capital portfolio. So it spans kind of the entire business from procurement to grid to the customer side. It's still early days. We're getting -- we've got benefits that we capture and they roll into our forecast. But I think the total opportunity there is something that will continue to evolve, especially as the technology evolves so rapidly. Aaron D. Moss: Maybe I'd add to that on the question about the advanced metering initiative. The data that we'll be gathering through AMI will be critically useful for us. Take a look, Ryan, at our application we do go through and quantify a significant amount of value that will come to customers from that program. And in that, we look at what's the case for a like-for-like replacement, and what's the case for -- what is a more expensive but much more valuable to customers, sort of state-of-the-art or near state-of-the-art metering initiative and how we could use data there to inform demand flexibility to provide customer signals to enable things like allowing customers to avoid the cost of a meter upgrade to charge their electric vehicle by better managing their electric consumption within the panel and within the meter that we have there. So a lot of benefits that have been quantified in that with a benefit/cost ratio for the incremental costs above the obsolescence case well above 1. Pedro Pizarro: Exciting stuff. And also all of this is supportive of the 5% to 7% EPS growth rate. Ryan Levine: Great. And then one follow-up question to some of the prepared comments. How are you assessing wildfire risk going into the summer wildfire season compared to prior years given weather and all the company actions over the last few years? Steven Powell: Ryan, it's Steve. I'll follow up on that one as well. So when we go into every -- I'll say, each year as the weather evolves, we're really focused on our long-term mitigations and how they're significantly reducing risk across the whole system. So we've now deployed more than 7,100 miles of covered conductor, nearly 100 miles of undergrounding. And that really forms the basis for that risk reduction. We layer on top of it going into each season, looking to see where the parts of our system that may have increased risk relative to the rest of the system. We do additional inspections, both for equipment issues as well as for vegetation management so that we can take care of all of the risky stuff before we're into the peak fire season. And then each year, it's about how we continue to improve our PSPS program. And so whether it is changes to our thresholds and triggers, importantly, getting ahead to understand where might we -- where might some communities see PSPS that haven't seen it as much in the past, so we can go and educate and really engage the communities to understand what to be ready for and how they can be prepared. So it's that suite of mitigations that as we head into each fire season or at least the summer and peak season that we're fine-tuning to help make the risk lower and lower every single year. The weather, this year, we've had a fair amount of rain early in the season. It's been drier more recently. Trying to predict what the fire risk will look like in a given season is a challenging one. We certainly can project how dry it may get, but winds are notoriously difficult to be forecasting. And so that's why we come back to making sure that we are fully deploying all of our mitigations, keeping in line with the activities laid out in our wildfire mitigation plan. Pedro Pizarro: I mean, Steve, I think you covered it so well and the only thing I would add is while, of course, we track year-to-year conditions and get those questions from investors regularly, the reality is the work that SCE is doing isn't about this year or next year. It's about recognizing that the risk posed by extreme weather driven by climate change is going to increase over the next several decades. And so that's why there's so much good focus on long-term risk management here. Operator: Our next caller is Shar Perez with Wells Fargo. Constantine Lednev: It's actually Constantine here for Shar, but I appreciate the time today. And first of all, a big congrats to Maria and Aaron on the transition here from the entire team. And I couldn't agree more with Pedro's comments on the prepared remarks. So kind of a couple of just cleanup questions maybe around the edge. But without trying to find an estimate today for the Eaton liabilities, how do you feel about the pace of the claim submissions? And is there a way to frame maybe a time line where you can get to a point of visibility? Maria Rigatti: Yes. So Constantine, think about it this way. The statute of limitations is actually still running. So there will be a lot more time still. It's a 3-year statute of limitations on property damage. So it's not out until 2028 that it will close in January. So we will get a lot more information as time passes. I think the other piece, and Pedro touched on this earlier, but maybe to emphasize is that there's a very complex interdependency between claims, but also insurance and the level of insurance that a claimant might have, whether they're fully insured, underinsured or uninsured in their entirety. So I think until we can get more information around that, and that will take time, it will be difficult for us to generate an estimate. The other piece of it is as more claims come in and we get more data from them, that would add to sort of our knowledge base. But even as claims come in, people don't have to give us a lot of specificity as to what their damages are. So that's maybe a way to express or to share with you some of the complexities that we're facing, but really fundamentally, it gets back to Pedro's point that we have not been able to provide a time line for when we will get to that point. Constantine Lednev: That's abundantly clear. And maybe just touching on the election rhetoric that we kind of touched on with the utilities. Is there anything that you see that's actionable or practical? And does this suggested distributed solution kind of work for driving down costs? Or is that a potential cost shift? Pedro Pizarro: Could you repeat it's actionable in what specific way, Constantine? Constantine Lednev: Actionable or practical from anything that has been kind of out there in the media. Maria Rigatti: So Constantine, you're talking about sort of like this concept that we've heard from some folks around disaggregating and breaking up the utilities. I think Pedro has made this point a few times that integrated utilities actually have lower costs than not. So we question sort of the mathematical foundation for some of those comments. Pedro Pizarro: Well, I'll just be very pointed here. I think specifically, one of the candidates, Tom Steyer, has made the claims around -- a couple of claims that stood out 25% rate reduction by breaking up the competitive -- breaking up the monopoly utilities and also claim that the lowest rates in the country are in competitive markets. And the reality is that I don't see any sort of fact basis for the 25% reduction. And we -- the way we get rate reduction is the hard work that, again, Steve, Aaron, the whole team at SCE are doing that has led to the lowest system average rates among our investor-owned utility peers. But also when you take a look at a national level, actually, the lowest rates tend to be in vertically integrated utilities. And so -- and I think much to Mr. Steyer's chagrin, some of those still have quite a bit of coal generation in their systems. So we've been very pointed about taking on things that are not connected to fact like those and being outspoken about them. Operator: And that was our last question. I will now turn the call back over to Mr. Sam Ramraj for any closing remarks. Sam Ramraj: Thank you for joining us. This concludes the conference call. Have a good rest of the day. You may now disconnect. Operator: Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.
Operator: Hello, and thank you for standing by. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Armstrong World Industries 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. I would now like to turn the conference over to Theresa Womble, Vice President, Investor Relations and Corporate Communications. Please go ahead. Theresa Womble: Thank you, Sarah, and welcome to everyone joining our call today. On today's call, we have Mark Hershey, our CEO, and Chris Calzaretta, our CFO, and they will be discussing Armstrong World Industries' first quarter 2026 results and the rest-of-year outlook. We have provided a presentation to accompany these results that is available on the Investors section of the Armstrong website. Our discussion of operating and financial performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the earnings press release and in the appendix of our presentation issued this morning. Again, both are available on the Investor Relations website. Now during this call, we will be making forward-looking statements that represent the view we have of our financial and operational performance as of today's date, 04/28/2026. These statements involve risks and uncertainties that may differ materially from those expected or implied. We provide a detailed discussion of risks and uncertainties in our SEC filings including the 10-Q we filed early this morning. We undertake no obligation to update any forward-looking statement beyond what is required by applicable securities law. So now I will turn the call to Mark. Mark Hershey: Good morning, everyone, and thank you for joining us. As many of you know, this is my first earnings call as CEO of Armstrong. I stepped into this role with deep respect for the remarkable legacy of our company and the culture that has defined it for well over a century, one built on integrity, innovation, and enduring relationships across the building ecosystem. For generations, our success has been rooted in our people, and the long-standing relationships we have built in our industry. Their loyalty, work ethic, and dedication to our values have been crucial to sustaining growth, and our unwavering commitment to our customers to consistently deliver the highest quality, most innovative products, and best-in-class service levels that earn their trust and enable their success. This commitment to our distribution partners, the A&D community, the contractor community, and to building owners and operators—and the strength of those relationships—are a meaningful competitive advantage for Armstrong. And they must remain at the center of how we work. As I shared in February, our strategy will remain consistent. Building on a strong and proven foundation, I envision an even more innovative and productive Armstrong and an enterprise that is squarely focused on driving AWI's earnings power through consistent Mineral Fiber growth based on both AUV and volume as well as healthy margins in our Architectural Specialties, or AS, segment. Through our growth initiatives, we strive to grow volumes ahead of market rates supported by our advantaged market position, strong channel partnerships, and, importantly, market-driven innovation that expands the value we deliver. In addition to our digital growth initiatives, Canopy and ProjectWorks, our TempLock energy-saving ceilings products and our recently launched data center solutions are great examples of this innovation. This industry-leading innovation differentiates Armstrong, creates new demand vectors, and positions us at the center of key macro trends that support AUV and volume growth in the coming years. I'm confident that we are over the right targets with these initiatives, and we'll share more on our progress later in the call. Expanding and scaling our AS segment is another part of our strategy. With acquisitions and organic investments over the last decade, we have enhanced our ability to win more on every commercial construction project, leveraging our commercial reach and thereby efficiently expanding our wallet share. And because of the complementary nature of our segments, and the brand equity, relationships, and influencer access we have earned over time, we've consistently proven that when both AS and Mineral Fiber Solutions are specified on a project, our win rate meaningfully increases. Our goal with AS continues to be outsized organic growth, coupled with sustainable attractive margins driven by our portfolio and capability breadth, and scaling new companies on the platform. Acquisitions will continue to be a key enabler of that strategy. With M&A, we look for opportunities that reinforce a differentiated market position in commercial construction, expand our capabilities, and enhance our ability to support customers across all stages of the project life cycle. As we've expanded our portfolio, we are now able to serve more complex, design-driven projects while reinforcing the value of Armstrong as a total solutions partner. That advantage is evident in our acquisition of Zener, and more recently, Eventscape, through which we've significantly enhanced our design and engineering expertise. Both companies enable us to collaborate with a broader network of architects, designers, engineers, and contractors, allowing Armstrong to engage earlier—especially when design concepts and technical requirements are still being shaped. As a result, we're not only increasing our project participation, but also connecting with a wider array of key stakeholders, enhancing the visibility and the influence of the Armstrong brand and platform. The strategic imperatives I've outlined are designed to further solidify the resilience of our business and further support our attractive cash generation profile. With profitable growth and strong cash generation, we can invest in each of our capital allocation priorities, which remain unchanged. While I've already discussed M&A, our first capital allocation priority is reinvesting back into our business where we see the strongest returns. These investments focus on both productivity enhancement and capacity expansion for growth areas of our portfolio that generate higher AUV, including TempLock and our smooth white acoustical tile, or SWAT, mineral fiber products. And finally, we'll continue returning value to shareholders through dividends and share buyback, which Chris will detail in his comments shortly. Turning to the quarter. While we faced a few discrete headwinds, the foundational building blocks for value creation that we've historically demonstrated are fully intact and remain strong, as is our confidence in our outlook. Total company sales in the first quarter increased by 7% with top-line growth in both segments remaining solid. In