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Operator: Good day, ladies and gentlemen, and welcome to the Amkor Technology First Quarter 2026 Earnings Call. My name is Diego, and I will be your conference facilitator today. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Jennifer Jue, Head of Investor Relations. Ms. Jue, please go ahead. Jennifer Jue: Good afternoon, and welcome to Amkor's First Quarter 2026 Earnings Conference Call. Joining me today are CEO, Kevin Engel; and CFO, Megan Faust. Our earnings press release was filed with the SEC this afternoon and is available on the Investor Relations page of our website, along with the presentation slides that accompany today's call. During this presentation, we will use non-GAAP financial measures, and you can find the reconciliation to the comparable GAAP financial measures in the slides. We will make forward-looking statements today based on our current beliefs, assumptions and expectations. Please refer to our press release for a disclaimer on forward-looking statements and our SEC filings for a discussion on the risk factors and uncertainties that may affect our future results. I will now turn the call over to Kevin. Kevin Engel: Thank you, Jennifer. Good afternoon, everyone. Thank you for joining us today. Amkor delivered a strong start to the year, achieving record first quarter revenue of $1.68 billion, up 27% year-on-year. We saw growth across all end markets, and we're encouraged by the breadth of demand we're seeing across our technology platforms. Communications delivered the strongest growth and mainstream posted its fourth consecutive quarter of both sequential and year-on-year growth. Leading chip companies continue to trust us for their advanced packaging and test needs. We are clearly benefiting from our partnerships and our leading technology as we execute on a growing set of advanced packaging programs. Earnings per diluted share were $0.33, significantly higher than last year, reflecting disciplined execution, and continued progress on our margin initiatives. Overall, this was a quarter that reflected momentum in demand, disciplined execution by our teams and continued preparation for the advanced packaging ramps we expect in the second half of the year. As we discussed last quarter, overall semiconductor demand is robust. The industry backdrop remains dynamic. We are closely monitoring export controls and evaluating trade policies. We see supply dynamics around advanced silicon, advanced substrates and memory and are managing these risks with agility alongside our customers and suppliers. Some customer supply materials are being delayed, causing nonlinear loading. This has been expected, and we are prioritizing production where materials are available to minimize impact. Uncertainty related to the geopolitical events in the Middle East have increased over the last few months. To date, we have not seen any supply disruptions related to these dynamics. However, conditions in the region are putting additional pressure on material pricing. We're working closely with our customers to offset these increases across the supply chain. Now let me share an update on our strategic initiatives. First, elevating technology leadership. We continue to invest in advanced packaging platforms, including HDFO, flip chip and test. These are critical to next-generation AI and high-performance computing. As discussed last quarter, we are engaged on several HDFO programs this year and the newest data center CPU program is expected to begin ramping this quarter. Our preparations in Korea remain on track to scale this program into high volume in the second half of the year. Overall, we see increasing opportunities for the compute market from a diverse customer base. Second, expanding our geographic footprint. In 2026, our priorities include meeting construction milestones of our Arizona facility and expanding manufacturing space in Korea. In Arizona, we are excited to see the progress as we wrap up foundation work and move towards building steel construction. Construction of Phase 1 is planned to be completed in 2027. In Korea, the new test building is on track for completion at the end of this year. This will provide incremental space to support data center demand going into 2027. Third, enhancing our strategic partnerships in key markets. We continue to strengthen collaboration with customers across the ecosystem, including foundries, fabless companies, IDMs and OEMs. As part of our partnership engagement model, our customers are making contributions that help align technology road maps, support our capital investment and enable rapid ramps as new capacity comes online. Across all 3 pillars, we remain focused on margin improvements driven by operational excellence, increased utilization, favorable pricing and a sustained mix shift towards higher-value advanced packaging. Our mainstream factories in the Philippines are seeing improving demand, and we're continuing to optimize cost in Japan. Utilization of our advanced sites in Korea and Taiwan is increasing, improving profitability. In just over 3 weeks, we will host our 2026 Investor Day. This will give us an opportunity to provide a deeper view into our strategic pillars. We will explain Amkor's position as the semiconductor industry turns to advanced packaging for value creation. We are well positioned for this shift, and we are at the beginning of a multiyear value creation journey. We're excited about our future. We look forward to sharing more of our story at the event on May 21. I'll now turn the call over to Megan to provide more details on our first quarter performance and near-term outlook. Megan Faust: Thank you, Kevin, and good afternoon, everyone. Amkor delivered record first quarter revenue of $1.68 billion, increasing 27% year-on-year. Revenue was above the midpoint of guidance, driven by stronger-than-expected performance across all end markets, except computing, where we saw softness in PCs and laptops. The communications end market was the largest contributor to our year-on-year growth, increasing 42%. We saw healthy demand across premium tier smartphones, especially iOS due to our strong footprint in the current generation. Android demand also remained healthy. For the second quarter, communications revenue is expected to be stronger than seasonal increasing mid- to high single digits sequentially, driven by continued strength in the iOS ecosystem. Revenue in the computing end market increased 19% year-on-year. Record revenue within AI data center applications was driven by broad-based strength across multiple customers. This was partially offset by softness in PCs and laptops. Computing is expected to grow mid-single digits sequentially in the second quarter, driven by the ramp of the new HDFO data center CPU device that Kevin mentioned. Automotive and industrial revenue increased 28% year-on-year. ADAS and infotainment demand drove record revenue for advanced technology in this end market. The recovery in the mainstream portion of automotive and industrial continued with Q1 marking the fourth consecutive quarter of sequential growth. Revenue within the automotive and industrial end market is expected to grow mid-single digits sequentially in Q2. Consumer revenue increased 4% year-on-year due to broad-based improvement in demand across customers. Revenue in Q2 is expected to grow low teens percent sequentially driven by wearable products. Gross margin of 14.2% exceeded the high end of our Q1 guidance range primarily due to favorable product mix. Gross profit for the quarter was $239 million, up 52% from last year due to increased volume and focused cost management. Operating expenses were $139 million for Q1. Operating income was $100 million, and operating income margin was 6%, an improvement of 360 basis points year-on-year. Our effective tax rate for the quarter was 12.8%, lower than our full year target of 20% due to discrete tax benefits recognized in the quarter. Net income was $83 million and EPS was $0.33, EBITDA was $285 million and EBITDA margin was 16.9%. As we have grown revenue by delivering high-value advanced packaging technology to our customers, we are benefiting from the operating leverage in our model. In addition, our actions to structurally manage costs are showing up in our results, demonstrating our ability to drive sustained margin improvement. As of March 31, we held $1.8 billion in cash and short-term investments and total liquidity was $2.9 billion. Total debt was $1.4 billion and our debt-to-EBITDA ratio was 1.1x. Our strong balance sheet provides the financial flexibility and liquidity for this next investment cycle. Now turning to our second quarter outlook. Building on the strong momentum in the first quarter, Q2 revenue is expected to be between $1.75 billion and $1.85 billion, representing a 7% sequential increase at the midpoint. Gross margin is projected to be between 14.5% and 15.5%. We expect operating expenses of approximately $120 million which includes a gain on the sale of real estate of approximately $20 million. Our full year 2026 effective tax rate is expected to be around 20%. Net income is forecasted to be between $105 million and $130 million, resulting in EPS between $0.42 and $0.52. Our 2026 CapEx estimate remains at $2.5 billion to $3 billion. As a reminder, 65% to 70% is projected for facilities expansion, including Phase 1 of our Arizona campus. About 30% to 35% is projected for HDFO, test and other advanced packaging capacity. The remaining spend is projected for R&D and quality programs. We anticipate elevated CapEx spend for facilities expansion through 2027 as we complete Phase 1 of our Arizona campus. At that point, we will begin recognizing depreciation and other start-up costs as we build and train the workforce ahead of production in 2028. Similar to our Vietnam ramp-up phase, these preparation costs will be recognized in OpEx until programs are qualified for production at which point they will transition to cost of goods sold. As a result, we anticipate this will start to dilute operating income margin by approximately 1% to 2%, beginning in 2027 and improving in 2028. Once at full scale, we expect Arizona will be a significant driver of operating income margin expansion reflecting the benefits of high-value advanced packaging at what is planned to be our most automated factory. To wrap up, we are pleased with our first quarter performance. and the momentum we are building in 2026. We remain confident in the full year outlook we provided last quarter, with revenue growth driven by acceleration in computing, and strong growth in advanced automotive. Our focus and discipline as we execute on our strategic pillars positions us well to continue generating improved financial results and sustain shareholder value. I would like to emphasize Kevin's remarks regarding our upcoming Investor Day. We are embarking on a multiyear value creation journey, investing today to drive materially stronger earnings power in the future. We look forward to sharing more with you at our event on May 21. This concludes our prepared remarks. We will now open the call up for your questions. Operator? Operator: [Operator Instructions] And our first question comes from Jim Schneider with Goldman Sachs. James Schneider: Given your commentary on some of the customer supply materials being delayed as well as some pricing pressure that you expect could happen. Can you maybe kind of discuss what on-net you expect to happen in terms of gross margins in the back half of this year? I mean it seems like there are some things very much in your favor, increased loadings, better mix. Maybe talk about from the Q2 baseline you just guided to what the sort of puts and takes are in terms of net impact on gross margins in the back half? Kevin Engel: So maybe let me -- and thanks, Jim. So let me start maybe with a little bit more detail on the material supply dynamics, and then Megan can cover the margin and profitability perspective. So I think when we look at the materials, obviously, we've highlighted that memory, advanced silicon, substrates, we are seeing dynamics there. Different -- slightly different dynamics. I'd say the one that we were able to kind of really see from a supply perspective is the advanced silicon. Sometimes when it comes to memory, we're not quite sure how customers are moving demand around depending on their supply, but we definitely see that from advanced silicon. So basically, what dynamics going on there is we have these situations where there's forecasted material, the wafers or the memory doesn't show up. And then we luckily we're in such a demand profile situation such that we have other material that we can typically load, so we haven't really seen a utilization impact, but that is creating a dynamic to where some of the demand is getting pushed forward. So we're definitely seeing that. And overall, we feel that this supply dynamic for Q2 will be similar as Q1. And we'll continue to manage that way. But Megan, can you talk a little bit about the margin profile? Megan Faust: Sure. So given that environment, we're also in what we would say a constructive pricing environment. So we have been working with our customers to manage some of these pricing pressures. So considering that aspect, we expect that would cover most of those cost increases. So as we look out to the second half of the year, we're still seeing our gross margins being able to rise in that mid- to high teens level given the increase in utilization as well as the ramp expected for our compute segment surrounding the data center. That will have a favorable impact on product mix in addition to that being more high-value advanced packaging. So those 3 elements, pricing, utilization and product mix are all going to support that lift in the second half. Kevin Engel: Yes. And maybe let me add a little bit more on pricing to give you a little color there. So when we go back to Q1, we started some pricing activities then that was early on focused on Japan. We had talked about some of the dynamics for Japan in the past. But what we've been doing over the last quarter is we're working with most, if not all, of our customers to look at pricing dynamics throughout the course of the year. I think, in general, customers understand that the environment is such that costs are going up, and we're seeing some ability and willingness from customers to help us in those dynamics. So we expect to see pricing will kind of increase as we go throughout the year. So that will just help offset some of these cost increases that we're seeing on the material side. James Schneider: That's great color. And then just to clarify, in terms of the computing ramp you're expecting in the back half, should we expect that to inflect in Q3? Or is that more of a kind of Q4 weighted event? Kevin Engel: So it's going to continue to ramp throughout the year. I'd say the ramp, specifically for the CPE device will start this quarter, but we'll start seeing meaningful revenue contribution in the third quarter and then just continues to ramp beyond that even going into 2027 and beyond. Operator: Your next question comes from Ben Reitzes with Melius Research. Benjamin Reitzes: I wanted to clarify your comments around the 1- to 2-point hit that comes at some point in 2027 due to the ramp of, I believe, Arizona. And when exactly should we think about that timing to [ op in ]? And then how should we be thinking about the offsetting revenue impacts there? Because I assume that there's quite a bit, but I'm not sure what -- if it hits right on time or if there's a delay. And I know you only guide 1 quarter at a time here or not that far out, but I'm wondering how you would advise us to model that as we look into '27, which is going to be a really strong year for the space. Kevin Engel: Yes. So thanks. Megan will go through a little bit of the details on the timing. I wanted to kind of step back a little bit and give you our color here. We wanted to make sure that the investment community understood the way we were looking at the dilution and the cost impacts. And part of that is thinking about obviously the building depreciation versus the equipment depreciation. And obviously, the equipment depreciation cycle is only a 7-year cycle. So that will have a larger impact as we really bring in equipment. So we wanted to just make sure that the investment community understood these dynamics and understood the timing and then, Megan, can you give me some more color there? Megan Faust: So Ben, as far as the exact timing for when in 2027, that's expected to hit, it's a bit too early. Our estimates can shift based on the timing of equipment delivery as well as the speed of qualification process. So as a reminder, this impact is really following the same framework as what we experienced in Vietnam, where those costs will begin in OpEx. And then once we call our first program, those costs move to cost of goods sold, and then those will be in margin. So as far as that 1% to 2% impact on operating income margin that was anticipated to be a full year impact based on our estimate of currently when we believe those costs will begin. And then we see that improving in 2028, which is when we're going to start scaling. And that leads to your second part of the question. We will see some modest revenue in 2028. That will then scale in 2029, where we believe exiting '29, we will have meaningful revenue such that moving into 2030, we would experience the full impact from the Arizona facility. And all that obviously is subject to customer qualification, et cetera, but that's what our current plan shows. Benjamin Reitzes: Okay. And then just with regard to the CPU ramp. This is a new product and whatnot. You've talked about it being higher margin. How should we think about -- you already mentioned, Kevin, that it's going to sustain and get bigger in '27. Do you see a strong pipeline for the CPU business, both ARM and maybe even x86, and just how would you characterize that win? Is it the first one? Is that the only one you have visibility on? Or is this a category that could become a meaningful contributor even beyond the big one that you got? Kevin Engel: Yes. Thanks for that. I would say, in general, strong tailwinds, obviously, the one device that will ramp first, we see a lot of opportunity there. Again, really ramping even beyond 2026. Other customers, we are engaged. So there are other activities going on there even in some of the more advanced package types, kind of again, kind of looking more into 2027 for the more advanced packages. But if we look at our -- this HDFO platform in general, whether this is a SWIFT technology, similar to TSMC's CoWoS-R or whether it's CoWoS-L, Amkor's S-Connect technology. The customer engagements are broadening. So those platforms now we have over 5 customers that we're engaged with, different levels of qualification. And then obviously, just to go back to the 2.5D, the silicon interposer type technologies. Again, while we're ramping down the legacy volume customer, we continue to see more customers engaging there. So that customer base, we had talked about before being half a dozen, I would say, we're over half a dozen now. So across that whole platform, that's where we're really looking at the -- when we look at our investments in equipment for this year, vast majority of that investment is going into these types of platforms in Korea and then some of the other wafer-based activities in Taiwan. Operator: Your next question comes from Randy Abrams with UBS. Randy Abrams: Yes. Okay. I wanted to ask a follow-up question on your loading level. Was it picking up across mainstream events. If you could give a sense of utilization or headroom to grow to take on projects both in Korea, Vietnam, just ahead of Arizona. And then if we look at the Phase 1, it looks like it adds about 10% to your network in terms of floor space. Should we think that's approximate revenue power or doing advanced packaging, should we take a different approach to revenue as you bring on Arizona? Kevin Engel: Okay. Yes. Thanks, Randy. So first, utilization. So at a high level, our Q1 utilization was in the low 70s, and if you compare that to Q1 last year, we were in the 50s, so pretty significant improvement year-on-year. When we think about Q2, we'll still be in the 70s. It will be a slight improvement, but a little bit of an increase from Q1. And then when we kind of think about how that split, I think, we talked about this a little bit last quarter. The advanced lines are filling up. And some of these areas, are getting to levels of high utilization. And then we still have some factories more on the mainstream side where utilization is low. I think we're seeing improvements in the Philippines and mainstream, but some other factories where we have some additional space to improve utilization. Then when we think about these more advanced programs prior to the U.S. factory coming online. For Korea, space is something that we're monitoring very closely. You may recall, we're building a new facility there now. That facility will be completed at the end of this year. So that will give us some headroom going into 2027 to continue to ramp. And then when we look at Vietnam, we talked a little bit about this in the past. We're migrating some of our SiP products from our Korea facility over to Vietnam. That will help provide additional room in Korea and then we'll also obviously improve our utilization in Vietnam. So we have continued room in Vietnam to grow from a space perspective. That building, we even have some clean room space that's yet to be facilitated. So we have headroom there. And then just to summarize again, Korea, we're expanding aggressively. I think that's an area where we see just a tremendous amount of demand going through this year and into next. Randy Abrams: Great. I appreciate the color on that. And then for the Arizona, maybe just a follow-up to the first question, Arizona, if you could run through a bit on the scale that could add? And then the second question I wanted to ask on the -- just a bit more on the computing. I think one side with the traction that Intel seeing on EMIB, if you could talk about opportunity, timing or potential to take on either foundry or internal business. If that's an opportunity. And then just curious a bit more on the CoWoS-L or S-Connect, how that's coming together with a lot more projects seem to be moving in that direction. Kevin Engel: Okay. Okay. Yes, Randy. So for Arizona, you're thinking right. I think we had mentioned roughly from a revenue perspective, we can be in the $1 billion run rate kind of range about 10% of our 2025 revenue to over 10%. So I think you're thinking around the right levels. Then when it comes to EMIB, I don't want to talk too much about that. Obviously, we had talked about how in the past that there is a collaboration with Amkor and Intel related to providing some additional outsourced modeling for EMIB, I'd say that activity is continuing. I don't think I want to go too much more into detail there. And then on the CoWoS-L, as I mentioned a little while ago, we do have 1 CPE product that we're working on with our customer. I think I would say we're still a little bit early in the development cycle with that customer, so it's going to take some time. I would say that's more likely a 2027 discussion. But because of this, the constraints in general in the supply chain and in the packaging space, these customers are very motivated to try to move as quickly as they can to develop these new technologies new supply chain options. So we really feel that's a positive benefit for us. Operator: Your next question comes from Peter Peng with JPMorgan. Peter Peng: Just on your advanced -- AI advanced packaging, I think last quarter, you mentioned that it can grow year-over-year. To what extent is that a demand number? Or is that a supply constrained number? I just want to get a sense of how much you guys can improve that number over the course of this year. Kevin Engel: Okay, Peter. So yes, I'd say we're still on track for tripling. I'd say the opportunities are there to grow beyond that. I'd say there are several dynamics that can affect it. Like you said, potentially silicon supply, memory supply, also just our ramp profile. Obviously, we're bringing in equipment as rapidly as we can to support these ramps. So I think either one of those could affect it. We'll see how the year progresses. But I think at this point, we're still very confident in that tripling. Peter Peng: Got it. And then I think last quarter, you guys mentioned that the compute is going to grow 20% and then the high end of the automotive is going to grow pretty strong and then rest of the business is kind of this low single digits. But if you kind of look at your communications, right, you guys are setting up for a strong growth. So one is, do you still see low single digit as a reasonable assumption for the remainder of the business? And if so, does that imply that you guys are probably baking in some sort of deterioration in your communication markets for the second half of the year? Kevin Engel: Yes. So I would say, if we look at communications today, a little bit stronger than we were thinking last quarter. So I'll say that. I think we guided single digits. I don't know that we've said low or mid, but we said single digits. I'd say now we're feeling a little more confident that, that market is going to be higher into low double digits. So I think that's positive. We are obviously looking at first half versus second half, the dynamics there. Typically, that second half lift is very high. We're anticipating potentially a slightly less boost in the second half related to that this was a very strong cycle we're coming off of the first half. We're seeing a little bit of strength, a little bit more than we would have anticipated. So we're a little bit hesitant to say that the first half, second half dynamic will be the same for this year. Operator: Your next question comes from Craig Ellis with B. Riley Securities. Craig Ellis: Yes. Kevin, I'll start with one there and just dig a little bit deeper into what you guys are seeing. So I think, in the data that we track, it sure looks like the supply chain built above seasonal for both smartphones, mid- to high end and PCs mid- to high end through the first quarter and our read is that, that's persisting in the second quarter. And some of that relates to memory and other component availability and there are some other things that are at play. So the question is this, can you quantify the extent to which the communications business, it may be tracking a little bit better and are you hearing any concerns from your customers about the build intensity in the back half of the year. And I was a little bit surprised to see that notebooks weren't a little stronger. Intel's client computing group comes to mind as an area of strength there. Is there something programmatic that's happening inside of that business? Or what do you see going on? Kevin Engel: Okay, Craig. I'll actually start with that one, and I'll ask Megan to help me a little bit on the communications side. So on the PC, yes, I'd say there's something a little bit different going on there. If we look at the unit volumes that we're seeing from the customers that we're supporting, it's still holding in there. So we've talked in the past about how the transition to ARM-based PCs, how more of a preference towards a premium tier that we think that will buffer us somewhat from the material constraints. And I'd say we're seeing that. One of the biggest dynamics that we're seeing is we have a customer where they were rebalancing their supply chain a bit and so we saw increases in a different market and then slight decreases in the computing in the PC space. So overall, that customer is growing significantly, but they decided to prioritize a slight different market. So I'd say that's a bigger dynamic than actual PC unit volume. So I definitely don't want to signal that we're seeing strong PC sales. So that's the first one. Megan, can you comment a little bit on comms? Megan Faust: Yes, Craig. So if I understood the question around comms, I mean, we did -- we are seeing both with our Q1 actuals and our Q2 guide the communications market coming in stronger than we expected last quarter. And just to reiterate Kevin's comments about the full year shape for comms because of that strength coming off a very successful last fall launch, we don't anticipate that the second half growth over the first half will be as pronounced because we see the first half being, I'm going to say, much stronger. And then for the full year, we do see a better outlook on comms rising into the high single-digit plus. Did that answer your question, Craig? Craig Ellis: Yes, it does. And then the follow-up, I'll direct to you, Megan. So we're looking for $2.75 billion in CapEx this year. It looks like we spent about $275 million in the first quarter. So how should we think about the linearity through the year with the balance of the CapEx investment? Megan Faust: Yes, sure. So the first quarter came in a little bit lower than what we were expecting. I will point you to the balance sheet. Our CapEx payable did increase $200 million. So that's really just timing of when those payments will be made. But as far as the shape of the year, it looks like it's going to be more of a 30% first half, 70% second half year for CapEx. Operator: Your next question comes from Denis Pyatchanin with Needham & Company. Denis Pyatchanin: I think sort of maybe partially answered in the previous question, but maybe for your end markets, could you please like rank order the expected growth or visibility going through the rest of 2026. And for all of these end markets are high memory prices showing any impact on demand at all? Kevin Engel: Okay. Thanks, Denis. So we don't want to start. So if we look at the -- trying to rank them a little bit. So the compute segment or market, as an example, we're still seeing plus 20% in that kind of a rate for the full year. Again, a couple of things there. As we mentioned, tripling on the advanced side for the data center and then muted on the PC side related to the dynamics we just spoke about. For auto industrial, we had talked about pretty strong growth there, definitely on the advanced side, a little bit modest growth on the mainstream. So that's the wire bond type packages and again, what's going on there, the dynamics you're aware of, increases in ADAS, in car computing, those types of applications. And then the more traditional drivetrain type of CPU, those types of products, they're just a little bit more muted, but at least recovering. Then when we look at the rest of the market, we had signaled again single-digit growth. We've been talking about how comms is looking a little bit better, potentially approaching double digits. So we feel better there. But in general, still a lot of different dynamics. It's hard to gauge how memory is going to impact things. I'd say a lot of customers obviously are talking about memory, prioritizing, looking at different supply chain options -- optionality for them. But in general, we're still seeing pretty strong demand. If we look at impacts related to material supply. I would try to give that a range of around $50 million to $100 million for and again, that likely is just a pushout of materials, and then we would expect a similar level in Q2. But again, we'll see how that develops over time. Denis Pyatchanin: Great. And then regarding the operating margin impact from the Arizona facility, maybe so if we look at the positive side going into 2028, how big of an impact can we expect there? Like what are your expecting CoWoS product margins? Are they significantly higher than the current corporate average? Maybe like on a related note, what are we thinking about the financing mix for the overall $7 billion outlay. Megan Faust: Sure, I can take that. So as far as the business that we are operating in our Arizona facility, that will be at a, I would say, meaningfully higher than our corporate average. So as far as impact on '28, we don't want to give too much detail here. We'll save that for our Investor Day and long-term outlooks. And then your second part of that question was about funding. So we had outlined a $7 billion investment for the 2 phases in Arizona. We have several, I would say, opportunities to help fund that. Just as a reminder, we do have government incentives in the form of chips grant funding of $400 million as well as the 35% investment tax credit. So together, that's a pretty meaningful support of $2.8 billion. In addition, we are working with our customers on different forms of support. And so that is a second part. We have some that have been executed and others that are currently in discussion. And then on the Amkor side, we have quite a bit of liquidity. We have, I would say, debt capacity. And so we're evaluating what we may need to do there as well in the future. But as far as our 2026 investments, our current liquidity provides ample flexibility for us to manage that. Operator: Your next question comes from Joe Moore with Morgan Stanley. Joseph Moore: You talked about export controls as a factor you're considering. Can you talk about what the variables might be there? Is that more around the AI-centric stuff or anything else that we should be aware of? Kevin Engel: Joe, I think what we were trying to signal more there was around pricing that basically between -- so -- well, I guess, 2 dynamics. One related to the Middle East and what's going on there. And as oil prices continue to rise and just commodity pricing in general, whether it's precious metals, things like that. Those are putting pricing dynamics in play for our suppliers. So that's one dynamic that we're watching very closely. And then the other one is just in general, whether it's trade discussions going back and forth between the U.S. and China related to different AI products. But I'd say that is at least become more normalized now for us. So we see the demand in fluctuations, but for us, there's -- whether it accelerates from a restriction perspective, or it loosens, I think, we're ready to kind of balance that. It's not a not a dynamic that has a huge impact on what we're looking at today. Operator: Thank you. And at this time, I'm showing no further questions. I would like to turn the call back over to Kevin for closing remarks. Kevin Engel: Thank you. Now for a recap of our key messages. Amkor delivered a strong start to the year, achieving record first quarter revenue of $1.68 billion, up 27% year-on-year, with growth across all markets. Utilization is improving, even as material supplies are constrained in the industry. Over the past couple of quarters, we have been preparing for growth in our advanced packaging portfolio. We are ready to support a strong Q2. Key product ramps are coming in the second half of the year. Our footprint is expanding to meet customer needs going into 2027 and beyond. Thank you for joining the call today and we look forward to seeing you at our Investor Day. Goodbye. Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
Krissy Meyer: Good morning. Thank you for joining Bank of Marin Bancorp's earnings call for the first quarter ended 03/31/2026. I am Krissy Meyer, Corporate Secretary for Bank of Marin Bancorp. During the presentation, all participants will be in a listen-only mode. After the call, we will conduct a question and answer session. Joining us on the call today are Bank of Marin President and CEO, Timothy D. Myers, and Chief Financial Officer, David Bonaccorso. Our earnings news release and supplementary presentation, which were issued this morning, can be found in the Investor Relations section of our website at bankofmarin.com, where this call is also being webcast. Closed captioning is available during the live webcast as well as on the webcast replay. Before we get started, I want to note that we will be discussing some non-GAAP financial measures. Please refer to the reconciliation table in our earnings news release for both GAAP and non-GAAP measures. Additionally, the discussion on the call is based on information we knew as of Friday, April 24, 2026, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion on these risks and uncertainties, please review the forward-looking statements disclosure in our earnings news release as well as our SEC filings. Following our prepared remarks, Timothy D. Myers, David Bonaccorso, and our Chief Credit Officer, Misako Stewart, will be available to answer your questions. I will now turn the call over to Timothy D. Myers. Timothy D. Myers: Thank you, Krissy. Good morning, everyone, and welcome to our quarterly earnings call. We are very pleased that our execution in the first quarter across a number of key areas resulted in continued improvement in year-over-year profitability metrics, loan production, net interest margin expansion, and improved credit quality. I would like to discuss our first quarter highlights. Compared to 2025, net income and earnings per share grew by 7,577%, respectively, in the first quarter of this year. Largely due to the repositioning of our balance sheet, our net interest margin increased 6 basis points on a sequential quarter basis and 47 basis points over the prior year’s period. During the quarter, we originated $81 million in new loans, $61 million of which was funded, an almost 30% increase over the prior year’s period. While the first quarter is a seasonally slower period for production, the additional hires we made to our banking team, the generally favorable economic conditions we continue to see in our markets, and a healthy increase in commercial real estate loan demand led to our strongest first quarter in a number of years. New loan product allocation was roughly in line with our existing portfolio with a slight skewing towards C&I. During the quarter, we worked diligently to improve our credit quality. We sold our longest-tenure classified and nonaccrual loans totaling $16.3 million, which were downgraded to substandard in 2021 and moved to nonaccrual in 2024. At that time, we took specific reserves of $7.3 million based on property valuation. The note sale proceeds validated our reserve assumptions, with the charge-offs equaling the specific amounts reserved. While other workouts were offset by new downgrades, the impact of the note sales on credit metrics was substantial. Nonaccrual loans declined from 1.27% of assets to 0.41%, and the ratio of classified to total loans decreased from 1.51% to 0.85%. Notably, following the note sales, virtually all of the remaining nonaccrual balances are comprised of one non-owner-occupied commercial real estate loan that has no loss expectations based on underlying valuation and cash flow. Despite strong seasonal loan originations, Q1 loan growth was negatively impacted by our nonaccrual loan resolutions. Excluding these purposeful exits, loan payoffs were roughly in line with the prior year’s period and were generally driven by asset sales and cash payoffs. We continue to experience elevated payoffs in consumer-related loans, primarily within acquired portfolios including auto and mortgage loans. Despite these dynamics, our net interest margin benefited as new loans came onto the books at an average rate that was 40 basis points higher than the average rate on payoffs. A Q4 interest recovery of $667 thousand not repeated in Q1 and the decreased number of days in the first quarter masked that rate-spread benefit. Excluding other unique transactions, we believe our loan originations will positively impact the net interest margin in 2026 going forward. Our banking team continues its relationship-based approach to attract lending opportunities and to cultivate new, deeply rooted relationships, with particularly strong momentum in the first quarter in the Greater Sacramento area. While we continue to navigate a competitive market environment on pricing and structure, we have attracted a significant amount of new client relationships while maintaining our disciplined underwriting and pricing criteria. Our total deposits increased in the first quarter due to a combination of increased balances from long-time clients as well as continued activity bringing in new relationships. The rate environment remains competitive and clients remain rate sensitive; however, they continue to bank with us for our service levels, accessibility, and commitment to our communities, allowing us to continue reducing our cost of deposits while growing our deposit base. With that, I will turn the call over to David Bonaccorso to discuss our financial results in greater detail. Thanks, Tim, and good morning, everyone. David Bonaccorso: Our net income was $8.5 million, or $0.53 per share. Our net interest income increased from the prior quarter to $30.3 million due to average balance sheet growth and higher investment security yields and reduced deposit costs, as well as the positive churn in the loan portfolio that Timothy D. Myers discussed, resulting in a 6 basis point increase in our net interest margin. Adjusting for the fourth quarter recovery of interest and fees on a paid-off nonaccrual loan relationship, our sequential quarter net interest margin growth would have been even more impressive at 14 basis points. During the quarter, the expansion of a deposit relationship with a relatively high cost was a headwind to net interest margin. At quarter-end we moved a portion of these funds off balance sheet to take advantage of a relatively high one-way sell rate, which boosts our overall net income and contributes to noninterest income. This opportunity has persisted into Q2; we will continue to look for opportunities like these to actively manage our balance sheet to improve shareholder returns. Moving to noninterest income, most areas of fee income were relatively consistent with the prior quarter, although we did receive a special dividend on FHLB stock as well as a BOLI death benefit, which positively impacted our total noninterest income in the first quarter. Our noninterest expense increased by $2.5 million from the prior quarter, primarily due to higher salaries and employee benefits related to seasonal salary and benefit accrual resets, including payroll taxes, incentive compensation accruals, profit sharing, insurance, and 401(k) matching. The first quarter also included a higher level of our annual charitable giving, which we expect will comprise almost 70% of the total for 2026. Overall, Q1 noninterest expense was broadly in line with our expectations. Though charitable giving is expected to return to more normalized levels during the coming quarters, we otherwise expect noninterest expense to continue near current levels as we continue to invest in people and technology, which we believe will fuel our growth and ultimately drive shareholder returns. Due to the improvement in asset quality in our loan portfolio and the substantial level of reserves we have already built, we did not require a provision for credit losses in the first quarter, and our allowance for credit losses remained strong at 1.08% of total loans, which we believe is an appropriate level following the sale of our nonperforming loans. Given the continued strength of our capital ratios, our Board of Directors declared a dividend of $0.25 per share on April 23, the eighty-fourth consecutive quarterly dividend paid by the company. With that, I will turn it back over to you, Tim, to share some final comments. Timothy D. Myers: Thank you, Dave. We continue to see stable economic conditions in our markets. Our credit quality continues to improve. Our loan pipeline remains strong amid healthy demand, and we continue to expect to generate solid loan growth in 2026 while also continuing to grow deposits through the addition of new relationships and expansion of existing client relationships. Given the positive trends we are seeing in many key metrics, we expect to continue to deliver strong financial performance for our shareholders as we move through the year. With that, I want to thank everyone on today’s call for your interest and your support. We will now open the call to questions. Operator: If you would like to ask a question, please click on the raise hand button at the bottom of your screen. Once prompted, please unmute your line and ask your question. We will now pause a moment to assemble the queue. Our first question will come from Matthew Clark with Piper Sandler. You may now unmute and ask your question. Matthew Clark: Hey. Good morning, guys. Timothy D. Myers: Good morning, Matthew. Matthew Clark: How much was the interest reversal that negatively impacted the loan yield on a dollar basis? That was prior, in Q4? It was, I believe, $667 thousand. Oh, okay. I am sorry. I think I misheard you. I thought there was some another one here in Q1. There is not. It was— David Bonaccorso: There is not. Timothy D. Myers: Quarter over quarter, and part of the decline was impacted by that $670 thousand interest accrual reversal in Q4. Matthew Clark: Got it. Okay. Okay. Thank you. And then I saw the spot rate on deposits. How are you thinking about deposit costs beyond that spot rate with the Fed on hold, and what would you suggest is your marginal cost of new deposits these days? David Bonaccorso: I think, similar to what we have done in recent quarters, we will continue to make targeted adjustments away from Fed cuts. Obviously, probably fewer Fed cuts are expected now than compared to what the market was expecting to start the year. So that is how we will continue to address that. We also have time deposit repricing happening in the background; I believe that was a 24 basis point decline sequential quarter. So those are a couple of data points. Anything else you want to add, Tim? Timothy D. Myers: No. I think some of the pressure on total deposits continues to be just large existing clients that have relationship rates that continue to go up. Some of that we are managing with one-way sells, etc. But overall, we continue to look for off-cycle reductions. And as you noted, the spot rate is 4 basis points lower than the total deposit rate at the end of the year. Matthew Clark: Yep. Okay. Great. And then you have not bought back stock for the last couple of quarters. You have a lot of your credit pretty much resolved here. How should we think about the buyback here going forward? Timothy D. Myers: As we described when we did the balance sheet restructure, given that we got support from the regulators and our constituents to do it without any equity raise, just with sub debt, we had said we were going to earn our way back into a median leverage ratio or CET1 ratio coming back toward peer levels. Certainly at the time, the perception was that holding more capital is better in the event that the credit situation with those loans worsened. As you noted, taking that off the table brings us closer to having a comfort level to do that. So it is a conversation we are going to start having. But we still want to earn our way back into a bit of a higher ratio before maybe embarking on that. Not needing to keep capital for the risk inherent in those deals we shed during the quarter makes us feel better about having that conversation. I do not want to overpromise, but that did remove a big hurdle for sure. Matthew Clark: Okay. Thank you. Operator: Your next question will come from Jeffrey Allen Rulis with D.A. Davidson. Jeffrey Allen Rulis: I guess, kind of following the restatement you had during the quarter, trying to get my bearings on the margin and expense levels. I think you outlined the expense expectation—it sounds like pretty flat from here, a pretty front-end loaded Q1 and then leveling off. But if I try to get into NII and the margin, I think we had discussions of a terminal margin level in the high 3s given the adjusted number is sort of a mid-3 figure. I am trying to get a sense for—there has been a lot of restructuring and repositioning. It sounds like there is still an upward bias to the margin, but all in, whether specific or not, what margin level is indicative of the balance sheet today? David Bonaccorso: I think on a full-year basis, mid-3s is probably still appropriate, in line with the comment you just made, obviously adjusted downward given the restructuring. We covered deposit costs a little bit, but we still think there are decent tailwinds with regard to loan repricing. Jeffrey Allen Rulis: So, Dave, the step-up this quarter, linked quarter—the jump-off rate of March is 3.26%. And you are saying by the end of the year, a mid-3s is doable. Would that put the linked-quarter margin increase—give or take—a pretty good proxy? David Bonaccorso: I would look at it a different way. You are probably looking at a handful of basis points a quarter. There are some movements comparing off the prior quarter with that nonaccrual loan payoff, etc. But that is how I would think about it moving ahead: with the benefits to loan repricing, that is probably worth a few basis points, and then any other deposit repricing benefits we have along the way would add to that, such that you get potentially up to a mid-3s number for the year. Jeffrey Allen Rulis: That is great. Thank you. And then maybe just one other question on the credit side. The timing of the large loan resolution—is that its own independent path, or do you find that is indicative of something moving in the market that makes you feel like you can move forward on this other larger $8 million owner-occupied CRE? Or do you view them really independently? Is that something that you were chasing down separately? And for this remaining loan, do you expect the workout phase to continue for quarters to come? Timothy D. Myers: They are completely different animals, Jeff. The notes we sold were the ones we downgraded—that was our pandemic special that we have been talking about ad nauseam for a number of years. The market was not going to recover in time for that to be properly restructured. We are not going to maintain a loan on our books where we need to take a charge-off, so we elected to sell the note, and Misako has done a really good job of estimating value and negotiating that sale such that we did not have any further provisioning impact. The other loan we have mentioned on the calls is something where, again, the loan-to-value, the debt service coverage ratio—all the metrics are adequate. We are in a dispute over terms of an extension or renewal—an extension. That is what is keeping it where it is. We are in the middle of a legal process on that, so it is not apples to apples. We will continue to look to resolve that, but we do not have any loss expectations on that credit, whereas the other one had a serious valuation impact, as you know. Jeffrey Allen Rulis: Appreciate it, Tim. Maybe most importantly, interested in your view of the general market on the CRE side. As you view vacancy rates and the broader Bay Area, is it firming up? How would you characterize recent CRE trends in the area? Timothy D. Myers: I would continue to bifurcate the Bay Area between San Francisco—particularly for office—and the rest of the Bay Area. We never saw the significant value degradation or lease rate declines in the outer markets that we saw in San Francisco, which, as you know, plummeted. The trends continue to be very positive, certainly a lot of that driven by AI-related investments. Even on the property, on the note we sold, we were looking at 20% to 30% a year of improving NOI. The market is rebounding. There is news about retail coming back in the retail areas. It had to hit a bottom. You see people being opportunistic now. For those of us that had assets at prior valuations, that was going to take a long time, but we certainly see more opportunism in the market. Some of our activity over the last couple of quarters has been related to people taking advantage and making purchases. I view all that as a positive. Again, I would bifurcate between dealing with an asset that was on the books before the value degradation and what is happening now. Overall, the trends remain very positive in San Francisco. Jeffrey Allen Rulis: Thanks. Appreciate it. Operator: Your next question will come from Woody Lay with KBW. Woody Lay: Hey, good morning, guys. David Bonaccorso: Morning, Woody. Woody Lay: I was hoping you could walk through the higher expenses in the first quarter—the jump from January. And it sounds like the forecast, excluding the charitable contribution, should remain relatively flat. Does that embed any additional hiring from here? David Bonaccorso: Sure, I will start. Zooming out a little bit, the company has a long-standing history of very strong expense management. If you go back the last ten years or so, our noninterest expense to average assets has been in the favorable top 30% of peers. It is important to what we do, and that is despite operating in some pretty expensive markets. Where the deviation may have happened is if an estimate was jumping off of Q4 for personnel expense. Keep in mind we did have some incentive bonus reversals in Q4, and historically Q3 has probably been a better predictor of Q1 than Q4 has. Relative to Q3, our Q1 looks similar to where it has been the last couple of years. Then you put on top of that the annual resets we discussed in our earnings materials—payroll taxes, profit sharing, etc.—that is how we get to the key driver of our overall number this quarter, which is personnel. On charitable contributions, we expect that to normalize. One other area that was a bit of an outlier this quarter was FDIC insurance expense. Due to the repositioning, we had a lower leverage ratio and negative earnings in our last assessment because of those losses. That was applied to a higher assessment base given the balance sheet growth and also lower tangible equity. That explains some of the expense you are seeing in Q1, and we expect that to normalize as more of the benefits of the repositioning flow through. Woody Lay: Got it. That is helpful. And then, putting some of the moving pieces together, it sounds like there is a continued tailwind to the margin. You have a slightly higher expense base, but it should be relatively stable versus Q1. So is the expectation still for positive operating leverage throughout the year? David Bonaccorso: Yes. I agree with that. Timothy D. Myers: We are looking to be opportunistic, though, and continue to add hires that help us drive growth. I cannot really predict the timing for that, but we are looking to make strategic growth efforts in some of the markets that maybe have been lesser performing for us to get more pistons firing. If we can make some hires that can help drive growth, we will be doing that with a mind toward adding interest-bearing assets to the books. That could impact the run rate over the year. But as Dave said, when you take all the noise out, it starts to flatten out—minus any adds. Woody Lay: Got it. Alright. I appreciate all the color. Thanks for taking my questions. Timothy D. Myers: Thank you. Operator: Your next question will come from Robert Andrew Terrell with Stephens. Robert Andrew Terrell: Hey, good morning. Maybe going back to the margin, I was hoping I could get a finer point on some of the loan repricing dynamics. Where are new origination yields coming in today, how does that compare to what is rolling off, and do you have a cadence of what you expect to reprice or turn over on the loan book throughout the year? David Bonaccorso: The usual statistic we give is a 12-month look at monthly loan yields, and that number is probably 15 to 20 basis points comparing the monthly loan yield in March 2026 to March 2025—interest rates flat and balance sheet flat. On yields of new loans, those were 5.91% in Q1, which compares to 5.51% for paid-off loans. We have about 17% of the portfolio repricing in the next year and 34% over the next three years. That is on page 25 of the deck. Not much change to those numbers, and still a relatively low level of floating rate. Timothy D. Myers: One of the headwinds is that for the prior couple of quarters, it was a pretty flat trend in new asset yields versus those paying off. We continue to have headwinds in the payoff of some of the acquired mortgage or auto loans that we have talked about, and that was one of the larger payoff categories in the quarter again, and those are at higher yields. Getting a 40 basis point lift despite that is encouraging, but that has been a headwind because those were some of our better-yielding loans, and the payoffs on that because of the rates have been slightly higher. Robert Andrew Terrell: Yep. Okay. Great. I appreciate it. If I could shift over—you talked a bit on the buyback—but your CET1 and capital ratios have normalized post the restructure last year. It seems like you are relatively in line with peer levels. Can you reframe—post the restructure and now that the credit picture looks a lot cleaner this quarter—where would you like to be from a CET1 or leverage ratio standpoint? Remind us of the north stars there or the binding constraints? Timothy D. Myers: We have not really established a specific level where we need to be. It is all relative to the risk on your balance sheet, obviously. As I mentioned before, that is a conversation we are going to be more willing to have now that we have less risk within our loan book and less chance of large, surprising provisioning or charge-offs. I am reluctant to give a target there, but I would say it is a conversation we are going to be more willing to have as a management team and board. I will add, because a lot of attention gets paid to holding company capital ratios, an important consideration for us is our bank-level capital ratios and relative to peers there. I think that is where we have probably more to do in terms of rebuilding those. Robert Andrew Terrell: Makes sense. Last one from me. Your profitability is up quite a lot since the restructure, but ROTCE on an operating basis is still around that 10% level. As you step back and look at your forecast, where do you see the incremental levers to pull to improve profitability closer to peer levels? Timothy D. Myers: The two where we are most intently focused are building loan activity—particularly while yields are where they are—and driving more fee income. We have some strategic initiatives around that. Someone mentioned building more operating leverage into the model; that is what we are looking to do. If we make adds, it will be mainly around driving loan growth. If that happens quickly enough, you get that almost immediate positive operating leverage. And we have strategies around driving fee income that can add meaningfully to the bottom line—nothing overly dramatic, but important steps. I do not see any big cost reduction activity; the goal at this point is not to cut our way into more profitability. Robert Andrew Terrell: Got it. Okay. Thank you for taking the questions. Timothy D. Myers: Thank you. Operator: As a reminder, if you would like to ask a question, please click on the raise hand button at the bottom of your screen. Our next question will come from David Feaster with Raymond James. David Feaster: Hi. Good morning, everybody. Timothy D. Myers: Morning. David Feaster: On the growth side for a minute, there are some really encouraging trends with the originations and the pipeline growth. I was hoping you could elaborate on some of the drivers. You alluded to new hires—that makes obvious sense as to increasing productivity—but you also discussed in the deck comp program enhancements and updates to calling programs. Can you elaborate on what you did there, and how much of the growth in originations you are seeing this quarter is from new hires versus increasing productivity from existing bankers? Timothy D. Myers: Thanks, David. I would say the majority of the production came from those hires we have been referencing over the last year. The top people continue to be the top people. We have made some leadership changes in our Sacramento market, realizing we needed to do better post the American River Bank acquisition to capture the opportunities out there, and that is paying dividends. I would say the Sacramento market overall is driving a good portion of the growth that was booked—even loans booked in other offices are to borrowers that are in Sacramento, just other people’s relationships. So it is doing a better job in Sacramento, doing a better job with hiring, and having an incentive plan that pays people fairly without so many caps so that you are incenting more of a hockey-stick approach. Maybe people have to do more to enter into the incentive component, but if they accelerate or exceed their higher hurdles, then the payouts get bigger. Combine good people with a better plan and you get results, and that is what we are seeing. We are starting to see life in the construction market. Our construction group has gotten a lot more active—going back to my comments earlier about activity in San Francisco—more people stepping in to buy properties for development for condos and single-family residences. We are starting to see that come back as well. It is not any one thing; it is a combination of all those things. David Feaster: Okay. Maybe just touching on the credit side. It is nice to see the credit cleanup this quarter. Exclusive of that—with that in the rearview—things look pretty benign, at least on your balance sheet. What are you seeing on credit broadly? I know the wine industry is under a bit of pressure. You have done a deep dive into upcoming CRE maturities. Can you talk about the takeaways from that—high-level credit commentary—and whether you are seeing more pressure on underwriting or credit broadly given increasing industry competition? Timothy D. Myers: I will start at your end there. I think competition has picked up—loan-to-value, debt coverage, recourse versus nonrecourse. We certainly see the market getting frothy at times, particularly in certain asset classes like multifamily. Wine is a big weak spot. We think we are managing that well, and our exposure is not all that big there anymore, but as a headwind to part of the North Bay economy, yes, that industry is struggling. We do not see a lot of impact within our customer base from things that are making the national news like tariffs or cost of oil and transportation. Not that it is not out there, but we are generally seeing stable and healthy economic trends with what we are looking at. We feel good about our commercial real estate and, minus some ups and downs in individual performance, I do not see any trends that cause me to worry that we are going to revert back to larger downgrades into substandard or nonaccrual. If you took out the legal aspect of what we are dealing with on the singular nonaccrual loan we have, we would be back to almost zero, which, as you know, is where we love to be. David Feaster: That is helpful. Looking at your slide deck—on slide six, you have those four top priorities to drive long-term value. Number three is scaling through efficiency gains and M&A. You already talked a bit about number four and number one, and said you are not going to talk about number two. I was hoping you could talk a bit about number three—where you are seeing opportunities for efficiency gains and any thoughts on M&A. Timothy D. Myers: I will talk about number two—it is not that I will not—it is just that giving guidance is something we are very reluctant to do. But we do have specific initiatives around treasury management fee income, wealth management and trust income. There are a number of components that will add up to a meaningful increase in that component, but no one thing that is overly dramatic. On M&A, getting our valuation back and continuing to build on that opens more doors for us. It is certainly something we remain open to; we have not shut the door on that at all. For a while, it was challenging on deal metrics with where we were trading, but we are hoping that continues to make improvements and M&A can become a more realistic opportunity for us. On efficiency, over the last couple of years we have done some staff adjustments and closed some branches. We are now in our second year of significant efficiency strategies within technology and back office, and going forward around AI—using that intelligently to build efficiencies into the system and more operating leverage. Again, it is lots of arrows in the quiver as opposed to any one or two big things. Those are the main things we mean in that number three. David Feaster: That is helpful. Thanks, everybody. Operator: Your next question will come from Timothy Norton Coffey with Brean Capital. Timothy Norton Coffey: Alright. How are you guys doing today? Timothy D. Myers: Good morning, Tim. Timothy Norton Coffey: Morning, Tim. I have a couple of questions on the loan side. When it comes to the spreads in the market right now, are you concerned about those spreads starting to compress given, one, the general level of competition, but also some of the new entrants to the market? Timothy D. Myers: There is no question there has been pretty incredible compression in pricing. We try to stick to an approach that meets our ROA hurdles. Generally, loans priced in the 200 over Treasury, depending on type of loan or above, are going to meet that. We regularly see people bidding at the 150 to 175 basis point level. Our job is to parse through those, get the really attractive opportunities, and not race to the bottom—get high-quality credit at as high a spread as we can. But the market is very aggressive on pricing. Timothy Norton Coffey: As you grow loans this year or book new loans, are you agnostic to the type, or do you prefer one over the other—like commercial over commercial real estate, for instance? Timothy D. Myers: I have been saying for a while I would love to do a higher proportion of C&I. That is a slow shift to turn, but we are seeing a higher proportion. If you look at the breakdown of loans we booked this quarter, it pretty much mirrors that of the overall portfolio, but within that breakdown there was a skewing towards C&I. We had almost $9 million of unfunded commitments within that C&I bucket for the quarter, so we would love to continue to drive that. We are seeing a higher mix over the last few quarters of multifamily, and I think all of which has been CRA-qualified, so that accomplishes a number of things. If we can win a multifamily deal at a good spread, that is something worth being moderately aggressive over. I expect construction to pick back up—obviously there is always risk in that book you have to manage—but that has been a piston that was not firing. Given the kind of construction projects we did in the geographies we did them, it is nice to see that coming back as well. We are generally agnostic, but if we continue those trends, it will help from both a concentration standpoint and the growth aspect. Where we are doing a good job and where the growth in the market is right now seem to align pretty well. Timothy Norton Coffey: Further growth in C&I and construction, all else equal, would probably put upward pressure on your allowance ratio. Is that about right? David Bonaccorso: Possibly, yes. Timothy D. Myers: It depends on the individual credits, but yes, that is possible. Timothy Norton Coffey: And then one for you, Dave. What is the appropriate tax rate to use? David Bonaccorso: What we experienced this quarter, I think, is pretty indicative for the full year. Timothy Norton Coffey: Alright. Great. Those are my questions. Thank you much. Timothy D. Myers: A little easier year from a tax perspective than last year. Timothy Norton Coffey: Alright. Got it. Thank you. Operator: We have no further questions at this time. I will hand back to Timothy D. Myers for closing remarks. Timothy D. Myers: Thank you again to everybody. If you need any follow-up information, by all means, please reach out to David Bonaccorso and/or myself, and we will get you answers. Looking forward to seeing you on the next quarterly call.
Dominik Prokop: Good morning. This is Dominik Prokop, on behalf of Alior Bank. May I welcome everyone to the results conference. We will talk about the first quarter 2026. And the first part, the bank's results as well as the trends, they will be discussed by members of the Board, President, Piotr Zabski, who will sum up the most important trends and will tell us about business results, Deputy President, Marcin Ciszewski, who will tell us about Risk; and Deputy President, Zdzislaw Wojtera, who will tell us about finance. After the end of the presentation, we will have a Q&A session. Before I hand over to Piotr, may I encourage everyone to ask questions already during the first part of the conference, which will help us smoothly move into the Q&A session. Piotr, you have the floor. Piotr Zabski: Good morning, everyone. The presentation will be composed of 4 parts. Firstly, operational activities with 2 business lines, the corporate and the individual customers, then the risk result and then financial results and other issues. So let me move on to the operational activities and about the first quarter. What you can see here is a slightly changed makeup of the presentation. We wanted to refer to our strategies. There are 3 pillars on the left, scaling up, high resilience, operational excellence. And it's within these categories that I'd like to tell you about what went on in the first quarter. But before moving on, let me just sum up. This was a good quarter for Alior Bank. Our results were PLN 1.5 billion with a 2% growth year-on-year. And taking into account that we have lower interest rates in the country, this kind of growth is really -- in revenue is really making us very happy. This is a real scaling up results. As far as net profit is concerned, we have PLN 403 million. This is a drop of 15%. The corporate income tax is the main result -- the main cause of this result. We will hear from our colleague later about more details. As far as the gross profit are concerned, we are on more or less the same level. As far as other parameters are concerned, very good return on equity, 13.8% increase, the corporate income tax is important in this regard. Very well-managed costs, 37.8% cost-to-income ratio, and we believe that this good level will be maintained. NPLs at a low level, even lower than last year. So this downward direction in the NPLs is maintained. What is crucial is, what you can see on the left-hand side and the first pillar, the scaling up. We grew in the deposit portfolio by 9% year-on-year, which is making us very happy. We want to grow in this particular area. As far as loan sales are concerned, there are 2 elements. But I want to mention mortgage loans in the first quarter 2026 in relation to the previous year, namely the first quarter 2025. It's an increase of 84%, PLN 1.8 billion was the value of the loan sales. There's been a very good quarter as far as the development of relational customers is concerned. We grew by over 100,000 in the number of relational customers. They have to meet a certain level of requirements. It is not obvious that you already become a relational customer while being a bank customer. It's been a very good quarter for Alior Leasing, which is our sister company. And that's part of our scaling up process. As far as high resilience is concerned, I want to draw your attention to our rating. We received an investment rating from S&P, which is important for us because we will be issuing bonds in the euro market, so we hope to receive a good rating level there. Our costs are stable. The credit risk is going down. And we are recommending for the third year running, the payment of dividend to the tune of 50%, PLN 8.93 per share. In the third pillar, the operational excellence, I want to draw your attention to our mobile app development. There's been a new launch of it in the current year. And compared to the previous version, it's on a much higher level. And so we are growing in terms of the users' numbers. It's the highest dynamic in the market, 90% growth at the end of March 2025 (sic) [ 2026 ]. Very good capital position, which gives us the opportunity for further growth. Liquidity is on a good level. New elements in the area of technologies, we have adopted an ambitious AI strategy. We want to be even more dedicated to this high-end use of AI in the bank, and we have very ambitious plans for the next years. That is all as far as the general summary is concerned. Now a bit more about the numbers. If you look at our balance sheet, the assets is almost PLN 105 billion, PLN 85 billion of that is deposits, which is a 9% growth. Assets grew by 8% and the gross performing loans grew by 7%. That's the performing loans, Batik 1 and 2. So these increments, which we announced in the strategy are taking place and allow us to realize higher levels of growth in spite of the drop in interest rates. In this particular slide, some more information about our customers. The relation customers grew by 6% over the year, and there's a 19% growth in mobile app users. What you can see on the right-hand side among the relational customers, which is 50% of the users of our application. And the customers are banking with us quite efficiently. In the mobile app, we have 44% sales in the general framework of our sales channels. As for the balance sheet on the left-hand side, we have the loan portfolio and the deposits on the right-hand side. Let me say a few words about the loans. The customer loans are stable in the growth. The general effort goes to maintain the portfolio and recreate the sales levels. There's a considerable growth in the Burgund Depart, namely the real estate loans. These are important. And the whole portfolio has grown by 8% over the 12 months. As far as the deposits are concerned, all the constituent parts in these bars are growing. That's a good result. The whole of the growth is 12% year-on-year, and we are very happy to see the growth in each of these constituent parts we are improving the results and that coincides with our strategic plan. As far as retail customers are concerned and the mortgage loans, there's been an 80% growth there, there's a lot of activity in the market as a whole. But on our side, the market shares in mortgages, for instance, is definitely higher than the Alior Bank share in the banking sector. So this is something that makes us very happy, and we are catching up there. As for the other loans, non-mortgage loans in the Burgund Depart, you have the installment loans. They have performed slightly worse in the first quarter, but the result was the fact that there's been some carryover of the business partner negotiations, and we haven't managed to do something in the first quarter, but I can be confident that it will be made up in the subsequent quarters. As for the cash loans quarter-on-quarter, there has been growth in spite of prepayments, in spite of the churn and short tenures. The effort that we put into the recreation of the balance is quite efficient and the balance will grow in the subsequent months. As far as the retail customers are concerned, I want to draw your attention to 2 types of activities. Our brokerage house on the left and our TFI sector on the right. What we announced in the strategy was for the second pillar of our strategy to make our results stable by use of the commission. One of the strong players in that department is the activity of our brokerage house. As you can see, there's been a 52% rise in the commission year-on-year, which is considerable with 38% growth of assets and FIO and the considerable rise in the structured product sales. On the side of Alior TFI, we are approaching the PLN 5 billion level of assets. We've even crossed over it, but March has not been a good result for that type of activity as there's been a lot of redemptions. So we hope to come back to the level of PLN 5 billion, but the 34% year-on-year rise is notwithstanding that, and we are definitely on the right track. And it is with these activities that we will be helping to stabilize the commission result. Now the business customer, the left-hand side is the business loan portfolio, which is quite stable if you compare year-on-year results. But within the portfolio, there's been some changes. The first one that means [ commenting ] is that the nonperforming loans dropped down from PLN 2.4 billion year-on-year. And this drop is mainly in the micro businesses sector. We had quite a big historical baggage of nonperforming loans in the micro companies sector. And this part is diminishing. What is important is the growing part in the middle are the segments that we want to develop, namely the small- and medium-sized companies. And here, we've seen an 11% growth. However, in the portfolio, we also have big consortium, the biggest players in the market where you can have slight movement. So the mix of the portfolio in the middle is changing. But in the general terms of its value, we have stability. And I can safely say that the mix of the portfolio is changing for the better. There is more of the healthy parts of the portfolio, which makes our business aims more viable. As far as business customers are concerned, there's been a 5% growth year-on-year in the deposit volume. The last quarter has been very important. We've had a 22% growth in the current account sales. So this is a good offer. It's been readily picked up by the customer and over 70% of the sales is online sales, the new type of banking that we have launched for business customers. And this is bringing profits in terms of current accounts sold. One more slide devoted to the corporate sector, let me draw your attention to our leasing company activity. Alior Leasing has seen record growth in sales, both in terms of leasing and loan sales, 27% is the rise year-on-year and the whole portfolio grew by 12%. So this is the kind of growth which is considerably above the level of the whole of the market. Our activity focuses on financing cars up to 3 tons. We are very strong in that particular area and the share of the market has grown by 6% from 2.9%. So you can see that the leasing is an alternative form for small and medium-sized companies, and these can readily obtain financing from our bank when they've been at least 2 years in operation and so we catch up the gap, we can sell it in the banking channels, and we are very happy with the growth that has been observed there. Some other type of information we are being appreciated in the market. We've been on the podium in the Golden Banker services. And in the Mobile Banking, our application reached the first prize. We have been a leader in the Institution of the Year ranking, so we've been appreciated there. And also, we've received 6 statuettes. Also, we've been appreciated in the top employer title. We've received the certificate for 2026. And what is crucial, but let me stress that again, the investment rating of the bank represents the appreciation of our efforts, which we put into building a quality portfolio, and this translates into the payment of the dividends, generating new sales. And this all creates a situation where Alior Bank is a bank with an investment rating, which makes us very happy. That is all from me about the first quarter, and I will hand over to Marcin for his comments about the risk management. Marcin Ciszewski: Thank you, Piotr. Good morning to all of you. The first quarter of 2026 ended with a very safe capital position. Tier 1 and TCR ratios are at the level of 17.85% with a huge excellent PLN 3.9 billion, which makes it possible to implement all the strategic endeavors. Concerning the TREA ratio, it's been at 21.60%, which is also a very safe position as far as liquidity is concerned. LCR is also at a very high level as well as NSFR, which is definitely higher than required by regulations, 236% and 152%, respectively. We are working on the transformation of our loan portfolio, and we are successively reducing the nonworking portfolio. NPL is at 5.39% at the end of the first quarter. We are maintaining our strategic goal, which is to get below 5% with this ratio at the end of this year. The cost of risk measured with the CoR 0.67%, slightly higher than during the previous period. But here, we can see the impact of our approach towards the sales of nonworking portfolios, which can be seen in the upper right graph, where we can see that at the end of the second and fourth quarters of the year, we are checking the level of the nonworking portfolio, and we are getting additional revenues, improving our CoR ratio. The nonworking portfolio went down from PLN 429 million to PLN 364 million. As far as the NPL indicator is concerned in segments for the retail customers, it's at 2.41% at the end of the first quarter market level. Concerning the business sector, we are reducing it consistently, but it's still higher than expected. At the end of the quarter, we are at the level of 11.35%. We confirm that as far as the cost of risk of our bank, it should not exceed 0.8%, which is also reflected by our strategy, which is implemented consistently. Thank you very much. And now Zdzislaw, has the floor. Zdzislaw Wojtera: Thank you, Marcin. Good morning. I'm going to discuss about the financial results right now. If we look at our income base, as Piotr has mentioned, in the business part, we are glad to see that the number of the clients and the level of loans and deposits are all increasing. With the interest rates getting down, this makes it possible for our income to grow by 2% year-to-year. Of course, the division of the results differs because on the interest rates, we are 0.3 points down. But on the commissions, we are 6% up. If we look at the net result, we can see that it's definitely lower. But as all the banking sector did, we applied a new approach for banking. But what is important is that the gross result is almost the same as the one we have obtained last year in the first quarter of '25. When we look now at the income statement, the P&L, so we can see the total income, net interest income and also the commissions. We have got dedicated slides I'm going to discuss in a moment. And we've got also results on other activities. Let me mention that we have got also the hedging transactions, plus PLN 18 million and also on the transactions with financial instruments, PLN 6 million. And in particular, the hedging transactions assessment is positive in this quarter, and it contributed in a good way to the result. It can change in the future, as you know very well. That's a positive one-off. If we look now at the total costs, they are also under good control. The costs of our activities increased by 2% only, and I'm going to discuss it more precisely on the dedicated slide. What is also important is that the legal risks costs, well, we have identified PLN 37 million as loss of risks due to foreign currency loans. And this is mainly due to the model modification. So when we extended the horizon from 2 to 5 years, the provision for that topic has increased. We do not see a major influx of mortgage in foreign currencies, claims, so this is a trend that is not deteriorating. As far as the gross result, the gross profit is almost at the same level as last year, which with lower interest rates and higher cost is quite a good result for this quarter. Concerning the net profit, we've got the impact of the corporate income tax. We have 37% of rate that has been applied to the whole year here. So getting down to more specific elements of the interest rate results, we can see a decrease by 1% quarter-to-quarter. But taking into account the fact that in February, we have 2 days less, so we can say that this is quite comparable as far as the interest rate results are concerned. When we look at the interest rate margin, which is probably more interesting for you, we can present with a big level of satisfaction this decrease because when we look at what happened as far as the reference interest rates of the National Bank of Poland is concerned, they went down by 200 basis points last year. And as we have already been saying for some time, we are changing the structure of our sales, and we have a huge growth of the mortgage loans, which is stabilizing the income of the bank in the long term, but it has got a negative impact on the margin. Taking into account those 2 basic elements. The fact that we went down from 5.88% to 5.19% only, this can be considered a huge success when we look at the general trend of this decrease. Concerning the deposits and loan ratio, it's 78.5%, which is quite a good result. Concerning the fees and commissions, it has increased by 6% year-to-year. When you look at its development in the past quarters of 2025, we can see that every quarter, it has improved. And I believe that this year, the trend should be continued, which would mean that the number of the clients will increase. The sales of our products will also result in an improved commission income. When I look at the first quarter, year-to-year, there are 2 things that needs to be commented. First of all, the increase of the brokers commissions by PLN 10 million, and this is connected with a higher volume of the investment funds and to a higher activity of our clients at the stock exchange. We've got also a second item, the sales of insurance connected with the mortgage loan sales. We have also seen here a huge growth by PLN 7 million. And my last slide on the operating expenses. As mentioned in the strategy, we want to maintain them at a comparable level, and we want to maintain them in a regime that we have adopted. In order to present it better, we have split costs, operating expenses into bank operating costs and BFG costs, which are above it. So as you can see, every quarter is getting slightly higher, but it's still comparable. When we look year-to-year, quarter-to-quarter, all we can see that there is a slight increase in costs. When we look at the last quarter, we can see that we have mainly HR costs that have increased, but this is due to the structure and to the charges we need to pay as employer for the social security. That's for the first quarter and then it's getting down in the next quarters. When we look at the general governance costs, so usually, in the last quarter, there are additional activities such as marketing activities, IT projects, consultancy services, and this all resulted in higher cost in the fourth quarter. So now we have a decrease in the first quarter of '26. What is important is that when we look at the cost/income ratio, BFG in time, 37.8% for the bank for a bank with our structure, which is a growing bank, it's a very good value. And the most important information for you, I think, we would like for the general cost of governance once BFG included to be maintained at the level of the inflation, so that it would not exceed the inflation ratio this year. Thank you very much. The floor is back to Piotr. Piotr Zabski: Thank you, gentlemen. On the last slide, I would like to comment as follows. We had quite a good quarter. I mean, the first quarter of 2026. We are changing the structure of our balance sheet, of course, it's moving progressively, but in the good direction. The P&L is increasing and even faster than expected in some segments. Mortgage, consumer loans are increasing. Concerning the business clients, the portfolio is stable, but the structure and the mix is improving. We are reducing the nonworking part. We are improving the segments in which we would like to be active. Concerning the P&L, well, all this results in higher income, PLN 1.5 billion that has been mentioned here is due to the increase of our volumes, and we are very glad because of that. Of course, our P&L is highly impacted by all kind of costs that seem to be very well managed. They are not increasing. They're not growing. We may say that in some areas, we are even able to reduce them. That's why we have a very good position on the risks and with a good road followed by the NPLs, all of the risks. The P&L is at a very good level. It's very stable, very solid, PLN 403 million of our results impacted by the corporate income tax mainly is very good. It's one of the best return on investments on the market currently. Cost-to-income, I have already mentioned that and NPLs. So we consider that this quarter has been a good one. It's a good opening of the year. The dividend is paid and our rating -- investment rating have been a strong element of this first quarter. And I think that I will end here, and we will be glad to answer to your questions. Unknown Executive: Well, first of all, what we are observing is a much better situation in terms of winning the law suit. That is why the reserve level is as it is. We are being much more efficient in the litigation process, and that's been the main reason for the drop. Thank you very much. The next question. Unknown Analyst: In the first quarter, was there a reserve for the legal risk related to SKD? And if yes, what was the amount of the reserve? Unknown Executive: Well, in the first quarter, we did not set up a reserve fund for that. We simply decreased because of the incidents of higher success rate that Piotr mentioned. What about the MREL at the end of first quarter 2026. At the capital group level, we received 11.5%. Unknown Analyst: The next question, does the Board see an impact of relational customers to the provision result? And what is the outlook as regards to the commission results for 2026? Unknown Executive: Well, I think this question is not so much about relational loans, but relation with customers. Yes, we see an impact. The relational customers give us a better level of banking. The relational customers bank more readily and use more of our products. Our aim is to increase the commission result by 4%. And we are on a good track as far as this is concerned, there's a growth trend which Zdzislaw showed us. Unknown Analyst: What was the WFD result at the end of the first quarter? Unknown Executive: 44.7%. Unknown Analyst: What is your assessment of the ECJ ruling about the para loan results? Well, what is this ECJ ruling about? Unknown Executive: ECJ said that banks can provide credit for commission, but cannot receive interest from it. However, the fact that they can't receive interest, so the loss from that can be set off by higher interest. So these are 3 important constituent parts of this ruling. We are analyzing what's going on. This is a very fresh ruling. We are very active in the Polish Bankers Union. And the whole of the sector will be very active in limiting the results of that ruling because in our view, this is about the mechanics of the calculation of the bank's remuneration. This mechanics should be modified. And ECJ said simply the potential losses that occur because you do not take interest on commission can be set off by higher interest. So ECJ agrees that remuneration is due to the bank because of that type of activity. And the next question. Unknown Analyst: What part of contract contains the cost of commission of insurance? Unknown Executive: As far as new sales are concerned, we're talking about marginal level of value. We have one as far as I remember. open line, but it is practically being wound up. As far as the other part of the portfolio is concerned, we are analyzing this. This is a fresh issue. So we cannot respond giving you any figures. But historically, we realize that this has taken place, and we are assessing the situation because there's been many changes in the contract, and it's too early to provide a definitive answer on that. Thank you very much. Dominik Prokop: The question from [indiscernible ]. Unknown Analyst: Piotr mentioned about the rise of MSP volumes by 11% year-on-year. On Slide 30, you show the drop by 16% year-on-year. Well, the drop is in the micro companies. But in other segments, we are growing. So I don't know what this is about. In one slide, we're talking about a working portfolio, the one that generates stable growth. And there, we have increased results. But in the subsequent slide, we have the total portfolio in the gross value, which includes the nonperforming loans? Another question about the ECJ ruling about SKD. Can this impact the bank's reserve levels? Unknown Executive: Well, I want to be quite definite. This particular ruling did not refer to SKD. Let us not introduce any confusion here. This ruling was about the right of the bank to obtain interest on the cost of credit like commission or whether this can be compensated. And ECJ said that this can be compensated by a higher level of interest. So this is not an SKD case. There is no sanction related to a free loan. This is about the mechanics of the calculation of revenues due to the bank stemming from commission on loans. Dominik Prokop: Thank you. That was the last question. Thank you all very much for the questions, and thank you to the Board. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Kotaro Yoshida: This is Kotaro Yoshida from Daiwa Securities Group Inc. Thank you very much for taking the time to participate in our conference call today. I will now explain the financial results for the fourth quarter of FY 2025 announced today following the presentation materials available on our website. First, please turn to Page 4. I will begin with a summary of our consolidated financial results. Percentage changes are in comparison to the third quarter of FY 2025. In Q4 FY 2025, despite the continued highly volatile market environment, our profit base, primarily driven by asset-based revenues, functioned steadily, allowing us to maintain a high level of consolidated profit. Net operating revenues were JPY 197.8 billion, up 1.7%. Ordinary income was JPY 67 billion, down 3.6% and profit attributable to owners of parent was JPY 49.8 billion, up 7.3%. Looking at the results by division in the Wealth Management division, as a result of our focus on total asset consulting, both the contract amount and net inflow for wrap account services reached record highs and net asset inflows also expanded. In Securities Asset Management and real estate asset management, assets under management grew steadily, continuing to expand our revenue base. Global Markets accurately captured customer flows amid market fluctuations, resulting in increased revenues in both equity and FICC. In Global Investment Banking, domestic M&A remained strong. As a result of these factors, the annualized ROE was 11.5%. The year-end dividend is JPY 35 per share. Combined with the interim dividend of JPY 29, the annual dividend will reach a record high of JPY 64, resulting in a dividend payout ratio of 50.8%. Please turn to Page 8. This page shows base profit, our KPI for stable earnings as outlined in the medium-term management plan. FY 2025 base profit grew steadily to JPY 182.7 billion, up 32.9% year-on-year. We have achieved a level that significantly exceeds the JPY 150 billion target set for the final year of the medium-term management plan, doing so in just the second year of the plan. Please turn to Page 11. I will now explain the statement of income. Commissions received was JPY 131.2 billion, up 2.0%. A breakdown of commission received is provided on Page 26. Brokerage commissions increased significantly to JPY 31.9 billion, driven by an increase in customer flow. Please turn to Page 12. Selling, general and administrative expenses were JPY 138.3 billion, plus 4.1%. Personnel expenses increased due to an increase in performance-linked bonuses. Please turn to Page 14. This slide shows the annual trends in revenues and SG&A expenses. Whilst performance-linked costs and strategic expenses such as IT investments have increased in tandem with business expansion, the increase in fixed cost has been constrained, keeping overall costs at a well-controlled level. Please turn to Page 15. Total ordinary income from overseas operations was JPY 6.9 billion, down 17.6% quarter-on-quarter. By region, Asia and Oceania saw an increase in profit, supported by equity-related revenues driven primarily by Asian equities. On the other hand, the Americas recorded a decrease in profit due to a decline in M&A revenues. Next, I will explain the financial results by segment. Please turn to Page 16. First is the Wealth Management division. Net operating revenues were JPY 81 billion, plus 5.2% and ordinary income was JPY 33.1 billion, plus 12.1%. We believe that the results of our ongoing efforts in the asset management type business have manifested in our sales performance despite the persistent high volatility in the market environment. By product, equity saw a revenue increase of JPY 1.1 billion due to increased trading in Japanese equities. Fixed income revenues also increased by JPY 500 million as we accurately captured investment needs. Sales of fund wrap increased significantly, driven by growing demand for long-term diversified investment and portfolio management. In addition to inflation hedging, wrap-related revenues reached a record high of JPY 18 billion. Asset-based revenues reached a new record high of JPY 33.4 billion, driven by increase in agency fees for investment trust and wrap-related revenues. The fixed cost coverage ratio based on asset-based revenue in the Wealth Management division was 120%, and the total cost coverage ratio was 76.5%. Please turn to Page 17. This slide shows the status of sales and distribution amount by product within our domestic Wealth Management division. Our wrap account service reached a record high level with total contract AUM rising to JPY 6.4046 trillion. New contract amounted to JPY 386.2 billion, and net inflows came to JPY 276.2 billion, both marking all-time highs. Our fund wrap also continues to grow strongly. Its characteristics have been well received by clients in both favorable market conditions and during periods of adjustment, resulting in a significant expansion in assets under contract. In addition, collaboration with external partners such as Japan Post Bank and Aozora Bank has been progressing steadily, contributing further to the growth in the new contracts. Please turn to Page 18. This section outlines the progress of our wealth management business model. Cumulative balance-based revenues for fiscal 2025 increased to JPY 123.2 billion. Net inflow of assets also remained high, totaling JPY 1.6342 trillion. In line with our group's fundamental management policy of maximizing clients' asset value, we will continue to provide optimal portfolio proposals based on each client's total assets while working to build a revenue base, which is less susceptible to market fluctuations. Please turn to Page 19. Here, we show the status of Daiwa Next Bank. NII, net interest income, totaled JPY 11.2 billion, up 11.2% and ordinary profit reached JPY 6.2 billion, up 30.2%. The increase in policy rates contributed to an expansion in net interest margins. The promotion of total asset consulting, together with initiatives such as competitive deposit interest rates, including a 1.2% 1-year time yen time deposit for retail customers proved effective and deposit balance surpassed JPY 5 trillion. And now turning to Page 20. Let me explain the Asset Management segment, beginning with Securities Asset Management. Net operating revenues were JPY 19.7 billion, up 5.9%; and ordinary income was JPY 11.4 billion, up 11.6%. Daiwa Asset Management publicly offered securities investment trust AUM topped JPY 37 trillion, hitting record high. And then moving on to Page 21 for real estate asset management. Net operating revenues were JPY [ 9.9 ] billion, down 10.6% and ordinary income was JPY 9.8 billion, down 5.6%. While revenues and profits declined on a quarterly basis, mainly due to the absence of property sales gains recorded in the previous quarter, real estate asset management is a business in which the profit grew in line with AUM. AUM at Daiwa Real Estate Asset Management surpassed JPY 1.6 trillion, and we expect stable midterm growth in line with continued AUM accumulation. In addition, equity method investment gains from Samty Holdings contributed to maintaining a high level of profit. On Page 22 is Alternative Asset Management. Net operating revenues were negative JPY 2.6 billion and ordinary income was negative JPY 4.8 billion. And the Renewable energy, we recorded provisions and impairments due to the revaluation of certain portfolio investments. On Page 23, lastly, let me explain the Global Markets and Investment Banking division. First, Global Markets, net operating revenues were JPY 51.3 billion, up 13.4% and ordinary income was JPY 17.7 billion, up 48.6%. Both equities and FICC performed strongly, resulting in a significant increase in revenues and profits. In equities, trading flows in Japanese stocks increased substantially, particularly among overseas investors, leading to a 6.2% rise in revenues. By offering a diverse range of execution methods, we successfully captured large-scale trading mandates contributing to revenue growth. In FICC, revenues increased 20%, driven by strong performance in JGBs and credits. We effectively captured customer order flows in both domestic and foreign bonds and the position management remained solid even in a highly volatile market environment. And now turning to Page 24. In Global Investment Banking, net operating revenues were JPY 24.1 billion, down 7.4% and ordinary income was 2.1 billion, down 60.5%. But M&A advisory remained strong in Japan and the revenues increased in Europe within our overseas operations. That concludes the explanation of our financial results for the fourth quarter of fiscal 2025. Fiscal 2025 on a full year basis experienced high volatility in stock price and interest rates, but the year itself was quite active overall. And the entire business portfolio had higher stability so that income was stable and the market response capability also improved. We were able to benefit from both of them. As a result, the second year of this midterm plan hit record high in terms of the profit and the ordinary income was hitting the highest in the last 20 years. Well, towards the end of the midterm plan, we think that we have a very good strong result. Now we'd like to move on to the announcements that we have made about the subsidiary of the ORIX Bank, as we have explained on our website. I will explain the overview, objectives and financial impact in accordance with the materials published on our website. Please turn to Page 2 of the document entitled regarding the acquisition of ORIX Bank as a subsidiary. This is a transaction summary. In this transaction, Daiwa Next Bank will make ORIX Bank a wholly owned subsidiary. We also plan a merger of the 2 banks in the future. The acquisition price is JPY 370 billion, and the final acquisition price will be determined after price adjustments stipulated in the share transfer agreement. The acquisition will be funded entirely by our own funds, strategically utilizing the capital buffer we have accumulated to date. Next, the primary objective of this transaction is to continuously expand the stable revenues of the Daiwa Securities Group and improve ROE and EPS through the strengthening of the Wealth Management division. By integrating Daiwa Next Bank and ORIX Bank, which have different strengths, we aim to enhance our ability to provide solutions for our clients' challenges regarding both assets and liabilities, thereby significantly improving the corporate value of both banks. Specifically, we will realize sustainable growth by combining the outstanding lending and trust capabilities cultivated by ORIX Bank with the deposit gathering capabilities backed by our group's solid customer base and sales network. There are 3 pillars to this strategy. First, deepening the total asset consulting tailored to the life stages of each individual client. Second, establishing a sustainable growth model through a virtuous cycle of deposit and lending expansion. Third, maximizing synergy effects through functional integration by a future merger. I will explain each of these in turn. Please turn to Page 3. The post-integration bank will have total assets of JPY 9 trillion and approximately JPY 400 billion in equity capital, evolving into a comprehensive bank, combining advanced lending and trust functions with strong deposit gathering capabilities. By offering competitive deposit rates backed by ORIX Bank's high investment capabilities, we aim to establish a sustainable growth model through a virtuous cycle of deposit and lending expansion. Regarding the impact on consolidated financial results, there is a potential to improve net interest income as a synergy effect. In addition to the over JPY 1.5 trillion of drawable funds from Daiwa Next Bank's current account at the Bank of Japan, we aim to accumulate JPY 2 trillion in deposits over the next 5 years as a synergy effect, separate from the stand-alone deposit growth of both banks through the provision of competitive deposit rates. We plan to invest a total of JPY 3.5 trillion in real estate investment loans and securities-backed loans to improve net interest income. Assuming we can secure a 1% interest rate margin improvement, our estimates indicate a potential improvement of JPY 35 billion in net interest income. In addition to these synergy effects, ORIX Bank's stand-alone performance will be consolidated into our financial results. The bank's average ordinary income over the past 5 years is approximately JPY 30 billion with a net income of approximately JPY 20 billion. On the other hand, we expect to incur amortization expenses for goodwill associated with the acquisition. Next, regarding capital and regulatory aspects. We will maintain financial soundness while effectively utilizing our capital buffer. Whilst the implementation of this transaction will lower the consolidated total capital adequacy ratio by 5 percentage points, it will still exceed 14% on a fully loaded Phase III finalization basis, securing a certain level of capital buffer. However, to expand our capacity for future growth investment and shareholder returns, we will also consider issuing perpetual subordinated bonds. Please note that we are not considering equity financing. Now moving on to Slide 4. Let me see the strength of Daiwa Next Bank. That is the strong deposit gathering capability. In the meanwhile, it has to challenge with the limited lending and the trust functions. Against that, the ORIX Bank has a strong lending and trust function. That's their strength, while the challenge is the deposit gathering capability. So while we are complementing or we are able to complement each other with the strength and the challenge, we think this is an ideal match between the 2. And moving on to Slide 5. I may be repeating myself, but the objective of making them a subsidiary is to strengthen the wealth management division and also a great leap in terms of the stability of the income as a result of that. The stronger Wealth Management division is not coming from one point. It comes from some pillars, the deepening total asset consulting, virtual cycle of deposit and loan expansion and accelerating growth through collaboration with the Asset Management division. Those are going to be the 3 pillars to enhance the management division and the stability of the income. And then moving on to Slide 6. We are trying to see the deeper total asset consulting capability for the clients. The assets and liabilities of our customers would change from life stage to life stage. That's the reason why not only the assets, but the liabilities all included. It's quite important to have the total asset consulting capability to optimize our capability of designing the balance sheet of the customers. By utilizing the ORIX strength, which is the lending and the trust, we are going to be providing the solutions for the pains of the customers depending upon their life stage. And then moving on to the Slide 7. We're thinking about accelerating the growth spiral by leveraging the strength of the banks. we look at those banks alone, the balance is going to be accumulated. But as a result, in addition to the growth of each bank's deposit balance, we aim to expand the deposit by over JPY 2 trillion in the next 5 years as a synergy effect, the asset -- the loan asset of the ORIX is quite competitive. So based upon which we're going to offer the Daiwa Securities customers a competitive deposit interest so that we are able to get -- acquire the [ stucki ] deposit. And then eventually, that is going to increase the deposit balance. That is going to be a great spiral of the growth of the banks overall. And then on Slide 8, this shows the changes of the balance sheet structure as a result of the integration of the 2. On the asset side, the lending and securities and on the liability side, the ordinary deposit and the time deposits are going to be all balancing so that the balance sheet is going to have a good risk diversification. The explanation is over with that. The details is going to be explained by our CEO, Ogino, at the management strategy meeting, which is scheduled to be held next month. By responding flexibly to the variety of needs by the customers, we're going to be capturing the changes in the market environment. And as a leader of the financial and capital market, we are going to pursue sustainable growth. We sincerely appreciate your continued support, and thank you very much for your kind attention. With that, we finish our explanation. Now let us move on to the Q&A session. Kana Nakamura: [Operator Instructions] I would like to introduce the first person, SMBC Nikko, Muraki-san. Masao Muraki: This is Muraki from SMBC Nikko Securities. So I have a question related to ORIX Bank's acquisition. The first point relates to Slide 3. You talked about the synergy and how it supplements with one another. So deposit is JPY 2 trillion increase. That is the number you've mentioned already, so 1.05% to 2%, that is the time deposit level. So going forward, do you intend to actually increase this to a competitive level? That is the first question. And also, you would have a loan increase by JPY 3.5 trillion. So you have the real estate loan and the secured loans. What is the breakdown in terms of the loan growth? So second part of the question relates to your capital strategy. So this is Slide 12 of the material. You have the image here. So this will be over 14%. The capital ratio will come down. But if you look at the future from the current level, the capital level intends to be built. So I don't know if it's 17% or 18%, it's hard to tell from this diagram. So whilst you're increasing this level, what are some prospects of the share buybacks? What are some of the ideas we should have? In the past, the share buybacks they conducted even amongst the high level of capital. But now if the capital is going to be depressed, perhaps there will be less allocated or different allocation to the share buybacks. So please give us some idea. Kotaro Yoshida: Thank you very much for that question. The first part of the question, so what are the JPY 2 trillion of deposit as part of the synergy? So what is the outlook? So related to this point, we are confident that we can acquire. We believe there is a fair chance that we can achieve that number. So within this fiscal term -- so after the rate hike, so Daiwa Securities, there has been a 2% of provision in the year. So last year, in terms of the time deposit, so about JPY 650 billion increase in terms of the time deposit. So if you can provide a competitive -- the deposit, right, given the fact that Daiwa Securities have a nationwide