the Mineral Fiber segment, sales increased 5% with solid AUV growth and a modest increase in sales volumes. Notably, we've grown Mineral Fiber sales volumes three of the last four quarters on a year-over-year basis. As expected, we saw some recovery in sales to federal government customers along with strong commercial execution and continued benefits from our growth initiatives. Also as expected, market conditions remained flattish—similar to how we exited 2025. Our 42%. This result was driven by strong AUV, along with productivity gains in our plants, and equity earnings contributions from our WAVE joint venture. Turning to AS. Sales increased 11%, driven by 7% organic growth and contributions from our 2025 and 2026 acquisitions, adding another four points to prior year results. We were pleased to see broad-based demand across most of our product portfolio, with organic growth improving sequentially, which has also continued steadily into April. Adjusted EBITDA for this segment declined in the quarter, primarily due to a one-time tariff adjustment relating to duties on aluminum, as well as targeted investments for growth in connection with growing demand. Looking forward in the AS segment, quoting activity has remained strong and our order intake levels have increased in the low double-digit range both in the quarter and over the last twelve months, supporting our full-year outlook—giving us some visibility early into 2027 as well. With an improvement in sales and lower cost headwinds, we expect AS segment adjusted EBITDA margin to significantly improve in the second quarter and that we will continue to make meaningful progress and expand margin toward our goal of 20% or greater EBITDA margin on a full-year basis. In support of that growth, our team continues to actively bid and win transportation and airport projects at a high rate. Year to date, we have already surpassed our entire 2025 order intake total for transportation projects. These large, complex projects often feature both high design and standard elements, with multiple AS product categories as well as Mineral Fiber Solutions. With our industry-leading portfolio, we are uniquely positioned to serve them. In addition to project wins at JFK and LAX mentioned on our last call, we have also won new projects at the San Antonio, San Francisco, and Dallas Fort Worth airports. Now before turning the call to Chris, I want to highlight two operational items within our plant network across both segments. First, on a total company basis, we had a strong safety quarter, with our total recordable incident rate well below one and well below industry average. This is a testament to the strong safety culture we have built across the enterprise, including our acquired companies. Among our greatest responsibilities is to protect the health and well-being of our employees throughout their workday. I'd also like to thank and congratulate our Mineral Fiber plants for successfully navigating a series of winter storms while maintaining strong quality and service levels for our customers. In fact, our perfect order measure for the first quarter exceeded our targets and reached a record for the month of February. As we have shared, this measure captures the full customer experience by assessing whether orders are shipped completely, delivered on time, priced and billed accurately, and received without damage. By holding ourselves accountable across every step of the order life cycle, the perfect order measure reinforces our focus on reliability, operational discipline, and customer trust—ensuring we do what we say we will do, every time. Success with this metric is among the key factors contributing to our ability to win in our markets and supports our consistent AUV performance. Now I will turn the call to Chris for a more detailed review of the financials. Thanks, Mark, and good morning to everyone on the call. As a reminder, throughout my remarks, I'll be referring to the slides available on our website. Chris Calzaretta: And please note that Slide 3 details our basis of presentation. We begin on Slide 6 with our Mineral Fiber segment results for the first quarter. Mineral Fiber net sales increased 5% in the quarter driven primarily by favorable AUV of 4% and a modest increase in volumes. AUV growth was primarily due to favorable like-for-like pricing while volume growth was driven by solid commercial execution and growth initiatives with overall flattish market conditions in the quarter. Mineral Fiber segment adjusted EBITDA grew 4% with an adjusted EBITDA margin of 42.4%. Mineral Fiber adjusted EBITDA growth was primarily driven by the fall-through of AUV, positive contributions from our WAVE joint venture, and slightly higher Mineral Fiber volume versus the prior year. These benefits were partially offset by higher input costs driven primarily by raw materials and energy inflation as well as unfavorable inventory valuation impacts, and an increase in SG&A expenses primarily due to higher gains in the prior year from deferred compensation. Achieving a consistently strong adjusted EBITDA margin reflects the continued resilience of the Mineral Fiber business, fueled by our value creation drivers of AUV growth, annual productivity gains, and contributions from our WAVE joint venture. As we look ahead to the second quarter, recall that last year's Mineral Fiber adjusted EBITDA margin performance of greater than 45% was a record high for the segment. We still expect strong performance next quarter even as we invest in our growth initiatives. On Slide 7, we discuss our Architectural Specialties, or AS, segment results. Net sales increased 11% in the quarter driven by solid organic growth along with contributions from our recent acquisition of Eventscape and the 2025 acquisitions of Parallel and Geometric. AS segment adjusted EBITDA decreased approximately $3 million, or 12%, versus the prior year. This decrease was primarily driven by higher manufacturing costs, which included a $2 million nonrecurring tariff adjustment, an incremental $2 million of costs of recent acquisitions, and approximately $1 million related to plant investments to support growth. The SG&A increase was primarily driven by $2 million of selling investments in support of top-line growth and $1 million of incremental expense from our recent acquisitions. I want to take the opportunity to further discuss the performance of the AS segment in the quarter on both an organic and inorganic basis. For reference, the organic adjusted EBITDA reconciliation for this segment is included in the appendix of this presentation. On an organic basis, net sales grew 7% driven primarily by broad-based growth led by our metal and wood categories. Organic AS adjusted EBITDA declined by 9% year over year, primarily driven by the nonrecurring $2 million tariff-related adjustment previously noted along with a total of $3 million of both higher selling expenses and manufacturing investments to support growth, all of which pressured segment operating leverage. On an inorganic basis, our recent acquisitions delivered $5 million of net sales in the quarter and were slightly dilutive to adjusted EBITDA. This anticipated short-term dilution was largely driven by the integration ramp that we experience from time to time with some acquisitions as we incorporate and scale these businesses onto the Armstrong platform. At the segment level, I'd like to note here that we expect the adjusted EBITDA margin for Architectural Specialties to significantly improve sequentially in Q2 and resume year-over-year adjusted EBITDA growth in 2026. I'll speak more on the second-half outlook for both segments shortly. On Slide 8, we highlight our first quarter consolidated company metrics. Net sales grew 7% and adjusted EBITDA increased 1%. Our consistent building blocks of solid AUV performance, incremental volume from both segments, and positive WAVE contributions were largely offset by higher manufacturing and input costs and higher SG&A expenses. Adjusted diluted net earnings per share increased 2% primarily due to a lower share count in the quarter reflecting an increase in the pace of share repurchases. Slide 9 summarizes our first quarter adjusted free cash flow performance versus the prior year. The 1% decrease was primarily driven by timing-related working capital and cash taxes, partially offset by higher dividends from our WAVE joint venture. We remain confident in our ability to deliver strong adjusted free cash flow growth in 2026 to support all of our capital allocation priorities. During the first quarter, we continued to create value for shareholders through disciplined capital deployment. We paid $15 million of dividends to our shareholders and repurchased $60 million of shares, representing an accelerated pace of repurchases as compared to recent quarters. As of 03/31/2026, we have $473 million remaining under the existing share repurchase authorization. In addition to shareholder returns, we continue to deploy capital in support of growth strategy in the first quarter, including the February Eventscape acquisition, as well as continued capital expenditures to support manufacturing productivity, innovation, and future growth initiatives across the business. With a healthy balance sheet that includes low leverage and ample liquidity, we remain well positioned to execute and advance our strategy. Turning to Slide 10. We are reaffirming our full-year guidance for net sales, adjusted EBITDA, and adjusted free cash flow. Given the accelerated pace of share repurchases in the first quarter, we are modestly raising our adjusted diluted EPS guidance to a range of 10% to 14% growth versus the prior year. We have also slightly revised our adjusted EBITDA margin assumptions primarily driven by our first quarter results. We continue to expect margin expansion in both segments for the full year, with Mineral Fiber adjusted EBITDA margin of approximately 44% and AS adjusted EBITDA margin of approximately 19%. On an organic basis, we expect AS adjusted EBITDA margin to be between 19% and 20%. Please note that additional assumptions are available in the appendix of this presentation. We continue to monitor geopolitical developments and their potential impacts on our business, including rising carrier fuel costs that have picked up in recent weeks. We have responded accordingly by implementing a fuel surcharge that took effect in late March. This is an example of our strong track record of mitigating inflationary headwinds as they arise. Before turning it back to Mark, I'd like to comment on our expectations for the second half of the year. We expect improved net sales and adjusted EBITDA growth in the second half of the year as compared to the first half in both segments, as well as improved adjusted EBITDA margin performance. In Mineral Fiber, we anticipate an acceleration in AUV growth, productivity gains, and WAVE contributions in the back half to support full-year adjusted EBITDA margin expansion in this segment. In AS, we expect organic net sales growth to accelerate in the second half of the year supported by strong order intake and healthy backlogs. We also expect higher inorganic contributions from our recent acquisitions. We remain confident in our outlook for 2026 and are well positioned to deliver strong results for the remainder of the year as we demonstrate the resilience of our business model. We remain committed to driving profitable top-line growth, margin expansion in both segments, and strong adjusted free cash flow to further our strategy and create value for our shareholders. And now I'll turn it over to Mark for further commentary. Mark Hershey: Thanks, Chris. As Chris outlined in his remarks, our view of the market remains consistent with how we began 2026 as we expect modest improvement for the year overall, even with the current uptick in uncertainty related to the geopolitical climate. This view reflects our current consideration of multiple macro, industry, economic, and on-the-ground inputs. Verticals like data centers, transportation, and health care are performing well. From a bidding perspective, we remain encouraged by the recent and consistent increase in overall project values as reported in Dodge data for both new construction and major renovation projects. With our robust portfolio, we are well positioned to serve that market environment. While we are also pleased to see some early signs of better discretionary demand, given elevated levels of uncertainty, it remains too early to shift our views on underlying market trends in construction. We will remain focused on driving our growth initiatives to gain traction and contribute incremental sales, giving us confidence in our ability to generate up to 1.5 percentage points of volume growth ahead of market-driven demand in 2026. These initiatives include ProjectWorks and Canopy, along with our energy efficiency and data center-specific solutions. First, looking at ProjectWorks and Canopy. Both are designed to improve sales volumes and AUV over time and further differentiate Armstrong with our customers. ProjectWorks continues to scale as we add more products from our portfolio to the platform, including, most recently, from our 2024 acquisition, 320% when projects go through this complimentary automated design service. Canopy also continues to reach new customers and improve from a revenue and profitability standpoint, more than tripling its EBITDA contribution in the first quarter. We are also pleased to see continued return customer growth along with healthy AUVs, nicely above our average AUV level for Mineral Fiber. Our newer product introductions that I mentioned earlier in the call are also gaining momentum. As we shared last quarter, our next-generation TempLock energy-saving ceiling products are now part of our SUSTAIN portfolio and meet the highest industry standards for sustainability. This makes TempLock even more attractive for building owners seeking standards that can increase their LEED v5 credits and differentiate their buildings from an energy efficiency standpoint. This innovation, with growing awareness of eligibility for tax credit incentives and validation by more real-world case studies, is driving growing interest, specifications, and adoption. Our TempLock pipeline continues to grow through heightened awareness, marketing, and commercial execution. These projects encompass a diverse set of verticals and project types. In February, we mentioned a couple of financial institutions in New York that are installing TempLock in new office construction projects. More recently, we've won projects that include a new health care facility in the Southwest, a Pennsylvania school district, and a small business office renovation in Pittsburgh, for an owner seeking the benefits of both the energy saving and the available tax credits for the product, the grid, and the installation. These, among others, are important points of validation for what we believe will be a meaningful driver for Mineral Fiber volume and AUV growth in the future. Our confidence in this outlook is bolstered by the urgent need for energy efficiency and grid stability as demands from AI, cloud computing, and data centers pressure grid systems. In addition, local and state regulations introduced over the last several years present real challenges for building compliance with carbon and energy reduction mandates. With few new solutions coming to market to tackle these challenges, TempLock is appealing for building owners facing these new regulations and even utilities looking for ways to protect the grid during peak usage hours. We believe this is a multiyear macro-driven opportunity for Armstrong and are pleased with the market development progress we're making so far this year. Data centers also represent a multiyear macro-driven opportunity supported by many of the same long-term trends tied to AI and the growing need for energy-efficient and resilient digital infrastructure. Over the past year, we've increased our capabilities and our market presence with expanded design-for-purpose offerings. The Armstrong portfolio—anchored by systems such as DynaMax, DynaMax LT Structural Grid, DataZone ceiling panels, and containment—builds on the core strengths of both Armstrong and our WAVE joint venture in manufacturing, specification-driven selling, and systems-based solutions for complex environments. Looking ahead to 2026, we see sustained activity across hyperscale, colocation, and enterprise data centers with customers increasingly focused on airflow management, support for higher power densities, and improved energy efficiency. We view data centers as a vertical market that aligns well with our capabilities and our disciplined approach to growth. Year to date, our pipeline for projects expected to ship in 2026 is more than 50% ahead of 2025 levels. These indicators of traction demonstrate we are well positioned to capitalize on both current and emerging market opportunities. We fully expect these efforts to not only contribute to our 2026 results, but also lay the foundation for future growth. With our dedicated employees serving our customers, our growth initiatives, and continued contributions from our core value creation drivers, we remain confident in achieving our 2026 outlook and in our ability to generate above-market growth, robust returns, and enduring value for our stakeholders as we move forward. With that, we'll be pleased to take your questions. Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. We ask that you please limit yourself to one question and one follow-up. Thank you. Our first question comes from Susan Maklari with Goldman Sachs. Please go ahead. Susan Maklari: Thank you. Good morning, everyone. My first question is on the bidding activity you're seeing out there, given the macro and obviously the start of the conflict in the Middle East during the quarter. Has that had any impact on the level of activity that you're seeing? And within that as well, can you talk about the new products and platforms and how that's perhaps driving some relative elasticity for you relative to the broader market? Mark Hershey: Thank you for the question, Susan. First on bidding activity, I think the best characterization of that would be that it's fairly stable overall. We have not seen a dramatic impact from the geopolitical backdrop. Both in the Dodge data that we use on the bidding activity and from an on-the-ground standpoint, we feel pretty good about the bidding activity. We've talked previously about bidding activity with project counts being down but project values being up. That continues. We continue to see that. That's a good thing for us. We continue to believe that that plays well to our strength—these larger, higher-value products—and, by the way, values that are up well above inflation for that matter. So bidding continues to hang in there, and we made some comments on our pipeline in our prepared remarks. Our intakes continue to be very strong—double-digit intakes—and good project visibility out into 2026 and beyond for that matter. On the new products that we mentioned in the prepared remarks, we continue to feel like we are absolutely over the right target on both energy savings and on data centers. As I mentioned, pipelines continue to build dramatically. We're seeing very good commercial execution from our sales teams on those projects, and it's giving us confidence in reiterating our view that we can get 150 basis points of Mineral Fiber volume growth ahead of market growth in the period. So in both cases—with data centers and energy savings—we're developing the market. We are, as Chris mentioned, adding selling resources. We're investing into these initiatives for growth. We're having more conversations, reaching more influencers, and feel really good about the traction of both of those initiatives. Susan Maklari: Appreciating that you outlined a lot of your initiatives and areas of focus as you step into the CEO role, just given the world that we're in today, can you talk about some of the things that you're focused on in the near term and how we should think about them coming through in the several quarters relative to some of the longer-term initiatives and things we should be watching for over time? Mark Hershey: Thanks, Susan. I'd say consistency—what you've seen from us over the last several years—we call it our winning formula, our building blocks for growth. So first and foremost, execution around our building blocks for growth: certainly AUV; certainly our product development focus on the innovation side and bringing new product to market; certainly across the enterprise, and I mentioned this in my opening remarks, productivity. Productivity from operations has been a hallmark of our Mineral Fiber business for a very long time. Extending that productivity mindset extends into the acquisitions we acquire, and just gaining operating leverage on the platform that we've built in Architectural Specialties over time. We know we'll go through cycles where we're adding on acquisitions—think about the last six months, we acquired three companies, a couple of smaller companies. There's a necessary ramp with those companies, but integrating them well, getting them up and running in our platform, and then getting the scale and the momentum behind those new additions is really important. So you'll see that in the near term, and we'll continue to be active on M&A—continue to build an active M&A pipeline—because that's also part of our strategy moving ahead. Susan Maklari: Okay. Great. Well, thank you for the color, and good luck with the quarter. Mark Hershey: Thank you, Susan. Operator: Our next question comes from Tomohiko Sano with JPMorgan. Please go ahead. Tomohiko Sano: Good morning, everyone. Mark Hershey: Good morning, Tomo. Thank you. Tomohiko Sano: On Mineral Fiber, volumes turned modestly positive, but in a flat market environment you highlighted commercial execution to push up 100 basis points. How's your view on volume trends for the second quarter and the full year changed compared to three months ago? We would appreciate any updated perspective on the drivers behind your outlook. Thank you. Mark Hershey: Thanks for the question. Overall, our view hasn't changed in terms of our Mineral Fiber volume outlook. We continue to be confident in that outlook. Just a couple of comments on Mineral Fiber volume in the quarter. I mentioned in my remarks we did see the federal government volume come through. We also saw, in addition to the commercial execution I mentioned, some flow business in the quarter, and that flow or discretionary business that we get for Mineral Fiber volume is an important signal for us. It comes through our distribution partners and that also contributed in the quarter. So across the board, we continue to grow AUV, but that flow business does tend to carry a lower AUV. But the higher end of our portfolio performed very well in Mineral Fiber volume as well—that SWAT part of the category—and so we're pleased with that. And that coupled with our initiatives gives us confidence in that outlook, Tomo. Chris Calzaretta: And maybe just to add on the volume, still expecting a modest step up in volume in the back half of the year and continued strong like-for-like performance and positive mix as part of that, AUV of about 6% for the year. Tomohiko Sano: Thank you, Mark and Chris. And just a follow-up on AS margins in Q2. You talk about the significant improvement in Q2, but could you please elaborate on the expected magnitude or level of this improvement? Any additional color on how you define significant and what we should anticipate in terms of margin recovery would be appreciated. Thank you. Mark Hershey: Thanks, Tomo. The way we're thinking about it is that the headwinds that we're seeing in the first quarter are largely short term in nature, and we don't expect them to continue throughout the rest of the year. So I think a fairly consistent margin performance through the rest of the year is how we're thinking about it without pinning it on a number. Obviously, you can see our guide and our outlook for margins overall for the year, and we're looking for a more consistent performance across all three of those quarters. Chris Calzaretta: Nothing to add. Again, still expect margin expansion for the full year in AS at the segment level. Mark Hershey: Yeah, and to add on to that, our outlooking margin expansion organically—confidence stems in part from what we're seeing in our pipeline, and the headwinds stepping away. Also, we've expanded margins in AS organically for four consecutive years, and we believe we've got the building blocks in place to continue to do that and that this will be our fifth year of organic margin expansion for AS. Operator: Our next question comes from Keith Hughes with Truist. Please go ahead. Keith Hughes: Thanks. I wanted to ask about this tariff issue more. Can you give us a little more detail of what this is about and is this going to be a continuing cost in quarters in 2026? Mark Hershey: Thank you, Keith. The short answer is no, we do not expect it to be a continuing cost, and happy to provide some color on it. Look, tariffs—as I think we've all seen—are a rapidly evolving area. There's been a lot of fluidity around the guidance, the application, frankly, the calculation of duties, and I want to applaud our team this year for constantly reevaluating that guidance and staying current on that. So we proactively, this quarter, in our reevaluation, decided to make a reconciliation, if you will, of our duty rates on, as I mentioned in my remarks, aluminum. These are finished goods that contain aluminum that are imports into the U.S. And so we made that reconciliation a one-time event. And with it, also deployed a series of mitigation measures so that we don't have this as a go-forward run rate. And I think over the years, we've proven our ability to mitigate those headwinds through a series of actions that can include supply chain changes, manufacturing changes, pricing if needed, so that we can mitigate that headwind. So we don't expect it to continue throughout the rest of the year. Keith Hughes: Okay. And one other question on AS. You talked about the manufacturing cost impacting the quarter. Was that primarily on the last acquisition you did? And is it just requiring some extra investment as you get into expand that? Or exactly where do those come from? Chris Calzaretta: Yeah, Keith, it's a little bit of both. It's the costs associated with manufacturing related to our recent acquisitions as well as some investments back into the organic side of the AS business within our plants. Keith Hughes: Okay. Thank you. Operator: Our next question comes from Rafe Jadracic with Bank of America. Please go ahead. Rafe Jadracic: First, I just wanted to start with you updating us on the inflation outlook for the year. Coming into the year, you were expecting mid-single digit with energy up low doubles and then low single digit on raws. Where is that tracking today? Chris Calzaretta: Thanks, Rafe. So just to reground on COGS inflation: raws are about 35% of our COGS, energy is about 10%, with a fairly even split between electricity and nat gas, and then freight's about 10%. So for total input cost inflation for the year, no change to our mid-single digit outlook that I shared in February, but a slight update on the components—let me walk through them here quickly. On the raw side, we expect mid-single digit inflation versus prior year. Freight—given a little bit of an uptick in the pricing of fuel—we're in that mid-single digit inflationary range. And then on energy, in that 10% range for the full year. So all in, no change to the total input cost inflation assumption of mid-single digits, but a little bit of shifting between the categories. Rafe Jadracic: That's really helpful. And then just the AUV acceleration in the second half of the year—I think 4% in the first quarter and then 6% for the full year. Was there any mix headwind in the first quarter that will reverse later in the year? Can you talk about the components of what's going to actually drive that acceleration as we get later in the year? Mark Hershey: Sure, happy to take that. We probably saw a little bit of product mix, and that does vary quarter to quarter based on the basket of product we're selling in our channels in a given quarter. There's probably a little bit of that in the quarter, and we expect that to even out the rest of the year. Our initiatives and our ability to continue to mix up will continue throughout the rest of the year, so we don't view that as a headwind going forward. And just stepping back, 5% overall sales top-line growth for Mineral Fiber—we feel really good about. From an AUV perspective, we got good pricing traction in the period. We got very good AUV fall-through in the quarter—well over our expected run rate there. So in terms of AUV overall, we're confident in that roughly 6% for the year. Operator: Our next question comes from Brian Byro with TRG. Please go ahead. Brian Byro: Morning. Thank you for taking my questions today. On the Mineral Fiber EBITDA margin outlook, even though Q1 was down a little bit year over year, had some pressures, still very good performance. It looks like you raised the full year to 44% instead of 43.5%. So, clearly, you have a good sense