network and the high-level consulting capabilities and through our consultants, we should be able to acquire the deposit. So of course, there has been a shift away from savings to investment. But this is not just the deposit into equities. But also, we have been providing consulting to their entire asset, inclusive of deposit. So within that process, the larger the pie is, the better chance that we may have for the acquisition of deposits. So JPY 2 trillion is feasible. That is our expectation. Also about the JPY 3.5 trillion of the loan, so real estate loans and also the securities, the back loans, the breakdown of that, we don't have the exact number as we speak. But already, what ORIX Bank is providing, that is an investment use in real estate loan, it is for the one mansion for the single-family hold in the metropolitan area. So the number of banks have been on the decline. But in terms of the number of households, single households in the metropolitan area is expected to rise. Therefore, we do believe there is sufficient demand. In the past several decades, ORIX Bank has built this lending capability. So in relation to that, it is very possible that we can achieve that JPY 3.5 trillion of lending. Also the second part of your question about the capital, the strategy. Please hold. So through this acquisition, so in terms of the consolidated total capital adequacy ratio will be out -- will be down by mid-5% or so. So right now, it's over 14%. So that is the level that we're expecting at this moment. So going forward, how the capital policy may change, and that is the intent of your question. But as of this moment, no change vis-a-vis our basic policy. So the dividend -- the payout ratio is at 50% or higher. And also the floor for the annual dividend of JPY 40, we'd like to maintain that. So through this acquisition, there will be some level of decline in terms of the total capital adequacy ratio. However, we can ensure the financial soundness. And also by steadily building on the profit, we can continuously keep this financial soundness. Also in order to ensure flexibility, AT1 bonds issuance is also under explanation. Of course, the actual amount is still under consideration. But again, we'd like to further have a solid capital base. Also in terms of share buybacks, the question was what are our plans going forward. Again, no change in terms of our general stance. So based on the assumption of financial soundness, in light of the different operating environment, gross investments will be considered. But of course, that is necessary for future shareholders' return. So we definitely like to prioritize on that. So looking at the gross investment and the buyback, we need to strike the right balance and be agile and flexible. So this particular deal, this is an impact of the profitability of ORIX Bank. And also through the realization of the synergy, we can expect to enhance the capital generation within the group as a whole. So ultimately, this would actually lead to increase in the source for shareholders' return. So going forward, the capital allocation, capital policy is a very important policy. So given the current operating environment, we'd like to make a comprehensive approach. Masao Muraki: Related to the second part of my question. So at this particular timing, you didn't announce the share buybacks. So in terms of the perpetual subordinate bonds utilization, related to that point, so what is the potential amount AT1 bond issuance that is? What is the amount they have in mind? And once you announce that, in light of the credit rating, we expect you to conduct share buybacks at that timing. Kotaro Yoshida: Thank you for that question. So in terms of the AT1 bonds, the issuance, so it will be within the part of the consideration. But in terms of concrete details, we will consider those going forward. Also in terms of the credit rating, so we would like to definitely conduct meticulous communication with the credit rating companies. So we may also incorporate those ideas. So based on that, so whether there's a possibility of buybacks, again, we'd like to take a comprehensive approach in making that decision. So that has been my answer. Kana Nakamura: The next question is by Morgan Stanley, Sato-san. Koki Sato: This is JPMorgan, Sato speaking. Well, I have several questions about the bank. One, we simply this consolidation, you're going to make them a subsidiary. After that, how should we think about how you're going to be executing it? On the material, you're talking about the recurring income of about JPY 30 billion and the net profit of about JPY 20 billion. What kind of upside are you expecting from that baseline? I think that, of course, depends on the analyst, but the depreciation or the amortization of the goodwill and also the sourcing cost, probably a part of that needs to be recognized as well. So when you explain that to the market participants, what kind of a level are you going to say to them on the annual contribution? What is going to be the level that you think you're going to be talking in that communication to the market? The second question is about this -- by the acquisition of this ORIX Bank, you still have an external partners. Are there going to be any changes in the relationship with those partners? Like Aozora Bank, you are currently accounting for them under equity method. So your business alliance with them, is it going to be changing because of your acquisition? There might be some changes in terms of like focal point that you are working together with those external partners. And also when it comes to the asset-backed ones, partly, you are working together with Credit Saison. What are you going to be thinking about those asset-backed securities? Kotaro Yoshida: Thank you very much for your questions. The first question about the bank. Well, as you say, the average of the ordinary income is about JPY 30 billion of the ORIX and the profit is about JPY 20 billion. At Daiwa Shoken Daiwa Securities Group, our capital average is about JPY 1.7 trillion, meaning that on a simple calculation, it has the positive impact of pushing up the ROE by 1.2%. The equity finance is not likely to happen. So that's the scenario that we are seeing at this point. But the amortization of the goodwill and assuming that AT1 is going to be issued, which we, of course, need to examine. But anyway, setting that aside, we think that is a basic simple calculation that we are currently having our basis. And the second question, first of all, we do have the external partnership with Aozora Bank. And regarding that partnership, we assume there's no impact. Well, regarding the integration, it's for strengthening the wealth management business. The total asset consulting business for the retail business, the asset to support from the total asset consulting is going to be stronger. And the trust functions in order to work in our wealth management business for the retail market, it's important to have the trust function. Well, organically within the company, we did not really have much capability to grow itself. And by having the external partners, we have provided some instruments. But from now on, we think we'll be able to do that in-house. That's going to be another one big pillar. Well, regarding Aozora Bank, our partnership with Aozora Bank, there are some corporates that are listed and private. We have been providing the referral to the Aozora Bank and also the LBO financing, for example, have been provided and have been providing in the past so that the customer trade is quite different in Aozora Bank. So we think both can actually stand. And also for the real estate-backed loans, well, Credit Saison is a part of the business that we've been engaged with. But Fintertech is jointly operating -- operated by Credit Saison. So they have the asset -- the real estate asset-backed loans. But of course, the market size is limited so that the capacity is not that big. And this time, thinking about the capability being much bigger. I think the issuance coming from the business is going to be having new opportunities for us to grow our pie itself. Does that answer my question? Koki Sato: What about the amortization of the goodwill. Any color on that scale? Kotaro Yoshida: The amortization amounts and the cost for the amortization we're going to be discussing in details more. So at this point of time, there's nothing that we can comment. So please be patient. During the time comes for the closing, we think we'll be able to come to that point. Kana Nakamura: So let us move on to the next question. BofA Securities, Tsujino-san, please. Natsumu Tsujino: The last point about the goodwill amortization, it could be as long as 20 years, but some say it could be 10 years. So you should have some sort of image in terms of the amortization. And also in terms of decision of the dividend, it would be -- so the net profit -- so would you be using the same sort of net profit regardless of the amortization. So 20 years or 10 years, I don't think that you have no image as to the amortization. If you can give us some color, that would be helpful. That is the first question. Kotaro Yoshida: Thank you very much for that question. So of course, we have some image or some ideas. So the duration that you've mentioned, it will be within the time frame that you've mentioned. But as of this moment, we're working together with the auditors. So we would like to refrain from giving you an exact answer. Also, as far as dividend is concerned, as you rightly mentioned, no change in terms of the dividend payout ratio. So 50% or higher of the earnings. So no change in terms of the dividend policy. Also in terms of ORIX Bank, so they have the Tianjin report. So as of September end, so in terms of the J-GAAP, excuse me, J-GAAP earnings, JPY 7.4 billion, and ordinary income was JPY 10.6 billion. So it is actually quite lower in comparison to 5-year average. So in order to drive this, do we just work towards that JPY 8.6 trillion. I think that is the direction we should aim for. But right now, it's a midterm -- sorry, interim times 2. Natsumu Tsujino: Is that the image that we should have in mind for ORIX going forward? The interim number, double that number? Kotaro Yoshida: First of all, as of September 2025, the interim results for the company -- so within ORIX Bank, there were some rebalancing of the securities. So there were some loss from sales. So that is why the amount has ended to that one. So somewhat lower that is. That is our understanding. So in terms of the underlying capability, then it is closer to 5-year average then. Natsumu Tsujino: Okay. Understood. So the third point -- the third question I have, this is a question related to the results. So FICC has been very favorable. So Q3, there was a growth. In Q4, there was a further growth in FICC. So how sustainable is this? So for the March quarter, how has been the recent performance? And how is it trending now as we speak? Kotaro Yoshida: Thank you very much for that question. So in terms of FICC, amidst this very high level of volatility, we were able to capture the customer flow, and we've been able to turn those into profit. So that has been very positive. Also in terms of products, that's been all around. So we have JGBs and also, we have some domestic derivatives and so forth. So within this high level of volatility, we do have a high level of activities amongst the customers. So the customer flow, we were able to capture that through the communication with the customers. We can anticipate the customer flow and conducted the positioning. So through this control, that has led to a positive impact of the earnings. So that has been the experience of this past quarter. So for FY 2025, in the first part of the year at the phase of rate increase, I think we have also mentioned there were some difficulties in conducting the position control. But we have addressed these issues, conducted communication with the customers and also develop customers and also address the diverse needs of the customers. We've been able to have more strengths in the position management. But just because that we were able to do that. That doesn't mean we can sustain this without doing anything because, of course, the market is changing every day. So accordingly, we would like to enhance our capability to capture the customer flow. And also, we'd like to steadily strengthen the position management system. Also for the fourth quarter, so for the March quarter, that is FICC, the revenue image that is, so January 3 and February is 2 and March is 5. So in terms of the month of April, so in comparison to the fourth quarter average, maybe it is somewhat subdued for the month of April. But again, the customer flow continues to be fairly active. So of course, the environment continues to be uncertain, but we would like to have a closer communication with the customers. And we are hoping that we can turn it to our better performance. Kana Nakamura: Next question is Nomura Securities, Sasaki-san. Futoshi Sasaki: This is Sasaki of Nomura Securities. One question about the earnings call results and one about ORIX. Well, I'd like to talk about the wealth management. The AUM in the first half was declined and the previous quarter was down, but the asset inflow was making an improvement. I would understand that, that is because of the drop in the U.S. equity price. For the retail investors, there was some sales for the realization sales. Am I right to understand that? If I'm not, then please correct me. And the second question is about the acquisition of ORIX Bank. So-called -- are there any binding contracts for like a key man close that you are going to be able to retain the key men or the management people. I will also be able to get those words from the ORIX side. The ORIX side, the asset is very characteristic is because of the support getting from their parent company, which is ORIX. Is that also something that you have captured? Or do you think the business is going to be continuing based upon your strength as a stand-alone basis? Kotaro Yoshida: Well, thank you very much for your questions. First of all, about the asset inflow. On the earnings announcement material, Slide -- just a moment. For the fiscal 2025, we have had the inflow. So compared to the year before, the inflow amount was about the same as the 2024. Futoshi Sasaki: I'm sorry. The fourth quarter is my question. The fourth quarter inflow. Kotaro Yoshida: Okay, Q4 only. But regarding the AUM, on this quarter, the amount has declined. However, the U.S. stock was one reason. And also the fall in the stock price in domestic as well. So the asset inflow, the net inflow has increased has surpassed as a result. But the asset inflow itself, as I mentioned earlier, has been quite active and quite strong. Well, since 2007, the asset flow side has been really big. Futoshi Sasaki: Okay. And regarding the acquisition of M&A in the contract, do we have any key men close about the retention of the management people. Kotaro Yoshida: Well, regarding the close of the contract, I should not make any remarks. But after the merger or after the integration, the smooth integration is going to be, of course, the most important. And ORIX and ORIX Bank, both are, of course, making effort for the smooth and continual operation. So as a large direction, we, of course, have had the agreement to come to this agreement or decision so that we shall make an effort to deliver results. Futoshi Sasaki: So assuming that, for example, the real estate finance, the property sourcing is basically coming from partly support from ORIX. Am I correct? The support from the ORIX Group. Is it also coming? Kotaro Yoshida: I didn't really understand. Well, from the very beginning for the sourcing, the ORIX Bank has been acquired by using their own network. So the support from ORIX is, as far as we understand, is limited, if any. Kana Nakamura: I would like to move on to the next question. SBI Securities, Otsuka-san, please. Wataru Otsuka: This is Otsuka from SBI Securities. Can you hear me? Kotaro Yoshida: Yes, we can hear you. Please go ahead. Wataru Otsuka: So one question at a time. So related to the -- you've talked about the asset inflow related to the previous question. So in terms of the cash in the past 2 years, it has been the strongest. So if you can actually tell us the reasons behind that. This is Page 49, Slide 49 about the actual the cash that is. Kotaro Yoshida: Thank you very much for that is. So we have the bank deposits as cash and it may turn into investment trusts and fund wraps. So there are different objectives for that. But roughly speaking, Q4 fund wraps, in order to contract the fund wraps, there are a lot of cash paid in from other banks. So we did see a lot in the past quarter. Also for Daiwa Next Bank deposit, so there were some cash paid in for Daiwa Next Bank's deposit. That was another reason. Also, there has been active transaction of the Japanese equities for the March quarter. So in order to buy the equities, a lot of people have actually cashed in. On the other end, the share price actually peaked in the month of February, some may actually sold their holdings. So actually, they may have withdrawn the cash. So on a net basis, this is the number that we had. Wataru Otsuka: Understood. So fund wraps then. So for additional and also new purchases, both have been strong then? Kotaro Yoshida: Yes, both. Wataru Otsuka: Second question relates to ORIX Bank. So this is Slide 6 of the presentation material. So in terms of the clients' life stage, I'd like to understand this accurately. So with the acquisition of ORIX Bank, the question is, where would you like to focus? So according to Slide 6, so 60s, 70s, 80s, actually, the asset exceeds the liabilities. So those who are in excess of assets and those generation, ORIX excels in the best real estate investment loans. So do you intend to actually provide those to those elderly customers? Or are you actually focusing on more those in 30s and 40s where the liability is larger for assets? We will be focusing on extending credit to them. So for those in 30s to 40s, so they will be the first house the purchases. So this is different from the investment real estate loans. So this may be an area ORIX Bank is not necessarily strong. So how do you intend to actually approach the different life stages of the clients? Kotaro Yoshida: Thank you very much for that question. So according to the Slide 6 on the bottom part about the image of asset and liability balance by generation. So generally speaking, by different age, so the younger, you would have more liabilities. So you may have the housing loans or investment loans. So basically, liabilities tends to be higher in comparison to assets. But once you exceed over the age of 60, net assets would start to increase. So for Daiwa Securities, the main customers for Daiwa Securities are mainly those 60s or above. So as you can tell from this image, so asset on a net basis, it is larger. And so we have been providing different consultation for the management of their assets. So in other words, for those customers in the 40s and 50s, asset formulation type of proposals by NISA, that has been conducted. But of course, the inherent needs of these generation is how they can actually extend and also repay the loans. And also for those who wish to actually invest in real estate, we didn't have the facility to actually provide credit towards that end for those in the 40s and 50s. Now for ORIX Bank, the real estate, the bank loans, the main customer image is to share with you is in the metropolitan area. And so those in the 30s and 40s, family men working for listed companies, they account for a large proportion of ORIX Bank. So generally speaking, they do have high level of income. And of course, they have their own the housing. But at the same time, they are investing in the metropolitan one-room mansions, one-room condos. So that has been the main customers that ORIX Bank has been cultivating. So going forward, what ORIX banks provide. So they have the apartment loans that is another part of the loan product offerings. So this is more towards high net worth individuals and also more of the more elderly customers. So we can actually provide these products to the Daiwa Securities customers for these apartment loans. Also from what we have received, the securities from the Daiwa Securities customers, we can actually use them. The securities can be backed and use it as part of the business. But of course, we do have -- we are connecting that already. But because of the capital regulation and so forth, it has been somewhat restricted. So with the addition of the ORIX Bank, we could expect to see further accumulation of the loans with the securities backed loans. Wataru Otsuka: I couldn't quite understand that point. So you mentioned those in 30s and 40s working for listed companies. And those who already have credit with ORIX Bank, you mentioned that. So already, they are customers of ORIX Bank. So whether ORIX Bank will become a subsidiary of Daiwa Securities, it doesn't really matter, doesn't it, because they are already customers. So is my understanding correct? Kotaro Yoshida: So if they're going to start the transaction with Daiwa Securities, that is positive. But taking this opportunity, it is not likely -- to be honest with you, I cannot actually imagine that they would all start doing business with Daiwa Securities. Actually, we do believe there could be a positive impact. So those who have the real estate loans from ORIX Bank, it is not so large in terms of number in comparison to Daiwa Securities customer base. So the impact could be limited. But in terms of the real estate investment loans, the customer base or customer potential is much larger, not just confined to those who are customers of ORIX Bank. So we also intend to develop new customer base together with ORIX Bank, so we can further expand the customer base. Wataru Otsuka: Understood. So perhaps at the IR meetings and also at the business strategy meeting, we'd like to continue the discussion. Kana Nakamura: Next is going to be the last questioner, UBS, Niwa-san. Koichi Niwa: This is Niwa of UBS. Can you hear me? Kotaro Yoshida: Yes. Koichi Niwa: Well, regarding the bank, I have 2 questions. One, I'd like to know the background of the acquisition. Which one has made the first comment and how long did it take? And also, you're talking about the margin of 1%, the interest margin of 1% as a guideline. How realistic that is going to be? According to your model, 1% of the interest margin seems to be easy to achieve. If that's the case, then that's going to be the image that we should consider as conservative? Or should we think about that a challenging target? That is the question about the bank. The second part of the question is that the U.S. private asset is now going through some turmoil. Any impacts on your business? Or do you have any exposure? And also the response of the retail investors, are there anything that you can share with us? Kotaro Yoshida: Thank you very much for your questions. First of all, the background of this M&A. We, with the ORIX as a company for our group, well, they have been an important business client for a long time. Including the management, we have had very good relationships. And there is much complementarity between the 2 banks. The possibility of working together, we have sounded out to the ORIX Bank from our side. In the last few years, because we entered into a world with positive interest rate, as I mentioned earlier, we have a high expectation of the complementary synergy to deliver. So since last fiscal year, we have made some serious proposals. So the 2 companies continued discussion. And as a result, we decided to work together as one company. That is the background. And talking about the interest margin, Daiwa Next has the deposit to BOJ, of course, at 0.75%. But the weighted average of the bank is about 2.1% for the lending. So thinking about the better yield for our companies, that's going to be 1.36%. So if we're going to have the calculation on a test basis at 1%, that was the scenario that we wanted to provide with you. And then moving on to the private credit, our exposure and the impact. First of all, our exposure is the one that we do have an origination, there's nothing. For the group as a whole, as an exposure, it's very limited and very much of the indirect exposure. So on a consolidation basis, there's no impact on our margin. And for the retail investors -- alternative asset -- for alternative assets -- as Daiwa Securities, the alternative investment is an option for less liquidity, but higher diversification so that the return profile can improve. So alternative is a very important asset class for us. But liquidity is limited. So when our clients decide to buy, then we do have the higher compliance guideline to follow. When there is enough assets and also the exposure should be just one portion of the total asset, especially given the consideration of the low liquidity, those are the items that need to be fully explained and then understood by the customers. The credit -- the private credit trust investment is managed and then consigned to Blackstone. The minimum amount of the investment is USD 50,000. So the subject is the high net worth customers. Though recently, we do see the mass media coverage. And that is causing some concern for the customers. So for all the customers who have those exposures, we are following up for all of them. For the Daiwa Asset and for ourselves, we have been very flexible and trying to provide the information that is user-friendly. So at present, we do see the situation where the cancellation request is mounting or anything. There are some number of people who are considering the cancellation, but it's not that high. So continuously, we will monitor the situation and then think about the follow-up to our customers. Kana Nakamura: Niwa-san, thank you very much for your questions. With that, we want to finish our Q&A session. Unknown Executive: [indiscernible] speaking from Daiwa Securities Group. Well, thank you very much for joining today for investors and analysts who would like to have a continued communication. So thank you very much for your continued support. If you have any further questions, please send us to IR team. Thank you very much for your attention today. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Good day, and thank you for standing by. Welcome to Norwood Financial Corp. First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Be advised that today’s conference is being recorded. I would now like to hand the conference over to Mackenzie Jackson, Corporate Secretary. Please go ahead. Mackenzie Jackson: Thank you, Liz. Good morning, everyone, and welcome to our first quarter 2026 earnings conference call. With me today are James Donnelly, our President and CEO, and John McCaffery, our CFO. The press release we issued earlier this morning, together with presentation material that accompanies our remarks, are available on the Investor Relations section of our webpage. Comments made by any participant on today’s call may include forward-looking statements. These statements are subject to various risks, uncertainties, and other factors that are difficult to predict. Actual results may differ materially from those expressed or implied, and we assume no obligation to update any forward-looking information. Please refer to our most recent Form 10-Ks and other subsequent reports filed with the SEC for more information about risks related to forward-looking statements. During our discussion, we may refer to certain non-GAAP financial measures. These measures are useful for analysts, investors, and management to evaluate ongoing performance. A reconciliation of these measures to GAAP financial results is provided in our presentation materials. I will now turn the call over to James Donnelly. James Donnelly: Good morning, everyone. We began 2026 with strong performance, extending the momentum we began to build last year. This was the first quarter that included results from the Presence Bank acquisition, increasing our assets, loan portfolio, geographic presence, and earnings power. I am proud of our team’s ability to focus on our mission to make every day better by serving our customers and communities while making significant progress on our integration activities. Net interest income was a record 24.6 million, an increase of 38% compared with 2025. Net interest margin expanded by 38 basis points to 3.68%. It was a great quarter for the bank as we benefited from our repositioned bond portfolio and favorable interest rate movement. Net income and earnings per share increased 35% and 14%, respectively, on an adjusted basis, with higher adjusted returns on average assets and tangible equity. I am pleased with our first quarter performance and remain optimistic that 2026 will be a great year for the bank. During our fourth quarter earnings call, I introduced our 2026 strategic priorities. I would like to provide you with an update on these. The first priority is to successfully complete the Presence Bank integration. I am pleased to report that we are on plan with these activities. Our plans include driving uniform systems and operating practices across the new combined entity, uniting the acquired businesses and branches under our new brand, and engaging in open conversations across our locations and functions to identify and adopt best-in-class policies that will enable us to better serve our communities while improving our results. Among our early accomplishments is the completion of our core integration and unifying our IT and HR systems. We have also begun the work of unifying all acquired locations under our brand, including signage, logos, and other branded materials to drive consistency and unity across our organization. The integration requires a lot of planning, organization, and execution across sites and functions to complete. While we have been actively integrating the systems, we have not taken our eye off serving our customers and communities, which has resulted in impressive loan and deposit growth during the same period. I am proud of our team for going above and beyond to ensure our integration plans are being accomplished and for taking great care of our customers while doing so. Our second strategic priority is to increase operating efficiency and elevate the customer experience through AI. This is an area where we are implementing best practices from Presence Bank and deploying their developed systems and processes across the combined organization. One item I am really excited about is the commercial credit system, which we will integrate in July. This uses embedded AI and machine learning to enhance the productivity of our talented credit officers by bringing automation, speed, and quality to the process. For example, automatic spreading will allow our credit analysts to save time, better reporting will provide our credit officers with helpful insights to make informed decisions, and the ability to draft credit memos will improve the speed and quality of the documentation process. These benefits will enable our employees to perform higher-value functions as well as underwrite deals more quickly to improve deal flow. Our third objective is to strengthen the talent pool and deepen our leadership bench. As I have met with our employees across the sites, including the newly added sites in Chester, Lancaster, and Dauphin Counties, I am continually reminded of the great team we have, and I firmly believe our key to success is our people. They are dedicated to serving the communities and working hard to find ways to make every day better. The team became bigger and stronger during the quarter as we welcomed the former Presence Bank employees to our organization, including additions to our executive leadership team. I am confident that together, we can continue to deliver financial solutions that improve the lives of our customers, allowing them to achieve their financial goals. Our fourth and final priority is to ensure everything we do increases shareholder value. The results we reported today demonstrate how we have accomplished this during the quarter, a culmination of our performance in Q1 and actions taken in previous periods, including the portfolio rebalancing we completed in 2024. The first three priorities I have reviewed position us to create even more value in future periods. One shining example of how we are creating value for shareholders is through our recent acquisition. Not only did the transaction bring immediate and meaningful growth to our bank, but we are also realizing the strategic and financial benefits of our acquisition more quickly than planned. One demonstration of this is that we now expect accretion to shareholder value ahead of our original projections. As a result of the quality of the Presence Bank team and assets, plus interest rates that have moved in our favor, we anticipate the tangible book value payback to occur more quickly than planned. After only one quarter since we closed the acquisition, it is obvious that we acquired a solid business with high-quality credit metrics and an excellent team, including several talented executives that have joined the Wayne Bank team, demonstrating their confidence in our joint future. The strong strategic fit and cultural alignment is contributing to our early success. I am encouraged by our initial progress and even more optimistic about our future and ability to generate meaningful and lasting shareholder value. I will now turn the call over to John to walk us through the results. John McCaffery: Thank you, Jim. Good morning, everyone. In the first quarter, we delivered improved financial results on an adjusted basis, continuing to benefit from our repositioned balance sheet and the outstanding performance of the entire Norwood Financial Corp. team. It was a great start to the year, continuing the momentum from 2025. We achieved record net interest income, increasing 3 million on a linked quarter basis due to higher interest-earning assets. Margin improved 8 basis points due to a slight decline in deposit costs coupled with a 7 basis point increase in interest-earning asset yields. Below the margin line, our quarterly results continue to include merger charges. We had about 5 million in merger charges in the quarter. We provided adjusted returns in the press release to show you performance ratios excluding these expenses. We are also providing pre-provision net revenue across the entire span of the press release. Provision was higher in Q1 versus 2025. Part of the increase was the result of annual updating of historical factors in the model as well as the integration of the Presence Bank portfolio. Our coverage ratio stands at 1.09%, compared to 1.07% at year-end. I will also note that we elected to adopt early ASU 2025-8 and therefore did not experience a CECL double count on the acquired non-PCD loans. Adjusted pre-provision net revenue was up about 11% on a linked quarter basis, mostly due to the improved margin on a larger balance sheet, offset by higher expenses. Noninterest income increased compared to the same period last year due to higher service charges and debit card income. Quarterly expenses were up as a percent of average assets compared to Q4 2025. Most of this increase is technology-related, as we are investing in new systems that will ultimately drive efficiency in the future. On that note, I would like to give a shout-out to the finance team that implemented a new accounting system while executing a merger and a core conversion. The first quarter was a transition period as we integrated the acquisition, with GAAP results impacted by related expenses. On an adjusted basis, we achieved strong growth in net interest income, partially offset by higher expenses. To expand on Jim’s point earlier, growth since January 5: loans grew approximately 46 million, or 8.4% annualized, and deposits grew about 70 million, or 11.6 million on an annualized basis. Overall, we are pleased with our performance and believe that our sound balance sheet management and credit metrics position us well for the future. Jim and I will now be happy to answer any questions you may have. Operator, please provide instructions for asking questions. Operator: If you would like to ask a question at this time, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from Daniel Cardenas with Brean Capital. Analyst: Good morning, guys. Couple of questions. On the operating expense number that came in this quarter, you said part of that was tech-related. How much was that? And then are all of the tech-related investments made? I am just trying to get a sense for what is a good run rate on operating expenses going forward. John McCaffery: The increase in tech expenses was mostly due to, well, again, we are increasing investments, as Jim mentioned, in the ABRICO system and our new accounting system. So there are ongoing expenses. We tried to exclude all of the conversion and other charges that were one-timers in Q1. So I think for OpEx going forward, the level that we are at is probably a pretty good run rate. Analyst: Okay. On the 16.1 million per quarter, is that where you think things will kind of shake out here? John McCaffery: I would like to see them come down a little bit. Again, we are trying to pull apart how much actually was related to activity during the quarter because of the merger, but I do think we will get efficiencies. I would not drop it below 15.08 million, I think, for the quarter. Analyst: Alright. Thank you. And then on the margin, the 3.68% margin, I probably missed it in the press release, but what was the contribution from yield accretion in the quarter? John McCaffery: The total pretax impact of purchase accounting was 435,000. That is substantially margin-related. There is some for the leases, but that is a minimal amount. So probably about 6 basis points this quarter. Analyst: And on a go-forward basis, what do you think yield accretion will contribute? John McCaffery: On a go-forward basis for the full year of 2026, we are scheduled at about 2.2 million, dropping to about 2 million for 2027, in total margin accretion. Analyst: Got it. And then one more question. The nonperforming number for the quarter, roughly 11 million if I am calculating that correctly. Was that all attributable to the acquisition, or were there other issues in the portfolio? John McCaffery: I do not think there were any nonperforming loans contributed from Presence. So that was mostly us. I am not aware of any large nonperformers that came in. Analyst: Pretty granular increase. Is that mostly on the commercial side? Maybe a little color as to what made up the linked-quarter increase? John McCaffery: Largely commercial. The indirect and consumer portfolios are about the same as the quarter before. We had a little dip in the last quarter on the commercial side, and we came back up to about where we were the previous quarter. I think we leveled off at that amount. Analyst: Okay. I will step back for now. Thank you. Operator: Our next question comes from Matthew Breese with Stephens. Analyst: Hey, good morning. I was hoping maybe to touch on the components of the margin. First, more broadly, I would love some color on competitive conditions around deposits in the Northeast. We have started to hear inklings of maybe some high 3% and low 4% promotional rates. Are you dealing with that? And what are your thoughts around the deposit cost outlook now that it does not seem like we are getting much, if any, rate cuts? John McCaffery: Even into Q1, we were continuing to lower deposit costs based upon the December rate cut. We are not talking about raising any of our specials on CDs at all. In the new markets, I think they are a little more competitive than we are used to up here in Northeast Pennsylvania, but we are not seeing competitive pressure in our markets on deposit pricing yet. James Donnelly: Yes, Matt. We see some spotty stuff. If you dig into why they are doing it, they are people with very high loan-to-deposit ratios or just interesting business strategies sometimes. But we see that we are competitive with our current rates, and we are not seeing a lot of upward pressure. I am still seeing some competitors bringing their rates down. Analyst: Got it. How much more room do you think there is to squeeze deposit costs lower? I look at your CD cost this quarter knocking on 3.6%. Is the blended rate of maturities still in the 3.30% range with some downside? John McCaffery: Most of that is just really churning our specials we have had out there. And there is a push to get our CDs down below 40% of total deposits. We hope that will give us some more levers to push on going forward. We had just a couple basis points drop in some of the deposit categories—just 1 basis point overall. I want to get a better feel for the full portfolio now that we have the deposits in one system. We completed the core conversion on April 5, so getting that kind of data is underway. We are not seeing downward pressure on the lending rates to the level that might be seen elsewhere in the Northeast. I think our ability to squeeze out of the deposits will be smaller than it has been. It is there, but it will be a smaller amount. Analyst: And then on the lending side, same question around competitive conditions. What are new origination yields on the pipeline right now, and how does the pipeline look? John McCaffery: The pipeline is very healthy and has been. Looking ahead 30, 60, 90 days, we are ahead of our general pipeline. Quality is very good. Pricing is in line with our expectations. The closings that we just had averaged 7.05% for the last 18 we booked. Most of the rates coming across are still higher than the portfolio yield, so we think there is still room for some expansion. Analyst: So it sounds like deposit costs are flat to down a little bit, and there is still upward repricing on the loan side. How do you feel like the margin will shake out as we progress through the year? John McCaffery: I think we still have room to expand somewhat. I would not put it at what we experienced in the first quarter, given the different financial ins and outs with the acquisition. If we can get another, let us say, 3 to 5 basis points on loans going forward, I think we can do better. We had some drag on cash in Q1 as well, which we will be able to deploy more easily going forward, given the systems issues. So I think the margin can increase throughout the year. I would not put it at 8 basis points on a linked-quarter basis, but maybe 3 to 5 basis points. Analyst: Great. I appreciate all that. I will stop there. Thank you. Unknown Speaker: Thanks, Matt. Operator: We have a question from Daniel Cardenas with Brean Capital. Analyst: Thanks, guys. Just a couple of quick questions. The margin discussion you just had, John—are you talking 3 to 5 basis points for the remainder of the year, or perhaps over the next couple of quarters? John McCaffery: Over the next couple of quarters. Analyst: Good. And then on the fee income side, nice improvement quarter over quarter. What are some of the drivers that could potentially push that number higher as we look at 2Q and beyond? James Donnelly: Part of it, Dan, is we were an underperformer on debit revenue. We put a strategy in place a couple of years ago and changed the way we were looking at that and promoting it. Part of it is getting more debit cards in more people’s hands and promoting utilization. We have been working on growing our fee income businesses for the last few years, and it is starting to pay dividends. There is lots of room for us to grow there. It is just a matter of making sure that we are able to staff up appropriately to grow our brokerage, trust, and mortgage businesses. Analyst: Okay. James Donnelly: Treasury management is geared up for the second half of the year to do a nice job as well. Analyst: I was just going to ask you about that. Okay. Perfect. Alright. I will step back. Thank you. Unknown Speaker: Thanks, Dan. Operator: That concludes today’s question-and-answer session. I would like to turn the call over to James Donnelly for closing remarks. James Donnelly: Thank you once again for joining us this morning. We made a great start to 2026, continuing the momentum built in 2025 as we live out our mission to help our customers and communities build strong financial futures so that every day, every year, every generation is better than the last. As we continue to integrate the Presence Bank acquisition and benefit from the shared best practices, we will be better positioned to deliver that better future, united to serve our communities. As we move forward, our disciplined approach, high-quality credit metrics, and careful execution enable us to deliver improved financial results and lasting value for our shareholders. I look forward to updating you on our progress. Have a great day. Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
Operator: Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cadence First Quarter 2026 Earnings Conference Call. [Operator Instructions] Thank you. And I will now turn the call over to Richard Gu, Vice President of Investor Relations for Cadence. Please go ahead. Richard Gu: Thank you, operator. I'd like to welcome everyone to our first quarter of 2026 earnings conference call. I'm joined today by Anirudh Devgan, President and Chief Executive Officer; and John Wall, Senior Vice President and Chief Financial Officer. The webcast of this call and a copy of today's prepared remarks will be available on our website, cadence.com. Today's discussion will contain forward-looking statements, including our outlook on future business and operating results. Due to risks and uncertainties, actual results may differ materially from those projected or implied in today's discussion. For information on factors that could cause actual results to differ, please refer to our SEC filings, including our most recent Forms 10-K and 10-Q, CFO commentary and today's earnings release. All forward-looking statements during this call are based on estimates and information available to us as of today, and we disclaim any obligation to update them. In addition, all financial measures discussed on this call are non-GAAP, unless otherwise specified. The non-GAAP measures should not be considered in isolation from or as a substitute for GAAP results. Reconciliations of GAAP to non-GAAP measures are included in today's earnings release. [Operator Instructions] Now I'll turn the call over to Anirudh. Anirudh Devgan: Thank you, Richard. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report that Cadence had a strong start to 2026 with accelerating AI demand and disciplined execution, delivering one of the best Q1s in company's history. Our record backlog of $8 billion was ahead of plan, reflecting strong customer confidence in our AI-driven portfolio and its pivotal role in enabling delivery of their increasingly complex chip and system design road maps. Given the accelerating momentum of our business, we are raising our 2026 revenue growth outlook to 17% and expect to achieve the Rule of 60 for the first time. John will provide more details in a moment. Agentic AI era is here, and Cadence is leading the transformation of semiconductor and system design. At CadenceLIVE Silicon Valley 2026, we took a major step towards fully autonomous chip design, pioneering the industry's most advanced and comprehensive agentic full-flow platform. We introduced AgentStack, the head agent framework for our AI Super Agent, which enables knowledge sharing across the design flow and extend autonomous designs from chips to 3D-IC to systems. Building on our revolutionary ChipStack AI Super Agent for RTL design and verification, we introduced two new breakthrough AI Super Agents, ViraStack for analog and custom design and InnoStack for digital implementation and signoff. Together, these solutions span the entire chip design flow, creating a connected continuous learning platform that brings the industry closer to comprehensive automation. As the industry begins transitioning to agentic AI, the need for physically accurate and highly mathematical EDA solutions become even more critical. Our agentic AI solutions are built on decades of domain expertise, proprietary data and tightly integrated physically accurate engines, delivering high fidelity results. We continue to view our platform as a 3-layer cake, with accelerated compute and data as the base layer, principal simulation and optimization as the critical middle layer and agentic AI as the top layer. As I've said before, we believe the greatest value comes from the tight coupling of these layers, reinforcing each other to deliver much better results. As these super agents invoke our simulation, verification and implementation engines at scale, we expect them to materially expand EDA consumption and drive higher usage across our platforms. We announced a strategic collaboration with Google to optimize the ChipStack AI Super Agent with Gemini on Google Cloud. By combining LLM reasoning with GCP scalable compute, this collaboration delivers a cloud-native platform for next-generation chip development. In Q1, we furthered our long standard partnership with MediaTek through a wide-ranging expansion across our new agentic AI offerings and core EDA, 3D-IC and system analysis solutions. Physical AI is emerging as the next big wave of intelligence as AI moves into autonomous systems, autos, drones and robotics, and Cadence is uniquely positioned to lead this transition. The addition of Hexagon's D&E leading structural and multi-body dynamics technologies transforms our system analysis portfolio to a leadership position in physical AI, enabling customers to build and train fundamentally new AI word models by narrowing the critical sim-to-real gap. At CadenceLIVE Silicon Valley, we announced an expanded partnership on AI and robotics with NVIDIA. By combining our agentic AI-driven solutions with NVIDIA's advanced technologies, we are accelerating engineering workflows and boosting productivity across chip design, physical AI systems and hyperscale AI factories. Now let me provide an update on our businesses. Our IP business continued its strong momentum, with 22% year-over-year revenue growth driven by accelerating demand of AI, HPC and automotive workloads. Growing complexity of advanced node designs and chiplet-based architectures is driving strong demands of our differentiated Star IP portfolio across interface, memory and foundation IP. We achieved meaningful competitive wins and customer expansions at marquee accounts, reflecting the breadth of our portfolio and more importantly, the differentiated performance of our solutions. We closed a record deal with a leading global foundry, marking our largest IP engagement with this customer to date and reinforcing our leadership at the most advanced nodes. With strong market tailwinds, focused strategy and expanding customer proliferation, we remain very well positioned for continued growth in IP. Our core EDA business delivered another strong quarter, with revenue growing 18% year-over-year, driven by increasing proliferation of our solutions at market-shaping customers. Our AI-driven solutions, and increasingly, our agentic offerings are becoming an important part of customer renewals and expansions. Demand for our hardware accelerated in Q1, resulting in our best quarter ever, led by AI HPC customers and increasing demand in automotive and robotics. Palladium Z3 continues to be the gold standard for emulation and drove multiple competitive displacement. Momentum on verification software grew, particularly in Xcelium and Verisium SimAI, And ChipStack generated tremendous customer interest, with a large number of evaluations underway. Led by AI-driven Cadence Cerebrus solution, our digital platform continues to gain share, especially at the most advanced nodes. A global semiconductor design leader significantly increased their Innovus usage and adopted our digital signoff solutions, and a marquee AI infrastructure company expanded their usage of our signoff solutions in their leading-edge ASIC designs. In custom and analog, our AI-driven Virtuoso Studio continued its strong momentum in design migration and layer automation as it gets increasingly deployed by analog and mixed signal leaders seeking greater productivity. Our System Design and Analysis business delivered 18% year-over-year revenue growth as AI-driven multiphysics simulation and 3D-IC become essential to addressing growing system challenges. We have strong momentum in 3D-IC, where our unified multi-die integrated design to analysis flow is helping customers address their rising chiplet and advanced packaging complexities. We also saw strong momentum in Sigrity and Clarity with multiple memory and advanced IC packaging customers expanding their deployments as they move to higher-speed interfaces. Customer adoption is increasing as they look to address signal integrity, power integrity and thermal challenges earlier in the design flow through deployment of a full Cadence signoff flow. In closing, I'm pleased with our strong execution and the broad-based momentum of our business. As the agentic AI era unfolds, Cadence is leading the charge to realizing much higher design productivity, increasing design complexity, and the growing need for productivity is creating a compelling long-term opportunity for Cadence. With our differentiated solutions and expanding agentic AI portfolio, I believe we are very well positioned to lead this transition and continue delivering meaningful innovation and value to our customers. Now I will turn it over to John to provide more details on the Q1 results and our updated 2026 outlook. John Wall: Thanks, Anirudh, and good afternoon, everyone. I'm pleased to report that Cadence delivered excellent results for the first quarter of 2026, with accelerating momentum and broad-based strength across all our businesses. Robust design activity, coupled with our solid execution, drove 19% year-over-year revenue growth and 45% operating margin for Q1. First quarter bookings were ahead of expectations, resulting in a record backlog of $8 billion. Here are some of the financial highlights from the first quarter, starting with the P&L. Total revenue was $1.474 billion. GAAP operating margin was 29.3%. Non-GAAP operating margin was 44.7%. GAAP EPS was $1.23, and non-GAAP EPS was $1.96. Next, turning to the balance sheet and cash flow. Our cash balance was $1.407 billion, while the principal value of debt outstanding was $2.925 billion. Operating cash flow was $356 million. DSOs were 67 days, and we used $200 million to repurchase Cadence shares. Before I provide our updated outlook, I'd like to highlight that it contains the usual assumption that export control regulations that exist today remain substantially similar for the remainder of the year. For our updated outlook for 2026, we expect revenue in the range of $6.125 billion to $6.225 billion; GAAP operating margin in the range of 27.5% to 28.5%; non-GAAP operating margin in the range of 43.5% to 44.5%; GAAP EPS and in the range of $4.39 to $4.49; non-GAAP EPS in the range of $7.85 to $7.95; operating cash flow in the range of $1.875 billion to $1.975 billion, and we expect to use approximately 50% of our free cash flow to repurchase Cadence shares in 2026. With that in mind, for Q2, we expect revenue in the range of $1.555 billion to $1.595 billion; GAAP operating margin in the range of 28.5% to 29.5%; non-GAAP operating margin in the range of 44.5% to 45.5%; GAAP EPS in the range of $1.07 to $1.13; and non-GAAP EPS in the range of $2.02 