of being able to overcome whatever happened in Q1, even though it's still very good, and perform even better in the rest of the year than, I guess, you had thought three months ago. What is driving that increased confidence in margin for the rest of the year? It sounds like even better AUV traction, but more clarification on that would be great. Chris Calzaretta: Thanks for the question, Brian. Overall, the margin expectation for the full year in Mineral Fiber is largely unchanged. We're at about 44%. We were outlooking a little bit north of 43.5%. So really no change there overall. And as you stated, we expect a modest uptick in volume in the back half of the year and then an increase in AUV in the back half of the year based on Mark's comments associated with product mix. Still strong AUV fall-through, still strong productivity, and, again, really good contribution from our WAVE joint venture gives us confidence in that margin and our ability to expand margins at the segment level on a full-year basis. Brian Byro: Got it. And then on raising the EPS guidance, I guess from higher share repurchases, I was just curious to hear more on the thought behind that and when you decided that was the right approach. Was it looking at the stock price itself and looking at the demand outlook for the year and seeing that disconnect? Just share more about what triggered the decision to execute more on the buyback or execute it quicker. Chris Calzaretta: In Mark's prepared comments, there's no change to our capital allocation priorities. We have a high-return business and we seek to invest back there first. Secondly, we seek to grow inorganically, and you can see our track record there. And share repurchases have been our flex option. We take into account and look at a multitude of different things in contemplation of that. The uptick in EPS—the raise in the guide—was really based on our share repurchases in the first quarter. We took advantage of some opportunistic buying there. The full-year guide is reflective of that step up we saw in the first quarter in terms of repurchases. It continues to be our flex option as we go forward as well, but it's, again, an examination and a look at a whole host of different factors as part of our capital allocation. Mark Hershey: And I'll just add, we'll continue to be opportunistic. Implicit in that is confidence in our free cash flow outlook, as well as what Chris described there. Operator: Our next question comes from Garik Shmois with Loop Capital Markets. Please go ahead. Garik Shmois: Hi, thank you. On the improvement that you talked about in the flow—discretionary—part of the business, was hoping you could talk a little bit more on that: what verticals are seeing improvement and any sense as to how sustainable the growth is there? Mark Hershey: Sure. That's the part of the portfolio we have a little less visibility to. By its nature, it's discretionary. It shows up through our distribution partners. So it's a nice stable volume flow. Our ability to trace it back to specific verticals is limited. I wouldn't say it would be vertical specific—it would be more broad based, just based on what we're seeing overall in the markets as well as projects. And the same would be true for geographic. It's still an uncertain environment, and I think that's what weighs on the ability for that to be a more consistent part of our Mineral Fiber volume flow or volume outlook. But it's a good sign, and it's one of those signs that we look at very closely every quarter as an indicator of future activity. So I'd say the flow business we saw this quarter, coupled with the pipeline, is what gives us confidence in our outlook overall. Garik Shmois: Thank you for that. Just a follow-up on Mineral Fiber margins. You talked to the 44% for the full year, but you also did mention the second quarter you're up against a difficult comparison. Just wondering if you could frame Q2 EBITDA margins in Mineral Fiber a little bit more. Would you expect margins to be up in the second quarter? Any additional color would be great. Chris Calzaretta: Thanks for the question, Garik. I'll stop short of guiding to the quarter there. We are lapping a strong base period—it's probably going to be close. But, again, thinking about the overall building blocks that have been a true testament to that business will still be on display in the second quarter: really strong AUV contribution, strong pricing within that, productivity, and a disciplined approach to cost control, balanced with opportunistically investing back into the business for growth. Mark Hershey: Okay. Got it. Thank you. Operator: Our next question comes from John Lovallo with UBS. Please go ahead. John Lovallo: On the Architectural Specialties side, organic sales were up about 5% year over year in the fourth quarter, up about 7% in the first quarter. How are you thinking about the cadence of organic growth into the second half? And then can you also give us an update on, I think, there were four or five big projects that got pushed out last quarter—any update there would be helpful. Mark Hershey: Thanks, John. I think we continue to be confident in that high-single digit range of organic growth for AS. We're pleased with 7% in the first quarter, and I'd expect more of the same—high single digits—throughout the rest of the year. We did follow through on all five of those projects. One of those projects that we were talking about last quarter actually shipped and closed in the quarter, and the other remaining projects we expect in the first half of Q2. So that's consistent with what we were expecting—that they would flow through in the first half of the year—and we're on track for those. Chris Calzaretta: And, John, as you model the organic top line in AS, be thinking about a pretty sizable step up in the back half of the year compared to the front half. John Lovallo: Understood. Thank you. Operator: Our next question comes from Stephen Kim with Evercore ISI. Please go ahead. Stephen Kim: Thanks very much, guys. Appreciate all the color so far. I wanted to focus on the data center vertical for a second. First, what features really matter the most within the data centers? I understand the DynaMax—you need a very robust grid system—but in addition to that, the tiles: am I right in thinking that perhaps gasketed products might be more important in order to really minimize the airflow? Is there something else? And do some of these products have a quicker replacement cycle that you can anticipate? Mark Hershey: Thanks, Stephen. Happy to talk data centers a little bit. I think you're over the right target there—airflow management is part of the value proposition. Before you even get down to a specific kind of product attribute like gaskets or airflow management, what's winning is speed and labor efficiency and labor savings. So trust, relationships, the ability to support lead times, and a complete system that is capable of being installed on time, quickly, with minimal labor or rework—that seems to be a priority value proposition right now. And so that's what we've done with our system: a complete, connected, holistically designed system—not just the tile, not just the suspension. We've talked about walkable platforms before, we've talked about containment. That's really what we're aiming for, and then to bring the Armstrong power of go to market and service and distribution to that equation to really give contractors and the other influencers who are really prevalent in the data center space that confidence so it's repeatable, it's reliable, and they can get the data center up and running as fast as possible. So that's been our priority. Stephen Kim: That's very helpful and actually a good segue to the other question I had about the data centers. As we know, the data center starts and announcements were obviously very robust, but that may be starting to slow a little bit in light of the practical realities of actually getting these things out of the ground. Do you anticipate perhaps that completion of data centers—which I'd assume matters most for you—might actually have a little bit of a hiccup sometime in 2026–2027 after the initial surge? Is that realistic? And then longer term, what percent of sales do you think data centers could ultimately represent, either in two to three years or maybe even longer than that? Mark Hershey: On your first point, point well taken. It's very tough to crystal ball what that will look like in the future. There has been public opposition to data centers in different communities as well, and we've been monitoring that. We've got our eye on that. We haven't seen the demand wane—we mentioned the number of wins we've had—so I think the opportunity in the near term is real. And frankly, with some of our solutions—energy efficiency in particular, acoustical solutions, exterior solutions—we've got a value proposition for data center construction that is kind of community friendly, so to speak, and we're focused on that. But could we see that wane in the long term? We'll see. It's probably too early to call. On your second question—sizing—still difficult for us to do. We haven't set this out as a separate discrete vertical. It doesn't rise, in our view, to the level of, let's say, our health care or our retail vertical. But to my point earlier about having a diverse set of verticals, it's a good thing. There's a strong tailwind in it, and we're going to take advantage of it and pursue what we believe to be our fair share of that work while it's here. We reflect that positivity inside our office vertical as we present it. So it's a positive factor overall in our vertical mix. Stephen Kim: Just to clarify, could you comment on the replacement cycle on some of the products that go in, particularly the tiles? Would there be any reason to think that the replacement cycle might be quicker? Mark Hershey: Not that we've seen yet, and maybe it's too early to tell on that as well because we're seeing a lot of new demand right now with data centers and not a lot of major retrofit demand at this moment. As that time comes, we'll have a better sense for the cycle and if there's a comparable to, let's say, tenant improvement—is there a data center tenant improvement comparable? We just don't know that yet and haven't seen that yet. Operator: Our next question comes from Phil Ng with Jefferies. Please go ahead. Phil Ng: Hey, guys. Question for you, Mark. Some of these growth factors you've called out—whether it's transportation, particularly in AI/data centers—and then TempLock would be a little different approach, more smaller customer base. How should we think about pricing, margins, and mix broadly? Mark Hershey: We'll start with pricing. Pricing and AUV generally are favorable to our standard AUV. That's how you should think about it for TempLock, for DataZone tiles in data centers—that's certainly true. And as we mix up the portfolio generally, we're trying to drive the high end of our portfolio. As we ramp these solutions—and we're still in ramp mode; we're still in ramp mode for TempLock for sure, and we're still in ramp mode to a degree for data centers—we'll build and gain leverage over time. And I think it's fair to say that for this year we're still in that ramp mode for TempLock as we generate momentum and create demand overall. Phil Ng: About transportation? Mark Hershey: Transportation is very favorable because of the mix and because of the broad solution set that we see there. So you take the typical airport job like I was describing in my remarks. We see projects that are a blend of high-AUV Mineral Fiber, very high-AUV architectural solutions, and the power of our portfolio really comes into play there, and our margins reflect that as well on transportation projects. We do really well with that portfolio effect. Phil Ng: And to tie it all together, you guys are winning here. Who do you compete with? Is it your typical competitors on Mineral Fiber that have more of a commodity product? AS is probably a little more nuanced. Give us a sense for some of these larger complex projects—who are you competing with? It does feel like you have an advantage here, and even on the TempLock side as well. Mark Hershey: I appreciate the question. For that reason, two years ago we organized a specific transportation vertical–focused team, a very cross-functional team from multiple parts of our business. These projects are complex; they're multiyear. The wins that we announced this quarter we've been working on for several years to try to win them. You're dealing with different influencers, there's a regulatory dimension to this, there are different authorities involved. So it is a complex, sophisticated, long-term sale. I think one of the most compelling value propositions we bring relative to competition is the breadth. Because these airports have a wide array of needs—there's a wide array of spaces in them from lounges to concourses to the exterior facade, for that matter. And I think this is really where you see the power of our portfolio and the brand come into play. And it can be served through our distribution partners very reliably. So that's a powerful combination when you put it all together. Phil Ng: One last one for me for Chris. EBITDA for AS was a little weaker than we would have expected for Q1. It sounds like you're expecting that to improve nicely into Q2. You called out a few things that were temporary in nature—the $2 million tariffs. Were the investments in the business and M&A lumpier in nature in Q1 that will fade? Help us think through why things get better in Q2, and do you have enough levers for EBITDA to be up year over year in AS in Q2? Chris Calzaretta: Thanks for the question. A little bit of lumpiness is the way I would think about it. In terms of overall confidence, we absolutely believe we're going to not only grow but also expand margins on a full-year basis. Be thinking about some of the nonrecurring impacts that we saw in Q1 on the tariff front as largely the impact that will carry through for the full year. Other than that, we feel really good about the order intake, our backlogs as we mentioned, and are very confident in our ability to deliver the outlook that we have for the year. Operator: This concludes the question and answer session. I'll turn the call to Mark Hershey for closing remarks. Mark Hershey: Thank you, everybody, for joining the call today. Thank you for your interest in Armstrong, and we look forward to speaking with you soon. Operator: And this will conclude our call today. Thank you for joining. You may now disconnect.