to $2.08. And as usual, we published a CFO commentary document on our Investor Relations website, which includes our outlook for additional items as well as further analysis and GAAP to non-GAAP reconciliations. In conclusion, Cadence is off to a strong start for the year. We are raising our 2026 revenue outlook to approximately 17% year-over-year growth. As always, I'd like to thank our customers, partners and our employees for their continued support. And with that, operator, we will now take questions. Operator: [Operator Instructions] And our first question comes from the line of Charles Shi with Needham. Yu Shi: Anirudh, I think I have a pretty high-level question, but this is probably top of the mind for a lot of investors. We obviously learned agentic AI is probably good for EDA, good for license consumption, et cetera. But we're still hearing some concerns around AI's ability to actually write the software, and there are some doubts around whether AI can actually write better EDA base tools like base tools, I mean, Virtuoso, Innovus, those kind of tools. So -- and obviously, there are always many EDA start-ups happening at the same time. And so the question is, is AI's ability to write software worries you about the defensibility of the EDA base tool business? Obviously, once again, we understand agentic AI is good for consumption of the base tool business, but I want to get your thoughts. Anirudh Devgan: Yes. Charles, thanks for the question. So I mean, there are multiple parts to this. Of course, I'm super excited about agentic AI applied to chip design and EDA. And your question is more specific to the base tool and whether AI can write those base tools. So first of all, I'm very confident in our position in the base tool and our competitive advantage, okay? And just to remind everyone, I mean, we have about 15,000 people now in Cadence and about 10,000 are in R&D. We have more than -- half of them have advanced degrees. I think more than 1,000 of them have PhDs from the top universities. So we will, anyway, deploy AI internally like we are to write our software better. But I'm not worried that some other party will be able to write any better base tools. So -- and our competitor of the base tool is anyway best-in-class, and I don't see any reason that will change going forward, okay? Now what I'm super excited that we launched in CadenceLIVE is the agentic part and the interplay of the agentic tools with the base tools, the AI orchestration combined with physical accurate base tool. And that creates new opportunities for us, both in terms of TAM expansion. Because what agentic AI allows us is to sell products in spaces we didn't have products before, like RTL generation, verification plan generation. And those products, I think will be consumed more on a subscription plus consumption model. So this is an entirely new category for Cadence. And then in turn, like you said, agentic AI will drive more of our base tools. So I feel pretty good about this kind of 3-layer framework we have talked about and confident going forward. Operator: And our next question comes from the line of Jason Celino with KeyBanc Capital Markets. Jason Celino: Maybe just a clarifying question. So I noticed that the operating margin guide is coming down by a little bit. Curious if -- like what are the main drivers of that, John? I know we're layering in kind of the Hexagon acquisition, but on like an absolute basis, it's relatively small layering in that OpEx. So maybe you can just help us understand the guide on the margin? John Wall: Yes. Sure, Jason. Thanks for the question. What you're seeing there is primarily the impact of including the Hexagon design and engineering business in the current outlook. The strategic opportunity there is very large, but the 2026 P&L reflects the timing of integration that we announced in the press release when we closed the deal, that we expect $160 million of revenue this year. That's in the guide now. We expect it to be dilutive to the tune of about $0.28. The margin impact on the $160 million is kind of in the 5% to 10% range. But the dilution comes from -- because we paid 30% of the acquisition price in shares and 70% in cash, so the interest component on the -- or the lost interest income on the cash causes a lot of the dilution impact in the short term. We'd expect it to be accretive in 2027. The -- yes, so I think the way to think about it is financially, 2026 is an integration year. And the guide includes the acquired cost base, the financing impact, the acquisition-related integration costs and kind of near-term dilution. And that's why revenue moves higher, while EPS and operating margin are lower than the February guide. So yes, $160 million. And I think in Q1, the impact was slightly less on the EPS that we had about $20 million of revenue from Q1 from Hexagon. So only about $0.01 kind of dilution impact. So EPS would have been like $0.01 higher if we didn't have Hexagon. Operator: And our next question comes from the line of Vivek Arya with Bank of America Securities. Vivek Arya: Anirudh, in the last year, all we have been hearing nonstop are different news about chip shortages and growing kind of price of chips and just the pricing power that many of your customers have. And my question is, what affect do shortages and the fact your customers have more pricing power, what effect does that have on their engagement with Cadence. Does it restrict chip starts? Does it shift them towards higher ASP products? Just what impact do semiconductor shortages have on your growth and engagement trajectory? What has changed? And what are you observing in your customer behavior? Anirudh Devgan: Yes. Thanks, Vivek, for the question. So I would say a few things. So first of all, I mean the environment is pretty healthy, both for the system companies and semi companies. So that's always good. Like you know, I mean, some of the hyperscalers and AI semi companies who are already doing well last year, but now the memory companies are doing well, even analog companies are doing well. So we, of course, want to see our customers doing well, and that creates a positive environment for engaging, especially with these new solutions we have. So that's actually a pretty marked improvement over the last 3 to 6 months. So that's number one. Number two, the shortages it doesn't directly -- I mean, the customer is still committed to long-term R&D road maps. And sometimes, they may like do -- like I've seen in a few cases, the customers, for example, may do multiple foundries or nodes to make sure there is capacity at a particular node or foundry. So that would directly lead to more design activity for us. So in general, if the customer is healthy because the revenue is going up, they will do not only more in the current designs to accelerate them, but also may start new designs. I think that's the second thing, I would say. And third thing, which is more exciting for us is, as we have these agentic solutions, it can give more productivity for our customers, and we can deliver more value ourselves. And the more value we deliver, the more opportunity we have to capture part of that value. And the customers are very open to those discussions as there is more automation. So we are actually -- like I mentioned, there's a lot of engagement with ChipStack and also the new AgentStack, InnoStack, ViraStack. There is no pushback at all. If we can deliver productivity, the customer is more than willing to engage. So that I would say, Vivek are the -- at least the 3 broad areas I see in the current environment. Operator: And our next question comes from the line of Jim Schneider with Goldman Sachs. James Schneider: I was wondering if you could maybe unpack your commentary on the agentic solutions, specifically around your indication they would drive increased consumption for base tools. Can you maybe talk a little bit about the pricing for those tools, how the agentic solutions are being priced specifically? And then on net, how -- if you could frame for us maybe how you might be able to capture more revenue value overall on net between agentic and conventional licenses? Anirudh Devgan: Yes. Thanks for the question. So I think the opportunity is significant, I believe, and especially with agentic because what -- and this happened over the last, let's say, 6 to 12 months, in my opinion, and more so in 6 months is -- not only the agentic tools have evolved, but agentic tools are able -- we can embed skills in them so they can do a lot more automation. For example, we launched ViraStack, which is analog automation. Analog has been a long problem to automate, right? It's very difficult to automate. But now with these agentic flows and skills, we can automate that. So what does that mean in terms of pricing or how these things are consumed? So first of all, like I said, this kind of automation was not possible before. So all this work used to be done by the customers themselves, right? And in that case also, I talked to one big customer. Like, for example, they said for analog or even for digital, every new design, they require 2x more engineers. And anyway, it's not -- it's like unrealizable headcount growth because they can't hire 2x more engineers every time. So the way we plan to monetize and the early signs are positive is that, first of all, we'll sell new tools that we never sold, which is more like this was manually done by customers like doing analog design or doing RTL. So that will be priced as a subscription plus consumption model, very similar to other kind of leading AI tools. So that's a completely new category for Cadence. And that will kind of bend the headcount curve for our customers, but the expected headcount curve was never realizable anyway. So this is the history of automation, as you know, in EDA. We always need to do that. But this time, we can do that with the agentic kind of AI flow. And then once the agent runs, like when a user designs a chip and this is pretty common, right? Like let's say that chip has 100 blocks, just to keep it simple. And there are 100 engineers, 1 engineer is running 1 block. So 1 engineer will run like 1 or 2 experiments, he or she, to see which settings or which design is better. But when the agent runs those blocks, they may try 10 or 100 variations of those things. And anyway, AI does a lot more exploration than a human would do. So not only agent can give more productivity, it by nature runs more of the base tools. So that's why if you look at -- our usage of base tool is going up pretty significantly in this kind of environment. So this is the 2 ways. And in those environments is a traditional business model, but -- in the base tools, but there will be more demand for it. And then the new business model, which is more automating which was manual with agentic flows. John Wall: Yes. And I would just add, Jim, that what we saw from Q1 is -- I mean, the overall pricing environment has improved. Pricing obviously remains value-based with us. We provide tremendous value to our customers, especially with our agentic flow, and we stand to benefit from our customers' success in that area. Also, any shift that you see from customers' labor spend to automation, that's likely to be irreversible and likely to accelerate over time. Operator: And our next question comes from the line of Siti Panigrahi with Mizuho. Sitikantha Panigrahi: Great. I want to switch to the IP business. Anirudh, you talked about IP entering now third year of strong growth. Could you give an update like what you saw in Q1? And are the HBM, LPDDR6 and all that remaining still the key drivers? Or -- and the new foundry like Rapidus, Intel Foundry, are they contributing meaningfully to the IP demand yet? And John, just to clarify also on your EPS guidance, you said $0.28 dilution, but you lowered only $0.20. Just want to clarify that your organic basis, you raised by $0.08 EPS. John Wall: I'll take the last part first. Yes, yes, we did. We raised by $0.08. Anirudh Devgan: And Siti it's a great start to the year, okay? And not just in IP across the board. And I was looking at with our team. I think this is one of the strongest raises we have had in Q1. We only gave you guidance in February. So 2 months later, I think this is one of the strongest raises we have had. Now all the businesses are doing well and especially IP is off to a great start, okay? And I think it will do well going forward from what I think I see. And there are at least 3 big reasons in my mind for IP growth. And like I said, it's the third year now. So we don't like to talk about things too early. But after 3 years of strong growth, I think that is a good trend. So the first thing is our IP quality and performance is just better. We have a new team, just the performance just -- because these things are standard-based IPs, right, like DDR or PCIe. So the spec is same. But if our power area is better than the competitor or what the customer can do, then they will buy our IP. So the most promising thing to me is because of the strength of our R&D team, our PPA is better, and that is leading to a lot of competitive wins at pretty significant major customers. And I highlighted some of them in CadenceLIVE. So these are like really big kind of marquee names. So that gives me strength that the team is operating well. So that's number one. Number two, our portfolio is expanding, like we have highlighted with like HBM. And some of it is organic, some of it is acquired, like HBM, we acquired from Rambus and then we improved it. But UCIe, which is a critical chip-to-chip technology was all developed organically, okay? So the second reason is that our portfolio is expanding. The third reason is these new foundries, okay? And it's very encouraging to see. Of course, we want to make sure we are best-in-class in TSMC, which is the leading foundry. But now there are at least 3 other major foundries with, as you know, Samsung, Intel and Rapidus at advanced nodes and then Global and others at mainstream nodes. So the amount of design activity with AI and number of increasing foundries requires more IP. So that's why I'm actually pleased to note today like in the prepared remarks that we had a pretty significant IP deal, one of the largest ones at a leading global foundry, okay? And just to clarify, that is not Intel, okay? We are actually pleased with our discussions with Intel, with Lip-Bu and team on 18A and especially on 14A. I think Intel realizes they need to invest more in 14A and this time, be more ready because the availability of IP and EDA solutions as 14A is critical as they go talk to their customers. So we are making very good progress with Intel, and we'll have -- soon, we'll have more to say on our engagement with Intel. But I'm also pleased with this engagement with the other global foundry. So overall, IP growth seems robust and I'm very pleased where we are. And we're already always very strong in EDA. But historically, last few years, we have not done as well in IP. But right now, I think we are very well positioned and also well positioned in SDA. Operator: Our next question comes from the line of Joe Quatrochi with Wells Fargo. Joseph Quatrochi: Maybe just to kind of follow up on the discussion earlier on EDA. I mean, I guess when you take a step back and you think about EDA's share of R&D expense and clearly, we're seeing an acceleration of R&D expense across a number of different companies. How should we think about EDA's contribution to that or percent of that? And where could that go given the value maybe you're providing from AI? Because we're also seeing, right, memory costs are increasing, things like that, that also need to flow through that R&D line. Anirudh Devgan: Yes, good question. And we have to observe it closely, right? You know us, we'd rather like print things than kind of predict what will happen because it's better to show than to. But as you know, historically, we have said EDA used to be 7% of R&D and now it's more like 11% of R&D. So it has gone up and R&D spend itself will go up significantly. But I think there is a real potential, especially with agentic AI for that 11% to go up. And all the big CEOs I talked to, they are not only willing, they want to see that happen. They want to invest in more automation and compute to make it happen. So I'm pretty sure right now, I think it will go up. Now how much it will go up, we will see, right? But I think there is a meaningful opportunity for automation to be a higher percentage of R&D plus R&D itself to go up. Operator: Our next question comes from the line of Ruben Roy with Stifel. Ruben Roy: John, I want to go back to the operating margin discussion. It's great to see that you guys are targeting Rule of 60 by the end of the year here. Just thinking about that, though, it's driven on revenue acceleration. Obviously, we've got the Hexagon integration costs here. But how are you thinking about the operating model relative to operating margin as you get over $6 billion in revenue? Does the operating model look a lot different than it did at $5.3 billion? Is this sort of 43% to 45% range, how we should be thinking about the operating margins? Or -- and I ask that because, obviously, you're investing in agentic AI and other sort of new product areas. Just wondering if you can give us a little bit of an idea of how you're thinking about the operating margin structure at this revenue run rate longer term as you integrate Hexagon. John Wall: Yes. Sure, Ruben. Thanks for the question. Yes, I think when we look at our like organic incremental margin, it's closer to 60% these days than 50%. And as we get our arms around these acquisitions, it typically takes us 12 to 18 months to improve the profitability up to kind of something close to our expectations that Cadence that -- and I would liken the profile to the way BETA. So in '24 and '25, you kind of had an operating margin profile where we had the dilutive impact of the BETA acquisition in '24, but then margins improved dramatically in '25 as we got the synergies and we got the benefits of making that more profitable. I would expect a similar pattern for '26 and '27 when it comes to Hexagon. We have a slight headwind in the short term, but there's plenty of opportunities to improve the profitability there. And also with the benefits that we're seeing in terms of customer engagement accelerating on the agentic AI front, I think there's even more opportunities to stretch that incremental operating margin going forward. Operator: Our next question comes from the line of Harlan Sur with JPMorgan. Harlan Sur: If I take your 2Q guidance and look at your implied second half guidance, the average quarterly revenue run rate in the second half is actually slightly below the 2Q level. Is there some lumpiness in the Hexagon business in the second half, maybe moving customers to multiyear license agreements? Or is it due to some lumpiness in the core business, maybe a more first half weighted hardware or IP shipment profile? John Wall: Yes. Thanks for the question, Harlan. Yes, sure. Look, the first half is very strong. And the second half, I'd describe as containing appropriate prudence. The -- your comment on Hexagon's D&E business is correct. They are more kind of first half weighted in terms of their profile. When I looked at last year's revenue for Hexagon, I think Q3 and Q4 were their worst 2 quarters of the year. They tend to have a lot of early year kind of dated contracts. But overall, I think the second half -- I mean, it doesn't -- Hexagon doesn't impact the first half, second half that much. It's really -- I think we had such -- as Anirudh said, Q1 guide represents one of the highest raises we've had at this time of the year. And we normally like to wait until we have 2 quarters under our belt to raise the guide. We couldn't help but raise the guide given the strength of Q1 bookings and the strength we saw across the board. So we just wanted to wait until July to update the second half. Operator: Our next question comes from the line of Lee Simpson with Morgan Stanley. Lee Simpson: I just wanted to ask about physical AI. I mean you've made some pretty good acquisitions. You now announced collaborations, especially with NVIDIA. So I'm just trying to get a sense for the momentum here and what really is still the early years in this breakout. And I think, in particular, the take-up of your emulation tools, especially as it relates to closing the sim-to-real gap in robotics and probably even self-driving chips as well, whether or not that's going to really lead to an outsized value capture for Cadence? And when do we actually see this in the numbers as well? Anirudh Devgan: Yes. Thanks for the question, Lee. So I mean, like I talked about it forever now that we look at this thing as a 3-layer cake, right? And there are multiple slices of the cake and the first slice was data center AI or infrastructure AI. And the second big slice is physical AI. And of course, I've said this for 5 years now, where I believe physical AI will be bigger than data center AI by a long chart because you're talking about like trillions of dollars of product opportunity. And it will reconfirm the data center layer -- data center slice because to deploy, for example, an AI model in the car, you need to train it on the data center anyway. So I think it will even help the data center slice. Now for our portion, yes, we made this acquisition we are super excited about, and we have this training flow for word models and also more complete simulation environment. So what is exciting about Hexagon is with a combination of our previous technologies like Millennium and Cascade and BETA, we do have finally a complete solution for physical AI in the middle layer kind of principal simulation and optimization layer. And then that can be used to do these word models, which will be different in the top layer. But the other thing I want to emphasize, apart from the SD&A and the AI part, that physical AI itself will drive a lot of silicon design. So it is also good for EDA and IP. And this is -- you're starting to see that. Of course, companies like Tesla mentioning that they don't have enough silicon because of physical AI. So physical AI not only is good for SD and AI, it is also really good for silicon. And it also is in the sweet spot of Cadence because Cadence always had both analog and digital solutions, and that's why we're always good with all the major semiconductor companies for automotive and now with all the system and OEM companies for automotive. And as that translates to drone and robots, it will also turbocharge the silicon business. That's why I have been always been excited about physical AI, not just for the AI and SDA part, but also for EDA and IP. Operator: Our next question comes from the line of Gianmarco Conti with Deutsche Bank. Gianmarco Conti: Perhaps on hardware, another strong quarter, of course. But as we think about the next refresh cycle for Palladium and Protium, historically, you've roughly been on a 2-year cadence. And should we expect Z4, X4 within the next 12 to 18 months? Or is the bar to upgrade higher now given how recently customers absorbed the first generation? And perhaps related, are you seeing any of your own agentic AI tooling materially compress the internal hardware development time lines to the same extent that customers are reporting that same 10x productivity on RTL? Anirudh Devgan: Yes, absolutely. Great question. So first of all, like I said, we have most of our headcount is engineering, right, whether it's R&D or customer support. So we always want to use our own products in both our hardware groups, which is a significant design team. We do both software, hardware and all the system design in Palladium and Protium. And also, just to remind you in our IP team. It's a great -- we are working very well together, our IP team and EDA team because IP, we have so much demand. And instead of, again, increasing headcount, we are always sensitive about how much headcount. We'll increase, and we are increasing headcount in all areas, including IP, but we can make them a lot more productive with agentic AI. Now on the hardware part, Yes. I'm very pleased. I mean it's a remarkable start to the year. Our competitive position is amazing. We are the only company that does its own chip, as you know. We have at least a 10-year lead in that in Palladium. And then Protium also is doing now in which we use the FPGA solution. Now just to be clear, we always design next-generation systems. And because we control the whole stack, including the system design and silicon design, one thing to remember is we will do it much faster than what the FPGA cadence will be. FPGA companies will also do next-generation FPGA designs. But because we are our own chip, we do our own design, it will be much faster than FPGA. So what that means is the lead of palladium over FPGA systems will only continue to increase as we introduce new products, okay? But I'm not going to get into like when we're going to introduce new products because the current products are doing amazingly well. Of course, we are designing Z4 and Z5. But what you have to remember is the current Z3 system has the capability to design 1 trillion transistor systems, okay? And right now, the biggest systems in the world are 100 billion to 200 billion transistor. So we have a lot of leeway. The industry is supposed to reach 1 trillion transistor by 2030. One thing I'll assure you is we'll have a Z4 system before 2030. So there is no issue of whether Z3 can handle the capacity and requirements. So we're just happy to work with our customers. At the same time, we want to assure our investors and customers, we have a very, very good road map on hardware systems. Operator: Our next question comes from the line of Jay Vleeschhouwer with Griffin Securities. Jay Vleeschhouwer: Anirudh, now that you've completed Hexagon MSC acquisition, it would appear that you are the fourth largest non-EDA simulation company, let's call it, industrial simulation with multiphysics. Your share is perhaps 1/10 of that total market, again, aside from EDA simulation. So the question is, now that you've assembled all these pieces, invested over $5 billion over the last 5 or 6 years, can you speak in some detail about what your principal technical and/or go-to-market objectives or executables are going to be for the next year or so? Synopsys talked about what they're doing with Ansys, perhaps you could do the same for your pieces. It also seems you're becoming a little bit more vertically integrated in go-to-market with the acquisition of a long-time channel partner. So maybe talk about some of those critical elements here to grow your revenues and share in that business. Anirudh Devgan: Yes, Jay, that's a lot there, right? There's a lot there. So let me try to unpack some of it. I'm sure we can talk more if I don't get to all the pieces there. Well, first of all, we are satisfied with the scope of our SDA business now after this acquisition. So I mean, this is rough numbers. So I think it will be roughly $1 billion of run rate. And what is more exciting to me is that it is focused in the 2 important areas of SDA. I'm a fan of SDA for a while now, I don't know, maybe 8 years now. But not all SDA is created equal, okay? To me, we want to do the part of SDA that is either growing well or is closely related to EDA. So the part of SDA that is closely related to EDA is, of course, 3D-IC, okay? So we have an inevitable position in 3D-IC with Allegro being the leading packaging platform, and then we completed that with Clarity and Sigrity and Celsius, so all the thermal electromagnetics. So and Integrity. So I'm pretty happy with the 3D-IC portion, which is like the closest to chip design, the part of SDA that is closest to chip design and the part that is growing the most because of AI. Now the other part now with Hexagon is all this physical AI and for design of cars and robots. So that with this acquisition is complete, and we can do a much better integration of that part of SDA. And there are multiple things happening there, okay? There are at least 2, 3 key things. So first thing is we will integrate the whole solution. I know you asked me this before, when will you integrate? So I think now that we have all the pieces of critical mass, this is the right time to integrate because we have CFD now, we have structural, we have multibody dynamics, we have pre and post, okay? So we have a lot of effort to make a full flow solution, integrate them. And I kind of hinted at that at CadenceLIVE. The other thing, the way to integrate these solutions, which is true for EDA, but will be true in this area is agentic flow. So you will see from us an agentic flow to do system design. And that part of the market has not seen that much -- it's even worse automation than chip design that had a lot of automation. But there will be agentic flow, which will integrate all these things in a better way. The second thing we will do is that there is a lot of room for improvement of these solvers especially in our history of improving the base solvers, adding GPU acceleration, adding phys AI or AI surrogate models. So for example, there's a potential for at least the order of magnitude improvement of performance of these new solvers. So that's the second thing we'll do in terms of R&D. And third thing, what I'm also pleased with Hexagon is we did get like a good go-to-market team. That's one area we have not been as strong because we were -- most of the others was mostly organic. And we did move some of our people into go-to-market. But with Hexagon D&E business, we get a much stronger go-to-market team. And then as we mentioned, we also acquired some resellers to strengthen go-to-market, okay? At this point, I'm very confident of our R&D solution, and it will get improved by agentic solutions. It will get improved by speeding up the solvers, but we also need to invest in go-to-market and Hexagon gives us a good start. So you will see that, too. So these are the 3 kind of focus areas of improvement of SDA. Operator: Our next question comes from the line of Kelsey Chia with Citigroup. Wei Chia: Anirudh, you mentioned that the AgentStack helps address talent gaps for chip designers. It sounds like the AgentStack adoption is just accelerating from here. Based on your conversation, is that the case? Or are you seeing cases where customers prefer to build or use their own agentic stack versus adopting Cadence's? And so is Cadence able to sort of charge for AgentStack or the increased base licenses as an incremental add-on within an existing fee or contract? Or is that monetization tied to renewals? Anirudh Devgan: Yes. Thank you. There's a lot of good questions there, okay? So make sure I -- and I'll start and John can add to that. Now first of all, I think just to be clear, the customers will always write their own agents as well, if I understand the first part of your question. Even in our pre-agentic flow, we would have given a lot of flexibilities to our customers. We had a Tcl/Tk or a Python interface to our tools, and they would always have their own flows. I mean this is natural for big customers. I mean these are who's who of tech companies. So they always want to have some differentiation from one flow to the other. So -- and that will happen in the agent word itself. So I think most of our customers are writing some of their own agents. But the key thing is that the critical agents, okay, like these big super agents we talked about, like RTL design and verification, analog design and physical design, these are like super categories. And also the value of the agentic flow is not just in the agent itself, it's always the coupling of the agent with the base tools because we operate the agent at a much lower level of interaction, this API calls, which is not possible for customers to do. So what has happened as an example, as we showed InnoStack or ViraStack and ChipStack to our customers, they realize, oh, there's no point writing these kind of agents, okay? So they would rather use the super agents we have because not only we are good in agentic flow, we are good in the coupling to the base tools. Now they will still write some agents to customize things which are specific to them, and we naturally welcome that. And then the AgentStack allows the environment to -- for the customer to write its own agent, but also the customer to write its own skills. We want the customers to write their own skills in InnoStack, which may be specific for a part of design. So this has always been our strategy to be more open to customer kind of customizing their own environment, okay? And I think the second question is on renewals versus new -- I mean it's a combination of that always, John, maybe you want to comment on that. John Wall: Yes. Yes. Thanks, Anirudh, and thanks, Kelsey. Our subscription model remains the anchor arrangement with our customers. The add-on monetization then comes incrementally through agentic workflow products that are kind of usage-based or consumption-based for capacity and through our token and card models. What's different about agentic AI is that it doesn't replace the core EDA engines. It calls them more often and it calls them intelligently. So the monetization opportunity is twofold really. So you've got like the new agentic workflow products and then you've got the increased usage of the underlying base tools through more exploration, more verification, more optimization and more compute. Now that said, we're obviously being disciplined in our 2026 outlook. We're not assuming a sudden step function in AI monetization in the guide, but we do believe agentic AI expands the long-term growth opportunity for Cadence. Operator: Our next question comes from the line of Andrew DeGasperi with BNP Paribas. Andrew DeGasperi: I just had a 2-part question. One is marquee -- I think you called out in the prepared remarks that a marquee AI infrastructure company expanded the use of signoff solutions. I just want to clarify, was this a cloud provider? And then second, at CadenceLIVE, you discussed about physical AI in terms of the time line of adoption being around 2 years. But yet you called out that automotive and robotics companies have adopted hardware. I was just wondering, does this mean that, that physical AI time line has been brought forward? Or is this just a natural evolution of how these new markets will adopt EDA? And if so, when do we see that kind of software benefiting from that? Anirudh Devgan: Yes. I think with physical AI and also agentic AI in general, I mean, yes, I've said for a long time, 2 contract cycles, and that is generally true. Though I think because of this new category of TAM expansion, which is more labor productivity related along with the base tools, I think there is a potential that the monetization of agentic AI could happen sooner than 2 contract cycles, okay? I don't want to predict too much. And like John said, we are not putting it in our guide. But I think definitely, the more opportunities there because of all the shortages, because all the build-outs, because of physical AI. So we are -- and like the previous question, we always can add in the renewal, but we always have capability to do add-ons, which we have already seen, okay? So that's what I would like to say. On the signoff, we are very happy. Innovus has been the leading solution for implementation, especially at TSMC and now increasingly with Samsung, Intel and Rapidus. But signoff is very -- is coming on strong at TSMC and other customers. And we are working with all the leading AI players. And I think the one we mentioned specifically is a major kind of AI infrastructure/ASIC company, and we are glad to see that adoption. Operator: Our next question comes from the line of Gary Mobley with Loop Capital. Gary Mobley: John, I think, if I'm not mistaken, 2026 is going to be a low renewal period. By that, I mean, existing long-time customers scheduled to renew this year, kind of like 2022 was. And so was the strong bookings in the first quarter a reflection of some add-on sales as salespeople are trying to meet their quota? And do we expect that type of behavior to last through the balance of the year? John Wall: Thanks for the question, Gary. Yes, I mean, 2026 is kind of lighter than 2025 for actual renewals on an annual value basis. But we often see that that's -- that those are some of the strongest growth years for us because of all the add-on activity. Yes, we were really, really pleased with the Q1 booking strength, and it was right across the board across all lines of business. So yes, so Gary, I mean, it bodes well for the year. But look, it's just one quarter. As you know, we like to wait for a couple of quarters before taking up the guide in the second half. And although the last few years, Q1 has been strong, and this one has been very, very strong. So we had to take up the guide at the end of Q1. Operator: Our next question comes from the line of Clarke Jeffries with Piper Sandler. Clarke Jeffries: I just wanted to ask around the largest IP arrangement today with a global foundry. Was it really the extension of that agreement to additional nodes, the scope of more content or the addition of agent ready AI flows that made the biggest difference to get that to the largest arrangement you've ever seen? Anirudh Devgan: Yes, that's a particularly IP contract. So that one particular is focused on IP. And the 2 things that drove it is that it is a new node, new advanced node, more specifically 2-nanometer and more content in IP because we have a much broader portfolio. Operator: Our next question comes from the line of Joshua Tilton with Wolfe Research. Joshua Tilton: Maybe just a 2-parter, a little unrelated, so I apologize. But anything to call out on what drove such a strong quarter for China? And then maybe just a second part to that. Can you help us just bridge what is driving such a great organic raise for the full year relative to the organic beat in the quarter? I know you mentioned the record backlog, but is there anything one level deeper you can give us, especially in the context of -- it sounds like you're trying to tell us that even though you raised by a pretty solid amount that there still seems to be some conservatism in the guide for the second half. So any help there would be greatly appreciated. John Wall: Sure, Josh. Thanks for the question. I'll take this one. So Josh, yes, China, it was 13% of Q1 revenue, and that was just kind of broadly consistent with what we were expecting. Yes, we still expect China to be about 13% for the year. I think it can be lumpy from quarter-to-quarter. So I think the year-over-year comps probably look generous because Q1 in 2025 wasn't that good in China. So the -- it being 13% revenue in Q1, probably the growth rate looks strong. But it's just -- it's a really important region for us that -- yes, and we're very, very pleased with the 13%. In relation to the guide, yes, I mean, we're -- look the, Q1 was a very strong start to the year. We exceeded all our metrics. And I guess when we back out the Hexagon, the $160 million of Hexagon and the $0.28, we're basically raising the year by $65 million at the midpoint for revenue and about $0.08 for EPS. Also on the cash flow front, that operating cash, the way we paid for Hexagon, the reported guide includes approximately $180 million of pre-close Hexagon tax liabilities that are economically part of the acquisition consideration, but are classified in operating cash flow. I think just the geography and the accounting forces us to put it through operating cash. If you adjust our operating cash guide, for that underlying -- for that pre-close Hexagon tax liability that we're paying, the operating cash flow outlook is approximately $2.1 billion, which would be about $100 million above our original guide. So there's a lot of strength we saw across the businesses. So the $65 million is what we took revenue up by, but we're seeing $100 million extra in cash that there's potentially strength in the second half, but we thought it was too early to raise the second half right now. Operator: And our final question comes from the line of Blair Abernethy with Rosenblatt Securities. Blair Abernethy: Just want to ask about the Millennium platform. How is the adoption going there, Anirudh? And just in general, the health in some of your non-semi verticals like automotive, aerospace, industrial equipment and so forth. Just any commentary around that would be great. Anirudh Devgan: Yes, absolutely. So yes, Millennium is doing great. I don't know if you saw Jensen was there at CadenceLIVE and did a nice autograph on Millennium box. So we are pleased with the partnership with NVIDIA there. And I mean, there are 2 ways to -- 2 kind of high-level applications. We are working on this kind of CFD or SDA application for a while, and that's going well, especially in auto and also in drones, okay? So there's a lot of -- you know what Cascade acquisition we made is very good at very high accuracy CFD, which also applies to aerospace and defense. So there is autos, but also A&D is Millennium uptick, and we have several customers. Some we can talk about, some we can't, okay? So that's in the traditional Millennium. And the other part, this year, like I mentioned in CadenceLIVE, we have all kinds of EDA application now on Millennium, which is super exciting. And the most exciting part of EDA application in Millennium is 3D-IC signoff because right now, the biggest issue is the complexity of these 3D-IC systems, not just to design them, which we can do in Integrity and Innovus, but to sign them off. So there's this huge system that need to do thermal simulation, electromagnetic simulation, power delivery simulation. And they are more naturally like a matrix without getting too technical, they are closer to a matrix multiply numerical solver, which is great for GPU acceleration. So right now, I see Millennium as applying to more traditional areas like autos and then new areas like aerospace and drones and then applying to 3D-IC signoffs. So we are super excited about the Millennium opportunity along with our traditional hardware systems. Operator: And I will now turn the call back to Anirudh Devgan for closing remarks. Anirudh Devgan: Thank you all for joining us this afternoon. It's an exciting time for Cadence as we begin 2026 with product leadership and strong business momentum. And on behalf of our employees and our Board of Directors, we thank our customers, partners and investors for their continued trust and confidence in Cadence. Operator: And ladies and gentlemen, thank you for participating in today's Cadence First Quarter 2026 Earnings Conference Call. This concludes today's call, and you may now disconnect. Goodbye.
Operator: Good day, everyone, and welcome to the Kforce Q1 2026 Earnings Call. As a reminder, this call is being recorded. At this time, I would like to hand the call over to Mr. Joe Liberatore. Please go ahead, sir. Joseph Liberatore: Good afternoon, and thank you for your time today. This call contains certain statements that are forward-looking, are based upon current assumptions and expectations are subject to risks and uncertainties. Actual results may vary materially from the factors listed in Kforce's public filings and other reports and filings with the SEC. We cannot undertake any duty to update any forward-looking statements. You can find additional information about our results in our earnings release and our SEC filings. In addition, we have published our prepared remarks within the Investor Relations portion of our website. We are extremely pleased to have successfully driven results in the first quarter that again exceeded our expectations from both a revenue and profitability perspective. The momentum that we carried into the beginning of the year has continued to strengthen, resulting in year-over-year revenue growth for the first time in several years. As Jeff Hackman will cover in more detail, our trajectory has continued to improve in the first month of the second quarter, which we expect will lead to accelerating year-over-year growth in Q2 in the mid-single digits. I cannot be prouder of the tenacity of our people or more appreciative of the trust that our world-class clients are increasingly placing in Kforce to drive more meaningful and valuable engagements with them. Our go-to-market approach, which was borne out of our integrated strategy efforts, appears to be paying dividends. Our people continue to operate more fully as one Kforce, leveraging the firm's capabilities across all service offerings. While recent economic data continues to point to a generally softer labor market for professionally oriented roles, our performance reflects strong execution and a clear shift we're seeing across our customer base. However, several of the leading indicators we track, which have historically signaled strengthening demand for our services are improving. Companies are increasingly turning to flexible talent strategies to move forward on significant backlog of high-priority technology initiatives, especially in the age of artificial intelligence where CEOs remain cautious to add permanent headcount. At the same time, heightened geopolitical uncertainty, including the conflict involving Iran has contributed to significant volatility in the global energy markets, resulting in sharp price increases across oil, gasoline, natural gas and electricity. In this environment, clients are focused on agility. We believe uncertainty is reinforcing the value of flexible workforce solutions as organizations seek to adapt while they gain greater clarity around geopolitical developments and the longer-term impact of emerging technologies on their business and talent strategies. Against this backdrop, we remain optimistic that our recent operational data and several consecutive quarters of improving revenue performance reflect a more typical historical cyclical pattern consistent with prior demand recoveries. As we have stated, we've witnessed and participated in transformative technology shifts before such as personal computing, the emergence of the Internet, the mobile revolution and the move to cloud computing. Each of these periods of technological change impacted labor markets. Yet over time, workers, including technologists, have continued to upskill and retrain themselves to improve the relevancy of their skill sets as technology has evolved. Over the last 50-plus years, we've placed skill sets that include mainframe operators, COBOL programmers, database administrators, web developers, mobile application developers, DevOps engineers, cloud architects, UI/UX designers, data scientists, data engineers, AI platform engineers, AI product managers, prompt engineers, et cetera. The point is the task change or, in some cases, completely go away. Job titles change, skill composition shifts, and at the end of the day, new roles are created. New businesses are spurred, new industries are created, resulting in a net positive amount of technology-oriented job growth as society's unquenchable thirst for technology advancements and productivity gains. We believe generative AI and its offshoots into Agentic AI and Cognitive AI are in the early stages of the evolution and may just be starting to align with historical patterns we've experienced. Recruiting the right in-demand talent, assembling effective teams and implementing target enterprise-level initiatives are crucial for organizations seeking to successfully integrate and leverage these new tools to maintain a competitive advantage. Our strong position enables us to grow our client portfolio and bring on new client opportunities, thereby sustaining our history of consistent above-market performance fueled by client share growth, ultimately strengthening the foundation that delivers enduring value to our shareholders. Our business model is intentionally simple, organically driven and intensely focused. By limiting inorganic growth within our existing service areas, we protect our teams from unnecessary complexity and distractions. That focus allows our people to do what they do best, build deep relationships and partner with clients to solve their most critical business challenges. Our strategy has been thoughtfully refined over time, not overhauled because it has proven durable. That focus, combined with a unified and resilient culture is a real differentiator for us and is central to our consistent market outperformance. As our operating trends continue to improve, we're also making great progress on our key strategic initiatives, including the implementation of Workday, scaling our India development center, advancing our internal AI initiatives and continued refinement of the execution of our integrated strategy. Further to that point, we are pleased to have recently announced the establishment of our AI innovation studio within our headquarters and associated AI pods in India to support evolving client needs. As I conclude my remarks, I want to acknowledge the outstanding people who make up the Kforce team. I'm incredibly proud of their fortitude, adaptability and dedication demonstrated across the firm, particularly given the challenging business environment over the past 3 years. I am grateful every day for the opportunity to work with colleagues who bring this level of skill and commitment. Thanks to their efforts, we are well positioned strategically, and I feel confident in our trajectory and the opportunities ahead. Dave Kelly, our Chief Operating Officer, will now give greater insights into our performance and recent operating trends. Jeff Hackman, Kforce's Chief Financial Officer, will then provide additional detail on our financial results as well as our future financial expectations. Dave? David Kelly: Thank you, Joe. Total revenues of $330.4 million represented a return to overall revenue growth for the first time since the fourth quarter of 2022. Encouragingly, we were successful at delivering year-over-year Flex revenue growth in both our technology and FA businesses. The first quarter is typically characterized by sequential revenue declines on a billing day basis due to calendar year assignment ends. This is a very normal part of our business and the broader sector. There's been a lot of discussion about our ability and the sector's ability to deliver revenue growth given the much speculated demand impact of AI tools and technologies. A data point that we think is particularly relevant is that our first quarter performance was meaningfully better than the average sequential decline over the past 15 years prior to AI becoming an hourly topic of conversation. Our results were driven by a combination of lower levels of project ends and a faster-than-normal rebound in new assignment activity. Further to this point, as Jeff Hackman will cover in his prepared remarks, the midpoint of our guidance contemplates year-over-year growth in Q2 of approximately 4%. While clients continue to take a measured approach to technology spending amid an uncertain macroeconomic environment, investments in critical initiatives, particularly in data, digital and platforms that underpin long-term AI strategies are actively being prioritized by our clients. Our recent momentum and operating trends suggest clients are increasingly greenlighting long postponed initiatives through the use of flexible workforce solutions that are strategic to their needs and don't have an easy or obvious AI-related solution. Importantly, improvements in our business have been broad-based with positive trends evident across a wide range of industries within our client portfolio and utilizing a wide range of skill sets. While we certainly continue to see growth in AI-related data, digital and cloud projects, we're also seeing a ramp in demand for platform and application development roles and projects. The demand for technology is broad-based. We continue to make targeted organic investments in our Consulting Solutions business to meet rising client demand for cost-effective access to highly skilled talent. These investments are strengthening our value proposition by expanding flexible delivery models and deepening differentiated expertise. As a result, our consulting-led offerings are positively contributing to the performance of our technology business, supported by a strong pipeline of high-quality opportunities. Our fully integrated delivery model, offering a seamless client experience across consulting, project-based work and staff augmentation spanning multiple technology and skill sets remains a clear point of differentiation in the market. We've seen clear signs of improving demand across the entire spectrum of our service models. This integrated approach has been a core driver of our technology performance, enabling meaningful gross profit expansion over the past year despite a challenging macroeconomic backdrop while maintaining stability in average bill rates. We leverage long-standing client relationships as the foundation of our model and focus on simplifying the buying process and accelerating decision-making. An increasingly important component of our ability to deliver cost-effective solutions is our global talent strategy, including access to highly skilled professionals outside the United States. Our development center in Pune, combined with strong domestic sales and delivery capabilities and a high-quality vendor network enables a scalable multi-shore delivery model that comprehensively addresses client needs. Demand for this channel continues to accelerate, reinforcing its strategic importance and strengthening our confidence in the durability of this model. We now have a multi-shore delivery model being utilized within 60% of our 25 largest clients. We've been able to maintain a stable average bill rate of approximately $90 per hour over the last 3 years, while building a higher-quality, higher-margin revenue stream. The increasing mix of consulting-oriented engagements, which command higher bill rates and significantly stronger margin profiles, along with disciplined management of wage inflation and core technology skill sets has effectively offset the downward pressure on bill rates from a greater mix of consultants based outside of the U.S. Demand across our core practice areas, including data and AI, digital platform engineering and cloud remains strong, and our pipeline of consulting opportunities continues to expand. These disciplines represent foundational capabilities for the development and deployment of AI solutions, and we believe organizations will increasingly require access to specialized talent to execute their strategies, creating meaningful and durable growth opportunities for our firm. Over the last several years, we've made responsible adjustments to align headcount levels with revenue levels and productivity expectations. As noted in last quarter's call, we implemented further refinements to our organization in the first quarter. Despite these actions, we believe we have sufficient capacity to absorb the near-term improvements in demand levels without the need for significant incremental resources, particularly as we continue to enable greater efficiency through our use of AI solutions. We remain committed to investing in our Consulting Solutions business and other strategic initiatives that we believe will drive long-term revenue and profitability growth. The actions taken in the quarter provide increased confidence in our ability to continue making these investments while maintaining our previously stated profitability objectives. We are energized by the opportunities ahead and confident in our ability to sustain recent momentum while continuing to deliver strong results. Our success reflects the deep trust and long-standing partnerships we've built with our clients, candidates and consultants. These are relationships that continue to serve as the foundation for our growth and innovation. I will now turn the call over to Jeff Hackman, Kforce's Chief Financial Officer. Jeffrey Hackman: Thank you, Dave. First quarter revenue of $330.4 million exceeded our expectations and earnings per share of $0.46 was above the high end of our guidance. Our results for the first quarter demonstrate our ability to grow revenues while also driving a higher quality of business as evidenced by better-than-expected gross margins in the quarter as well as generating enhanced operating leverage. Overall gross margins of 27.3% were up 60 basis points on a year-over-year basis due to expanding Flex margins, which more than offset the impact from lower direct hire mix. Sequentially, gross margins were up 10 basis points in a quarter when they were expected to be seasonally down as improved Flex spreads and favorable health care costs more than offset the seasonal payroll tax resets. The success we have had expanding our margin profile can be attributed to our teams pricing more effectively with clients to more appropriately reflect the value of our services and the benefit of higher quality business that we have been strategically driving. We have discussed that solutions-oriented engagements have an appreciably higher margin profile. As that mix has continued to improve, that has driven margin improvement. In addition, Dave mentioned that the mix of consultants working outside of the U.S., both through our nearshore partners and through our India business continues to grow. We have seen higher margins from our business abroad, which although it's had a relatively small positive impact on current margins, it could continue to provide upward opportunity if the overall mix were to continue to grow. As we look forward to Q2, we expect overall Flex margins to improve sequentially due to the alleviation of higher seasonal payroll taxes, but for spreads to be relatively stable with first quarter levels. Overall SG&A expense as a percentage of revenue of 23.2% increased 40 basis points year-over-year, which was primarily driven by greater performance-based compensation due to the higher levels of financial performance we have been successful delivering in 2026. As discussed on our last call, the refinements we have made to headcount levels have provided incremental operating leverage, and we are continuing to make targeted investments in our sales and solutions capabilities while also maintaining investments in advancing key enterprise initiatives. While this will continue to impact near-term SG&A levels, we are beginning to see the benefits of these investments in our productivity metrics and expect continued improvements to create future operating leverage. As we have stated on prior calls, we anticipate beginning to realize benefits from our Workday implementation more significantly in the second half of 2027. Our operating margin was 3.6%, and our effective tax rate in the first quarter was 30.2%. During the quarter, we remained active in returning capital to our shareholders with $18.6 million in capital being returned through dividends of $6.8 million and share repurchases of approximately $11.8 million. We were incrementally opportunistic with respect to share repurchases in the first quarter and utilized our strong balance sheet during a typically low cash flow quarter, given what we believe is a disconnect between our operating trends and demand environment and the valuation of our stock. This resulted in an increase in net debt to $90.2 million from $64.3 million. Against trailing 12-month EBITDA, our leverage of 1.2x continues to be relatively conservative. Looking ahead, we expect to continue returning excess cash generated beyond our capital requirements and quarterly dividend to shareholders through repurchases, while being prudently opportunistic in repurchasing our shares. Operating cash flows were negative $4.1 million due to higher cash outflows in the first quarter associated with the actions we announced on our last call in addition to the timing of cash collections, which we expect to normalize in the second quarter. We expect positive operating cash flows of approximately $20 million in Q2. Our return on equity remains at approximately 30%. The second quarter has 64 billing days, which is one additional day compared to the first quarter of 2026, but the same as the second quarter of 2025. We expect Q2 revenues to be in the range of $344 million to $352 million and earnings per share to be between $0.67 and $0.75. The effective income tax rate for the second quarter is 31%. The midpoint of our guidance of $348 million in revenue is up approximately 4% on a year-over-year and sequential basis per billing day. Notably, earnings per share at the midpoint of guidance reflects a 20% increase year-over-year. Our guidance assumes a stable operating environment and excludes the potential impact of any unusual or nonrecurring items. We feel strongly about our strategic position and our ability to deliver above-market results while continuing to invest in initiatives that drive long-term growth. We are increasingly confident in our ability to generate at least 8% operating margin when annual revenues return to $1.7 billion, which is more than 100 basis points higher than when that revenue level was achieved in 2022. On behalf of our entire management team, I want to extend our sincere appreciation to our teams for their outstanding efforts. We would now like to turn the call over for questions. Operator: [Operator Instructions] The first question comes from Mark Marcon from Baird. Mark Marcon: Congratulations on the strong quarter and the even better guide. I was wondering if you could just talk a little bit about what you're seeing in terms of your trends by major verticals? And I'm particularly interested in terms of the financial services vertical. What are you seeing there? And just given the strength of the guide and the better-than-normal sequential uptick, at least relative to recent years, can you talk about any sort of new contracts that you may have won or gains that you're seeing among existing clients? David Kelly: Mark, this is Dave. Thanks. So I would say, generally speaking, Mark, across industries, we're seeing either stability or growth pretty broadly. In fact, year-over-year growth in 6 of our top 10 sectors that we segregate the business in. In particular, I'd note strength in the information space and manufacturing space. Retail has been also strong as well. And we've had some benefit, in particular, with some pretty digitally enhanced clients in the retail space. So when we think about our business footprint. Professional services has had some negative impacts when you kind of look year-over-year. Those are really pretty much DOGE-related, we think, though. Financial services, you asked about specifically. We've seen a little bit of seasonal decline there, some reasonable, however, stability. So I would say nothing materially out of some -- any variation across any industry. Maybe just to follow on, maybe give you a little bit more color. You asked a little bit about some of the indicators and pipeline. When we think about industry activities, projects, maybe I'll segregate a little bit into some metrics and then maybe a little pipeline information. When we think about some of the things that we cover from a metric standpoint to give you some sense of what we're seeing in terms of demand, we've had a pretty good strength as we've looked at this over the last year. When you look at client visit information in the first quarter, that really is up nearly 10% year-over-year. We've had some good strength from a job order perspective as well. That's up nearly 20% year-over-year, really translating into some good new assignment starts really that also in the low double digits. The point there is that's, again, pretty broadly distributed. In terms of project-related activity, we're seeing strength as we've been talking about, as you'd expect, in the areas where our consulting service is focused, digital data, platform engineering, cloud, all of those have been pretty good. I think notably, our data and AI pipeline is up nearly 50% year-over-year. So I would say, generally speaking, Mark, in terms of the strength in the revenue stream, we're seeing it, as Joe alluded to, across our service spectrum from staff augmentation all the way through consulting project work. We're certainly seeing strength in those AI and AI-related revenue streams, but also some of the more traditional areas of strength for the firm, we're continuing to see growth in as well, right, platform engineering, application engineering, application development, all pretty strong. So it's a pretty good story across the entire spectrum of the revenue stream. Joseph Liberatore: Yes, Mark, so I just net it out. I mean it was broad-based. It was across our enterprise accounts, our market accounts. So there were -- it was across geographies. So we're just -- we're seeing it broad-based. Mark Marcon: Great. And then can you talk a little bit to what extent you think you're gaining share? And to what extent are your -- it's still relatively new for you, but your Indian operations, to what extent are those helping you to capture share? And what percentage of the work is now being done in India? And since you're still relatively early in that journey, where do you think that could go? And what are the implications as it relates to gross margins for that? David Kelly: Yes. So well, let me first talk about India. You asked a few questions about that, and then we can get to the share question. So just as a reminder, we started this initiative, gosh, less than 2 years ago. The focus of this really is to enhance the capabilities of our domestic footprint, right? As I've mentioned and Joe had mentioned in the past, we're seeing a lot of demand from our client base to build blended projects. Obviously, cost is a key driver here. So this is not specifically set up to go and capture business in India with India clients. So I think probably the best way to think about this is how our clients are thinking about our prospects and how we're providing services in the types of business that we've been performing, right, across the spectrum of services that we provide. I made a comment in my prepared remarks, 60% of our 25 largest clients are using those services in a blended model. So it's a combination of a blended model. There are some projects that are offshore entirely. This is true in the consulting space, and that is really where we've set up this initially. We're just now starting to think about providing some staff from a talent solutions perspective, so more staff augmentation. That's early on. So we've seen some good growth there. It is still a very small percentage of the revenue stream. I think we're seeing a pretty significant increase in new orders, but still a very small percentage. In terms of future prospects, I think it's pretty clear. Our clients are always looking for ways to cost effectively find great talent. And I would say the talent that we find in India is as good as that as we would find in the United States. There's been a lot of firms who've had success there as well. So I wouldn't necessarily put a precise percentage number on it, but it wouldn't surprise me that a very, very high percentage of our clients use this as a blended model, and it could be a very meaningful percentage over the next couple of years. Joseph Liberatore: Yes. And the one thing that I would add there, Dave touched upon it a little bit there, but I want to accentuate this point, that talent level, especially when you get into AI skills of what we're identifying and finding in India, real shortage in the U.S. We're definitely seeing much more talent availability, especially from an AI standpoint, especially as we built out our AI pods over there to get some leverage for our people. David Kelly: So Mark, I think the second part of your question -- or the first part, I should say, was a question around share, market share, client share. I think again, we're quite proud of our performance this quarter. Just to reiterate, the expectation is revenue growth, we believe, is going to accelerate in the next quarter. We've had the benefit of generating some additional client share that is certainly a part of the revenue growth. We've also continued to attract a lot of new clients as well. So when you look more generally across the market, as I kind of look at the metrics of how the market might be performing, I think our growth rates certainly are in excess of that and are certainly expected to be in excess of that. So the math basically tells me we're capturing share both within existing clients as well as acquiring new clients. Mark Marcon: Great. And then just as I look at the -- and this is the last one for me, and then I'll jump back in the queue. But when I take a look at the bill rates moving up as well as the gross margin, can you just talk a little bit about the Indian portion of the mix, to what extent is it actually margin accretive as it relates to gross margin? And how are you able to offset the lower bill rates over there to end up actually increasing the bill rate? Jeffrey Hackman: Mark, this is Jeff. I appreciate the question. Let me first say, I think you touched on a couple of things, bill rate and margin. Let me first say, I'm really proud of the broader Kforce team for the collective efforts and ensuring that we're pricing the value into our engagements and assignments that we're bringing to our clients. You look at our gross margin profile, and we're up 60 basis points year-over-year. You look at our Flex gross profit margins, those are up 90 basis points year-over-year. The preponderance of that, Mark, is driven by good solid bill and pay spread expansion. Out of that 90 basis points, that comprised 70 basis points of that. Part of that is driven by, as I mentioned, the execution of our teams. The adjustments, we made some adjustments and refinements in how we're incentivizing and how we're compensating our people to put that a little bit more towards the forefront of the conversation. And then at the last component, I would say, Mark, is just what we're driving from an overall higher quality of business. To that last point, we've talked about the growing mix of Consulting Solutions business that margin delta continues to run in that 400 to 600 basis points of higher margin. So certainly, as that mix continues to improve, we're getting the benefit of that. You asked about our nearshore/offshore business. The margins there have also been very healthy relative to overall Flex margins. So to Dave Kelly's point, as that business continues to scale, we expect that to lead to enrichment at the Flex margin line. So I think, Mark, in the near term, these things don't change overnight. You heard the comments from us. This is a culmination of a lot of activities over the last year plus. I think in the near term, we certainly expect spreads to be stable, but over the medium to longer term, certainly an opportunity to see some further enrichment here. David Kelly: Just maybe a little added emphasis on Jeff's comments to make sure it's clear. The impact on flexible margins from the offshore facility are nominal, right? That spread improvement is a result of the demand for the services that we're providing here, the execution of our teams, the emphasis we're putting on execution just generally and the mix of business that we're seeing as it relates to the consulting work that we're doing. So that is an opportunity for us as we move forward. Operator: The next question comes from Trevor Romeo from William Blair. Trevor Romeo: I had maybe a couple of AI-related questions. So one is just along the lines of flexible talent becoming especially valuable in the AI era. I think I appreciate Joe highlighting how things have kind of evolved from mainframe operators all the way to prompt engineers and the like now. So the question is just to get a sense of how things can quickly change and how your model can adapt. Like is there some kind of way to think about what percentage of the demand you're seeing now for the Flex business or the consulting projects? What percentage of that is new roles or project categories that really weren't even around, say, 5 years ago? And how have things evolved? Joseph Liberatore: That's a great question. I guess I would start, and I don't want this to come across the wrong way. But virtually almost 100% of what we're doing today didn't exist 5 years ago because even the traditional roles that still exist today that existed 5 years ago, now they're being augmented with certain skills in AI. The bulk of the requirements that our people are coming across, some type of AI aspect is embedded in virtually every role that we're working on. In terms of what I'll say our newly created roles, I think we're still in the early stages of new role creation, I mean, outside of some of the general ones that you hear about with prompt engineering and certain other AI engineering specific. So I think this will continue to evolve. It's one of the reasons why I've always appreciated this business that we're in because we don't create demand. We follow where demand is. And at the end of the day, that's what we've been -- I've been doing this for 38 years. And the people that we're placing today aren't the same people that I was placing 38 years ago, although I did hear from some of our people that there's been a resurgence of demand for COBOL people, kidding. But the point being, the roles are constantly evolving, and our responsibility is to identify that talent that's in demand. So that's why we get really excited because we're not locked into any specific footprint. We typically move with where the footprint is moving towards. This is a lot of what we're seeing from an AI standpoint, not what I would consider pure AI, but augmented AI in terms of the skills and the skills evolution. So I don't know if that just gives you a little bit of a feel in terms of what we're seeing. Trevor Romeo: I appreciate that, Joe. That was helpful. And then you also mentioned the new AI innovation studio. So maybe you could talk a little bit more specifically about what that entails and what kind of value you can deliver to clients with that. Joseph Liberatore: Yes. One of the things in today's world with AI, the days of when you're in front of clients and you're trying to work through solutions for those clients of presenting PowerPoints or walking them through something visual like that. Organizations really want something that's tangible, that is a prototype, a working model. And so that's really what we're doing with our innovation studio, which is part of our broader innovation experience. And so that's so that we can work with clients on ideation, get real-world examples of what they're using, also expose them with some of the tools that our people have developed, which can also accelerate some of the development. So it's -- we've already been doing this mostly on client sites, but what we're also seeing is there are select clients that would prefer to get out of their environment and to get into a studio environment based upon the nature of what they're looking to do. And that's also tied into what we're doing in India. We've established what we call AI pods in India, which is where we get really a lot of leverage on building out some of these tools and the platforms that we're working with the clients. And we'll scale that accordingly based upon how demand evolves. Trevor Romeo: Helpful again. If I could maybe sneak one more quick one in for, I guess, either for Jeff or Dave. I think you typically give segment level expectations on these calls for the next quarter. So just any color you can provide on what's built into the guide for each of the segments in Q2? Jeffrey Hackman: Yes. Trevor, it's Jeff. I appreciate the question. Yes, and certainly happy to cover this in more detail tonight. But I think we mentioned in Dave Kelly's script that overall, at the midpoint of our expectations that year-over-year and very close to that is a sequential performance of roughly 4%. So if you look at technology with that being 93% of what we do, that technology performance is a preponderance of the driver there. I think when you go down and look at our FA business, again, we reorganized that business in early 2025, started to see sequential growth in the second quarter of last year, started to see some really nice sequential growth into the mid- to high single digits. In quarters 3 and 4, certainly saw some seasonal downtick to FA. But when you look at the year-over-year and our FA business at the midpoint of our guide, that's in the mid- to slight high single-digit range. Then you look at our direct hire business, the first quarter was the last year-over-year difficult comp for us. So really do expect at the midpoint, Trevor, some stability in our direct hire both sequentially and year-over-year. So you look across the market, very clear to us. Dave Kelly mentioned client share and market share, very clear at the midpoint, the 4% certainly is taking share. So hopefully, that helps, Trevor. Operator: The next question is from Tobey Sommer from Truist. Tobey Sommer: When you talk about your AI groupings in India, are you developing sort of repeatable solutions that maybe you could price differently than a bill rate, pay rate classic staffing or time and materials consulting model? Joseph Liberatore: Yes, I would say more so as we're working with clients, clients are looking for us to bring solutions to the table, which accelerate the development process, leveraging AI. So yes, the tools in themselves are repeatable. But in terms of products that we're looking to go to market with, we're not a product-based organization. But when it comes to methodologies, when it comes to tools, and all those things obviously get embedded into margins and pricing. So I would say that's more of the approach. Now I will say one of the things, obviously, we see is with industry focus, different organizations within a given industry, they're dealing with the same problem. So some of those things, which are not proprietary in nature, it does provide us an opportunity to bring those solutions that are more industry-specific to our other industry clients within the marketplace where we can leverage some of those past capabilities. Tobey Sommer: Right. So well, I didn't really intimate you're a product company, but if you're able to apply some of those learnings within different industry players and still respect confidentiality and all that, I'm sure you would price. Are you able to generate a higher return, higher margin on the second, third, fourth time you've sort of take a swing at a similar set of projects? Joseph Liberatore: Yes. Hypothetically, that would be the case. We don't have the practical experience that I can give you tangible that we've created a given AI solution and then we've taken that broadly across an industry. So I think time will tell on that, but logic would lead you down that path. Tobey Sommer: Okay. And Jeff, from a capital allocation standpoint, first quarter is a low cash quarter, so it makes sense that you're going to continue to return sort of at a more of an average quarter trend line. But given the valuation the way the stock has traded tomorrow notwithstanding where it's likely to be up, do you think you'll continue to, on a more sustained basis, lean into repurchasing shares at a greater level than annual cash flow? Jeffrey Hackman: Yes. I think, Tobey, you've certainly seen that, first, thanks for the question. You certainly saw that in 2025. I think we returned in excess of 100% of operating cash flows in 2025, took on -- leverage the balance sheet, the strength of the balance sheet that we had going into '25. We continued even in a -- as you acknowledged, Tobey, the first quarter for us relative to the other, certainly is the lowest cash flow quarter. We maintain share repurchases. Obviously, we're looking at our operating trends every day, every week and assessing what that means for our future. Certainly, in the first quarter, it looked like there was a significant dislocation between the underlying trends in the business and how the market was perceiving that with the valuation of our stock. So we're very comfortable outstripping the operating cash flows certainly in the first quarter. That led to debt of roughly $90 million, 1.2x levered. Tobey, you've been here long enough. I think since I joined in 2007, I think maximum leverage that I've seen in my tenure here is roughly 2x. So I think we're going to continue to pay attention to the trends, the valuation of our stock. But as we sit here today, we've got a very strong balance sheet. Historically, we have been conservatively levered at 1.2x as of March 31. So you're not going to see us get super aggressive and super wild, but we do have a strong balance sheet moving forward. Tobey Sommer: And last question for me. I think in the prepared remarks, you kind of said that this would be -- could look like a recovery from similar to historic recoveries. Is it your expectation that it is possible to have in year 1 or year 2 of this budding recovery, the kind of growth that we've had exiting prior recessions where there was relatively rapid growth for a year or 2 before settling into a more normalized rate? Joseph Liberatore: Yes. I would say let's remove the great shutdown, which was a little bit unique coming out of that. But if we look at prior cycles, that's really what our trends are telling us and what we're seeing. So Tobey, this goes back to the cycles that I know I spoke about. I know Michael spoke about, where we typically see companies when we go into tougher times, the first thing they do is they let go of contract or temporary labor. The next thing they typically do is they rightsize their organizations. Then as there starts to become some firming and visibility, they start to bring flexible workforce back in. And until there's great certainty, then they start to rebuild their permanent workforces. There is no question in looking at the data that the dynamics that were driven by coming out of the great shutdown, all of the overhiring, all of the hoarding of people, basically, our belief is we've now, over the course of 3 years, organizations by natural attrition versus rightsizing have basically gotten to a baseline of workers that they can't support the work that needs to be done. So we're at that same point that we historically have seen during normal recessionary cycles. We usually get there in a matter of 12 months. It's taken over 36 months to get there. So we would anticipate short of anything macro happening or major disruptions that that's where we are in the cycle and that the use of flexible workforce will continue to build from this point forward. Operator: [Operator Instructions] Up next is Josh Chan from UBS. Joshua Chan: I guess on that cyclical recovery point, I guess, in past cycles, you normally have like a broader economy recession before everything recovers. So I guess I'm wondering your thought about the ability to have a staffing recovery without a broader economic recession to kick start it all, I guess. Joseph Liberatore: Yes. I guess I would answer that a little bit differently. While we didn't have a GDP-oriented recession for the better part of the last 3 years, for professionally oriented roles, there has been a job recession. So a recession is a recession when it comes to the employment environment, and that's what we've experienced over the course of last 3 years, meaning the businesses -- and this isn't just Kforce, this is just not just technology. It's broad-based across all of the players. You saw what took place in terms of demand dropping. And again, that was because I'll go back to this. Employers were holding on to people. So basically, they were supplementing the work that normally would have been pushed off into temporary workforce models. They were getting it done internally by holding on to the people, letting natural attrition take place until now where they've gotten to a place where they can't get the amount of work that needs to be done, done. Joshua Chan: Okay. Okay. That makes a lot of sense. And then on the bill spread -- pay bill spread increasing, I guess, do you feel like the market is becoming less competitive because it's improving? Or do you feel like Kforce is securing the better portions of what's available in like an otherwise stable market? Jeffrey Hackman: Yes. Josh, this is Jeff. I appreciate the question. I don't think the competitive environment itself is becoming any tighter or any looser. As you mentioned on the margin question in my commentary earlier, much of this is execution and mix driven within our business. The higher quality revenue stream that we're driving with respect to our consulting solutions, those engagements, Josh, we've talked about it many times, are 400 to 600 basis points of higher margin. That mix benefit is benefiting overall gross margins. I know the nearshore, offshore is a relatively minor portion now as we move forward, expect a little bit of momentum there as well. But when you look holistically across our enterprise and market-based clients, we're executing well from a margin perspective. The mix clearly is benefiting us. So I do not believe that it's a competitive change in the marketplace. David Kelly: Yes. To further that, I don't -- you haven't seen broadly margin degradation in the space. And one of the things that we've continued to say, talent is sometimes difficult to find, right? So companies understand, especially highly -- we're talking about highly skilled talent in the space that we play. And so paying a premium to make sure you get the right individual with the right skill set or the right team of people, you are less price sensitive than you might otherwise be if you didn't need to get the work done. So it's a combination of those things, but this isn't just a pure dynamic that you have an individual and you just price it to the lowest price because you need the talent. Operator: And everyone, at this time, there are no further questions. I'd like to hand the conference back to Mr. Joe Liberatore for any additional or closing remarks. Joseph Liberatore: Thank you for your interest and support of Kforce. I'd like to express my gratitude to every Kforcers for your efforts and to our consultants and clients for your trust and faith in partnering with Kforce and allowing us the privilege of serving you. We look forward to talking with you again after our second quarter of 2026. Operator: Once again, ladies and gentlemen, that does conclude today's conference. Thank you all for your participation. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Sanmina Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] This call is being recorded on Monday, April 27, 2026. I would now like to turn the conference over to Paige Melching, Senior Vice President of Investor Communications. Please go ahead. Paige Bombino: Thank you, John. Good afternoon, ladies and gentlemen, and welcome to Sanmina's Second Quarter Fiscal 2026 Earnings Call. A copy of our press release and slides for today's discussion are available on our website at sanmina.com in the Investor Relations section. Joining me on today's call is Jure Sola, Chairman and Chief Executive Officer. Jure Sola: Good afternoon. Paige Bombino: And Jon Faust, Executive Vice President and Chief Financial Officer. Jonathan Faust: Good afternoon. Paige Bombino: Before I turn the call over to Jure, let me remind everyone that today's call is being webcasted and recorded and will be available on our website. You can follow along with our prepared remarks in the slides provided on our website. Please turn to Slide 3 of our presentation and take note of our safe harbor statement. During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections. The company's actual results could differ materially from those projected in these statements as a result of factors set forth in the safe harbor statement. The company is under no obligation to and expressly disclaims any such obligation to update or alter any of the forward-looking statements made in this earnings release, the earnings presentation, the conference call or in the Investor Relations section of our website, whether as a result of new information, future events or otherwise, unless otherwise required by law. Included in our press release and slides issued today, we have provided you with statements of operations for the second quarter ended March 28, 2026, on a GAAP basis as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and slides posted on our website. In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, noncash stock-based compensation expense, amortization expense and other unusual or infrequent items. Any comments we make on this call as it relates to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, operating income, operating margin, taxes, net income and earnings per share, we are referring to our non-GAAP information. I'd now like to turn the call over to Jure. Jure Sola: Thanks, Paige. Good afternoon, ladies and gentlemen, and welcome, and thank you all for being here with us today. First, I would like to take this opportunity to recognize our employees and Sanmina leadership team for doing a great job. So to you, Sanmina's team, again, thank you for your dedication, hard work and delivering excellent service to our customers. Please turn to Slide 4. Ladies and gentlemen, I can tell you that I'm very pleased with our performance for second quarter. We delivered strong results for the second quarter. Revenue came in at $4.01 billion and strong non-GAAP operating margin of 6.4% and non-GAAP diluted EPS of $3.16. Cash flow from operations was also strong at $399 million. Overall, we are executing according to our plan with a strong execution in both Core Sanmina and Sanmina AI Group ZT Systems. To tell you more about it, let's go to our agenda call today. We have Jon, our CFO, to review details of the second quarter results for you. I will follow up with additional comments about the results and future goals, then Jon and I will open for question and answers. And now I'd like to turn this call over to Jon. Jon? Jonathan Faust: Great. Thank you, Jure, and good afternoon, ladies and gentlemen, and thank you for joining today's earnings call. Before I review our financial results for the quarter, I want to acknowledge the entire Sanmina team for their focused execution and thank them for delivering a solid second quarter and first half of fiscal 2026. Now please turn to Slide 6, where I will speak to the financial highlights. As Jure mentioned, we are very pleased with our results for the quarter. As you can see, we exceeded our outlook across the board. Our revenue of $4.0 billion came in well above our outlook range, driven by strong execution and customer demand for the ZT systems business resulting in some accelerated compute shipments previously expected in the second half to shift into the second quarter. Also, we delivered growth across the majority of our end markets for the Core Sanmina business, which Jure will cover in more detail later in the call. Our non-GAAP operating margin of 6.4% and our non-GAAP diluted earnings per share of $3.16 also exceeded our outlook, driven by the additional revenue, mix and disciplined cost management. These results put us on the right path towards achieving our revenue growth, margin expansion and diluted earnings per share growth objectives for the fiscal year. Now please turn to Slide 7, where I will speak to our non-GAAP P&L performance. As I just mentioned, we delivered revenue of $4.0 billion, which was up 102% versus the same period a year ago. Our Core Sanmina business revenue grew 7.3% versus the same period a year ago, in line with our expectations. Our ZT Systems business revenue was $1.88 billion, exceeding our expectations. As I explained just a moment ago, this was driven by strong execution and customer demand resulting in some accelerated compute shipments previously expected in the second half to shift into the second quarter. This is an important proof point of our partnerships with customers and their confidence in us to support them going forward as we grow the ZT Systems business with new program launches later in the calendar year. Our non-GAAP gross profit was $360 million or 9.0% of revenue. This was down 10 basis points versus the same period a year ago, driven by mix. Our non-GAAP operating expenses were $103 million or 2.6% of revenue. These strong revenue results along with ongoing cost discipline and operating leverage enabled us to achieve non-GAAP operating profit of $257 million or 6.4% of revenue, up 80 basis points versus the same period a year ago. This represents our third quarter in a row of non-GAAP operating margin at 6% or above. Our non-GAAP operating income and expense was a net expense of $25.9 million. Our non-GAAP diluted earnings per share was $3.16 based on approximately 55 million shares outstanding. This strong non-GAAP diluted earnings per share performance represents a 125% increase versus the same period a year ago and showcases the operating leverage in our business model. Now please turn to Slide 8, where I will speak to the segment results. IMS revenue came in at $3.58 billion, up 123.5% versus the same period a year ago driven primarily by growth in the cloud and AI infrastructure end market, including the strong contribution from the ZT Systems business. Core Sanmina IMS revenue was $1.70 billion for the quarter, and grew 6.0% versus the same period a year ago. ZT revenue was $1.88 billion for the quarter. Total IMS non-GAAP gross margin was 8.5%, up 80 basis points versus the same period a year ago. This was driven primarily by favorable mix, including the impact from the addition of the ZT Systems business. CPS revenue came in at $461 million, up 12.2% versus the same period a year ago. And CPS, non-GAAP gross margin was 11.6%, down 230 basis points versus the same period a year ago. This decrease was primarily driven by depreciation and other expenses related to investments to support new programs, which we expect will deliver margin accretive growth in future quarters. In addition, component shortages impacted the timing of revenue and profitability for one of our product businesses, which we believe will be resolved in the second half of the fiscal year. Now please turn to Slide 9, where I will speak to the balance sheet highlights. We continue to have a very strong balance sheet with prudent leverage and ample liquidity, giving us the fiscal agility to support our growth objectives. Cash and cash equivalents were $1.58 billion. At the end of the quarter, we had no outstanding borrowings on our $1.5 billion revolver, leaving us with substantial liquidity of approximately $3.7 billion, which will support the expected growth of the business. We ended the quarter with inventory of $2.1 billion, net of customer advances, which is up 75% versus the same period a year ago, driven by the ZT Systems acquisition. Inventory turns, net of customer advances were 6.9x for the quarter, up from 5.9x in the same period a year ago. Our non-GAAP pretax ROIC was 34.7% for the quarter, well above our weighted average cost of capital and an improvement from the 23.0% from the same period a year ago. We continue to have one of the strongest balance sheets in the industry with a net leverage ratio of 0.56x. This ratio is calculated in a balanced manner by annualizing our non-GAAP EBITDA results for the first half, which only includes 5 months for ZT Systems, but also some shipments advanced from the second half, as using the pro forma trailing 12 months for ZT Systems wouldn't accurately represent the current run rate of the business. As we have previously communicated, our long-term target net leverage range is 1.0x to 2.0x. We still expect our leverage to increase into our long-term range over time as we invest in working capital to support the growth of the ZT Systems business and the core Sanmina business. That being said, we remain committed to maintaining a healthy balance sheet, which means carefully managing the liquidity needed to invest in the business and capitalize on strategic opportunities that further strengthen our position in the market. Now please turn to Slide 10, where I will speak to our cash flow highlights. As a result of the team's disciplined working capital management, our second quarter cash flow from operations came in very strong at $399 million. Capital expenditures were $57 million for the quarter, below our outlook, primarily due to timing. As I've mentioned before, we will continue to make strategic investments in the technologies and capabilities needed to strengthen our position in the market and to support our long-term financial objectives. Free cash flow was $342 million for the quarter. During the quarter, we repurchased approximately 1.1 million shares for approximately $160 million to offset the remaining dilution for the year. Our strong cash flow performance gives us the flexibility to continue to invest in the business and return capital to our shareholders. Now please turn to Slide 11, where I will speak to our capital allocation strategy. When it comes to capital allocation, it's incredibly important to have a clear strategy and a well-defined set of priorities when making decisions. As we've shared with you before, our first priority is to invest in our business to drive long-term organic growth and margin expansion. We evaluate all investments with discipline and take a structured ROI-based approach. Second, we continuously evaluate strategic acquisition and partnership opportunities, which need to meet our ROI expectations to help accelerate our growth. Third, we carefully manage our balance sheet and liquidity position with a focus on our long-term net leverage target as well as our long-term goal of achieving investment-grade ratings. And finally, when appropriate, we return capital to shareholders through share repurchases, subject to maintaining a strong balance sheet and liquidity position. We have and will continue to execute on this strategy by utilizing these options, which enables us to take advantage of opportunities to grow our business. We believe that our stock is a great long-term investment, and as such, share repurchases remain an attractive capital allocation option. With that said, today, we announced that our Board of Directors authorized an additional $600 million of share repurchases. This authorization has no expiration date as we intend to continue to repurchase shares opportunistically and in the context of the capital allocation strategy I just outlined. Now please turn to Slide 12, where I'll provide an update on the ZT Systems business. The Sanmina and ZT Systems leadership teams have been working together to ensure a successful and seamless integration of the business with a clear objective to realize the full value of combining the 2 companies. In order to do this, we are following a 3-phase plan. The first phase is focused on executing the immediate post-transaction integration actions, which are largely complete at this point. While we'll always look for opportunities to streamline processes, improve the way we work and drive efficiencies for our customers, the core of the ZT Systems business has now been integrated and we've made most of the necessary capital investments in incremental power, liquid cooling and test cell capacity to be production ready for the next generation of accelerated compute. The second phase, which is well underway, is focused on securing customer business and ensuring continuity. Since closing the acquisition, we have won and shipped new accelerated compute business which is evident in our strong results for the quarter. In addition, we have secured next-generation accelerated compute business with both hyperscale and OEM customers and are currently in the process of finalizing customer production schedules. And the third and final phase, which we've already started working on, is about driving growth and expansion. We expect to do this by driving additional synergies through vertical integration and increasing our addressable market by expanding on our existing engineering capabilities to support all platforms. Today, the focus of ZT Systems business is full systems integration at scale. But in the future, by combining it with Sanmina's existing capabilities, will also have the ability to build subassemblies and leverage our components, products and services technologies. Now please turn to Slide 13, where I will provide our outlook for the third quarter. Our outlook is based on current customer forecasts and takes into account ongoing market uncertainties stemming from the macroeconomic and geopolitical landscape. We expect revenue between $3.2 billion and $3.5 billion. We expect core Sanmina revenue to be in the range of $2.2 billion to $2.3 billion. And we expect ZT Systems revenue to be in the range of $1.0 billion to $1.2 billion. As a reminder, ZT Systems revenue is down compared to the prior quarter due to the accelerated compute orders that shifted from the second half into the second quarter. At the midpoint, total Sanmina would be $3.35 billion which reflects 64% growth versus the same period a year ago. We expect non-GAAP operating margin of 6.4% to 6.9%. We expect other income and expense to be a net expense of approximately $30 million. We expect our non-GAAP effective tax rate to be between 21% to 23%. We estimate an approximate $5 million noncash reduction to our net income to reflect our India joint venture partners' equity interest. We expect non-GAAP diluted earnings per share in the range of $2.55 to $2.85 based on approximately 55 million fully diluted shares outstanding. At the midpoint of $2.70, that represents a 77% increase compared to the same period a year ago. We expect capital expenditures to be $95 million as we continue to invest strategically to support our future growth expectations. And finally, depreciation of approximately $50 million. Now please turn to Slide 14, where I will provide our outlook for the full fiscal year 2026. We expect revenue to be in the range of $13.7 billion to $14.3 billion. Within this range, we continue to expect the core Sanmina business to grow in the high single digits and the ZT Systems business to end up well within the $5 billion to $6 billion annualized range that we communicated when we first announced the acquisition in May of last year. We expect non-GAAP operating margin to be between 6.3% to 6.6%. And finally, we expect non-GAAP diluted earnings per share in the range of $10.75 to $11.35 based on approximately 55 million diluted shares outstanding. So in summary, I'm very pleased with our results for the second quarter and for the first half. There is still a lot of work to do in the fiscal year, but we're on a great trajectory for both the core Sanmina business and the ZT Systems business. And while this is a year of transition for the ZT Systems business, our 3-phase plan is working, and the proof points I shared earlier are direct evidence of that. The core Sanmina and ZT Systems teams have done a great job with the integration and execution of our objectives for the ZT systems business, which is helping to position the company for future success. Based on what is in front of us, we are increasingly confident in our ability to achieve revenue of $16 billion plus in 2027. And with that, I would like to turn the call back over to Jure. Jure Sola: Thank you, Jon. Ladies and gentlemen, as you heard from Jon, we delivered strong results for the second quarter. Most important is that fiscal year '26 is tracking better than our expectation at the start of the fiscal year '26. Please turn to Slide 16. Let me talk to you about -- now about the revenue by end market for the second quarter of '26. Communication Networks Cloud & AI Infrastructure came in at $2.77 billion. As you can see, there was a nice growth. Actually, it's almost 280% growth. Sanmina core contributed to that, $891 million. That's up 22% year-over-year. And as you heard from Jon, ZT System delivered $1.88 billion. So very strong demand in our Communication Networks & Cloud AI Infrastructure. Industrial & Energy, Medical, Defense & Aerospace, Automotive & transportation group delivered 31% or $1.24 billion. Overall, that was flat, which was expected. We knew that industrial was going to be slightly down, and that's what happened. But overall, this is a great quarter when you look at the revenue now being over $4 billion. Core Sanmina revenue grew 7.3% year-over-year. I can tell you that the bookings for second quarter were strong. Book-to-bill was better than 1.1. We're seeing a very positive trends in our end markets to tell you more about it, please turn to Slide 17. Communication Networks & Cloud AI Infrastructure is well diversified in this segment. What we consider high-performance communication networks, that business for us has been pretty strong, driven by IP switching and routing, optical system, pluggables, broadband access and 5G wireless infrastructure. As you heard from Jon, Cloud & AI Infrastructure continue to do well, driven by accelerated compute, general-purpose compute and storage. So key takeaways for this is that AI is driving growth for entire end markets, but we're also seeing some positive growth from a traditional telecommunication business. Bookings continue to be strong. We won several new programs. We do see a strong pipeline for new projects, especially as we look at in the calendar year '27 and '28, and we are positioning our company to be ready for that. We're well positioned to drive the growth in this segment. Please turn to Slide 18. Let me talk to you about Industrial and Energy. This segment for us is very promising, driven by power generation and distribution of power. We have multiple customers in this segment that we expect it to do well. Semiconductor capital equipment starting to move in the right direction and demand continues to go up. We have a good customer base there, and we expect to see nice growth. Transformers. We're investing in that business, both from an engineering and design. We have multiple customers working on that, and we expect to see nice growth, especially in '27. Power and storage and management is also a very strong business for us and safety and surveillance equipment. So the key takeaways on this is that we're doing well. We expect growth to accelerate in the second half. We're expanding energy business for AI data centers, all the way from engineering design to full system and vertical integration. Please turn to Slide 19. Let me give you some highlights on Medical. In this segment, we are well positioned around disposables, wearable consumer business. Laboratory diagnostics, research equipment and hospital & medical offices. Key takeaways here are very stable in market. We expect growth to accelerate in second half and we are leveraging our regulatory knowledge and experience to expand customer base and the new programs to drive the growth, well positioned here. Please turn to Slide 20. Let me give you a few comments on Defense & Aerospace. We're well positioned here. Sanmina/SCI has been in this business forever. We are building business here around the defense and commercial aerospace. We do all everything from design to full system integration. Key takeaways here is we expect the growth in traditional USA Defense & Aerospace business to continue. We are expanding customer base in satellite market, which have some big opportunities, and we continue to see strong demand in fiscal year 2027 and beyond. But as we look at the second half of '26, it's really positioned us to a good year, but most importantly, we see a lot of growth in the future. Please turn to Slide 21. Few comments about Automotive & Transportation. We're well positioned here. We have some solid customers still around automotive EV business, self-driving cars and transportation. Key takeaways, again, overall, we have stable customer demand here, a great customer base. We continue to win key programs from new and existing customers and programs that transitioning from NPI into full-scale production for us. Please turn to Slide 22. Let me talk to you right now about our Sanmina's capabilities. We do have a diverse set of capabilities where we provide end-to-end solution for all our key markets. Our capabilities are industry-leading from engineering, designed to full system for our key markets, including data center, AI infrastructure end market. We typically get involved early stage of product development. We help the customer bring the product to the market. We provide high technology printed circuit boards. In this segments, we have some of the leading technology in the industry both here in North America and Singapore. We fabricate and assemble some of the most advanced board and test. We built mechanical racks and enclosure and design. We're investing fair amount in liquid cooling. We fabricate and build cooling manifolds, busbars. We also have a strong compute and storage system around ODM and joint development, and we're expanding that. We do provide custom memory for key customers. We've also been growing and investing in custom optical modules, as I said, from the engineering to full system integration and direct global order fulfillment for our customers. So when you look at Sanmina's capability, that's what really allowed us to establish a diverse customer base and market leaders with average relationship with our customers over 15 years. So very proud of that. Please turn to Slide 23. Here, you can see Sanmina manufacturing footprint, which is strategically positioned to support our customers globally. We are aligned with the customer requirements, and we have a strong U.S.A. presence. We are leveraging our established global infrastructure and have the right capacity in place for the growth as we talk about next year, '27 and '28. Our global and regional supply chain is connected by 1 IT system, which is managed by Sanmina Smart MES. Sanmina's IT systems are very agile and responsive. We have industry-leading capabilities, especially in the market today when there's a lot of material shortages. Please turn to Slide 24. In summary, as you heard from Jon, and I'm repeating myself again, our team executed well and delivered a great second quarter results. Revenue outlook for fiscal year '26 coming in strong at $13.7 billion to $14.3 billion, midpoint of $14 billion year-over-year growth of approximately 73%. We also well diversified, as I just explained to you earlier, cross and with all end markets. We have strong USA presence and global regional manufacturing footprint for the future. New programs will drive the growth for us in fiscal year '27 and '28. And as Jon said earlier, we're well positioned to deliver $16 billion plus in fiscal year 2027 based on the forecast that we have in front of us right now. And again, we feel good about opportunities in front of us. I can tell you that overall, our strategy is working, is to build bigger and stronger Sanmina for the future. Now ladies and gentlemen, I would like to thank you all for your time and support. Operator, we're now ready to open the lines for question and answers. Thank you again. Operator: [Operator Instructions] Our first question comes from the line of Ruplu Bhattacharya from Bank of America. Ruplu Bhattacharya: It sounds like ZT came in a lot stronger than