Operator: Welcome to Visa's Fiscal Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to your host, Ms. Jennifer Como, Senior Vice President and Global Head of Investor Relations. Ms. Como, you may begin. Jennifer Como: Thank you. Good afternoon, everyone, and welcome to Visa's Fiscal Second Quarter 2026 Earnings Call. Joining us today are Ryan McInerney, Visa's Chief Executive Officer; and Chris Suh, Visa's Chief Financial Officer. This call is being webcast on the Investor Relations section of our website at investor.visa.com. A replay will be archived on our site for 30 days. A slide deck containing financial and statistical highlights has been posted on our IR website. Let me also remind you that this presentation includes forward-looking statements. These statements are not guarantees of future performance, and our actual results, outcomes, or timing could differ materially as a result of many factors. Additional information concerning those factors is available in our most recent annual report on Form 10-K, and any subsequent reports on Forms 10-Q and 8-K, which you can find on the SEC's website and the Investor Relations section of our website. Except as required by law, we do not undertake any responsibility to update these forward-looking statements. Our comments today regarding our financial results will reflect revenue on a GAAP basis and all other results on a non-GAAP nominal basis unless otherwise noted. The related GAAP measures and reconciliation are available in today's earnings release and related materials available on our IR website. And with that, let me turn the call over to Ryan. Ryan McInerney: Thanks, Jennifer. In our fiscal second quarter, net revenue was up 17% year-over-year to $11.2 billion and EPS was up 20%. This represented the strongest net revenue growth since 2022. And when you exclude the post-pandemic recovery and the Visa Europe acquisition, it was the strongest since 2013. Payments volume grew 9% year-over-year in constant dollars to $3.7 trillion and processed transactions grew 9% year-over-year to $66 billion. Our business has incredible momentum. Visa has become the leading hyperscaler of payments globally, and our strategy and Visa as a Service stack will help us drive future growth in 4 important ways. One, we are winning in consumer payments, commercial payments and money movement. Our investments and innovations are paying off in a meaningful way and will continue to drive growth. Two, AI and agentic commerce will expand our addressable market, and our efforts will accelerate Visa's long-term growth. Three, stablecoins and blockchain are significant opportunities, and we have established Visa's role as a key interoperability layer between this powerful infrastructure and real-world solutions for users. And four, value-added services is an even bigger opportunity and has demonstrated its value as a key driver of our growth, now representing 30% of our net revenue, growing at 25% plus in constant dollars. These services have durable competitive advantages as the vast majority are linked to transactions, cards and accounts, and they are only strengthened with AI, reinforcing their importance as a growth lever for years to come. We have deep conviction in our ability to grow revenue well into the future, not just for the next 3 to 5 years, but beyond. I'll go through each of these 4 drivers in more detail. As I mentioned, our investments in consumer, commercial and money movement are delivering meaningful results. We are winning with fintechs, wallets and apps. They are building on our stack, and tapping into our innovation and our vast acceptance footprint, to help hyperscale their growth and ours, capturing both carded and non-carded payments. A few recent examples. Just last week in the U.K., we partnered with TikTok to launch a debit card specifically designed for content creators. The Creator Card enables faster access to income from TikTok LIVE, brand partnerships and platform payouts so that creators can spend, plan and reinvest in their business quickly. In Japan, a country with nearly 50% of spending in cash, we are collaborating with mobile payments app, PayPay and their 40 million monthly transacting users and millions of acceptance locations to deploy new domestic and international solutions. With Visa, PayPay plans to grow Japanese merchant acceptance, utilize our Visa Flex Credential to integrate multiple payment methods into a single Visa credential and expand internationally. Shifting to commercial and money movement solutions, where revenue grew 24% in constant dollars as we continue to reinforce the value of our offering with expanded reach and tailored solutions. Visa Direct, the largest money movement network globally, now has more than 18 billion endpoints. This vast network is helping us win new business and power more transactions. In Q2, we had 3.7 billion transactions, up 23% year-over-year. In the U.S., X will soon begin early public access for X Money, enabling push and pull payments for their millions of users with Visa Direct, and payments anywhere Visa is accepted using a Visa Flex Credential. In Mainland China, UnionPay International will connect Visa Direct with UnionPay's Moneyexpress, enabling real-time cross-border remittances and payouts to reach more than 95% of their debit cardholders through a single integration. Moving to commercial, where this quarter, we drove 11% payments volume growth in constant dollars with strength in our travel, fleet and premium business reward portfolios. Commercial cross-border volume now represents the highest percentage of both commercial volume and total cross-border volume in Visa's history. In Travel, we expanded our agreement with fintech issuer processor, Highnote, to enable their 8 OTA platforms with our flexible interchange product for virtual cards called Visa Commercial Choice for Travel, which also includes specific automation, controls and reconciliation across the travel value chain. In Fleet, we signed a new agreement with Westpac that expands our partnership and demonstrates the potential for Pismo for commercial card modernization. We also secured their commercial card portfolios, including credit and debit for small business. Another example of deepening relationships with our clients is with Scotiabank. Across 11 countries in Latin America and the Caribbean, we have created a new strategic agreement, consolidating our relationship and expanding into new areas of issuance focused on affluent and small businesses. So our momentum in consumer, commercial and money movement is clearly strong and will strengthen with agentic commerce and stablecoins. I'll start with agentic commerce. We believe AI and agentic commerce will expand our addressable market in 4 important ways. First, like eCommerce and mobile commerce before it, agentic commerce will accelerate the digitization of commerce around the world. And just like the acceleration from eCommerce and mobile commerce, Visa will benefit. Second, agents will create significantly more transactions. Agents will intelligently split purchases across multiple transactions, optimizing price, timing and value to the buyer. And importantly, in some use cases, we expect agents will pay for their own data and resource consumption transaction by transaction and event by event, which creates an entirely new category of commerce with micro transactions. Third, we will see accelerated digitization of B2B payments, where there is still enormous friction that AI agents can help remove. They will be able to automate payment initiation directly from invoices and contracts and manage approvals autonomously. In this context, virtual cards and tokenization will become a preferred way to pay and be paid. And lastly, just like the advent of eCommerce and mobile commerce, agentic commerce will increase economic growth generally. Third parties estimate we are looking at a boost of 80 to 150 basis points of incremental GDP growth from AI and when GDP grows, spending grows and digital payments transactions grow. Visa is extraordinarily well positioned to win in agentic for 3 important reasons. Our network, security and trust. Our network has enormous scale, more than 175 million seller locations, 5 billion credentials in 200 countries and territories with nearly 14,500 financial institution clients who have opted in to using this network. Payment security is only going to become more difficult and more valued. With our scale comes over 300 billion transactions annually, equating to an average of about 900 million transactions per day, and all of the data that comes with it. Visa has proven it knows how to manage transaction risk, identity risk and fraud, all enabled by this transaction data. And trust. Visa has well-established trust grounded in our standards and brand. We've set the standards that enable trusted payments in the digital and emerging agentic ecosystem. And a big part of our network, security and trust are Visa tokens. Visa is a proven leader in tokenization, which is foundational in eCommerce and is set to become an essential element of trusted transactions in an agentic world. People overwhelmingly choose to pay with cards face-to-face and online, and they will prefer their agents to pay with cards. And merchants want this, too. We recently launched Intelligent Commerce Connect, which acts as a network protocol and token vault agnostic on-ramp to agentic commerce for agent builders, merchants and enablers. Now while it's early, we are seeing growth in agentic shopping and the emergence of early agentic commerce, real transactions with Visa agentic tokens. And AI continues to evolve. With the AI landscape, we are seeing that Claude code and other agentic coding assistants will allow anyone to become a developer. It's that easy to work in simple command-style tools like the command line interface, or CLI. These agentic coding assistants are a great example of how we see AI and agentic commerce increasing economic growth as they enable anyone to bring their new business ideas to life. We see a world where we will all design, build and launch digital products and experiences ourselves, engage with digital platforms and buy digital services using the CLI, or a slick consumer-friendly version of one as our interface. The CLI itself is becoming a commerce platform, and we believe that the preference and value of cards will be equally strong for all sizes of transactions, including micro transactions. A key to making this happen is enabling safe, simple and easy payments that are widely accepted by all API endpoints. We recently launched Visa CLI as a proof of concept, which shows how easy it is for a developer, soon all of us, to use their Visa credential to pay for digital services like an image, a website builder or more via the CLI. The early feedback we have been receiving from developers is very positive. And as we move forward, we plan to enable CLI commerce at scale, which means scaling the availability of command line tools and card acceptance by promulgating standards, products, rules and pricing. Over time, we have continued to adapt our technology and commercial model to win when new payments use cases emerge. Transit, vending, parking, subscriptions, app purchases and Visa Direct are all great examples of where we've made purposeful investments to enhance our commercial and technical model to deliver new smaller ticket payments use cases. Agentic Commerce will be another great example. In all of these use cases, Visa cards are providing significant value. They're easy to use, broadly accepted, integrated into the transaction flow, offer privacy, unlike most stablecoins, offer a way to manage liquidity in aggregate rather than funding millions of real-time micro transactions, offer an issuer KYC user, security protections if something goes wrong, and in many cases, cards offer rewards and benefits. We see no other payment method on earth that delivers all of these features. Buyers know this, sellers know this and soon so will agents. We expect more transactions, more value-added services and therefore, more revenue in the years ahead from agentic. Let's shift to stablecoins and on-chain payments. Our strategy and innovations have positioned Visa as a hyperscaling bridge layer between stablecoin and real-world solutions and applications for users. I'll call out 3 important examples. On-ramps and off-ramps, settlement and money movement and blockchain infrastructure. In many countries around the world, especially in emerging markets, consumers and businesses are increasingly using stablecoins as a store of value, essentially on-chain, primarily U.S. dollar-denominated accounts. In these countries, stablecoins are not generally accepted as a means of payment. We are providing on-ramps and off-ramps with stablecoin-linked Visa cards. So consumers in these countries are increasingly using stablecoin-linked Visa cards to spend their stablecoins online and at their local grocery store, petrol station and restaurants where Visa is accepted. Businesses are using stablecoin-linked Visa cards to buy digital advertisements and supplies for their businesses. And we now have over 160 stablecoin card programs globally with key partners such as Rain, Reap and Bridge, and the payment volume continues to grow at a very strong rate, up nearly 200% year-over-year in Q2. Now to my second example, a pragmatic real-world B2B use case, Visa's own settlement capabilities. Last year, Visa settled almost $13 trillion among in between our nearly 14,500 financial institution partners. Nearly all of this was settled in fiat currencies on Monday through Friday. We have been enabling our clients to settle with us using stablecoins. So an issuer who's working in stablecoins can pay us in stablecoins 7 days a week, and an acquirer or merchant who wants to get paid can get paid in stablecoins. This provides immense liquidity and efficiency benefits. We have just added 5 additional blockchains for settlement, [ Arc, Base, Canton, Polygon and Tempo ], bringing the total to 9. We currently have a $7 billion annual run rate of stablecoin settlement volume, and it's growing fast, up more than 50% since last quarter. Now to the third example, becoming a key player in blockchain infrastructure. We are actively participating and innovating to ensure Visa plays an important role in emerging payments-focused blockchains. We are design partners for Layer 1 blockchains and have become a validator on Tempo and a super validator on Canton network. Our role as a design partner with Tempo allowed us to play a critical role developing and launching the machine payments protocol card specification that is enabling Visa CLI payments. Running a validator node moves Visa from a blockchain participant to an