you had expected. What drove that outperformance? Was it the MI300 series product that you shipped more of in fiscal 2Q? Or was it NVIDIA GPU business? You said something got pulled in. So any details on that? And then when we look at your fiscal '26 guidance, you're saying that ZT will be well within $5 billion to $6 billion. And I think you're guiding $1.1 billion for 3Q, which would mean that fiscal 4Q has to be at least $1.5 billion of revenue from ZT. What is giving you confidence in meeting that level of revenue given you just had a pull-in in fiscal 2Q? And I have a couple of follow-ups. Jure Sola: Yes, Ruplu, excellent question. First of all, this was a great quarter. A customer wanted to pull in some of the product that originally was on a schedule for a third and fourth quarter that had a demand and our team was able to deliver it. So that's good. We did not ship any accelerated compute of NVIDIA product. Whatever we shipped, it was all based on AMD technology. As we look at the future, I think there's a lot of exciting stuff going around the new products. We won multiple hyperscalers and ODMs for the future. So it's been an exciting quarter for us. And Jon, I don't know if anything else you want to add to that. Jonathan Faust: Yes. Just to add, Ruplu, on the front end. So I mean we're very excited, as Jure said, to do so much business in this quarter around accelerated compute, and it's new platform business, not the old legacy products that ZT had. And you and I have spoken quite a bit is this would be a good proof point for Sanmina if we won business building out these new products. So we're certainly excited about that. And then it was strong execution, too. There's a lot of demand out there for that product, and the customer want it quickly. When we came in and we guided at the beginning of last quarter, we weren't sure that we get all the components and so forth that we would need to get it done, but that came in. The team was able to build it quickly. So that's great. And hopefully, we'll see if there's going to be more of those types of orders. At this point, given the nonlinear nature, there isn't any. So -- but we'll see that could change. But our real focus, as Jure was saying, is on the future new generation platform. So we're focused on getting production ready for that and excited about the new opportunities that we won for that business. Ruplu Bhattacharya: Okay. Jon, you mentioned in the PowerPoint that the margin profile for ZT is in line with the overall company. So that would be about 6.4%. Do you see this margin profile as sustainable over the next couple of quarters as the AI or accelerated part of the business ramps higher? Jonathan Faust: Yes. It's like you're kind of insinuating or getting at, Ruplu, it all depends on the mix of the business. So right now, it's very much in line in this quarter, landing at 6.4%. If you look at our guide for Q3, it was at 6.4% to 6.9%, and that's kind of implied for Q4 because the full year comes in at 6.3% to 6.6%. And that's because we're not going to have as much of the accelerated compute as we would in the future. But like long term, as we've said before, we expect the margin profile to be roughly in line with core Sanmina and where that's been. Now this will all depend as we're finalizing some of the customer agreements and where we land in terms of consignment and so forth, that may adjust. So a little bit early to talk about expectations for '27. But we did want to give you the guide specifically for fiscal year '26. That's why we guided the full year to let you know what we expect over the next 6 months. Jure Sola: If I can add to that, Ruplu, I think it's -- as Jon said, it's a transition year, a lot of work, but we're ahead of schedule. And we're going to have a lot better year than what we expected at the beginning of the year. And most importantly, how well we're going to be positioned for the future when it comes to the demand. Demand is not going to be a problem. It's about all about timing when the hyperscalers mainly they do their scheduling and so on and so on. So it's all about getting ready for the better days in the future. Ruplu Bhattacharya: Okay. Jure, I'm going to try and sneak one more in. Can you give us some more details on the Communications segment? I mean this has been traditionally a strength for Sanmina. Can you talk about like you mentioned optical IP switching and broadband 5G. How much of the segment revenue comes from each of these buckets? And are you seeing more demand for optical transceivers? Or are you seeing demand for switches? And are you actually shipping 1.6T switches today? Jure Sola: First of all, before I forget, I'm an older guy here. Yes, we are shipping 1.6 terabyte switches in what I would call new product introduction and so on. As you know, we have multiple customers that will build switches. We do not compete with our customers, but we're building some of the most advanced switches for our partners. But back to your direct question, yes, we are very excited about our communication business because we're building some of the most advanced product that goes in there around IP routing, optical systems, optical pluggables, around 400, 800, and we're also developing 1.6 terabytes in pluggables. So those are all exciting stuff. And then as I said, traditional telecom is coming back. And we do a little bit of 5G wireless. That's a small percentage of our overall business, maybe 2%, 3% of it, but it's a couple of solid customers there. So overall, yes, everything is -- this segment for us right now is really -- is doing well in every segment inside of it, and we're well diversified from high-performance communication networks to cloud AI infrastructure. Operator: Your next question comes from the line of Samik Chatterjee from JPMorgan. Samik Chatterjee: Maybe for the first one, just going back to your reference to new wins on the ZT Systems side with customers where you're shipping preproduction systems and waiting to finalize customer schedules. Just checking in to see if you can give -- flesh that out a bit more. Are these timing sort of more driven by whether you can ship in 2026? Or are these some systems that ship in 2027? Any more visibility on the timing? And how broad-based the customer base is here? Is it all of the hyperscalers that are engaged? Or are you engaged with 1 or 2 hyperscalers? Any sort of color on the customer mix as well I have a followup. Jure Sola: Well, Samik, again, welcome for covering Sanmina. Let me kind of take some of that, and I'll turn it over to Jon because Jon has been responsible pulling ZT into Sanmina has been doing an excellent job. First of all, when you look at the market opportunity for us, let's talk about Cloud AI infrastructure around the hyperscalers is tremendous. So every hyperscaler out there, we're already starting to do some business. But our goal is to win every one of these large hyperscalers over the next 12 months, 18 months. It's been better than what we expected will be more successful than what I expected when we acquired the ZT Systems, okay? But opportunities, demand is big. And we are positioning the company, and we're putting an infrastructure in a place to be able to handle the latest technology for the future. So from my perspective, we see a lot of upside. So Jon? Jonathan Faust: Yes. Let me add a few points, Samik, and thanks again for joining, and welcome. So yes, the business that we did this quarter was we called new accelerated compute business, nothing to do with the legacy platforms, but there was very little, right, when you think about the next-generation product. Now that's scheduled to be out in September, and everything is very much on track from that perspective. We're doing everything that we're responsible for, which is getting production ready, making sure that we can build all the products at scale for all these customers but that's very much on track now. Whether or not we get a huge amounts of revenue in September has remained to be seen. And now everything is on schedule, but just to give you guys some perspective, once the silicon and so forth becomes production ready, it takes us a while to build the products, so say, a couple of weeks, right? And then we've got to ship the products all around the world. And just to be clear, like the revenue recognition for us in this business is when the customers receive it, right? So the opportunity in our fiscal 2026 isn't really huge. That's more of an FY '27 play. That's why we talk about towards the end of the calendar year. But as we said on the call or in our prepared remarks, we have started to ship some preproduction volumes. We're learning more and more about building these products, getting ready. And so more to come on the customer specifics and the schedules. That's why we wanted to put on the slide that we're working through those details. But we are happy to say that we've won several customers now, multiple customers. And our goal is to fill up all of our capacity. And if we continue to win beyond that, we'll look to invest more. Samik Chatterjee: Got it. Got it. And for my follow-up, maybe to your comments about sort of 2027 revenues from these systems. Just looking at your $16 billion guide for fiscal '27, if I still assume core Sanmina grows at high single digits, that sort of indicates ZT doing about $7 billion of revenue and you'll be exiting the year at $6 billion. So is that the right way to think about sort of where the starting point is before some of these new opportunities come through? Just how you size that business, how you're thinking initially about fiscal '27? Jonathan Faust: Yes. It's just that it's early days. That's why we said 16 plus. And just a little bit of history to Samik. Like back when we first announced the deal in May of last year, so almost a year ago, we said that we'd expected to double Sanmina within 3 years. And then when we got to our Q4 earnings call last year, we accelerated that to within 2 years. That's where the $16 billion number comes from for fiscal year '27. Now we're saying $16 billion plus because we see all the demand is there. But we're still assuming at this point that the vast majority of that business will be consignment. It's not entirely clear just yet. We're working through some of those details with customers. That's why it's still early days, but we did want to make the point that we feel very confident. I think my words were increasingly confident, right, about the revenue profile next year. So this year, we still got to wait to see how much we might do in, let's say, the 300 series business, kind of the current version of accelerated compute but new for us. And then the growth potential from there will all come down to the customer schedules, as Jure said. Jure Sola: Yes. No, it's an exciting future. And in our business, Samik, you take one quarter at a time, but we feel very comfortable for the rest of this fiscal year and I think there's more to come in the future. Operator: Your next question comes from the line of Steven Fox from Fox Advisors. Steven Fox: I guess I had a couple of questions. Maybe first, Jon, on the cash flows. I know that you mentioned a couple of puts and takes with CapEx, and I see a onetime item in there. But you grew revenues quarter-over-quarter like $900 million, and you still generated almost $300 million of free cash flow in the quarter. Do you have a better sense now for how the combined business can sort of throw off cash on a 12-month basis? Anything you want to sort of hold your feet to the fire at this point in terms of CapEx versus working capital and things like that? It would be helpful to get a better feel for that. And then I had a follow-up, if I could. Jonathan Faust: Yes, sure, Steve. Thanks for joining. So yes, this quarter, Q2 was just a great cash flow from operations. I'll talk that first before free cash flow. So almost $400 million in cash flow from operations. And it was really due to the linearity of the business and just very strong execution, right? So we executed, manufactured a lot, shipped a lot of product and collected cash. So if you look at the details there, you'll see it in our 10-Q, our inventory levels came down, AR levels came down because we collected very well on that front. So I would kind of frame that up as linearity. And I have, to your point, learned a lot over the last, say, 6 to 9 months around the dynamics of the ZT Systems business. And once we hit more of a production steady state with customers and get out of this transition period, even more will become clear, but very excited to generate the cash that we did this quarter. Now as we look ahead into Q3 and Q4, we don't guide cash specifically, but we will start to build inventory levels, rebuild some of those inventory levels to prepare for that new accelerated compute business. That will probably start to come more in Q4. But I expect in the near term to continue to generate cash. But as I was saying in my prepared remarks, I do think our leverage ratio will come within that range as we build the inventory to support the future business. But we're very pleased with where we're at right now. Steven Fox: That's super helpful. And then if I'm reading through all the details here correctly, it sounds like you have 2 main cloud customers that have generated the upside and give you confidence in the numbers. I know you're doing business with all 5, like Jure said. But can you talk about like how we think about not just the number of cloud customers for ZT and the potential there in like between now and '27, but also like OEM business. Like I know the focus is on cloud, but can you talk a little bit about how ZT can grow with OEMs too? Jonathan Faust: Yes. It's really both, Steve. I mean ZT legacy was working with a handful of customers, and those are great customers that we want to maintain. But part of our strategy has been to expand the number of customers that we're working with, so more hyperscale, more cloud CSP customers, but OEMs, too. So we're focused on both, even the neo-clouds as well. It really all comes down to maximizing the capacity that we have at the ZT plants. And then as I was saying, just a few minutes ago, answering some of Ruplu's questions or maybe [indiscernible] if we continue to see more demand and there's a lot of demand out there, we'll look to invest to even expand beyond that. But first things first, right now, it's focus on the customers that we're winning, make sure that we do very good business for them. And that's why I say Q2 was a great proof point. The ZT Systems team executed extremely well, right, on the demand that the customers are looking for. Jure Sola: But we're building plenty of capacity. Capacity is not going to be an issue, Steve. Operator: Your next question comes from the line of Mehdi Hosseini from SIG. Mehdi Hosseini: A couple of follow-ups from my end. Jure Sola: Mehdi, also welcome to covering Sanmina. Hopefully, we'll have some good quarters together for years. Mehdi Hosseini: Sure. Definitely. I look forward to meeting in person. A couple of follow-ups for me. And just quickly on the fiscal year '27 revenue target of $16 billion plus. How should I think about ZT Systems? Should I assume that you're focused on the core customer there at AMD and you would benefit from their ability to scale? Or is there opportunity for you to diversify your customer base there? And I have a follow-up. Jonathan Faust: Yes. Mehdi, thanks for the question. As Jure said, welcome to the call. It's great to have you on board. So right now, FY '27, it's early days. I was giving Samik, when I was answering his question, a little bit of context on where the $16 billion came from, which we're now calling $16 billion plus, but it relates to some comments that we made when we first acquired ZT. So we wanted to reiterate, right, that we're still very much on that trajectory. But early days to kind of call out what we would expect exactly from them. But if core Sanmina continues to grow high single digits, that get us close to, say, like $10 billion next year. And then as you think about what ZT would have to contribute, that would be like, say, $7 billion or so, $6 billion to $7 billion. Samik was doing that same math. Now as soon as we lock down the number of customers that we're going to work with, the actual production schedules, sort out any details on rev rec and timing like that, we'll be able to give a specific guide, but we feel increasingly confident that $16 billion plus is going to be achievable for next year. And the way that we get there is kind of just how I was answering Steve's question. So we want to maintain the customers that ZT has had historically, the handful of customers that they had, but we're expanding. So CSPs, OEMs and otherwise. Jure Sola: Mehdi, let me add more to our rest of the Sanmina business. The key for us, as Jon mentioned in his prepared statement, ZT was mainly doing the final system integration. And there's a lot of opportunity for us to expand the vertical integration from fabricating the certain subsystems that go inside of the system that will help the growth of what we call Sanmina Core. I think will make us a lot more important with the customers. We'll be able to accelerate time to market and so on. So there's a lot of opportunity for us to expand that. There a lot of work in front of us, but I think the future is more exciting than historical. Mehdi Hosseini: Sure. I agreed. And actually, as a follow-up to it, given opportunities there is, especially as we think about optimizing next-gen racks, would you need to elevate the R&D to above $10 million a quarter or should we assume that the current R&D level can support the 15% revenue growth in FY '27? Jure Sola: Well, first of all, I think revenue for us is not going to be -- at least what we see today, as I look at the '27, '28 demand is there. We're going to continue to invest for -- not just for '27 and '28, we're investing for the future. We're working very close with our existing customer base, which basically is who's who. We got all the key players. So we're going to continue to invest for the growth of the business. It's a partnership. End of the day, we are an extension of our customers and building that what I call transparent relationship and building the trust is the key in our business. And if you look at the relationship with our customers well over 15, 20, we have some customers that have been with us over 35 years. So our goal as we go into the AI business and growing their opportunity is to build a strong relationship, and we'll invest whatever it takes to be an industry leader because the capabilities that we acquired from ZT are industry capabilities, the leadership there, and we are investing a fair amount to make sure that we build to be able to meet not just today's requirements, but also tomorrow's requirements. So company is in a great position to continue to do what's right for our customers. Mehdi Hosseini: Let me rephrase the question. As you -- and please correct me if I'm wrong, it is my impression that you're transitioning or at least part of the business driven by ZT transitioning from EMS to value-add ODM service provider. Would that require some additional R&D as you go through this transition? Jure Sola: Yes. Yes. Yes, definitely, definitely will. That's a part of the growth. As you -- in our business as long as you grow, you're going to be spending more R&D. It's a project by project, program by program that is looking at it, yes, but Sanmina will be investing to be able to create the right value and right solution for our customers. Jonathan Faust: Yes. And just to add to that, too, Mehdi, we've got a strong foundation of engineering capabilities. That's where we spend our R&D dollars today. But as the business grows, to Jure's point, depending on the final customer set that we have and the opportunities that we want to pursue, whether it be vertical integration or otherwise, we could invest more. So more to come. Everything that we've planned on so far is factored into the guidance that we just gave, but more to come as we look ahead into FY '27 later this year. Jure Sola: Operator, we have time for one more question. Operator: [Operator Instructions] Our next question comes from the line of Anja Soderstrom from Sidoti. Anja Soderstrom: Most of my questions have been addressed, but I'm just curious, are you seeing any sort of supply chain disruptions or input costs or difficulties to find components at all? Jure Sola: Yes, definitely, Anja, there's some material shortages around the memory, custom ASICs and things like that, that is going on. I think it's going to continue through rest of the year, and we'll see how things change. But yes, definitely, material is challenging right now as we look at the rest of the year and probably potentially in '27? Anja Soderstrom: But you don't see any risk to your revenue in terms of that? Jure Sola: Anja, in our business, we are custom manufacturing, there's always -- you have to chase parts every day. So I hope we manage that every day. We have a great IT system. We have a great relationship with our suppliers. We work very close with our customers, planning these things in ahead. But last quarter, we could have shipped a little bit more if we got able to get every part number that we needed. And yes, it's something that we have to manage every day, Anja. Jonathan Faust: Yes. Just to add to that, too, I mean, everything that we're aware of today has been factored into our guide. To the point Jure just made, our book-to-bill was over 1.1:1. We could have shipped a lot more. I mean if you think about the core Sanmina business, communication networks and cloud infrastructure, that's been growing 20% plus year-over-year for the last 6 quarters. It could be growing a lot more if there was more components and equipment and so forth like available out there. But everything that we know of as of today and the forecast from our customers, that's been factored into our guide. Jure Sola: Okay. Well, ladies and gentlemen, thanks for your time. Looking forward to talking to you 90 days from now. But for some of you that have questions, please give us a call at any time. Thank you again. Thank you. Bye-bye. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings. Welcome to Simpson Manufacturing Company's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Kim Orlando, Investor Relations. Thank you. You may begin. Kimberly Orlando: Good afternoon, ladies and gentlemen and welcome to Simpson Manufacturing Company's First Quarter 2026 Earnings Conference Call. Any statements made on this call that are not statements of historical fact are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in the company's public filings and reports, which are available on the SEC's or the company's corporate website. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events or otherwise. On this call, we will also refer to non-GAAP measures such as adjusted EBITDA, which is reconciled to the most comparable GAAP measure of net income in the company's earnings press release. Please note that the earnings press release was issued today at approximately 4:15 p.m. Eastern Time. The earnings press release is available on the Investor Relations page of the company's website at ir.simpsonmfg.com. Today's call is being webcast and a replay will also be available on the Investor Relations page of the company's website. Now I would like to turn the conference over to Mike Olosky, Simpson's President and Chief Executive Officer. Michael Olosky: Thanks, Kim. Good afternoon, everyone and welcome to today's call. With me is Matt Dunn, our Chief Financial Officer. As we begin, I'd like to step back and briefly anchor our performance this quarter and the broader ambitions that guide how we build and grow Simpson. Across the organization, we remain focused on being the partner of choice for our customers, and innovation leader in the markets we serve and strengthening our values-based culture, all while delivering strong financial performance. We are making meaningful progress on these ambitions despite continued market challenges. A defining hallmark of our values-based culture is the depth of experience and long-term commitment across our organization. As we celebrate our 70th year as a company, that continuity matters. It reflects a culture that has allowed us to perform, adapt and grow through many different construction cycles. Throughout the year, we'll be highlighting employees whose long-term dedication and impact reflect the values and culture that have defined Simpson for 7 decades. I'd like to take a moment to recognize a few members of our team. First is Sheryl Wyatt, Plant Director for our Southeast operations. She is celebrating 42 years with Simpson. Sheryl started her career in our customer service organization, gaining firsthand insight into our customers and how we support them. She advanced through several manufacturing and operation roles and today leads our highest volume and most cost-effective manufacturing facility. I'd also like to recognize Cyndi Chandler. Cyndi started her career with Simpson in Texas and has spent 41 years with the company. She currently leads our business in the United Kingdom, where she made meaningful profitability improvements. Over her career, she has consistently led teams through complex change from reshaping our U.S. national accounts approach, to launching operations in Chile and most recently, successfully strengthening our customer relationships across the U.K. Finally, I'd like to recognize our brothers, [ Genaro and John Sid ] from our Southwest operations. With 48 and 42 years of service, respectively, [ Genaro and John ] bring a combined 90 years of experience spanning production planning, leadership and quoting. They are a great example of the deep operational knowledge and customer focus that underscore what makes us unique. These are just a few examples of the people behind the results and we're grateful for the experience, leadership and commitment they bring to work every day. Now turning to our financial results. We delivered net sales of $588 million, up 9.1% from the prior year quarter. As outlined in our investor presentation, net sales growth was primarily driven by our 2025 pricing actions, which contributed approximately 6% and foreign exchange of approximately 3%. These gains were partially offset by an approximate 1% decline in volume as a result of softer housing start activity during the quarter. In North America, net sales were $461.9 million, up 9.8% from the prior year quarter, including a $31 million benefit from pricing actions. As we look across our North American business, performance remains mixed by market segment and varies by geography, consistent with broader construction trends. However, we continue to see areas of resilience and growth for our strategy, business model and customer relationships position us well. The component manufacturer business delivered a strong quarter with volumes up double digits, driven primarily by new customer wins. This business continues to represent one of our most attractive long-term growth opportunities. Even amid broader residential housing softness, customer engagement remains solid, particularly around productivity-enhancing solutions. Truss manufacturers remain focused on labor efficiency, throughput and operational visibility, resulting in increased demand for our solutions across software, plates, equipment and design services. We are making great progress in expanding and enhancing our offerings with value-added functionality. We are also improving our ability to respond quickly with new software features as customers' needs evolve. Adoption of our solutions continue to advance, strengthening our role as a strategic partner to our component manufacturing customers. The OEM business delivered another strong quarter with double-digit volume growth. This segment remains an area of relative strength and strategic importance, supported by long-term trends toward prefabrication and off-site construction methods, including engineered wood systems and mass timber. While project timing can vary, customer engagement remains high and our pipeline of opportunities continues to build. Our ability to pair innovative products with deep engineering expertise, testing capabilities and field support remains a key differentiator. As customers pursue increasingly complex performance-driven projects, we believe our OEM segment is well positioned to grow faster than the broader construction market over time. Our residential business volume increased modestly year-over-year, supported by continued cross-selling of connectors, fasteners and anchoring solutions. While builders are focused on cost control, cycle time reduction and lowering inventory levels, we renewed builder agreements, launched new products and increased our service offerings to support both our builders and our LBM partners. These initiatives, combined with high service level across the industry's broadest and deepest product line have enabled us to perform relatively well in a market pressured by soft housing starts. In our commercial business, first quarter volumes were down slightly year-over-year, reflecting mixed construction activity by segment and geography. Demand for cold-formed steel and anchoring systems remains relatively resilient. Customers continue to value our technical expertise, project coordination, broad portfolio of code compliance solutions and reliable product availability on large complex projects, particularly where early engagement helps reduce risk and improve execution. While overall activity remains uneven, our differentiated capabilities position us well for continued share gains. Our National Retail business experienced low single-digit decline in shipments, while point-of-sale volumes declined in the mid-single digits versus the prior year. The retail environment remains competitive and reflective of broader housing and repair and renovation trends with customers remaining value focused and selective in discretionary spending. Our teams remain focused on disciplined execution, strong in-store support and close collaboration with retail partners to optimize merchandising. We continue to make progress through pay optimization initiatives, targeted product innovation and the expansion of decorative hardware via our Outdoor Accents offerings. While near-term volumes remain pressured, our emphasis on service, reliability and in-market execution continues to strengthen retail relationships and support long-term growth opportunities. In summary, while near-term market conditions remain difficult, our diversified portfolio, strong customer relationships and focus on engineering and value-added solutions resulted in solid performance across the North American business. In Europe, first quarter net sales totaled $121 million, up 6.3% year-over-year, driven by foreign currency translation. On a local currency basis, net sales were down 5.4% with a decline in volumes partly offset by price increases. The market has been off to a slow start this year but we continue to expect flat to low single-digit market growth over the next couple of years. Even in this environment, we've had several meaningful customer wins, including multiple mass timber projects. We also made progress improving profitability in select countries and continue to optimize our footprint to support long-term performance. While our raw material positions remain strong, we are seeing input cost headwinds that have required us to pass through surcharges and price increases. Taken together, these dynamics reinforce our confidence in our ability to continue improving profitability in Europe. Our consolidated gross margin declined 130 basis points year-over-year to 45.2%, driven by higher material, factory and tooling and labor cost as a percentage of net sales, including start-up costs from the ongoing ramp of our Gallatin facility that opened late last year. Our 2025 price increases, which we now expect will contribute approximately $130 million in annualized net sales helped offset these costs, including those attributable to tariffs. Gross margin was also negatively affected by product mix, partially offset by our productivity initiatives. Our operating margin was 19.5%, up 50 basis points year-over-year, which included onetime costs of $2.3 million related to our strategic cost savings initiatives. Adjusted EBITDA totaled $139.4 million, a 14.1% increase year-over-year. As outlined in our last call, our financial ambitions remain: one, driving above-market volume growth relative to U.S. housing starts; two, maintaining an operating income margin at or above 20%; and three, consistently driving EPS growth ahead of net sales growth. In summary, our first quarter results reflect disciplined pricing and cost management reinforced by strong execution and an unwavering focus on supporting our customers. As we look ahead, we expect conditions in both the U.S. and Europe to remain challenging and we do not anticipate sustaining the same level of revenue growth through the remainder of the year. As for our outlook on the markets, we now believe 2026 housing starts in the United States will be down low single digits compared to 2025. And in Europe, we expect flat to modest growth in the market for 2026. Looking ahead, our culture, customer focus, innovation and financial discipline position us well to execute and maintain a strong competitive position. With that, I'd like to turn the call over to Matt, who will discuss our financial results and outlook in greater detail. Matt Dunn: Good afternoon, everyone. Thank you for joining us on our earnings call today. As we celebrate our 70th year as a company, I'd like to echo Mike's comments and extend our gratitude to our many long-standing employees who have made Simpson the company it is today. I'd also like to mention that unless otherwise stated, all financial measures discussed in my prepared remarks refer to the first quarter of 2026 and all comparisons will be year-over-year comparisons versus the first quarter of 2025. Now turning to our results. Consolidated net sales grew 9.1% to $588 million. In the North America segment, net sales rose 9.8% to $461.9 million. Europe delivered a 6.3% increase in net sales to $121 million, driven by $13.2 million in favorable foreign currency translation and price increases, which were partially offset by lower sales volumes, partly from adverse weather conditions across the region. Globally, wood construction product sales were up 8.3% and concrete construction products sales were up 14.7% as a larger percentage of these products are imported and included in tariff-driven price increases. Consolidated gross profit increased 6.1% to $265.9 million, resulting in a gross margin of 45.2%, down 130 basis points. In North America, gross margin was 47.8%, below the 49.8% reported in the prior year, reflecting the impact from tariffs and higher factory overhead and labor costs as a percentage of net sales, along with some unfavorable product mix in the quarter. As Mike noted, start-up costs in our Gallatin facility represented an approximate 100 basis point headwind to our first quarter gross margin, which we expect to moderate as we progress through the year. In Europe, gross margin increased to 36.3% from 35.2%, driven by higher pricing and lower material costs, partly offset by higher factory and tooling costs as a percentage of net sales. From a product perspective, our gross margin was relatively flat at approximately 46% for wood products. For concrete products, gross margin was 40.2% compared to 49.5% 1 year ago, with the decrease due to tariffs, partly offset by recent pricing actions. Now turning to expenses. As a percentage of net sales, first quarter operating expenses were 25.6%, an improvement from 27.5% last year. SG&A headcount was down approximately 9.1% year-over-year, which reduced personnel-related costs. In total, operating expenses increased 1.7% to $150.7 million, driven primarily by $4.2 million of foreign currency translation and onetime costs in Q1 2026 of $2.3 million related to our strategic cost savings initiatives. These increases were largely offset by lower professional fees and variable incentive compensation. To further detail our SG&A, our research and development and engineering expenses decreased by 6.1% to $18.6 million on lower personnel cost due to less headcount and footprint optimization. Selling expenses were relatively flat at $54.5 million as a result of our strategic cost savings initiatives. On a segment basis, selling expenses in North America were down 3.3% and in Europe, they were up 11.9%, primarily due to FX. General and administrative expenses increased by 4.5% to $77.6 million due to onetime costs of $2.3 million related to our strategic cost savings initiatives. As a result, our consolidated income from operations totaled $114.6 million, an increase of 12% from $102.3 million. Our consolidated operating income margin was 19.5%, up from 19.0% last year. In North America, income from operations increased by 12.8% to $118.3 million due to higher net sales and reduced operating expenses. Our operating income margin in North America was 25.6% compared to 24.9% last year. In Europe, income from operations decreased 23.8% to $7.1 million due to lower volumes. Our operating income margin in Europe was 5.9% compared to 8.2% last year. Our effective tax rate was 24.1%, approximately 140 basis points below the prior year period. Accordingly, net income totaled $88.2 million or $2.13 per fully diluted share compared to $77.9 million or $1.85 per fully diluted share. Adjusted EBITDA was $139.4 million, an increase of 14.1%, resulting in a margin of 23.7%. Now turning to our balance sheet and liquidity. As of March 31, 2026, we had $74.2 million drawn on the revolver, resulting in $525.8 million of remaining availability. Our debt balance was $370.5 million, down $3.8 million from December 31, 2025 and cash and cash equivalents totaled $341 million, resulting in a net debt position of $29.5 million. Our inventory position as of March 31, 2026, was $549 million, which was down $45.2 million compared to December 31, 2025. Pounds of inventory on hand in North America were down double digits with a nearly double-digit increase in cost per pound driven primarily by raw materials. We generated cash flow from operations of $35.9 million for the first quarter. Our capital allocation strategy remains focused on both supporting growth and delivering returns to our stockholders. In Q1, we invested $17.7 million in capital expenditures, returned $12 million in dividends to our stockholders and repurchased $50 million of our common stock. As announced in October, the Board authorized a new share repurchase program for 2026, permitting the repurchase of up to $150 million of our shares through year-end 2026. This authorization underscores our confidence in the long-term prospects of the business and our ongoing commitment to returning capital to shareholders. Next, I'll turn to our 2026 financial outlook. Based on business trends and conditions as of today, April 27, 2026, our guidance for the full year ending December 31, 2026, is as follows. We continue to expect our consolidated operating margin to be in the range of 19.5% to 20.5%. Additional key assumptions include our outlook for U.S. housing starts to be down in the low single-digit range, a lower overall gross margin based on imposed tariffs and increased depreciation costs, a higher realization of the annualized contribution from our 2025 price increases, an expected $3 million to $5 million of footprint optimization costs in Europe and a projected $10 million to $12 million benefit on the sale of vacant land in the back half of 2026. Our effective tax rate is estimated to be in the range of 25% to 26%, including both federal and state income tax rates based on current tax laws. And finally, our capital expenditures outlook is expected to be in the range of $75 million to $85 million. In summary, we delivered solid results in the first quarter with growth in net sales, EBITDA and operating margin despite a housing market that remains challenged. Pricing actions are contributing as expected and are projected to add roughly $130 million in annualized net sales, helping offset some tariff-related cost pressures. Overall, while we were pleased with our Q1 results, we do not expect this level of revenue growth to carry through the remainder of the year, given our tempered outlook for the housing market in 2026 and the timing of 2025 price increases. We remain focused on disciplined capital deployment and our commitment to return at least 35% of free cash flow to shareholders. With that, I will now turn the call over to the operator to begin the Q&A session. Operator: [Operator Instructions] Our first question is from Daniel Moore with CJS Securities. Dan Moore: Congrats on the quarter. I guess we'll start with the -- this modest change in expectations around housing starts for the year, certainly not a surprise. And I realize we're talking weeks, not months. But just talk about the sort of the cadence of demand and volumes in North America that we've seen since the start of the war in Iran and spike in oil prices. Just wondering if -- what sort of impact you're seeing in real time? And how do you kind of see that playing out as we look through to the remainder of Q2? Michael Olosky: Dan, thanks for the question. So we started coming into this year thinking the market was going to be roughly flat. And as you know, the census data is a little bit delayed. But when we look at the market, Dan, we're doing 2 things. We're getting basically feedback from 6, 7 different firms on how the year is going to play out. Consensus from those 6 or 7 firms is kind of low single-digit number. And then we're certainly cross checking that with a lot of our customers. And what we hear from the customers in the spring, it's been a bit of a soft selling season, which kind of confirms that low single-digit market growth rate expected for the year. Dan Moore: Very helpful. In terms of pricing, Q4, about a 5%, 6% benefit, again, 6% benefit this quarter. Have you taken or contemplated any additional price increases given continued inflationary pressures? And how should we think about the impact of pricing in Q2 as well as the back half of the year? I know you mentioned kind of $130 million all in. Just any comments on cadence is certainly helpful. Michael Olosky: Yes, Dan. So when we look at pricing going forward, in Europe, we are seeing rising inputs in a lot of different areas. We have started doing the surcharges and done some price increases there, which we mentioned in our prepared remarks. We're certainly experiencing some rising costs across other parts of our business in North America. We are working really hard to take cost out and try to drive productivity with the expectation that we maintain our gross margins over the longer period of time. Matt Dunn: Yes. And Dan, this is Matt. Just to answer your specific question, we haven't taken any additional price increases in North America beyond the 2 that we announced last year. And again, as we look forward, we're seeing those cost increases, whether it be fuel or potentially steel but haven't contemplated or announced anything. And again, we're just really focused on maintaining and kind of preserving our gross margins. So potentially have to look at that if things change. But right now, nothing in the works. Dan Moore: Okay. And taking a step back from the macro, good color and detail about increased penetration, particularly in some of those newer end markets, trusses, some of the outdoor decorative. Just if you want to sort of dig in and give a little bit more color in terms of how things are progressing from a share gain perspective? And how you -- what you -- what your expectations are for sort of outpacing the housing starts for the year from a volume perspective, assuming it does come in, in that low single-digit range. Michael Olosky: Yes. And again, Dan, let me start with the market just one more time. So again, delay in the census data. So we're not exactly sure how the first part of the year has played out. We're going to get, I think, the first round of data in another couple of weeks. So that will give us a little bit of a better feel. We do believe we are slightly ahead of the market based on off of a trailing 12 months. And when we look at driving above-market growth, it comes back to those market playbooks that we have. We're almost in 5 market segments. We also have product playbooks all around trying to drive innovation, drive new customer gains, get additional shelf space and get more content on the houses. When we look at some things we're particularly excited about, again, the component manufacturing business growing double digit. Again, new customer wins there. We're very happy with how the truss business is developing. The producer tool has been out in the market for a while. It is cloud-based. So we've already been able to do multiple releases to respond quickly to some customer needs and questions around it. We're still feeling pretty confident about our director, a new design tool that's going to be rolled out later this year. We're actively using AI to help us develop new software and new quality assurance in the truss space. So we're feeling pretty good about that and we're getting, again, good feedback from our customers. And then in the OEM segment, we've been talking about mass timber for a while. These mass timber jobs just keep getting bigger and bigger. And they want a broad set of solutions from us that we're able to offer and the Gallatin facility is going to help us respond quicker. And we've done some other things to help us do really these high-strength heavy-duty connectors packages for some of these big mass timber buildings out of our Riverside facility and we're happy with the progress we've made there. So again, we're feeling good about it. And at the end of the day, we want to make sure that we're driving above-market growth at that 20% operating income level. Dan Moore: Great to hear. Last one, just a housekeeping. I think you said timing around the gain on sale of land, H2. Has that been pushed out at all? Just trying to get a sense from a modeling perspective. Matt Dunn: Yes, Dan, this is Matt. It's definitely going to be in the back half. It's included in our guidance for the year. That really -- we didn't specify a quarter when we gave guidance 3 months ago but we've got more visibility now that it's going to be in the back half. TBD, whether it's Q3 or Q4. We'll try to refine that once we get closer. Operator: Our next question is from Trey Grooms with Stephens. Trey Grooms: Congrats on the quarter. Nice showing. So thanks for the color on -- so thanks for the color on the outlook you gave on housing, makes a lot of sense. But how are you thinking about some of the other end markets? And sorry if I missed this. But are you still expecting demand for commercial to be kind of flattish? And then as we -- you kind of look into retail or R&R for that to be kind of flat to up a little bit? Or any changes there? Michael Olosky: Yes. When we look at our end markets, we're looking at basically a -- we're looking at several firms that help us get the U.S. housing starts number. That's the low single-digit range. When we look at the market numbers for the National Retail business, or repair and renovation, when we look at that particular area, we're thinking basically flattish to maybe up 1-ish percent, in that range. In the commercial area, we're looking at starts and we have a firm that helps us with that. There, we're thinking low single-digit range. And then our OEM business, we really just kind of benchmark that versus the IPX and that we expect to be low single digits. Trey Grooms: Yes. Okay. Got it. So no real change there. So -- and then maybe looking at geographically, I know you guys have seen some mix headwinds, I guess, geographically, some mix headwinds from some underperformance in California and Florida, I guess, over the last few years. It sounds like some of the commentary we're hearing from -- out there in the market from homebuilders, et cetera, it sounds like Florida might be recovering somewhat. Anyway, any details maybe you guys could give us on what you're seeing geographically and maybe some of this mix headwind, if you will, kind of starting to subside if Florida is started to pick up? Michael Olosky: Yes, Trey, good question. So if we talk about just market specific, the state level data on starts is -- there's a lot of variability depending upon the sources you look at. But if you just look big picture, Florida and California, they are down significantly from their peak housing starts about 3-ish years ago. When we look at our business in California, a lot of engineering into it, especially from a seismic perspective. We continue to talk with customers that are saying they've got a strong backlog. A lot of projects are about ready to get kicked off in that area but we have not yet started to realize that in our sales revenue. In Florida, from what we've seen, really no significant change for us at this point and it's still a little soft. Trey Grooms: Okay. All right. Sounds good. And maybe a housekeeping to some degree, maybe, Matt, on the inventories, down pretty significantly in the quarter despite some -- you had some good sales improvements, actually stepped down sequentially. And I understand that you guys usually build some inventory in the 1Q and then kind of work it down in seasonally stronger quarters. Any color you could give us on kind of how we should be thinking about that, given it's kind of lower level as we're kind of entering the building season, how we should be thinking about that seasonal trend? Matt Dunn: Sure, Trey. I mean we're doing a lot of work to drive productivity on raw material -- sorry, finished goods and work-in-process inventory. And so that's playing out a little bit when you look at our inventory drop in dollars. It shows up in pounds even more broadly as you think about the cost of things is more expensive, so it doesn't quite show up in the dollars to the level it shows up in the pounds. We're down quite significantly on pounds. So I would say the bulk of that drop, though, is really on the raw material side, so think of steel and steel coils. And so as we're kind of working through the inventory there, as you know, we tend to buy kind of in lumpier chunks when the market meets our needs and kind of the sweet spot for where we want to be. So it's going to be a little bit lumpy on raw material steel and that those prices are starting to move a little bit as we look forward. So I would expect that we'll probably bump back up a little bit on raw material throughout the course of the year. But at the same time, we're working on productivity on the finished goods and the work in process. So maybe somewhat a little bit offset but hopefully not get quite back to the -- certainly not back to the peak we were on pounds. On dollars, it's a little bit tougher to say because the price per pound is going up. But I think where we kind of started 2026 would be sort of like a high watermark and we would probably stay below that. Operator: Our next question is from Kurt Yinger with D.A. Davidson. Kurt Yinger: Just wanted to go back to pricing. Can you just talk a little bit about kind of the difference between the new $130 million versus the $100 million previously? Is that, I guess, just an updated view on what you'll capture? Or does that encapsulate maybe some of these surcharges and whatnot you've discussed in Europe? Matt Dunn: Yes, Kurt, this is Matt. We -- previous guidance was about $100 million annualized. And if you recall from our previous quarter release, we realized about $60 million of that in 2025, which would have implied additional $40 million in 2026. We're upping the annualized number to $130 million. So that would imply $70 million in 2026 incremental. And it's a combination of some of the pricing we've enacted in Europe, particularly related to the surcharges but also some price increases. And then a little bit of product mix in North America, which is driving more pricing. So if you think about the products that had higher price increases, that's primarily fasteners and anchors, they'll continue to grow a little bit faster than the connector business, which provides some additional dollars when you just look at the pricing impact. It doesn't necessarily drive better gross margin or better op income. But when you look at pricing quantification on dollars realized and pricing, it does benefit there. So it's really a combination of those 2 things that's kind of upped it to that $130 million number. Kurt Yinger: Okay. That makes a whole lot of sense. I appreciate that. And just on the cost side, I mean, it doesn't sound like the change in 232 tariffs is really having any impact on you guys but I would appreciate if you could just touch on that. As well as on the freight side with the self-distribution angle, how is transportation and freight costs, I guess, shared among you guys and customers? Is that a situation similar to Europe where there are surcharges but those are just passed along? Can you talk a little bit about that? Matt Dunn: Yes, you're right. On the 232 tariffs, the announcements that came out, I think, early April don't really have much of an impact for us. The tariffs that we were paying are pretty much staying the same. If you think about the fuel rates and things that are impacting surcharges there, I mean, we're seeing it some from our suppliers, passing along surcharges, changing rates weekly sometimes. A lot of our shipments travel prepaid freight. So we have not put any surcharges in place. So from time to time, we have to adjust the amount of a purchase that is able to travel with prepaid freight for free. So meaning sometimes we have to up the minimum purchase. I don't believe we've done any of that yet but that's some of the things that we're considering. But we are seeing an impact in our 2026 outlook from increased fuel costs and we haven't acted on passing any of that through. But we're kind of actively monitoring it and kind of see what -- where it shakes out, what level it goes to and then evaluate the best way to, again, try to make sure that we're preserving our gross margin. Kurt Yinger: Okay. Got it. And then just on the volume side, I mean, a really good quarter for the North American residential business, it seems. Is there anything to call out there that might have been a transitory boost? And maybe looking at the full year, I mean, it sounds like you kind of trimmed the expectations for housing starts. But if we look at the comps, the first half is very difficult, gets easier in the back half. Just given the positive performance here in Q1, I guess, is there any reason to believe that wouldn't be sustainable just as comps get a little bit easier? Michael Olosky: So Kurt, we're very pleased with the development our residential business team has made. We continue to leverage the business model. And with that shift we made about 3 years ago of going from a product-focused sales team to a market-focused sales team, that's enabled us to really cross-sell the complete product line. And we've continued to develop our warehouse network so that we're closer to customers and we can make sure that we get to a very, very, very large percentage of our customers. They place an order today in the morning, we ship it in the afternoon, they get the next day. And I think all that added up, Kurt, just continue to get more content on houses and pick