infrastructure leader. And in the case of Canton, where we are a super validator, Visa also helps govern the network that validates the transaction. Ultimately, we will help operate the infrastructure that can make private regulated blockchain transactions possible. Additionally, we are increasingly providing value-added services to crypto-native partners and traditional financial institution partners to help them expand their stablecoin offerings to better serve their users, which is a good transition to the fourth driver of Visa's growth, value-added services. As I said at the outset, value-added services is a bigger opportunity than ever for Visa. Value-added services revenue grew 27% in the second quarter in constant dollars, and we are just getting started. VAS is inextricably linked to our network business and with that comes significant distribution globally. We have transaction data at scale, and we will enhance that data with AI. We have the brand assets and sponsorships to provide unique opportunities for our clients and Visa to grow, and we are winning because our VAS portfolio of solutions brings powerful capabilities, the trust that Visa stands for, and our commitment to continuous innovation. The vast majority of our value-added services revenue is linked to transactions, cards and accounts. So as we grow consumer and commercial payments, we are also fueling VAS growth. For example, eCommerce transactions are the fastest-growing part of consumer and commercial payments, and many of them utilize our value-added services to help increase authorization rates and reduce fraud. Also, affluent cards are the fastest-growing area of consumer payments and more and more of them have a deep set of card benefits and loyalty services linked to them. Across Visa, AI is making what we do even better, especially for our value-added services. Our new Visa Large Transaction Model is beginning to act as the foundational model for a variety of AI-powered fraud and risk services at Visa. Early results have shown that it can power up to a 5x increase in fraud value capture. Our team has been integrating new AI-enabled features across our suite of VAS solutions, including the recent release of 6 dispute resolution capabilities. In fact, across all of our services, client adoption has been the fastest among AI embedded services such as Smarter Stand-In Processing and Visa Provisioning Intelligence. In addition, our brand and sponsorship relationships are highly valued. In our fiscal year 2026, Olympic and Paralympic Winter game sponsorships tracked ahead of plan with more than 100 projects across more than 70 clients and nearly 40 markets. And with FIFA, we have already seen increased activation of cards, spend and engagement from our clients. Our acquired capabilities represent important growth opportunities as well. In Q2, Pismo signed our first clients in France, the Philippines, Paraguay and Romania, reaching 15 new countries since the acquisition. And we're thrilled to announce that Wells Fargo has entered into an agreement to migrate to Pismo's core account ledger as part of its core banking modernization over the coming years, reflecting the strength of the partnership between Wells Fargo and Visa. We recently announced the acquisition of Prisma, a credit, debit and prepaid issuer processor and Newpay, a real-time payment services, bill pay and an ATM network. We believe the combined technology platforms will accelerate the deployment of advanced technologies such as tokenization, biometric authentication, intelligent risk tools and agentic commerce solutions, and help us to grow both our carded and non-carded business in Argentina. Our value-added services are highly differentiated and even more so in an AI world. Before I close, I wanted to say that we are watching the impacts from the conflict in the Middle East closely. Chris will go into more detail about the impact on our business in a moment. Our primary concern is, and has been, the safety of our team and clients. You can see from our second quarter performance that there is momentum in our business, tailwinds behind us, and enormous opportunities ahead of us. We are pushing every day to build the future of payments faster and better than ever before and to make our stack the most capable and valuable way for our partners to connect to the world's payments ecosystem. Our track record, strategy, innovation and Visa as a Service stack will help us drive growth well into the future. Now over to Chris to discuss our financial performance. Christopher Suh: Thanks, Ryan, and good afternoon, everyone. We delivered an outstanding second quarter with strong revenue and profit growth, driven by effective execution of our strategy and the resilience of our diversified business model. Drivers remain strong and relatively consistent with Q1. In constant dollars, global payments volume was up 9% year-over-year. Cross-border volume, excluding intra-Europe, was up 11%, and total processed transactions grew 9%. Fiscal second quarter net revenue was up 17% year-over-year with the out-performance largely driven by higher-than-expected volatility, stronger-than-expected value-added services revenue and lower-than-expected incentives. Second quarter net revenue was up 16% in constant dollars. EPS was up 20% year-over-year in both nominal and constant dollars, better than expected, primarily due to stronger-than-expected net revenue growth. Now let's go into the details. U.S. payments volume grew 8% year-over-year, up almost 1.5 points from Q1, reflecting resilience in consumer spending. E-commerce spend outpaced face-to-face spend. Both U.S. credit and debit demonstrated broad-based spend improvement, and we believe both were helped in part by higher tax refunds. Debit grew 7%, up almost 1 point from Q1 and credit grew 10%, up more than 2 points from Q1, with strong travel spend in both consumer and commercial. Growth across consumer spend band saw incremental improvement from Q1 with the highest spend band continuing to grow the fastest. Across our volume, both discretionary and nondiscretionary spend remains strong. We do not see signs of the lower spend consumer weakening in our volumes. Second quarter total international payments volume was up 10% year-over-year in constant dollars, generally consistent to the growth we've seen over the past several quarters. Latin America and Europe payments volume growth was relatively consistent with Q1 in constant dollars. Canada had a more than 1 point improvement from Q1, primarily due to processing days. In Asia Pacific, we saw macro improvements in Mainland China. And in other Asia Pacific countries, we saw strong client performance. In CEMEA, we saw a step down of about 2.5 points in payments volume growth in constant dollars from Q1, primarily due to the conflict in the Middle East. Keep in mind that CEMEA generally represents about 6% of our total payments volume. Pulling it together, globally, our total payments volume growth remains strong, up almost 1 point from Q1 in constant dollars. Now to cross-border volume, which I'll speak to in constant dollars and excluding intra-Europe transactions. Q2 total cross-border volume was up 11% year-over-year, consistent with Q1. Cross-border eCommerce volume was up 13%, 1 point above Q1. While crypto continued to be a slight drag, the improvement was primarily driven by U.S. inbound volume. Travel-related cross-border volume was up 10%, generally consistent with Q1, led by continued strength in commercial and improved U.S. inbound volume that generally offset the impact in the Middle East that was most pronounced in March. With that as a backdrop, I'll move to discuss the financial results. Starting with the revenue components. Service revenue grew 13% year-over-year, versus the 8% growth in Q1 constant dollars payments volume, primarily due to pricing and card benefits. Data processing revenue grew 18% versus the 9% growth in processed transactions, primarily due to pricing, strong value-added services performance and higher cross-border transaction mix. International transaction revenue was up 10%, below the 11% increase in constant dollar cross-border volume growth, excluding intra-Europe. Even with the favorable FX, we had offsetting impacts from volatility, mix and hedging. While volatility was better than we expected for the quarter, it was still below last year's levels. Other revenue grew 41%, primarily driven by growth in advisory and other value-added services, especially marketing services revenue as well as pricing. Client incentives grew 14%, lower than our expectations, driven primarily by deal timing and performance adjustments. Now to our 3 growth engines. Consumer payments revenue was driven by strong payments volume, cross-border volume and process transaction growth. Commercial and money movement solutions revenue grew 24% year-over-year in constant dollars. CMS revenue was better than expected, driven primarily from performance adjustments and deal timing in addition to pricing. Commercial payments volume grew 11% in constant dollars, up more than 1 point from Q1 and faster than Visa's overall payments volume growth, primarily due to strong client performance driven by both new wins and continued cross-border strength. Visa Direct transactions grew 23% year-over-year, consistent with Q1, driven by continued strength in domestic and cross-border. Value-added services revenue grew 27% year-over-year in constant dollars to $3.3 billion, driven by underlying business drivers, which included process transactions, number and mix of credentials and client consulting and marketing engagements and pricing. Value-added services revenue growth was better than expected, primarily due to greater demand for network products for issuers and acquirers and marketing services. Marketing services leverage our brand assets, expand and deepen our relationship with our clients, help them increase engagement with their customers and drive increased spend, all while growing revenue at attractive levels of profitability. As Ryan mentioned, the Olympics and FIFA are exciting opportunities this year, and we also see further expansion opportunities for sponsorships beyond sports. One example was with the music tour sponsorship in Asia Pacific for a popular K-pop group. We completed activations for multiple clients in the region and drove increased payments volume growth and card issuance, which drove revenue for our clients and Visa, in addition to driving direct VAS revenue. For one client, they saw a nearly 30% increase in year-over-year spend as a result of this campaign and another client saw a 50,000 increase in card count in just 6 weeks. Operating expenses grew 17%, consistent with our expectations, driven primarily by personnel and marketing. Non-operating expense was $45 million, above our expectations, primarily due to lower cash balances and higher debt levels and interest rates than forecasted. Our tax rate for the quarter was 16.4%, consistent with our expectations. EPS was $3.31, up 20% year-over-year, better than expected, with an approximately 0.5 point benefit from exchange rates. For our non-GAAP results, Prisma and Newpay increased net revenue and operating expense growth by approximately 0.5 point each and had a minimal impact on EPS growth. In Q2, we bought back $7.9 billion in stock, the highest quarterly buyback in Visa's history, and a tangible sign of our capital allocation strategy at work, and our belief in the long-term value of our company. We also distributed $1.3 billion in dividends to our shareholders. We funded the litigation escrow account by $125 million, which has the same effect on EPS as a stock buyback. At the end of March, we had $13 billion remaining in our buyback authorization. And in April, the Board of Directors authorized a new $20 billion multiyear share repurchase program, putting our total buyback capacity at approximately $33 billion. Now let's look at drivers through April 21 with volume growth in constant dollars. U.S. payments volume was up 9%, with credit up 10%, and debit up 8% year-over-year. For constant dollar cross-border volume, excluding transactions within Europe, total volume grew 9% year-over-year with eCommerce up 14% and travel up 5%. The step down in travel from March was driven by both the impact from the Middle East conflict and Ramadan timing. When you normalize for Ramadan timing, the total April cross-border volume growth was in line with February levels. Processed transactions grew 8% year-over-year. Now let me move to our guidance, which is on an adjusted growth basis, defined as non-GAAP results in constant dollars and excluding acquisition impacts. You can review these disclosures in our earnings presentation for more details. The key message is we are increasing our total net revenue and EPS guide for the full year. For net revenue growth, we now expect low double-digit to low teens. This incorporates the strong year-to-date performance and our current assumptions on drivers, incentives, volatility and expected higher value-added services revenue growth, which incorporates the increased enthusiasm from our clients for the upcoming FIFA World Cup. Let me walk through those assumptions. First, the drivers. We are assuming the broader consumer spend stability continues from a macro perspective. The Middle East conflict has introduced some near-term uncertainty, in particular to cross-border travel spend in the CEMEA region. As we have seen, our spend is incredibly diverse. And as we look to the rest of the year, we are expecting improvements in the U.S. and Latin America inbound travel due to FIFA, and we have the lapping impact of low U.S. inbound growth from last year. Furthermore, cross-border eCommerce continues to grow very well, so we're assuming our drivers overall remain resilient and strong. On pricing, there are no material changes in our pricing assumptions. And as we said before, our new pricing goes into effect in the back half of the year. On incentives, we have no material changes. You may recall that Q3, 2025 represented the low point for incentive growth last year. And as we will be lapping that, we still expect a step-up in the incentive growth rate from Q2 to Q3. On volatility, it was higher than expected in Q2 and thus far into Q3. We are, therefore, bringing our assumptions back up to where we originally guided in October, with Q3 and Q4 more in line with where we exited in Q4 of 2025. On the expense side, largely due to the increased client demand for FIFA-related marketing services, we also expect low double-digit to low teens operating expense growth. We are investing further in marketing-related solutions