up more shelf space with our lumber yards and Pro dealer customers. Matt Dunn: Yes. Kurt, I think as you look at your comments around back half comps and things, certainly, our volume comps get a little bit easier in the back half when you compare to what we did in the last half of last year but also including a little bit of expectation that the market is potentially going to be a little softer as we go throughout 2026 as we kind of updated in our guidance. So I mean part of the challenge now is, we're flying a little bit blind on what is the market doing because there's been delays in reporting and even going back to 2025 actuals, I think they're still subject to revision from the Census Bureau later this week when they publish the February and March starts numbers. So we believe we're outperforming the market a little bit on volume. We certainly expect to continue to do that. But what that market is going to look like quarter-on-quarter that we're comparing to is a little bit up in the air. We kind of got to see where we shake out here in the first quarter when we get the numbers to see where we were. And then the outlook for the year has gotten a little bit worse from our perspective, kind of backed up by most of the market forecasters out there that are saying it's going to be a little bit softer in '26. Kurt Yinger: Okay. That makes sense. And just lastly, on the national retail side. The weakness there, it seemed like over '25, there were some points where sell-in didn't necessarily match sell-through but POS has kind of turned now. Do you think that's just a function of the overall project environment in a lot of the categories that you're serving or more so maybe a skew to customers going with a more value-sensitive approach in terms of products? I guess any thoughts on kind of the performance there early this year? Michael Olosky: I wouldn't say that we're seeing a shift in the value performance story. So Kurt, if somebody is coming into one of the national retail customers, especially at Pro, I mean, they know exactly what products they're looking for. So I wouldn't necessarily say that. I think we've had some time over the last probably 6 months where point-of-sale data and our sales into the national retailers was a little bit disconnected. It's kind of flipped and gone the opposite way in the first quarter. But we continue to work with them to help them develop the business by merchandising activities. We continue to push our outdoor living solutions product line, which has had pretty good growth over several years now. We're working hard with the Pro dealer -- the Pro desks with our national retail customers. We provided some estimating services and we're doing other things to help them really cross-sell the full product line. We think over time, that will all play out in the short term. We do occasionally see some inventory shifts with those guys and that's been reflected in the numbers in the last 6 months or so. Matt Dunn: Yes. And I think, Kurt, this is Matt. I think just to cap it off, I think it's good to see that trend reverse a little bit in terms of sell-in versus sellout. We've seen several quarters in a row where our POS units were quite a bit better than our sell-in. So 1 quarter doesn't make a trend but good to kind of stop that trend and then we'll kind of see where it goes from here. Operator: Our next question is from Tim Wojs with Baird. Timothy Wojs: Nice job on the results and the inventory number. So I guess maybe just my first question, just, if I remember right, you guys were expecting about $30 million of annualized cost savings from some of the SG&A actions you took last year. What was the -- I guess, what was the realization in the first quarter? I don't know if I missed that. Michael Olosky: Yes. Matt Dunn: Yes. So if you remember, Tim, the $30 million was about 2/3 SG&A and 1/3 in COGS. So that was kind of how we framed up the $30 million net. And then we said in the last quarter that we expected $10 million to $15 million on a annualized basis below last year's SG&A spend actuals. In the first quarter, SG&A was actually up $1 million but you got to peel it back a little bit. There's 2 big drivers there. One, exchange rate was a $4.2 million hurt on that. So that's the translation of European expenses back to dollars. And we also had about $2 million of onetime related cost to our cost savings initiatives that were in the first quarter. So -- and if you take those 2 kind of the face value and say we are up 1, we were down about $5 million net-net. And I think an important point is what we mentioned in the script on headcount, our SG&A headcount is down about 9% when you look year-over-year. So I would say the realization in the first quarter, if you kind of adjust for FX and the onetime costs is in the, call it, $3 million, $4 million, $5 million range. And if you kind of project that across the course of the year, you can kind of get pretty close to that number we said would be the net number we expect to be down by the end of the year versus last year's actual. Timothy Wojs: Okay. Okay. Great. No, that's really helpful. And then on the component manufacturing business, just, I think last quarter, it might have been up low single digits and now it's up double digits. Is that just kind of the lumpiness that can be kind of inherent in that business? Or it was a pretty significant amount of adds in the component business specifically? Michael Olosky: Yes. It is a little lumpy, Tim, as you know, because it takes a bit of effort to convert a customer. So we continue to add customers and we've added a couple over the last months of 2025 that are now starting to build in 2026. Timothy Wojs: Okay. Okay. And then is there any way to just, on that business, just kind of give us a kind of a ballpark figure to maybe how big it is today? Michael Olosky: No. We have not commented on the size of the component manufacturing business or the different market segments. Matt Dunn: Other than we've said publicly that the market size and kind of our rough share position. So I know you've heard that before, so then you can kind of ballpark it somewhere. So... Operator: Our final question is from Andrew Carter with Stifel. W. Andrew Carter: Just wanted to ask in terms of the residential volume performance, up slightly. I know you're taking your guidance down to low single digits. But I think based on the sources you have, customer conversations, I would assume that your guidance is -- you would soon be assuming that there was a pretty deep decline in the first quarter that improves throughout the year. Is that fair? Or anything -- any of my assumptions are flawed? Matt Dunn: Yes. I mean I don't know if I'd say deep decline. I think when the numbers come out, I think we'll -- we expect to see that the market was down in the first quarter from a housing starts standpoint. And then I think keep in mind, the back half of last year was the worst part of last year compared to the front half of last year, which actually, I think, had slight growth when you look at the front half from a market standpoint. So the comps are a little bit different. So I think it would be -- if you're doing the math on how do you get it down low single digits for the market, the front half has a tougher set of comps. So I think potentially the front half could look worse and then the back half could look a little bit better but probably more a function of what you're comparing to than a change in the starts rate. W. Andrew Carter: Got you. And then kind of wanted to kind of build on that component manufacturer question, truss, the kind of reacceleration you had in the quarter. You mentioned customer wins. I mean, how often do those occur? Do those -- do you get those, like a shot at that annually? I mean, is that double-digit run rate something you can carry through the year just because you have the customers? Is there any kind of unlocks you get as you roll out the rest of the software program later in the year? Just any thoughts on that cadence? Michael Olosky: Yes. I think -- so if you step back and you look at those customers, we've been working with them for a long time in a variety of other businesses, especially all the larger Pro dealers. So, I mean, they know us very well. But a lot of those smaller to midsized guys, we've known these customers for a long time. They know the Simpson service and the approach that we take to working with customers. And we've also been talking with them over the last 12 to 18 months about the development we're making with the software. We've been giving regular updates to it. We've been showing some demos and just letting people see how it develops. And I think you kind of add all that up, that is what has helped us continue to grow as they want to work with a long-term partner that operates like Simpson. We do our level best to take great care of the customer. We believe that our plans to have a cloud-based solution that is very customer-friendly and contracting terms that are a little bit more customer-friendly, it's going to create some additional opportunities for us. And now they see the investment that we've made in this space really over the last couple of years. And I think that's opened some doors and that's made some people realize that we would be the partner of choice going forward for them. W. Andrew Carter: And final question, kind of Europe. I think you said something about flat to low single digits over the next 2 years. Correct me if I'm wrong, I thought that was kind of the expectation for this year. It obviously started out down 5% organic this quarter. I guess that would be the market where you see -- you might see incremental weakness from energy prices, et cetera but it's also 2/3 commercial, so longer cycle. So any update on that market? Or could you -- do you see further risk of that declining? Just any help there? Michael Olosky: When we look at the composite index that we built based on the countries we operate in and the mix, as you said, between residential and commercial. And we use, again, experts that pull those forecasts in to help us get the numbers. Our thoughts going in were flat to low single digits. And the fact that they had a tough first couple of months because of weather really hasn't changed that. I think there is some optimism in the market in Europe. To be quite honest, 0% to 2% or 3% will be better than we've had the last 3 or 4 years and certainly better than what we've had in the U.S. the last 4 years. So we're hoping that plays out. In the meantime, we're focusing on the things that we can control and that's just trying to pick up new applications, shelf space, more content on jobs. Operator: With no further questions, that will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Q1 2026 Bed Bath & Beyond, Inc. Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Melissa Smith, General Counsel and Corporate Secretary. Melissa, please go ahead. Melissa Smith: Thank you, operator. Good afternoon, and welcome to Bed Bath & Beyond, Inc.'s First Quarter 2026 Earnings Conference Call. Joining me on the call today are Executive Chairman and Chief Executive Officer, Marcus Lemonis; President, Amy Sullivan; Chief Financial Officer, Adrianne Lee; and Chief Operating Officer, Lisa Foley. Today's discussion and our responses to your questions reflect management's views as of today, April 27, 2026, and may include forward-looking statements, including, without limitation to statements regarding our future business strategy, goals, financial performance, outlook for the remainder of the quarter or any other period, anticipated growth, stock price, profitability, macroeconomic conditions, the value of any of our brands and investments, relationships with third parties and agreements we are entering into with them, margin improvement, expense reduction, marketing efficiencies, conversion, customer experience, changes to brands or websites, product offerings, the merger agreement with The Container Store, blockchain and tokenization efforts and strategies and the timing of any of the foregoing. Actual results could differ materially from such statements. Additional information about risks, uncertainties and other important factors that could potentially impact our financial results is included in our Form 10-K for the year ended December 31, 2025, and our Form 10-Q for the quarter ended March 31, 2026 and in our subsequent filings with the SEC. During this call, we will discuss certain non-GAAP financial measures. Our filings with the SEC, including our first quarter earnings release, which is available on our Investor Relations website at investors.beyond.com contain important additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Following management's prepared remarks, we will open the call for questions. A slide presentation with supporting data is available for download on our Investor Relations website. Please review the important forward-looking statements disclosure on Slide 2 of that presentation. With that, Marcus, it's all yours. Marcus Lemonis: Thank you so much. I am both honored and privileged to be serving, as of January 1, as the CEO of Bed Bath & Beyond, and I want to thank everybody for joining. Over the last 2 years, our company has been focused on rebuilding this business, reconstructing the cost structure and lowering the hurdle for profitability with an intense amount of discipline and tough decisions around headcount, legacy technology and the cost of acquiring and retaining our customer base. The objective has been to reposition the company for growth with a definitive point of view of reclaiming profitability, coupled with long-term durability. That work was not about short-term fixes or temporary solutions, it's about making structural changes to how we operate by simplifying the organization, removing layers, materially reducing our cost structure and aligning the team around a clear and consistent set of priorities focused on the homeowner, asset allocation and data. These priorities have not changed. We're focused on driving top line growth, operating profitability and building something that is unique, durable and meaningful in the home space. In many cases, those decisions were not immediately visible in the numbers. Last couple of years were rough. Declining revenue, while dramatically improving margins and lowering the cost structure created short-term pressure on the perceived value of our company. Those changes were necessary because without resetting the foundation, there was no path to substantive profitability or to building something with purpose that would last. I knew the changes would take time to show up, but that when they did, they would appear in a way that were durable and repeatable. This is the eighth quarter in a row where the bottom line has improved. Back in January, when I laid out our long-term plan with our Everything Home 3-pillar ecosystem, we as a team committed to inflect top line growth while continuing to reduce costs. That happened. We delivered revenue of approximately $248 million, up 7% year-over-year or 9.4% when you exclude our discontinuing operations from Canada, which marks the first time in 18 -- 19 quarters that this business has delivered year-over-year growth. That result occurred concurrently while our operating costs for the quarter reflected the lowest operating cost structure in over 12 years. The growth we are seeing is emerging from a fundamentally reset operating mindset, not incremental spending or short-term activity. That shift becomes clearer as you look beneath the top line. We're acquiring our customers more efficiently. Our own channels are performing better and the engagement we are seeing is higher quality. As the quality of the business improves, the financial performance begins to reflect it. Adjusted EBITDA improved by $5 million year-over-year, and our net loss improved by $24 million. At the same time, the underlying trends are moving in the right direction. We're encouraged by the stability of our active customer file with returning customers and orders delivered improving sequentially. These trends are important because they show that the foundation is not only holding up, but it's beginning to build. Stabilizing the business was never the end goal. It was just my starting point. Everything we are building starts with a simple idea. The home is not a single transaction, it is a life cycle that unfolds over time, providing us with an opportunity to use technology and data to create lifetime value from every single customer relationship. On average, homeowners remain in their home for approximately 11 to 12 years. And during that period, they move in, maintain their home, improve it, finance it, experience life events and eventually transition out of it. Historically, those interactions have been fragmented across different companies and disconnected systems. What we are now building is a connected approach. As a reminder, we have organized the business into 3 pillars that reflect that life cycle. The omnichannel platform is where the relationship begins. Yes, the retail business, online and in-store. Our products and financial services platform allows us to participate more deeply in the economic activity tied to the home. And our home services platform, maybe the one I'm most excited about, brings us directly, physically into the home. Earlier this quarter, we completed the first acquisition of our omnichannel pillar with the Kirkland's transaction. We acquired strategic real estate, a product development and sourcing organization second to none and exceptional management. Additionally, we announced the deal to acquire The Container Store. That transaction gives us stroking real estate that is wildly underutilized, a world-class distribution and supply chain system and a home services business with Elfa and Closet Works that will move into Pillar 3, a foundational culture and process that will sit at the hub of Pillar 1. And it comes with exceptional leadership as well. Between those two, we will absorb the capabilities our businesses and our customers want and eliminate all of the redundancies and inefficiencies quickly. Pillar 2, our product and financial services group, is just getting started. And as noted previously, will include property and casualty insurance and home warranties through a nationwide relationship with Brown & Brown Insurance via the Beyond Home Agency. It will also include America's first homeowner credit union in partnership with a leading credit union. Additionally, this pillar will include our credit card program and product warranties. At the center of this pillar is a transaction agreed to in principle that includes a real estate brokerage, home title company and mortgage brokerage. This acquisition would not only create an origination engine for the overall ecosystem, but through technology and AI will allow us to meet and transact with tens of millions of customers without a traditional cost of acquisition. The final pillar and potentially the most exciting is Pillar 3, our home services business. Early this quarter, we announced the intent to acquire F9 Brands, which includes Cabinets To Go, Lumber Liquidators and Southwind Building Products. This acquisition would serve as a platform transaction, bringing unbelievable executive management, warehouse and supply chain capabilities and over $0.5 billion of revenue. Attached to that platform are Elfa and Closet Works Elfa organization systems, which were part of The Container Store transaction. Lastly, we've agreed to in principle to acquire a nationwide network of installation and renovation professionals. We believe that's part of building our moat. Together, we believe this creates a high-margin pillar that is defensible against e-commerce competitors and firmly differentiates our company as a service provider regardless of what's happening with the economy. But what is equally important and what I want to be very clear about is how we are building this business. We are not acquiring companies for the sake of scale, we are acquiring capabilities. Many of these businesses and brands that I mentioned have had decades of success but struggled more recently as stand-alone entities. They became burdened with fixed costs, duplicative infrastructure and inefficient cost structures and debt that limited their ability to perform. What we see is something very different. We see capabilities that fill specific roles across our white paper for the entire homeowner life cycle. When you think about the white space of homeownership, each of these businesses represents a critical function that, that customer needs over time across those 11 or 12 years. Our strategy is to extract those capabilities, preserve what makes them valuable and eliminate, very strongly eliminate the layers of cost and inefficiency that came with operating them independently. We preserve what works, we remove what does not work, and we connect everything through a single system. Earlier today, we announced a partnership with Bilt that allows that single operating connectivity system to work for the consumer. When we bring those capabilities together inside of one platform, supported by shared infrastructure and a unified data lake and a single customer identity, they become significantly more powerful together than they ever were apart. This is where our model is fundamentally divergent from traditional consolidation. Most consolidations focus on cost removal. That's part of our model, and we'll continue to eliminate those costs and inefficient operating expenses, including underperforming assets. But the real opportunity is not just cost, the real opportunity is the revenue that we believe we can create by understanding that single sign-on, unified customer layer. Giving each of these brands and each of these businesses an opportunity to cross-promote inside of one big data lake. By connecting these businesses through technology and artificial intelligence, we are building a system that allows us to engage with the same customer across multiple needs over time, dramatically lowering our cost of acquisition while increasing the lifetime value that customer could offer us. Each of these businesses has built and retained its own customer base. By bringing those customer bases together into a single ecosystem, we create a competitive advantage that allows us to grow revenue at a disproportionate rate compared to stand-alone competitors. It's over 100 million unique homeowners. That's not theoretical, it's structural. That is our business model. When you look across the brands we've acquired and are in the process of acquiring, including Overstock, Bed Bath & Beyond, The Container Store, buybuy BABY, Kirkland's, Lumber Liquidators, Elfa, Closet Works and Cabinets To Go, along with our partnerships across insurance, credit, warranties and our planned acquisition in brokerage, mortgage, title, installation and renovation, what we are assembling is not a collection of businesses, it's an ecosystem. Each business contributes to capability, each capability strengthens the platform. And together, they create something significantly more value than the sum of its parts. Each of these pillars has value independently, but the real value is when they work together. That's what allows us to move from serving a customer once to serving the same customer repeatedly over time. With that, I'll turn the call over to Adrianne. Adrianne Lee: Thank you, Marcus. I'll now turn to our first quarter financial results. Revenue increased 7% year-over-year in the first quarter and 9% if you exclude the impact of discontinuing our Canadian operations. AOV improved 6%, driven by our continued focus on improving assortment, driving a healthy mix in the living room furniture and patio on the Bed Bath side and an increased sales mix in the Overstock. Orders delivered increased by almost 1% in the period. Gross margin landed at 23.9% for the quarter, a decline compared to the same period last year, but still within the bounds of our operating range. We maintained effective discounting tactics, partially offset by lower sales and marketing expense, lapped loyalty points breakage from 1Q '25 and saw benefits from improved carrier costs and exiting underperforming operations. Sales and marketing expense had improved efficiency of 50 basis points as a percent of revenue versus last year. This result was driven by disciplined spend in paid and improved return in owned channels. G&A and tech expense of $36 million decreased by $5 million year-over-year or $8 million if you exclude the impact of onetime costs from acquisition-related activities. All in, adjusted EBITDA came in at a loss of $8 million, a 41% or $5 million improvement versus the first quarter of 2025. Reported adjusted diluted EPS was a loss of $0.25 per share, a $0.17 improvement year-over-year. We ended the quarter with cash, cash equivalents and restricted cash of $163 million. Cash used in operating activities improved year-over-year by more than $39 million or 77%, illustrating stabilization of operations. In the quarter, we invested approximately $26 million in acquisition-related activities. With that, I'll turn the call over to Amy. Amy A. Sullivan: Thank you, Adrianne. Our focus on the operating side is simple: translate the strategy into consistent, disciplined execution and ensure that as we scale these capabilities, we do it in a way that is efficient, scalable and built to drive sustainable returns. This work is being led by a strong operating team. Lisa is driving execution across operations and shared services, while Kyla, who we announced this afternoon is leading our technology transformation. Together, they are building the unified data and intelligence layer that connects the ecosystem and enables how we operate and scale. Today, the majority of our revenue is driven by an asset-light, increasingly productive e-commerce platform. We're pairing that strength with a fleet of more than 320 stores, allowing us to serve the customer across channels while improving productivity and return on assets. As we scale, we are focused on identifying the capabilities that truly drive performance and building around them, while decisively eliminating the inefficiencies that come from operating as fragmented layered businesses. Across the fleet, we are evolving our store formats with clearer roles and stronger economics while taking a disciplined approach to underperforming locations through repositioning, consolidation or exit where returns do not meet our thresholds. That same discipline is driving our merchandising strategy, where we are simplifying assortments, improving margin productivity and strengthening vendor partnerships. Across the organization, we are simplifying how we operate, consolidating systems and teams into a unified platform while removing layers that slow decision-making and limit efficiency. This approach extends to our data and engagement layer. As announced this morning, our partnership with Bilt accelerates a unified customer identity and loyalty foundation across the portfolio, strengthening engagement and lifetime value across all our brands. Customer service is central to this transformation. As we consolidate these functions, we are raising the bar across every single brand and every touch point so the customer experiences consistency regardless of how they engage with us. This is about building an operating model that scales, retaining what drives value and removing what does not. As we continue to integrate new capabilities into the platform, that same approach will apply across the ecosystem, ensuring we preserve what works and remove excess complexity across retail, products and financial services and home services. The result is a simpler, more transparent and more accountable organization with a cost structure designed to drive profitable growth. With that, I'll turn back to Marcus to close. Marcus Lemonis: Thanks, Amy. What you're seeing this quarter is early proof of a model that is beginning to come together. Look, we've stabilized the core business, demonstrated that we can grow revenue while removing costs and established a framework that allows us to build on that foundation with confidence. As we continue to add capabilities into the platform, we expect those capabilities to contribute not only to the efficiency, but to the incremental growth across the system over time. Importantly, this is not a model built solely on cost reduction. While we will continue to remove duplicative and inefficient operating expenses, including underperforming assets, a larger opportunity is the ability to drive revenue through a connected system powered by data, technology and artificial intelligence. All can expect that over the next 9 months, as we bring these pillars together and fold in these companies with their capabilities, we will remove an additional $60 million of cost out of the consolidated company while simultaneously strengthening our ability to grow more efficiently. As we approach our shareholder vote on May 14, we are asking for your support as we continue to execute this strategy. For those of you who have been long-term holders of our company, we appreciate your trust. For those who are newer to the story, we believe there is nothing more meaningful than the opportunity ahead. We have work to be done to reset the business. We think we're well on our way. Before we head into the Q&A section, I want to thank Adrianne Lee for the years of service that she has provided this company. She has been by my side as we have taken the current business down to the studs. We've developed a new operating strategy and have seen the fruits of that labor pay off from our team's hard work in the first quarter. Brian LaRose, who came with The Container Store acquisition and has been a very formidable CFO in the omnichannel retail products and services space will be joining our company. He's joining us here on the call today. But it is important to recognize that we have seen a lot of changes in the last couple of years. And to Adrianne and all the folks that helped us get to this point, we are grateful to the new companies and new executives who are joining our company, like Jason, like Amy, like Brian, we believe that the future is very bright. So we'll move into the formal Q&A section. Operator: [Operator Instructions] Your first question comes from the line of Steven Forbes from Guggenheim. Steven Forbes: Marcus, the upcoming transition of The Container Store locations, curious if you can maybe just speak or give us a sneak peek in the amount of space you plan to merchandise with Bed Bath & Beyond products. What some of the key merchandising features you're going to be reintroducing to the consumer with these refreshes? And then if you can, like how you sort of expect sales per square foot to change over time as we look out 12, 24 months and so? Marcus Lemonis: Yes, it's a great question. I think it's important to delineate the two omnichannel businesses that we have purchased. Kirkland's with its small format, what I consider undermarket real estate. Meaning that we believe we acquired leases that are under market, about 230 to 240 of them. They range from 5,000 to about 10,000 square feet, and you've heard me talk about them over the last year. The reason that we slowed our pace down of converting many of them to Bed Bath & Beyond home stores is as we looked at the numbers, we just didn't feel like we had all of the categories that we needed. And while we did the economic standoff with the current owners of TCS, I knew that eventually we would get that transaction to fold in with the pressure that we were putting on that business. So in addition to the 100 Container Store locations, we will have at least 100 small neighborhood format locations of Bed Bath & Beyond/Container Store, Container Store/Bed Bath & Beyond. As I move to The Container Store specifically, for the last 18 months, I've been studying this business, visiting every single store. I've been to, I think, 93 of the 100 already and spent a lot of time really trying to understand what they had, what they had too much of, how their sales per square foot were functioning, how they used to function, how the custom spaces function. And what I came down to is one simple conclusion. Across the 100 locations, there was 2.2 million square feet of retail. And in my opinion, half of that, maybe slightly more, was wildly underutilized, with triple-facing SKUs with, in my opinion, certain categories far too wide and not deep enough and with an attempt to address certain categories that I felt fell very short. Rather than thinking about walking into the store and expecting to see Bed Bath & Beyond on the left and Container Store on the right, I would rather you thought about it as general merchandise in one specific area that includes storage and organization, kitchen, bath, bedroom, a little bit of decor and other impulse items that may be seasonal relevant on one portion of the store and the other portion of the store would be filled with custom spaces and design spaces, which would include Elfa, Closet Works, Gracious Home Cabinetry, which is a higher version of Cabinets To Go and Gracious Home Flooring, which is a higher version of Lumber Liquidators, but leveraging their existing supply chain and expertise. So that when a consumer walks through the door, it is my goal to take it from an average of about $220 per square foot, I think we can get to $500 a square foot within 24 months. Now nobody should be applauding or patting anybody on the back for $500 a square foot. The true number to get to the 7% EBITDA contribution on a 4-wall basis is it takes about $615 a square foot, but it takes a very good balance between general merchandise and the home services business. And the reason that I create that delineation is that the blended margin of general merchandise should be in the 35% to 37% range, and the blended margin of the home services business is north of 60%. So we want to make sure that we're allocating not only enough talent, training and resources to the home services, but we need that blended margin to come in north of 40% for us to see the kind of EBITDA margins we know give us the kind of returns on investment we need. Steven Forbes: That's super helpful. And then maybe just a quick follow-up and more of a clarification for myself and maybe the group on the line here. The goal to remove $60 million of cost, right, that's sort of post all the announced acquisitions over the next 9 months. And I don't know if you can maybe just frame up for us like what is the end state of that? Is that -- does that bring the business to a positive free cash flow state? Or is there still more work to be done, whether it's sales growth or greater productivity initiatives to get to a free cash flow positive state? Marcus Lemonis: It is my belief that if we continue with low to mid-single-digit revenue growth in our primary business, and we're able to stabilize the margin as we have for the last 12 months, continue to stabilize it, and we're able to expand the home services business, the $60 million of eliminated costs puts us way ahead of needing to worry about being cash flow positive. My goal is to get this business to a 6% to 7% EBITDA margin business. And to be candid with you, if you go back and look at the amount of costs that have been taken out of just the original Overstock business, which is north of $100 million, one should assume that my $60 million number is very conservative. What I want to be realistic about is that I want to make sure that we make the right decisions, the right decisions on what locations to close, the right decisions on what headcount to eliminate. But I have to be unfortunately brutally clear and honest with everybody, both internally and externally. With the formation of AI outside of our business and now being deeply integrated in our business and us only wanting to take on capabilities that we think add value, we're going to experience significant reduction in headcount, is significant. And in some cases, some of that reduction will be redeployed in areas where we think we're under nurtured. Customer service does not have enough to my liking. The amount of staff qualified, trained staff in the stores, upselling customers, designing for customers, servicing their home for customers is not enough. But we are going to become an organization that puts its payroll in the field, that puts its payroll generating revenue and does not put its payroll in corporate offices with big leases and lots of warehouses. So we will be eliminating supply chain costs. We will be eliminating IT, accounting, marketing, merchandising, et cetera, across the entire platform. And it's never a good thing to do that. But if you go back and you study the independent financial statements of all these businesses just in a normal mid-cycle environment, Container Store as an example, prior to COVID, $90 million every year. Kirkland's, $25 million every year. We know what Bed Bath can do, we know what buybuy BABY can do. The problem is we're living in a different world. And this particular forecast and model that I'm talking to you about today assumes no inflection in the housing market. The goal was always to get this business to neutral or slightly positive in this kind of economic environment that we're living at today, where the 10-year treasury is north of 4%, where mortgage rates are north of 6%. And while I don't have a crystal ball that will tell me when south of 4% and south of 6% are going to happen, we are going to take out all the costs to prove that we can be a breakeven company in an environment like this. What does that tell you? You get to a mid-cycle environment, and you're not talking about 4%, 5%, 6%, 7% increases in revenue, you're talking about low double-digit increases in revenue, 10%, 12%, 15%. And if the cost structure is right and the sourcing is right, then our profitability will be where it's supposed to be. Operator: Your next question comes from the line of Thomas Forte with Maxim Group. Thomas Forte: Amy and Brian, welcome to the call. Adrianne, it was a pleasure working with you, and I wish you all the best in your future endeavors. So Marcus, I have one plain vanilla question, and I have one spicy one. We'll start with the plain vanilla first. So can you give your current thoughts on your decision tree for building, buying or partnering to advance your three pillars? Marcus Lemonis: It's very simple for me. On a whiteboard back on December 31, while everybody was out having a party, I drew out what I thought the homeowner time line was to owning a home in one simple cycle, and it's about 11 or 12 years. And I thought about every single thing that the homeowner would do right before they decided to buy all the way to the point that they made the decision and close on the sale they bought 11 years ago. And I started to think about all the needs, both the products, the services, the financial needs that they would have, the insurance needs that they would have, the life events that they would experience and started to map out on the giant whiteboard, what were all the types of products and services that we're missing to be able to do this. Now most of you know what my background is. For 25 years, I had the blessing of being able to build a business that is an ecosystem around one particular lifestyle. And I understood that in order to do that, you had to aggregate all these products and services. And as you did that, the moat would get deeper and deeper and deeper. And the goal here is to not only build the moat, but to be part of the homeowners' life cycle, not just once but multiple times. What's missing for me, Tom, what was always missing is that it's great to sell couches and patio furniture and containers and decor for your home and flooring and all those things. But the reality of it is, is that the cost to find that customer, the cost to acquire that customer, retain that customer is what led most of those companies to have to take on debt, take on lots of different expenses, take on layers of personnel and allow them, force them to not be as successful. As I started studying all the things that were available in the marketplace, it is true, I do like distressed things. I like them because for my shareholders, we get a good deal. But we only get a good deal if we recognize that extracting capabilities and discarding duplicative costs has to be the mandate, have to be the discipline. When I listed off all those brands, I don't think a year ago or 2 years ago, everybody would have -- anybody would have imagined that all those brands can be part of one system. But the thing that I think is missing is how it all interconnects. And I'd like to have Amy talk about that. And then we'll get on to your other question. Amy A. Sullivan: Yes. So we announced our partnership with Bilt this morning, and I think that's a really important sort of moment to think about the sort of red thread that goes through all of these brands. And so when you think of the cost of customer acquisition and the desire to make those customers trust our brands and be the most loyal they can be to us, we believe the partnership with Bilt begins to build that entire network for us of how we link our brands together within our own ecosystem and how we link our brands within the neighborhood that he or she lives in. And so that partnership is really the part that begins to tie this together. Both Lisa, who is joining us on the call today and Kyla, who's an amazing new talent that we added to our team will be part of driving that with us. But there are parts of our business that are just such a natural match for what Bilt already does with renters that we believe we can benefit from what they have already built as well as partner together on things such as the financial services pillar of our business that we want to do together with Bilt. Thomas Forte: Great. And then for my follow-up, so Marcus, you're about assure as they come, and I appreciate all your efforts to drive shareholder value. I was curious what you thought of the following. Would you consider converting any of The Container Store locations to AI compute centers given their close proximity to urban city centers. Marcus Lemonis: The answer is no. We don't want to play games with having AI be part of our boxes. But what I can tell you definitively is that in our new team member, Kyla, who's joining our team and Lisa, who's now our Chief Operating Officer, the two of them have been insanely focused on eliminating headcount and eliminating costs by layering in AI as part of all of our business. And even when we start to look in the accounting or the risk mitigation world, where we're managing payables or managing receivables or managing treasury, this is a technology business first. The problem was is that the technology that we've been working through and getting rid of was a decade or 2 old. That doesn't make it bad, it just makes it not current. And so while we're not going to turn any of our locations into AI centers, we are going to turn our business into an AI-centric business, not because it's fun to say or we think it's going to drive our stock, but because we know it's necessary to be competitive. We know the customer expects it to get information that's curated for them. And we know that in order to efficiently market our business and get our marketing costs down back into the 12% or lower range, we have to be far more efficient with everything. Operator: Your next question comes from the line of Alicia Reese with Wedbush. Alicia Reese: First, just following up on the last question. You had mentioned in your prepared remarks, of course, that The Container Store real estate is wildly underutilized. Just wondering if you can speak to some possible uses, if it's not for AI data centers or anything of that manner. What possible uses have you considered so far? Marcus Lemonis: So when I take a typical store that's around 22,000 square feet, those stores have been generating a decent amount of revenue with general merchandise that The Container Store historically held and sold Elfa Closets and a few other custom closet systems. As we acquire businesses across the home space, it is our expectation that all of them in some form or another will have a physical presence there. And whether that is providing cash offers on real estate or allowing a title closing to happen there or allowing somebody to come prepared to take their son or daughter to college or getting ready for the Christmas holiday or picking out new floors for your newly bought house or designing a new kitchen. We want to make sure that every single square inch of those 22,000 square feet are intensely utilized. When I talk to you about the quality of this real estate, for those of you that know The Container Store in your own town, it is the cream of the crop real estate. But one of the things that I think brought Container Store to a tough spot is that it didn't have a broad enough offering for the home, it was very nichey. And as the Internet came to be more predominant, it lost a little bit of its competitive edge. As the economy got tougher, it lost a little bit of its competitive edge. Historically, The Container Store has served the customer that was probably $200,000 a year in household income. We believe that the addition of Bed Bath not only widens the funnel for that customer, but the offering widens as well. I would expect that within 24 months, the revenue coming out of those 22,000 square feet when you incorporate all the home services in the general merchandise, and you can quote me on this, should be double. It should be double. And I don't think anybody in our company believes that, that's a pie in the sky number only because the company has done it before. So we want to utilize those to meet customers, to serve customers and to have every pillar in our company, including our potential brokerage business, our credit union business, our credit card business, all of those businesses extract value. What we like to say internally is we're going to sweat the assets and get every last drop of revenue that, that piece of property was intended to give us. Alicia Reese: I'm wondering if you could also speak to the product mix shift at the original Overstock.com site and how you're honing that, to what extent you're layering products from the other businesses now or steering people to other banners under your other businesses? Amy A. Sullivan: Hi Alicia, I'll take that one. So from -- as we think about all of the banners, I do believe they each fill a unique portion of the home segment of the business. And so as Marcus just described in The Container Store real estate, in our largest stores, for example, there's an opportunity for all of those things to be represented. But when you get back to the e-commerce business, there's a massive opportunity for each of those to be more thoughtfully curated to what we all expect from those brands. Overstock specifically has really been headed in the right direction in terms of its focus on patio rugs and furniture as well as sort of an eye dropper amount of the fashion luxury space that does so well on that site. Bed Bath & Beyond is probably where we have the most opportunity to sort of fine-tune and make sure that, that business is the best of what we remember of Bed Bath & Beyond while still protecting some of the growth that we've sort of acquired over time with that legacy Overstock customer. So I think there's tremendous opportunity to curate each one of them, but really bring it together in the store footprint. Marcus Lemonis: I want to add a little bit to that. Overstock is run by an unbelievable woman who came back to the company because she liked the direction that we were going and has brought in a whole new supporting cast of merchants underneath her. And really, if you think about Overstock in its best days was great brands and big ticket items at unbelievable prices. You can expect that even by the end of the year, and I don't want anybody to like overreact to this, but even by the end of the year, in addition to selling patio furniture, Rolex watches, Gucci handbags, we will be selling cars and anything else that we believe fits into the four corners of the property and the four walls of the house. We're not going to be the sellers. It's a marketplace, and we rely on the best companies, the best brands and the best supply chains to satisfy that. But I think Overstock, when I look at all of our e-commerce businesses, separate from getting normal improvement out of Bed Bath and normal improvement out of The Container Store, Overstock is the one that has the most potential to be a massive brand again. On a trailing 12 months, we're back up around $0.25 billion. And every day, we're seeing $700,000, $800,000 a day. We know that it needs to be unlocked and unleashed, and we've always been trying to manage our priorities while trying to get to profitability. As we bring on these other businesses and we start to add billions of revenue, and I want to be clear, Container Store, Bed Bath, Overstock, Lumber, Cabinets To Go, Elfa, Closet Works, all these brands, we're starting to dance in the $2-plus plus-plus billion range. And when you start to add all of that revenue and all of that gross profit and you extract the costs that come with those, you start to get to profitability within a year or 2 in a material way. Overstock is like that prize jewel box that doesn't get enough attention, but it will continue to get the attention, and we expect the growth to continue to be low double-digit like it has been over the last 12 months. Operator: Your next question comes from the line of Jonathan Matuszewski with Jefferies. Jonathan Matuszewski: My first one, Marcus, was just on a theme that's emerging here, and that's kind of potential revenue synergies from cross-marketing across the businesses that you've been aggregating. So how should we think about kind of measuring progress there? As you think about the separate customer files today, where does cross-shopping stand before integration? And are there any kind of milestones that you have in terms of measuring as these businesses come under one umbrella? That was my first question. Marcus Lemonis: We've been working with a firm out of Canada, Lisa Foley, our Chief Operating Officer, has to really understand how to create one single data layer. And that data layer takes the entry point of any customer in any brand at any moment in time and ingest them into that data layer. Ultimately, what we want to do is ensure that we do that address and that person, and we create two unique identifiers. The first is the homeowner or a renter, it's an important distinction, both, the homeowner or renter themselves and their behavior and their historical purchases, so we know who they are and what their preferences are. That's the first unique sign-on. The second is the home itself. And I liken it to the automobile business when you think about cars. When you are in the automobile business and you're trying to grow any portion of that ecosystem, you think about the car and you think about the VIN number. And there's a term called VIN explosion, which allows you to understand a heck of a lot more about that car and its journey through its life cycle, including repairs, maintenance, accidents, insurance, everything. We look at the home address the same way. So the single sign-on with the customer tells us about them and the home address tells us about the home. Over time, with all of these partners, including title, mortgage, credit card and all of these other brands that we talked about, we want to be able to gather everything about that address that you can imagine, not only the purchase price, not only the square footage, permits, titles, deeds, surveys, mortgages, and you could expect all of that data to live on blockchain. Remember, this company is also heavily invested in tokenization and in blockchain. And we believe that the transfer of information for the homeowner, transferring it for themselves or for the home itself, transferring it from one owner through title to another owner should be able to transfer that proprietary data information on that home as well. As we understand those two single sets of data, we then create journeys that allow us to communicate with those two assets uniquely based on where we think they are in their 11- or 12-year life cycle. As we think about where they are in that journey, Lisa has done an unbelievable job of starting to craft the way we communicate with those different assets and giving them the right offer at the right time with the right price and the right tone, hoping that they will capture something there as opposed to this spraying effect where every customer gets every e-mail every single day. It is not a perfect science today, which is why Amy and Lisa fought really hard to bring Kyla into our organization. She has transformed multiple companies on the digital and AI transformation road maps and believes when we interviewed her that she could really help layer the simplicity to ingest the data, to understand it and to communicate back to it in a way that we don't believe any other company in the home space can do it for one simple reason. There is no other company in the home space, not Home Depot, not Wayfair, not anybody else that will have as many touch points across those 11 years and as many entry points into the life cycle as we have. And we're not done making acquisitions. And so whether it's buying a brokerage and knowing that, that's a hot origination today or doing a HELOC on blockchain with somebody today or selling somebody a crib today, we know that all those moments create opportunities to bring them into our systems and keep them through life. Jonathan Matuszewski: Really helpful, Marcus. And then just a quick follow-up. As we think about the core business, I think you mentioned some progress on improved repeat spend. So I just wanted to ask about kind of customer loyalty. And maybe if you could frame it in terms of just an update on the welcome rewards program. Where is that today in terms of enrollment? How productive is that customer? And what's possible ahead with all the changes you're making to merchandising and whatnot? Marcus Lemonis: Got it. Well, first and foremost, the e-commerce business is not our core business anymore. Our core business is the Everything Home business and everything that's around it. Particularly when you look at the revenue and margin contribution, the e-commerce business, coupled with our retail business is our omnichannel business. That's pillar 1. And those other pillars really matter significantly to make sure that we are addressing everything that, that homeowner wants. As it relates to our welcome rewards, our welcome rewards program will be ingested by our Bilt program. Amy A. Sullivan: So as we think about the Bilt program, I would think of that as sort of the halo over all of the loyalty programs in our system. And so we want to be able to recognize that if someone is a buybuy BABY customer or a Cabinets To Go customer that that's how they entered the system. But we want them to be able to earn in the whole ecosystem of Beyond Rewards, which will be powered by Bilt, so that those points can be leveraged and traded from anything from a crib purchase over to Bed Bath & Beyond to how you think about mortgage and our financial services businesses as well. So we're less focused on Beyond Rewards as a stand-alone reward program and more appropriately focused, I would say, on building out this entire ecosystem that I believe she will find far more value in as she shops all of our brands. Marcus