that will generate incremental revenue around our activations in a high-yielding and profitable way. For example, after we set our budget for the year, we partnered with one client in Latin America with nearly 20 million cards to design FIFA campaigns, tying exclusive tournament experiences to everyday spend. And in just over 3 months since the launch of the campaign, the client reported a 10% lift in active cards, driving payments volume growth and Visa generated $10 million in VAS revenue for delivering these campaigns. And with the first match less than 45 days away, the FIFA campaigns should continue to deliver value to our clients, their customers and to Visa. Our expectation for nonoperating expense is now approximately $150 million as a result of the first half and our increased debt levels and interest rate estimates. We have no change to the range for our tax rate between 18% and 18.5%, although we do believe it will be closer to the low end of that range. This implies adjusted EPS growth in the low teens, also revised up from our prior outlook. For non-GAAP nominal expectations, our acquisitions add approximately 1 point to net revenue growth, approximately 1.5 points to operating expense growth and approximately 0.5 point to EPS growth. Moving to Q3 financial expectations, which again are on an adjusted basis. We expect Q3 net revenue growth in the low double digits. Consistent with the directional comments provided at the start of the year, this low double-digit growth should be the lowest growth quarter of the year. When compared to Q2 growth rates, there are a few dynamics at play. First, higher incentive growth as a result of deal timing and lapping of the low point of incentive growth in Q3, 2025. Second, lower volatility levels with a tough comparable versus the highest volatility quarter that we saw last year. And third, the second half weighted pricing going into effect, which will somewhat offset the first two factors. For those of you connecting the dots to the full year guide, this implies an approximately 1 point step-up in net revenue growth from Q3 to Q4, primarily driven by less of a drag from volatility and stronger marketing services-related revenue. We expect Q3 operating expense growth in the low teens, a slight step-up from Q2, primarily due to FIFA-related marketing. Non-operating expense is expected to be about $55 million. And our tax rate in the third quarter is expected to be around 18.5%. As a result, we expect third quarter EPS growth to be in the mid- to high single digits. For our non-GAAP nominal Q3 financials, Prisma and Newpay will add approximately 1.5 points to net revenue, and approximately 2 points to operating expense growth, and an approximately 0.5 point to EPS growth. As always, if the environment changes and there are events that impact our business, we will remain flexible and thoughtful on balancing short- and long-term considerations. To echo Ryan, we firmly believe in the future growth of Visa. We have a proven track record of delivering strong net revenue growth, driven by higher growth in both commercial and money movement solutions and value-added services, underpinned by consistent consumer payments growth, all with industry-leading margins. The opportunity across our entire business is significant, and we are executing against our strategy to capture it as is evident in the financial results that we're delivering. And now Jennifer, I'll hand it back to you. Jennifer Como: Thanks, Chris. And with that, we're ready to take questions. As a reminder, please limit yourselves to only one question. Operator: [Operator Instructions] Our first question comes from Tien-Tsin Huang from JPMorgan. Tien-Tsin Huang: Really strong revenue momentum here, sorry. Just thinking about Ryan and Chris, what you guys went through -- through a lot of notes. I think was the largest revenue upside that we've seen in 3 or 4 years, so just trying to disaggregate it. What were the biggest factors that drove the upside in the quarter? And how does that change your second half outlook exactly? I don't want you to rehash everything you talked about there, Chris, but just trying to maybe rank the top 2 or 3 things. Christopher Suh: Sure. Sure, Tien-Tsin. Yes, Q2, we had a very strong quarter. We're very pleased to see that, both net revenue and non-GAAP EPS coming in better than we expected. In terms of differences, I think that was your question versus what we had expected. The things that I would call out, again, are volatility. It was very low, if you recall, at the start of January when we set the guide and then it rose higher throughout the course of the quarter. It was still a drag year-over-year, but it was better than we anticipated. Secondly is our VAS business. We had strong growth again across all our portfolios. It was better than we expected, primarily due to greater demand for our network products, as well as marketing services. And then incentives grew at 14%, which was below our expectations for the quarter, primarily deal timing performance adjusted -- performance adjustments rather. In terms of our Q3 guide, primarily the difference, as I said, largely our assumptions around incentives, remain the same. The volatility was higher in the course of Q2, and we're anticipating that pulling through into Q3, and we're continuing to see strength across the breadth of the business. And so we're anticipating another strong quarter in Q3. Operator: Next, we'll go to Craig Maurer from FT Partners. Craig Maurer: I wanted to ask about the agentic commerce discussion earlier in the call. We've seen American Express step out there and take on the risk of a fraudulent agent transaction with -- and so I'm curious about are you -- how can you achieve something similar with a 4-party network versus a 3-party network, when it seems that issuers are going to have to buy in to whatever rule-making you decide on? Or are they going to be left to decide how they're going to deal with that risk? So any discussion there would be helpful. Ryan McInerney: Sure, Craig. And I appreciate the question. If I just start at the highest level, just as a reminder, this is all very early. And I think as the agentic commerce use cases and threat vectors start to mature, we'll adapt and evolve our capabilities and our rules, which you noted, as we have historically. You saw this with the evolution of eCommerce, you saw it with the evolution of mobile commerce. If a Visa cardholder experiences fraud, they're going to be protected. That's been part of the promise for Visa cardholders for a very, very long time. I would add to that, in agentic commerce, we're going to have more transactions that are initiated from authenticated tokens, which is good. Will further reduce fraud, will further protect the ecosystem. And the other benefit of agentic commerce is issuers and merchants are going to have more data on transactions. They're going to have data on user intent. They're going to have more data to include in the dispute processes and all of those types of things. So we're working very hard on it. And again, as all of this starts to mature and evolve, we'll evolve our rules with full buy-in from the entire ecosystem. Operator: Next, we'll go to Matt O'Neill from Bank of America. Matthew O'Neill: I'd love to follow up on some of these discussions as well around stablecoin and agentic. Specifically, could you just maybe take a step back and give us the high-level unit economic top-of-the house view? Are these transactions kind of accretive, dilutive? Or are you agnostic, but obviously very excited about the types of growth rates we're seeing in volume and a small but increasingly important base? Ryan McInerney: Yes. Thanks for the question. Again, I would orient here and go back to what I described in my prepared remarks, which is that we've positioned ourselves as a hyperscaling bridge layer sitting between this very powerful infrastructure, stablecoins and blockchain and on-chain payments in general, and real-world solutions, and real-world applications for users. So we're taking kind of the Visa as a Service stack, and we're engaging at all the different levels in the stablecoin stack and ultimately delivering these bridge solutions that have very similar economics to the products that we have today. So if you're an average Visa employee in Argentina and you're holding $1,000 in stablecoins in your wallet. And then like I said in my prepared remarks, you go use your Visa debit card issued on top of those stablecoins to go to the restaurant, to go buy petrol for your car, to go buy groceries for your families. The economics of those products look just like our normal products. So by investing in building this hyperscaling bridge layer, we're providing real-world utility for buyers and sellers, and we're doing that in the context of similar economics to what we deliver today. Operator: Next, we'll go to James Faucette from Morgan Stanley. James Faucette: I wanted to follow up on the agentic topic and specifically in the area of agent-to-agent transactions. I realize that a lot of these are very small and micro transactions. But wondering if you can talk about some of the capabilities of Visa and the Visa networks that you can deliver in those kinds of environments, and whether that be beyond just the transaction but providing trust, et cetera. And how we should think about the potential for that to be accretive or additive to the volumes that you do? Ryan McInerney: Yes. Thanks. we're very excited about all of it, and we feel extremely good about our position. I, kind of, emphasize one of the words you mentioned to go back to what I said in my prepared remarks, which is you look at our network, you look at our security and you look at the trust that our users, both buyers and sellers have in Visa. And all 3 of those are going to position us in a very strong way. There's a lot of talk around AI in general. And the limiting factors, if you will, or people talk about compute and they talk about power and they talk about data centers. I think the limiting factor for agentic commerce is trust. I think when we all think about ourselves as buyers and we all think about ourselves having agents go out and transact on our behalf, we are going to fall back on payment methods that we, as users, trust. And kind of go back to the way I was describing Visa cards in my prepared remarks, they're easy to use, they're broadly accepted. They're integrated into the transaction flow. They offer privacy. They offer sellers a way to manage liquidity in aggregate rather than funding millions and millions and millions of real-time micro transactions using stablecoins or something like that. They offer billions of issuer KYC users that are ready to go with these credentials, and they offer security protections if something goes wrong. And then you add to it that, in many cases, we all have cards that offer rewards and benefits. So when you think about yourself as a user, when you think about kind of who you're going to trust your agent to make payments on your behalf, whether those are macro transactions, average transactions or micro transactions, we feel really good about our ability to win those transactions for our users using all of those capabilities. Operator: Next, we'll go to Tim Chiodo from UBS. Timothy Chiodo: I want to talk about 2 programs, both that have something in common. They are allowing for reduced total cost of acceptance to merchants and also providing more data, or requiring the merchant to provide more data to Visa. And those are, of course, the commercial Enhanced Data program, or CEDP, and then the more recent introduction of the Digital Commerce Authentication Program or DCAP. So for CEDP and DCAP, they both have that reduced cost element and they also have the more data element. I was hoping you could expand upon the importance of these 2 programs for the payments ecosystem and what that data may mean to Visa? Ryan McInerney: Yes. Thanks for the question, and thanks for being so studied on our program. It's great to hear. And I think I bridged my answer for your question to the answer I was -- part of the answer I was saying earlier, which is a lot of the ways that we can add value as a network, as digital commerce continues to evolve, to both our merchant partners, our acquirer partners and our issuer partners is by creating enhanced data payloads so that our partners can use that data to, as I was saying earlier, run more efficient dispute processes, to run better risk programs, to make better authorization decisions, to help reduce fraud. And these two programs that you mentioned, CEDP and DCAP, both have those elements in common. We're able to use, kind of, our position in the ecosystem, whether it's in the case of CEDP, a commercial product platform that we've built, or in the case of DCAP, the tokenization platform that's been deployed, to deliver these types of data payloads, create incentive -- create incentives for players across the ecosystem to add that data to the transaction payloads and then create opportunities for people to use that data. I think that's what both those programs have in common. Operator: Next, we'll go to Bryan Bergin from TD Cowen. Bryan Bergin: I wanted to dig in on VAS and really the underlying strength that you noted here in the network assets and the marketing services offerings. It really seems like a switch kind of flipped here over the last 4 quarters just to carry the overall robust level of growth. So just key on what has worked so well there, and how you're thinking about the sustainability of those key contributors? Ryan McInerney: Yes. Thanks for the question. Let me broaden it to the widest aperture and then specifically hit your question on VAS. I think if you just take a step back, we laid out a very clear strategy to you all at our Investor Day a couple of years ago. We have worked very hard to create investments in the company, to invest ahead of those opportunities. Whether that's product solutions, sales force, go-to-market, new ways of running the company in order to drive the performance that we are looking at. And I think overall, what you're seeing is us executing that strategy along the lines that we all described to you. If I look specifically at VAS in that context, if you go back again, several years, we built out the VAS business units. We built leadership in the company. We built leadership teams. We built product road maps, and we've been deploying those products aggressively. We've been shipping new, especially AI-driven products in the issuing solutions space. We outperformed in the quarter in our AI-driven stand-in processing platform. We outperformed in our Visa supplier payment services platform. Those are two of the service -- issuing solution platforms. In the acceptance side of the business, our Visa account updater platform outperformed. That's one that allows merchants to automatically upstore credentials when you might have had fraud on your account and it was reissued or something like that. Look at our Risk and Security Solutions area, we saw outsized performance in VCAS, our Visa Consumer Authentication Service, or also in our VAA and VRM platforms, Visa Advanced Authorization and Visa Risk Manager. These are all products that we've been deploying in market, largely AI-driven products, and they've been driving broad-based out-performance across the value-added services portfolio. So a long way of saying, I think that's right. I think you're seeing the strategy working. We're executing the strategy, and you're seeing the results. Operator: Next, we'll go to Harshita Rawat from Bernstein. Harshita Rawat: I have a question on payments nationalism. We've seen this growing desire for countries to control their payments infrastructure, or at least have it locally. There have been some renewed discussions in Europe. I know this is not something new to you. You've worked through this in the past. But maybe share your updated perspective on payments nationalism outside the U.S. and how you're engaging with the government? Ryan McInerney: Thanks. As you would know, and read, and alluded to, we're spending real time on it, but we've been spending real time on it for a while. Nationalism and sovereignty concerns are not new for Visa, whether it's in Europe, to your point, or more broadly around the world. And if you just think about it, payments are an inherently local thing. Like they're critical to work the way that they need to work in every country we do business around the world. And national sovereignty considerations are a long-standing feature of the payments landscape. We've been dealing with these issues for decades. We -- in all of our key markets, we operate with local teams, local infrastructure, local partners to navigate the regulatory, political and market-specific requirements of any given country or market. And that's as true in Europe today as it has been, and it's as true in other markets as it has been. If I just, I guess, comment specifically about a couple of things in Europe. First, we are deeply committed to Europe. We have a long-standing presence there across 38 countries. We've got, I, think it's, 29 offices. More than 6,000 employees in Europe. The business itself is very strong and growing. We've been adding cards and winning business. We added nearly 30 million cards in the last year or so. And we told you all that we were going to bring on another 30 million cards because of wins that we've already closed over the coming year. So we're winning. And I think that's because buyers and sellers in Europe really value the Visa network, the Visa brand, the Visa trust. There's been a long-running set of initiatives in Europe, some of which have gotten more traction than others. For those that have gotten traction, there is a pretty wide base of domestic digital payment wallets in Europe that I think have had good uptake, especially in the account-to-account, but more so in the person-to-person space. And then you've got the long-running story of, I think, what was first PEPSI and then EPI and now Wero, and then you add the digital euro to that as well. Our expectation is that there's going to be more competition in Europe, not less, just like we see around the world. We're going to continue to, kind of, deliver what we do and do the best job we can. And as a result of that, hopefully continue to win more than our fair share. Operator: Next, we'll go to Darrin Peller from Wolfe Research. Darrin Peller: Chris, one for you is just if we can dissect how much of the VAS strength is driven by the World Cup versus sustainable drivers? And then, Ryan, when I think about VAS again, you talked a lot about the -- all the different services you're providing. Have you seen a step function in demand for your fraud protecting services? We've heard about a lot more fraud instances given AI and bots and others being used. I'm just curious if you're seeing that directly impact you guys in terms of demand for the products? Ryan McInerney: Yes. Why don't I go first and then Chris, you can fill in. And the short answer is yes. We've really -- we've seen more demand across the board for our fraud products. And I think that's a signal of two things. One is the environment that we're living in. When I go talk to CEOs of clients around the world, whether they're issuers, acquirers or merchants, fraud is a top 3, top 4 concern for them. And that just wasn't the case several years ago. And fraud broadly defined, whether that's cyber or more traditional payments fraud, enumeration attacks and everything in between. And it costs them on the bottom line. It ultimately creates bad user experiences, and there's a high demand for services. And then second, they view us as their most trusted provider for these types of services. And we've been able to put products and services out in market that are performing at much higher levels than the market has seen. One example, I think I mentioned in my prepared remarks is our own Visa LLM that we've built based on billions of our own transactions, our own foundational model for payments, that we're now using to fuel a lot of these models and solutions. And it's having 2, 3, 4, in some cases, 5x improvements in value capture. So yes, we're seeing a lot of step-up in demand for those products and services. Christopher Suh: Darrin, I'll just add on, just to dimensionalize that a bit. As Ryan talked about, we're seeing very broad-based strength across all the portfolios. And while we do anticipate seeing accelerated marketing services growth this year with the Olympics and with FIFA, that doesn't take away from the growth that we're seeing across all the portfolios. In Q2 specifically, I talked about network products being one of the drivers of the out-performance. And so we are continuing to see strength. And specifically with regard to marketing services and the durability of that, obviously, when there's a big event, we tend to see strong growth. But it's also a business that we see -- we're quite optimistic about. As you know, it deepens our client engagements and in turn, helps their clients grow their Visa business with us. And so there's a good flywheel at work, and we think clients are definitely interested in engaging with us in it. And so that's a business that we'll continue to see -- be strong as well. Operator: Next, we'll go to Andrew Bauch from BMO Capital Markets. Andrew Bauch: I wanted to hit on the VAS, kind of, margin dynamics. You emphasized marketing and other value-added services growing at attractive profitability. And as we think about VAS as it becomes a larger share of revenue and scale, how should we think about incremental margins relative to Visa's historical network margins over time? Christopher Suh: Yes. Yes. Let me try to parse that apart a little bit. I mean the first thing I'd point to is obviously looking at the facts, meaning looking backward at history. Now we've grown our value-added services business to be 30% plus or minus of our business. And we've done so while preserving the overall margins of Visa, and it's grown across a number of portfolios. Now as you point out, though, I think embedded in your question, there are different margin profiles within those different business portfolios, and we're continuing to see strong growth across all of it. The important thing on the marketing services that we're seeing this year is the point that I made to the last question, which is there is definitely a profitable business. It's incremental revenue and incremental profits to Visa, but there's also this flywheel where as our clients continue to grow faster, they continue to drive volumes and drive spend back to Visa, and that's good for both of us, frankly. And so that's a flywheel that we've seen and proven to work. And so when we look at the totality of the business, we continue to be really disciplined about our expenses across the entire breadth of our business, and we continue to be really enthused about the opportunity in VAS. Operator: Next, we'll go to Bryan Keane from Citi. Bryan Keane: Congrats on the awesome results. Looking at the cross-border growth chart, Chris, can you help us quantify the impact of Ramadan in the Middle East? I guess it looked like March, it spiked higher, which I guess is a surprise given what's going on in the Middle East. And then the month of April year-to-date results, it comes back a little. And I'm just trying to figure out when we net this all out, some of these onetime impacts with maybe a lingering impact in the Middle East, what should we put together for our models for cross-border in third quarter? Christopher Suh: Sure. Yes. Let me talk to that. Our cross-border business has been and remains strong and healthy. Even with the latest data that you referenced, the April data, where cross-border had ticked down 1 point to 9. If you normalize for Ramadan timing, it's impacted -- that April data is impacted by Ramadan timing and the Middle East conflict. And if you normalize for Ramadan timing, it will be back to February levels. Why is this? As we've spoken to many times, our cross-border business is very resilient. It's well distributed. And while there is some impact in the Middle East as we saw in Q2, and we do expect to see in Q3, we've seen that there's offsetting factors, strength in other regions, other parts of the business. For example, we're expecting an increase in inbound volumes in the U.S. and Latin America given the enthusiasm for the upcoming World Cup. We're lapping a low period of U.S. inbound a year ago and commercial volumes continue to be stronger. And also, I should point out, cross-border eCommerce has been stronger than travel and is a bigger share of cross-border volumes today. So all considered, whether it's cross-border or frankly, across our entire business and payments volumes, we continue to expect our drivers to be healthy and strong, and that's what's embedded in our expectations for the rest of the year. Operator: Next, we'll go to Jason Kupferberg from Wells Fargo. Jason Kupferberg: So I wanted to tie together some things we already talked about on the call, particularly related to VAS and obviously, the CMS business performing really well. Also, we think back to the Investor Day last year, the medium-term outlook we were talking about was 16% to 18% growth combined for VAS and CMS. Clearly, you're well ahead of that now. You're in the mid-20s range. Olympics and FIFA may be helping a little bit this year. But just should we be recalibrating our multiyear view on how fast these businesses can collectively grow? Christopher Suh: Yes. So we don't -- first, I'll just start with the caveat that we don't guide to growth pillars. We are seeing terrific performance momentum, execution across both those growth pillars. We talked about VAS extensively. I won't sort of rehash all of that. I will talk about CMS a little bit since that's new. The 24% revenue growth this quarter is higher than we've seen in recent quarters. I did note in my prepared comments that some of that out-performance this quarter was related to adjustments and deal timing as well as pricing. And so while the underlying fundamentals remain very healthy. We don't anticipate some of those onetime items to reoccur. But that doesn't take away from the strength of the business across both VAS and CMS as well as, frankly, the strength in our consumer payments business. So we're really enthused about the overall -- the strength of the business across the broad portfolio, and we'll continue to focus on executing against our longer-term growth aspirations. Operator: And for our final question, we'll go to the line of Sanjay Sakhrani from KBW. Sanjay Sakhrani: Ryan, congratulations on your Wells Fargo relationship signing at Pismo. That seems to be a meaningful add in the U.S. I'm just curious, one, how should we think about the monetization strategy? Is that like a VAS revenue addition? Or is it in other areas? And then secondly, do we see more of these large bank types as a target opportunity for Pismo? Ryan McInerney: Yes. Thanks for the question. On the answer to your question around the geography in the P&L, I think Pismo -- well, I'm going to leave that for Chris. So I'll let Chris take that in just a second. When we talked about buying Pismo, I shared our thesis for why we were buying Pismo. And it was two things. One is when we had been talking to the leaders of our large financial institution clients around the world, there was a common theme. They were all preparing to embark on a platform modernization strategy, often involving a migration to the cloud. And that -- we identified that as a structural shift, almost like a moment-in-time opportunity for the entire industry around the world. And then the second part of the thesis was there were a lot of issuers, especially fintech issuers that were trying to expand geographically, especially into emerging markets. And there wasn't an issuer processing stack that was cloud-native, modular and had the ability to scale geographies quickly. And those were our two thesis. And so far in our journey with Pismo, they're both playing out. And what I said at the time is we had scoured the earth to find the best cloud-native, modular API-driven stack that we could put to work against both those thesis. So to your question about Wells Fargo, this continues to be a need for large financial institutions around the world. We continue to believe that Pismo is the best platform out there, both for core bank or for issuer processing stacks as our issuers kind of make this migration. And we're very proud of the partnership I mentioned with Wells Fargo, but we're also hard at work working with other potential clients around the world and hopefully have more to share with you over time. Christopher Suh: And then in terms of where we report Pismo. Pismo Is considered VAS. We report it as VAS, and it shows up in revenue in the other revenue line. Jennifer Como: And with that, we'd like to thank you for joining us today. If you have additional questions, please feel free to call or e-mail our Investor Relations team. Thanks again, and have a great day. Operator: Thank you all for participating in Visa's Fiscal Second Quarter 2026 Earnings Conference Call. That concludes today's call. You may now disconnect, and please enjoy the rest of your day.