Lemonis: Jonathan, one thing before you go. It is really important, and it's a big shift because over the last 24 months, all we've been talking about is taking revenue down and getting rid of SKUs and getting rid of negative margin vendors and getting rid of people. And it's been a painful process, which is why our stock is, in my opinion, wildly undervalued. But based on what was happening, we understood that. As we did these transactions with these other sellers and we asked them to take all stock, we were asking them to put their business, their lifelong business in the hands of our business. And they understood that what we were ultimately trying to build was something that had never been done before. And I love reading articles about how ambitious it is or how it's not possible or how it isn't going to work and it really is very simple for me. If you start by understanding data, and how to properly catalog it and how to properly look at it and how to properly communicate with it. And then you surround it by businesses in the same eco space. We're not going to be off doing random things just because we have data. Then really, what you've done is you've taken good brands with a lower cost structure, with good talent, playing in the same space and you've allowed them to play in a totally different sandbox. What that ultimately means is that the customer should be the big winner because as they do business with us in one business, they should be earning rewards. And the one thing that we said to the founder of Bilt when we did this deal, and Amy and I sat in their offices, I'm only going to do this deal if we can build the model where if they buy a lot of stuff from us as a renter, they can earn enough points to have enough of a down payment to buy their first home. I have been obsessed for the last 12 months about the lack of affordability of buying a home in America. And I don't see any company doing anything about it. Part of what we want to ultimately do is bring low-cost, high value. And whether that's bringing a credit union to the forefront, where there'll be mortgages, HELOCs, checking and savings or bringing Bilt to the forefront where they'll be able to enjoy rewards at tens of brands, 20s of brands. That ultimately is, I think, what's been missing from the general marketplace. Brands trying to stand on their own, never going to work. Brands trying to stand inside of a simple, flatter ecosystem, we think that's ultimately why this matters. But it really is data center. We want to be known going forward as a data and technology company that happens to cut its teeth in the home space, the largest TAM in America, by the way. Operator: Your next question comes from the line of Bernie McTernan with Needham. Bernard McTernan: I was wondering if the better-than-expected results, at least relative to our estimates for 1Q impacts how you're thinking about the year at all? And maybe within that, just any impact you're seeing either on the consumer or suppliers or anything you're hearing in the industry just in terms of higher gas prices impacting the macro? Marcus Lemonis: We haven't seen gas prices change our demand trajectory, but we are holding steady with the guidepost that we provided earlier in the year, which is low to mid-single-digit revenue growth. It is important that everybody understand one part very clearly. As we get into Q2, we will have onetime operating expenses that will be directly associated with eliminating redundancies and purging systems and terminating leases and doing all the unpopular things that are required. Brian has committed that we will clearly, in our second quarter, show people what the core revenue is and the core margin is and the core operating expenses are. And we will highlight clearly what expenses. For example, in the second quarter, we will run through the P&L about $12 million to $13 million of expenses through the Kirkland P&L because we haven't had it in our hands until April 1. But I'm happy with what we're seeing there. I also want to be clear that when we did the deal a while ago, there were 300 stores. There are now 240 stores. We may end at 210 stores. I am not taking any chances or any kind on deploying any of my shareholder assets on anything that I don't think we can get a return on. And what I'd rather do is be upfront about what we're getting out of it. When we look at The Container Store, there are already three leases that we have shaken hands on, had a nice gracious exit, and we will be exiting those locations. We are getting out of distribution centers, we are getting rid of lots of old contracts. And so as you look at the next couple of quarters, it is important to know that there will be incremental expenses. I believe that if you looked at what we had laid out in the guidepost, Q2 will have about $13 million of onetime expenses. I would expect that Q3 will probably have between TCS around $13 million or $14 million as well. We don't see as much in the Lumber Liquidators, Cabinets To Go business. Jason Delves, who's the CEO of that company, runs a pretty tight ship and he's feeling a little -- I think he's getting a little FOMO knowing that he's got to get rid of some things as well. And then as we start to think about all the deals we're doing going forward, we're requiring a lot of those businesses make those changes when we sign the deal. And so as you see other deals get announced here, you're probably going to see immediate and radical changes happening at the same time that we announced it. With Kirkland's and TCS, we don't -- we didn't own Kirkland's until April 1, and we don't technically own TCS until July 1-ish, around that date. We're lining it all up, but we will have to purge the system. Nothing daunting or nothing monumental and nothing that we can't handle, but we want everybody to know that there are some onetime things that we will lay out for people. Bernard McTernan: Understood. And as a follow-up, with all these acquisitions set to close in relatively short order, how should we expect them to start impacting the larger company strategy? Like as you mentioned, there's a bunch of things that need to be done once deals close. So what's the time line that we should expect, yes, to be a positive influence in that Connected Home strategy? Marcus Lemonis: I think in Q2, as an example, based on when we close and the time of year that it is, we'll see about $80 million of increase coming out of Kirkland's, $75 million to $80 million coming out of Kirkland's. It's a second half of the year business. We're still seeing nice revenue growth on the e-commerce business that low to mid-single-digit growth there. The only thing that you should expect to see in Q2 is about $13 million of onetime expenses. So whatever your consensus was, whatever your number was, and I don't know what it is on this call, I would add about $13 million to it. We're hoping to be a little bit better than that. And then the same thing what happened in Q3 with the closing of TCS, I would expect that we will have a forecast that looks pretty good in probably 30 to 45 days that will give you an outlook, a range, a guidepost, assuming the economy doesn't get any better with about 6% to 7% revenue growth on a CAGR for '27, '28 and '29. That's what we're hoping to show you guys in the next 45 to 60 days. And I think it will be about what you would expect it to be. The TCS business is about $0.5 billion. The Kirkland's business on an annualized basis is about $350 million, $325 million depending on how many stores we end up keeping. The Lumber Liquidators, Cabinets To Go business is about $500 million. The installation business that we're talking about, the renovation installation business is about $60 million. And so we'll build all of that for you as we build this live together. But they'll fold in, in cadence. And I would expect that by August, September, we should have everything closed that you've heard about today, that doesn't mean there won't be more tuck-in acquisitions that would fit into Pillar 1, 2 or 3 based on what Amy wanted, Brian wanted or Jason wanted. Operator: We have reached the end of the Q&A session. I will now turn the call back to Marcus Lemonis for closing remarks. Marcus Lemonis: I don't have any closing remarks. We are happy that we were able to report Q1, and we're looking forward to exciting quarters ahead. Thanks for joining us. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Welcome to the Rambus First Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to John Allen, Interim Chief Financial Officer. You may begin your conference. John Allen: Thank you, operator, and welcome to the Rambus First Quarter 2026 Results Conference Call. I am John Allen, Interim Chief Financial Officer at Rambus. And on the call with me today is Luc Seraphin, our CEO. The press release for the results that we will be discussing today has been filed with the SEC on Form 8-K. We are webcasting this call along with the slides that we will reference during portions of today's call. A replay of this call can be accessed on our website beginning today at 5:00 p.m. Pacific Time. Our discussion today will contain forward-looking statements, including our expectations regarding projected financial results, financial prospects, market growth, demand for our solutions, other market factors, including reflections of the geopolitical and macroeconomic environment and the effects of ASC 606 and reported revenue, among other items. These statements are subject to risks and uncertainties that may be discussed during this call and are more fully described in the documents we file with the SEC, including our 8-Ks, 10-Qs and 10-Ks. These forward-looking statements may differ materially from our actual results, and we are under no obligation to update these statements. In an effort to provide greater clarity in the financials, we are using both GAAP and non-GAAP financial presentations in both our press release and on this call. A reconciliation of these non-GAAP financials to the most directly comparable GAAP measures has been included in our press release, in our slide presentation and on our website at rambus.com on the Investor Relations page under Financial Releases. In addition, we will continue to provide operational metrics such as licensing billings to give our investors better insight into our operational performance. The order of our call today will be as follows. Luc will start with an overview of the business. I will discuss our financial results, and then we will end with Q&A. I will now turn the call over to Luc to provide an overview of the quarter. Luc? Luc Seraphin: Good afternoon, everyone, and thank you for joining us. We opened 2026 with a strong first quarter, meeting our financial targets and broadening our portfolio to address the accelerating demands of AI. The quarter reflects solid momentum as we execute against our road map to support long-term profitable growth for the company. This is an exciting time for Rambus, and we are well positioned to capitalize on the market trends in the data center and AI. For decades, we have developed foundational technologies and solutions across a wide range of memory and interconnects. That heritage positions us well as systems become more diverse, memory dependent and performance-driven. To give more context, there are several market and technology trends playing out across the data center and AI that continue to work in our favor. As AI adoption accelerates and inference use cases expand, workloads are becoming more persistent and context-rich and performance is increasingly defined by how efficiently data can be stored, accessed, moved and secured. To support these workloads, AI infrastructure is becoming more complex and heterogeneous, combining a mix of traditional and AI server platforms to support orchestration, data management and real-time execution at scale. At the same time, the expansion of inference and particularly agentic AI with continuous reasoning and multistep workflows is driving more always-on activity and placing even greater demands on memory capacity, bandwidth, latency and power efficiency. Together, these trends are driving new memory and connectivity architectures to support purpose-built solutions across a wider range of use cases and form factors. This increases our opportunities for richer content and broader adoption of our industry-leading IP, reinforcing our position for sustainable long-term growth. Now let me turn to our quarterly results, starting with our chip business. Our performance reflects strong execution and ongoing leadership in our core DDR5 RCD chips. We delivered product revenue of $88 million in Q1, in line with our guidance and up 15% year-over-year. Looking ahead, we expect to deliver double-digit product revenue growth in the second quarter. We continue to see increasing customer adoption of new products and remain well positioned to support the ramp of next-generation platforms as they enter the market. We continue to execute on our strategy of delivering comprehensive industry-leading chip solutions to address growing customer and market requirements. As I mentioned in my opening remarks, we recently expanded our product portfolio with the introduction of our chipset for JEDEC-standard LPDDR5X SOCAMM2 modules, building on the same signal and power integrity expertise we have applied across multiple generations of DDR. This chipset is the first offering in our road map of LPDDR-based server module solutions and includes new voltage regulators as well as the SPD Hub to support reliable, power-efficient server class operation. As part of that road map, we are actively working with industry partners on the definition and development of LPDDR6-based SOCAMM2 solutions, which would offer a natural upgrade path for future generation AI platforms. As AI server architectures diversify to address varying performance, power efficiency and form factor requirements, some platforms are now leveraging LPDDR-based memory. While LP memory offers attractive power characteristics, it was originally designed for mobile environments with very short signal paths and tight power margins, making reliable deployment in server systems inherently challenging. The SOCAMM2 addresses these limitations through a compact CPU proximate module architecture with optimized signal routing and localized power management to enable LPDDR modules to operate in server environments. The Rambus SOCAMM2 chipset enables power-efficient, reliable operation of up to 9.6 gigabit per second in a compact module form factor. As LP-based server modules scale to higher speeds and bandwidth in future generations, they will require increasingly sophisticated interface power and control functionality. This progression is similar to what we have seen in DDR-based server modules and reinforces our opportunity to extend our road map of high-value chip content across memory types in the future. As I mentioned previously, the ongoing expansion of AI is driving demand for a broader range of memory types and form factor. To meet these needs, we continue to build on our leadership solutions in DDR5, including chipsets for RDIMM and MRDIMM and selectively expand our road map of novel solutions as they begin to play a complementary role in heterogeneous systems. With active engagements across customers and ecosystem partners, we are helping shape next-generation server modules, reinforcing the opportunity for richer chip content and sustained growth. Turning now to silicon IP. We saw strong customer traction in the first quarter with continued design wins at Tier 1 companies and growing engagement across our portfolio. We remain focused on delivering industry-leading premium IP that enables differentiated solutions for AI in the data center, including accelerators and networking chips across a wide range of architectures. There's increasing momentum for custom silicon in AI, especially among hyperscalers as they tailor hardware to their own software stacks and deployment needs, optimizing for performance, power efficiency and total cost at scale. This is driving an accelerating pace of design and expanding demand for value-added IP to support memory bandwidth, advanced connectivity and security. During the quarter, we saw growing traction for our value-added PCIe retimer and switch IP to support increasingly complex AI systems across scale-up and scale-out environments. We also expanded our memory IP portfolio with the introduction of the industry's fastest HBM4E controller, setting a new benchmark for AI accelerator memory throughput. In addition, we launched a new network security engine designed for Ultra Ethernet to protect distributed AI clusters. All of these IP offerings are in great demand and further strengthen our position as a critical enabler of next-generation compute and connectivity solutions for AI infrastructure. In summary, we executed well in the first quarter. We delivered solid results and expanded our offerings for both chips and IP to extend our leadership in our core markets. As we look ahead, Rambus is well positioned to capitalize on the megatrends in data center and AI. Our sustained technology leadership, disciplined execution and increasing traction across our portfolio of leadership products will continue to fuel our results. With that, we expect strong growth in 2026, and I'm confident in our long-term trajectory. As always, I want to thank our customers, partners and employees for their continued trust and support. Now I'll turn the call over to John to walk through the financials. John? John Allen: Thank you, Luc. I'd like to begin with a summary of our financial results for the first quarter on Slide 3. We delivered first quarter revenue and earnings in line with our guidance with solid contributions from each of our diversified businesses. We also continued our strong track record of cash generation. This performance reflects the continued strength in our business model. Our strong balance sheet and disciplined capital allocation enable us to invest in growth initiatives while returning value to shareholders. Let me now provide you a summary of our non-GAAP income statement on Slide 5. Revenue for the first quarter was $180.2 million, which was in line with our expectations. Royalty revenue was $69.6 million, while licensing billings were $70.8 million. The difference between licensing billings and royalty revenue mainly relates to timing as we do not always recognize revenue in the same quarter as we bill our customers. Product revenue was $88 million, representing 15% year-over-year growth, driven by continued strength in DDR5 products and ramping new project contributions. Contract and other revenue was $22.6 million, consisting predominantly of silicon IP. As a reminder, only a portion of our silicon IP revenue is reflected in contract and other revenue and the remaining portion is reported in royalty revenue as well as in licensing billings. Total operating costs, including cost of goods sold for the quarter were $104.6 million. Operating expenses of $69.9 million were up sequentially due to seasonal payroll-related taxes in connection with equity vesting. Interest and other income for the quarter was $6.9 million. Using an assumed flat tax rate of 16% for non-GAAP pretax income, non-GAAP net income for the quarter was $69.3 million. Now let me turn to the balance sheet details on Slide 6. We ended the quarter with cash, cash equivalents and marketable securities totaling $786 million, up $24 million from Q4 2025 with strong operating cash of $83 million, partially offset by $38 million in taxes paid on equity vesting and $17 million in capital expenditures. We increased our inventory balance by $14 million during the quarter and expect to continue building inventory strategically in the second quarter. Our strong balance sheet gives us the flexibility to increase inventory to support our product revenue growth and manage through potential supply chain constraints. First quarter depreciation expense was $8.5 million. Free cash flow in the quarter was $66.3 million. Let me now review our non-GAAP outlook for the second quarter on Slide 7. As a reminder, the forward-looking guidance reflects our best estimates at this time, and our actual results could differ materially from what I'm about to review. In addition to the non-GAAP financial outlook under ASC 606, we also provide information on licensing billings, which is an operational metric that reflects amounts invoiced to our licensing customers during the period adjusted for certain differences. We expect revenue in the second quarter to be between $192 million and $198 million. We expect product revenue to be between $95 million and $101 million, a sequential increase of 11% at the midpoint of guidance. We expect royalty revenue to be between $72 million and $78 million and licensing billings between $76 million and $82 million. We expect Q2 non-GAAP total operating costs, which includes cost of sales to be between $114 million and $110 million. We expect Q2 capital expenditures to be approximately $14 million. Non-GAAP operating results for the second quarter are expected to be between a profit of $78 million and $88 million. For non-GAAP interest and other income and expense, we expect $7 million of interest income. We expect non-GAAP tax expenses to be between $13.6 million and $15.2 million in Q2. We expect Q2 share count to be 110 million diluted shares outstanding. Overall, we anticipate Q2 non-GAAP earnings per share to range between $0.65 and $0.73. Let me finish with a summary on Slide 8. In closing, we delivered solid results in line with our objectives, driving ongoing profitability and cash generation. Our diversified portfolio remains a core strength with each of the businesses contributing meaningfully to our performance. Our patent licensing business continues to deliver consistent, predictable performance, supported by the long-term agreements we have in place. Our silicon IP business is well positioned, driven by critical interconnect and security technologies, addressing the accelerating demand for AI solutions. Our product business grew 15% year-over-year and is poised for sequential growth in the second quarter. We remain focused on delivering long-term shareholder value with year-over-year revenue growth in 2026. Before I open the call up to Q&A, I would like to thank our employees for their continued teamwork and execution. With that, I'll turn the call back to our operator to begin Q&A. Can we have our first question? Operator: [Operator Instructions] Your first question comes from the line of Kevin Garrigan with Jefferies. Kevin Garrigan: Can you just help us think about your product revenue into the June quarter? So last quarter, you discussed the low double-digit revenue impact from the onetime OSAT issue. And I think we may have been expecting a larger sequential increase for June just kind of given the strong -- how strong demand has been. So can you just walk us through the drivers for the June quarter product revenue and why the recovery might be a little bit more measured? Luc Seraphin: Thank you, Kevin. Yes, sure. So the first thing I would say is that the issue that we have talked about in the prior call is behind us. Everything has been resolved. And it's a question now for us to restabilize the supply chain, which we are doing, and we see a normalization of that supply chain. So it is behind us. And the revenue for Q2 is guided at 11% over Q1. So that's the right trajectory. And we continue to expect to grow sequentially after that in an environment where our footprint continues to be very strong. I mentioned in the earlier call that it was older generation of DDR5. The market is transitioning from Gen 2 to Gen 3, which is a good catalyst for us. So I would say we met or we guide to double-digit in the second quarter. We met what we said we would meet on the operational strain in Q1 and we will continue to grow sequentially quarters after that. We don't see any issue with the demand, and we don't see any more issues with the quality issue that we had in Q1. So we feel quite confident for the rest of the year as the market moves from Gen 2 to Gen 3. Kevin Garrigan: Okay. Great. And then just as a follow-up on your LPDDR5 SOCAMM2 server module chipset. When would you expect to start seeing revenue from this chipset? And what kind of milestones should we watch to gauge traction? Luc Seraphin: I would see this as having a very good strategic impact at this point in time. The financial impact in the short run this year is going to be very minimal just because the volumes are very small for this type of solutions. As a reminder, it only addresses a very small portion of the AI workloads. So volumes are small. The content is small as well. But it's strategically -- so I wouldn't put it in the model for 2026, but it's strategically very, very important because there is a trend to look at LPDDR in the server environment in the long run. LPDDR still has issues to address the server requirements, but it also has traction and it has benefits. So we see this as a stepping stone for us. It builds on the fact that over the last few years, we have developed our product line as chipsets. So we have the whole chipset for the SOCAMM2. We have our own teams for power management development, and these are the 2 new chips that we are proposing for this solution. So we see this as a stepping stone. It allows us to engage with us with other AI players in the industry. And we are working on next generation as well. But I don't think that the financial impact is going to be significant this year, just given the volumes. Operator: Your next question comes from the line of Tristan Gerra with Baird. Tristan Gerra: A quarter ago, you highlighted shortages and sounded a little bit maybe not cautious, but muted on the growth opportunity and you provided a fairly muted data center unit forecast. How are shortages for component potentially impacting your revenue this year? What are you seeing that's different now than a quarter ago? And given the outlook for DRAM to remain very tight next year, how should we look at your product revenue growth and specifically your RCD growth with excluding the new product layers that will be adding on to that from a year-over-year growth standpoint. So in other words, would you expect the same type of growth next year, year-over-year versus this year? And I understand you're not guiding for next year, but just wanted to get a bit more color on what you see on the market that potentially could put constraint on your growth. And clearly, that's an issue for a lot of other companies as well. Luc Seraphin: Yes. Thank you, Tristan. First of all, let me say a few words about the demand. We do see demand continue to grow for standard servers, which is good for us with agentic AI in particular. We expect the server market to grow faster this year than last year. We model it at low double-digit growth because despite the excitement around AI, there's also a large portion of the server market that is not AI related. But we do see demand growing on the server side, which is really a good catalyst for us. But as we said last quarter, we're watching the situation with supply, especially on the back end. Certainly, since last quarter, the situation has not improved. We're working with our suppliers, but the lead times are long, and there is tension on the back end. So we take this into account when we forecast our business. This is one factor. The other factor that affects or that comes into play when we forecast is the timing of launch of new platforms in the market. As you know, it's been the case in the past for us, the launch of our new products depends on the launch of new platforms in the market, and that's a dependency that we have. So we don't see the situation as materially different than what we saw in Q1. But from a supply standpoint, things have not improved. And we expect the supply situation to be tight going into 2027 as well when we talk to industry players. Tristan Gerra: Okay. That's useful. And then as my follow-up question, any additional color on the MRDIMM opportunity? I know you've talked in the past about some very initial shipments late this year, specifically with inferencing. Any additional color as to where it could be in terms of revenue in '27? I think you've talked in the past about your expectation that you probably fully realized the $600 million TAM for MRDIMM by '28. So what should we be looking at for next year kind of in between? And what's really driving that? What's going to be driving the demand? Is it going to be mostly inferencing? And any additional color you may have beyond what you've said in the past on customer interest for this technology and where it's going to ramp? Luc Seraphin: Thank you, Tristan. First, we continue to make progress in the launch of these products and the interaction with our customers on this MRDIMM. We're excited by the opportunity for the reasons we've always talked about, larger capacity, larger bandwidth in the same ecosystem. So the adoption is easier. The main, I would say, factor affecting the ramp of our MRDIMM is going to be the timing of the launch of the platforms from Intel and AMD in particular, where they do have this capability attached in the next-generation platform. So we continue to see the ramp starting in 2027 in earnest. And a SAM at this point in time, which we still value at about $600 million. As I keep saying, the SAM, once the products are in the market and we get feedback and the market gives us feedback, we're going to have a much better view of that SAM. But at this point in time, this is the right number to keep in mind. Operator: Your next question comes from the line of Aaron Rakers with Wells Fargo. Aaron Rakers: I guess kind of just building off that last question first. When you kind of think about the $600 million incremental opportunity around MRDIMM, I can appreciate that there's a lot of unknown variables at this point. But I'm just curious, as you rolled up that expectation, what assumption are you making in terms of attach rate on AMD Venice and Diamond Rapids at this point? And how might that evolve? I mean I would assume that you're being rather conservative on that attach rate at this point. And then also on that, how do you see CXL starting to play out? Luc Seraphin: At this point in time, we model a low attach rate. As I said, until my experience is until the product is in the market, it's hard to make those models more significant. There are a lot of variables coming into play. As we just said, the most important one is the timing of rollout of these platforms in the market. There's also the whole situation with DRAM pricing and the prices of modules and how our customers' customers are going to make the decisions between the combination of modules they want to have in the current memory cycle environment. So we model, I would say, a conservative percentage for MRDIMM at this point in time. But ramp will start when the platforms ramp in the market, and that's when we're going to have a better view. Aaron Rakers: And any thoughts on CXL? Luc Seraphin: Sorry, I missed the second part of your question. Sorry, Aaron. CXL, we do have very good traction on our IP business. We are not planning to launch a semiconductor product at this point in time. We do have this on our shelves, if you wish, as we designed one a couple of years ago. But we do see the -- with agentic AI, we do see demand for standard DIMMs and MRDIMMs as being the main benefactors of that. And that's where we will continue to focus our attention. Aaron Rakers: Yes. And then one final quick one. When we -- when you guys talk about the opportunity to grow sequentially in the product revenue into the back half of the calendar year, I'm curious if you were asked about seasonality in the second half versus first half, if there's anything that changes your views maybe relative to the last couple of years. And I think you've seen some decent growth second half versus first half. Luc Seraphin: Yes. Thanks, Aaron. That's a good observation. We actually do see second half shaping out slightly different than the first half, better growth in the second half. A lot of times, it had to do with the launch of new platforms that typically hit the market if they are on time in the second half of the year, and that's where you have more products there. But even if you look at the first half of this year at the midpoint of our guidance for Q2, and you look at the first half of last year, we're still growing close to 18%. So the first half, despite our issue in Q1 is still much higher than the first half of last year. And we believe the second half is going to show growth. We do see some seasonality. And typically, our second half is stronger than our first half. Operator: Your next question comes from the line of Gary Mobley with Loop Capital. Gary Mobley: If I take the sum of your license billing in your contract and other revenue in the first half of this year for the results in the guide and compare that to the same period last year, it looks like you're generating some abnormally strong growth. Is that due to any sort of variance in the patent licensing? Or should I take this to mean that your silicon IP business might actually be running north of $150 million annually right now? Luc Seraphin: So -- thanks, Gary. We can see some quarter-to-quarter variations in these 2 categories just for the nature of the business. I would say that underlying this, we see very good traction on our silicon IP business. Actually, AI has an impact on our silicon IP business, which is also very positive as people who develop custom solutions for AI are looking for new interfaces and new security solutions like the ones I mentioned in the prepared remarks. So we do have very good traction on the silicon IP business, and we continue to expect this business to grow 10% to 15% a year based on that. Our other business, our patent licensing business, it can also be changing from quarter-to-quarter. We do renew agreements on a regular basis. And sometimes these agreements are structured in different ways depending on the customers and what they want to do. So we have some strong quarters, some quarters that are not too good. But on average, this business continues to be stable at $200 million, $210 million. So I would say I would not pay too much attention on the quarterly split on these revenues, but the fundamentals are really, really good. What I would add to this is if you look at our patent licensing business, our silicon IP business or our product business, they all benefit from what's happening in the memory subsystem area. They all benefit from AI and the move from -- or the move from AI to AI inference. So -- and that gives strength to our results. And when we have a challenge like we had last quarter on the product line, then we have these 2 other product lines also that allow us to meet our numbers. Gary Mobley: Okay. As my follow-up, I wanted to ask about CPU roles in AI-optimized servers. I think there's been a lot more noise recently indicating a higher ratio of CPUs to GPUs in AI-optimized servers driven by agentic workloads, and you sort of hinted to that. To put this into a question, I'm curious if we move to a point in time where we might see a 1:1 ratio CPU to GPU. Does this alter your view on the growth rate of your SAM for your product revenue or the size of it? Luc Seraphin: So we are excited with where the market is evolving with agentic AI and inference. If you look at the types of architectures, software architectures, hardware architectures that inference requires, then you clearly see that the ratio between CPUs and GPUs is changing and is changing in favor of CPUs. So overall, that's a very good thing for us. It's just coming from the nature of what inference or what agentic AI is. So that's a good thing for us. Is it going to be a one-on-one? Very difficult to say at this point in time. Everyone is trying to optimize now the memory subsystems. Everyone is trying to use HBM where it's really good, use LPDDR where it's really good and use DDR and MRDIMMs where it's really good. And I would say that DDR and MRDIMMs will continue to be the workhorse of these inference AI solutions. But the fact that all of these systems start to coexist, HBM, DDR, LPDDR, is really good. They all try to resolve a different part of the AI workload, and this plays to our strength because this is what we've been doing forever at Rambus. But I would say that the move to AI inference and the move to agentic AI will change the ratio in favor of CPUs, and that's good for us. Operator: Your next question comes from the line of Sebastien Naji with William Blair. Sebastien Cyrus Naji: Maybe my first question, I wanted to ask about the new SOCAMM products that you announced last week. Could you maybe just comment on what Rambus' dollar content looks like for each SOCAMM module, just across the different voltage regulators and the SPD hub? Any unit economics you can give us? Luc Seraphin: Given the current competitive environment, I'd stay away from giving pricing on these things. But I would say that the content on a SOCAMM from the standpoint of Rambus, we have 3 voltage regulators and an SPD Hub. So the content is minimal. This is what I was saying earlier on one of the questions. I do believe that this is strategically important for us because in the long run, LPDDR may play a larger role, especially in next-generation LPDDR solutions in the data center. But from a content standpoint, it stays minimal and the volume stays minimal. I would leave it there. Sebastien Cyrus Naji: Okay. Okay. That's fair. And maybe just turning back to the RDIMMs. Could we get an update on the progress you're seeing with companion chips? How much revenue came from those companion chips in Q1? And then maybe just relatedly, how important is it for your silicon customers that they have all of these DIMM components bundled together coming from one provider versus having to put these together from different providers? Luc Seraphin: Yes. John, go ahead. John Allen: Sure. The newer products, Sebastien, they're contributing low double-digit percent of our total product revenue during the first quarter. We would expect it to be roughly the same in the second quarter as we see some growth in the overall revenue contribution from that part of our business. Luc Seraphin: Yes. And what I would add to this is that we -- this is steady growth quarter-over-quarter. You saw this in 2025, every quarter, we had a slightly higher percentage. We continue to do that. And we expect to continue to do that for the second half of the year with this. And we expect maybe to exit the year mid-double-digit of product revenues on -- coming from our new chips. Now to your other question, it is becoming more and more important for customers to have the whole chipset from one supplier, especially as the performance requirements increase. And the reason has to do with interoperability, making sure that all of these chips on a module work well together at very, very high speed in very, very harsh environment is becoming more and more difficult to achieve. And that's why our customers request us to have the whole solution and to help them go through these generational changes. Operator: Your next question comes from the line of Kevin Cassidy with Rosenblatt Securities. Kevin Cassidy: During the quarter, as you're building inventory, were there any orders that you had to leave on the table that you weren't able to book because you didn't have the inventory, but maybe some upside surprise? Luc Seraphin: No, we've not been in that situation. But there are a few market dynamics that we have to anticipate. One is, as I said earlier, we do see supply tightening, especially on the back end. So we want to make sure that we have -- if that situation continues, we have enough supply to supply our customers. The second thing that is happening is that there's fast transitions between generation. And you remember, we were talking about Generation 1 moving to Generation 2. We indicated in the last call that Generation 3 is ramping very, very fast. So we want to make sure that on these new generation of products, we also have enough inventory because the ramps on the customer side can be quite steep, and we just don't want to miss them. Kevin Cassidy: Okay. I understand. And maybe even when you're using your balance sheet to build more inventory, when Intel reported, they said they even were able to ship some previously written down inventory. It seems like the demand for CPUs is so strong and also DRAM that maybe older generations are -- will get a little bit of a revival. Is that anything possible? Or it sounds like you're saying everything is shifting to Gen 3 very quickly. Luc Seraphin: From a demand standpoint, it's certainly the bulk of the demand for DDR products is shifting to Gen 3. But what you're describing in terms of using inventory of old products to serve demand is something that we continuously do and look at. That's part of our inventory management processes. Operator: Your next question comes from the line of Mehdi Hosseini with SGI (sic) [ SIG ]. Bastien Faucon-Morin: This is Bastien filling in for Mehdi. My first question is on LPDDR, SOCAMM2 chipset. Would you mind clarifying the content of the chipset? It seems that the solution consists of 1 SPD and 3 voltage regulators. Do you expect to add any PMIC content there? And what does the pricing look like of the SPD and voltage regulator relative to the DDR, DIMM? And I have a follow-up. Luc Seraphin: Sure. So yes, on the SOCAMM solution, we have 1 SPD Hub and 2 types of voltage regulators, 3 voltage regulators in total, but 2 types, one 12 amp regulator and two 3 amps regulators. So that's the content. So as I said, the content is minimal. You're talking about PMIC. There's no power management IC per se. That function is done by the voltage regulators in this generation of product. But the way -- that's why we say it's very strategic for us. The way we look at this is that when LPDDR6 is available, that LP memory will offer even more speed and even more power capabilities, then it will require possibly more complex chips for power management, and we will work on those. And one can imagine as well that as the market evolves in the longer run, the market will probably need as well as the equivalent of RCDs in the long run. And this is exactly in our strategy, and that's why I'm talking about the stepping stone. We want to make sure that we are early in these new technologies. They do not cannibalize the old technology. They are complementary to them. And in the long run, they have the potential to grow quite nicely, and they build on strengths that we have, which has to do with signal integrity and power integrity. Now in the short run, for the SOCAMM2 and LPDDR5X, as I said, the volumes and the content -- the dollar content is going to be very low, but that's a very interesting and strategic stepping stone for us in that area. Bastien Faucon-Morin: That's really helpful. And I guess my second question is on DDR5. How should we think about the timing of the ramp of Gen 4 and Gen 5 as they go to higher volume manufacturing? Luc Seraphin: So Gen 4 is going to start to ramp this year, but Gen 4 is a kind of a niche generation, if you wish. It doesn't have the same traction as Gen 1, Gen 2, Gen 3 or Gen 5. I think everyone is now waiting for Gen 5. We're going to start shipping products that correspond to Gen 5 towards the end of the year. But just like for the MRDIMM, Gen 5 is completely dependent on the timing of the ramps of the next-generation platforms for Intel and AMD. This is where they're going to be adopted. And that's why we do see initial volumes this year, but the bulk of the volume just like for MRDIMM is going to start in 2027. Operator: Your next question comes from the line of Mark Lipacis with Evercore ISI. Mark Lipacis: A question on the DIMM attach rate. Is it different for CPUs used to perform orchestration in agentic AI versus CPUs used in standard servers versus CPUs that might be put next to the GPUs and the XPUs and the custom ASICs. Should we think about the attach rates differently for these... Luc Seraphin: It's a very good question, very difficult question also, Mark. I would say that the way we look at it is, if you look at inference and agentic AI, the functions that have to be performed by these standard CPUs are closer to standard CPUs. I think the highest attach rate that you would find is really close to the GPUs, HBM platforms. That's where you have the heaviest load, if you wish, for these CPUs. That's how at this point in time, I would compare it. I would say, if you take a DGX box with GPUs and HBM, then the CPU there are the CPUs that use the most memory in terms of capacity and bandwidth. I would say that when you go to inference, then it's probably a little less, but it's difficult for us at this point in time to model that. Mark Lipacis: Sorry, I guess my phone dropped. I don't know if my question came through. But Luc, I was wondering, is -- should we think about the DIMM attach rate differently for CPUs that would be used in orchestration for agentic AI versus CPUs used in standard servers versus CPUs that are used for inferencing that get put next to the GPUs and the ASICs and the XPUs. Is there a different density there for the DIMMs? Luc Seraphin: So it's a very good question, Mark, but a very difficult question to answer. I would say the way we look at it at this point in time is that the highest use of memory capacity and bandwidth really resides close to the GPUs and the GPU, HBM clusters, if you wish. That's where you have the most need for very high capacity and very high bandwidth, which, on average, could be higher than what we found in inference and other solutions. But we have not modeled that at this point in time. It's hard to model. But we do see in aggregate, the fact that inference is being added to training as a very good traction for the use of standard DIMMs or MRDIMMs in general. The attach rate is difficult to model at this point in time. Mark Lipacis: Got you. Okay. That's fair enough. And then the tightness in the back end that you're noticing, is this -- do you know or can you explain what the cause of that is? Is that because of the idea that a lot of the back end happens in Southeast Asia and they procure a lot of energy from the Middle East? Is that it? Or is it capacity? Is it more like just the whole industry is in a great recovery time and the capacity utilization rates are really ticking up. Do you have a sense of the cause of the tightness in the back end? Luc Seraphin: There's a couple of reasons. One is the demand, especially in the data center has become very high recently. So there's increased demand there. And the second reason is that a lot of semiconductor suppliers have moved their back-end supply chain away from China to other countries in Asia, and that has put a strain on the total capacity of these back-end suppliers. So it's the combination of the 2. We've not seen an effect yet, not yet, of the war. There are discussions about some basic elements like gas that are going to be affected, but we don't see this yet. The main reason at this point in time is increased demand, especially in the data center, combined with semiconductor companies moving their supply chains outside of China. Mark Lipacis: Okay. That's really helpful. And the last question, if I may. The -- as you think about your market share in this year, are you of the view that you are a share gainer or you keep share flattish or down? Like what is your view on your ability to gain share? Luc Seraphin: Yes. So we continue to gain share in '24 to '25. We were -- we exited '25, we were mid-40% share. There's no indication that we are not going to continue on that trajectory. This year, the market is really at a high level, transitioning from Gen 2 to Gen 3, and our footprint in Gen 3 is really, really good as well. So there's no sign of any erosion of the share. If we add the other components, then we'll grow faster than market because we add content as well to what do we ship to the market. So again, we're very pleased with where we were in 2025. As you know, Mark, we tend to talk share on a yearly basis. They can fluctuate from quarter-to-quarter, but we don't see any sign of erosion of our share going into 2026. Operator: At this time, there are no further questions. This concludes the question-and-answer session. I would now like to turn the conference back over to the company. Luc Seraphin: Thank you, everyone, who has joined us today, for your continued interest and time. We look forward to speaking with you again soon. Have a good day. Operator: Thank you. This now concludes today's conference.
Operator: Good morning, and welcome to Fulcrum Therapeutics First Quarter 2026 Financial Results and Business Update Conference Call. [Operator Instructions] This call is being webcast live and can be accessed on the Investors section of Fulcrum's website at www.fulcrumtx.com and is being recorded. Please be reminded that remarks during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 may include statements about the company's future expectations and plans clinical development time lines and financial projections. While these forward-looking statements represent Fulcrum's views as of today, this should not be relied upon as representing the company's views in the future. Fulcrum may update these statements in the future, but is not taking on an obligation to do so. Please refer to Fulcrum's most recent files with the Securities and Exchange Commission for a discussion of certain risks and uncertainties associated with the company's business. Leading the call today will be Alex Sapir, CEO and President of Fulcrum. Joining Alex on the call are Alan Musso, Chief Financial Officer; and Dr. Iain Fraser, Senior Vice President, Clinical Development. After providing updates on the company's key programs, there will be a brief Q&A in which the full management team will be available for questions. With that, it's my pleasure to turn the call over to Alex. Alexander Sapir: That's great. Thanks, Shannon, and good morning, everyone. We appreciate you all joining us today. The first quarter of 2026 was an important and exciting period for Fulcrum highlighted by the positive clinical data we reported from the Phase Ib PIONEER trial of Potero der in sickle cell disease. Now as a reminder, sickle cell disease is a serious genetic blood disorder with a significant unmet need, affecting approximately 120,000 patients in the United States and millions more globally. Patients with sickle cell disease face a substantial disease burden, including chronic pain and fatigue as well as serious complications, such as vaso-occlusive crises, stroke and progressive end organ damage, all of which result in a substantial reduction in life expectancy of over 20 years. Now we have known for decades that increasing levels of fetal hemoglobin or HBF and in patients with sickle cell disease leads to improvements in anemia and reductions in vaso-occlusive pain crises. And so it was for that reason that we were so pleased with the data that we reported in February, demonstrating that after only 12 weeks of treatment, 20 milligrams of Potero der taken once daily demonstrated a robust and clinically meaningful increase in HbF from 7.1% at baseline to 19.3% at week 12, along with improvements in markers of hemolysis and improvements in anemia. We also observed continued progression toward pancellular expression of HBF, which we believe is critical for achieving meaningful clinical benefit. And importantly, we saw a reduction in the number of VOCs we would have expected in this severe patient population with 7 of the 12 patients experiencing no VOCs during the 12-week treatment period. And importantly, pociredir has continued to be generally well tolerated with no treatment-related serious adverse events reported to date. And so taken together, these data reinforce our conviction in pociredir's potential to address the underlying biology of sickle cell disease. -- and support our belief that pociredir has the potential to represent a differentiated, once-daily oral treatment option for patients. Now during the quarter, we also initiated an open-label, long-term dosing trial for patients in the PIONEER study, and we recently enrolled our first patient in this new study. All patients in this long-term dosing study previously completed 12 weeks of treatment as part of the PIONEER trial. Therefore, we expect to provide a distinct -- we expect this study to provide a distinct data set offering important insights into long-term safety, durability of response and the effects of reinitiating treatment with pociredir. We also continue to support initiatives aimed at improving the care journey for people living with sickle cell disease, including our recent collaboration with medical alert and the Sickle Cell Disease Association of America, or SCDAA to help improve access to patient-specific care information in the emergency department setting. Looking ahead, we are now focused on the next stage of clinical development for pociredir, and we expect to provide an update in the design of our next trial later this quarter following our upcoming end-of-phase meeting with the FDA and receipt of the final meeting minutes. Pending FDA feedback from that end-of-phase meeting, we plan to initiate a potential registration-enabling trial in the second half of 2026. And so with a strong balance sheet that provides cash runway into 2029, we are well positioned to advance pociredir through the next phase of clinical development. Now before turning it over to Alan, I want to cover the 2 other important corporate updates. First, I want to welcome Josh Lehrer to our Board of Directors. Josh brings to Fulcrum a deep experience and passion for sickle cell disease as well as a strong track record in advancing transformative therapies in this space, including his role in the development and approval of Oxbrina. We are honored to have Josh joined Fulcrum at this important stage. And secondly, I would also like to thank Alan for his years of dedication and leadership as he looks towards retirement later in the year. Alan has played a critical role in strengthening our balance sheet and instilling financial discipline across the organization, and we are grateful for his continued commitment to Fulcrum as he remains in his role until a successor is named to ensure a smooth transition. And so with that, let me now turn it over to Alan to review our financial results and again, I want to thanks... Alan Musso: Thanks, Alex, and thank you for the kind words. It's been a privilege to be part of Fulcrum's progress, and I'm proud of what we've accomplished together. With the impressive results from the PIONEER trial, a talented and motivated team and a strong capital base. The company is well positioned to deliver transformative therapy for sickle cell patients. I look forward to continue working with the team over the coming months and ensuring a successful transition. And with that, I will now go over our results for the first quarter ended March 31, '21, '26. The research and development expenses were $14.1 million for the first quarter of 20 compared to $13.4 million for the first quarter of 2025. The increase of $700,000 was primarily driven by higher employee compensation costs, including $400,000 of increased stock-based compensation expense. General and administrative expenses were $8.1 million for the first quarter of 2026 compared to $7 million for the first quarter of 2025. The increase of $1.1 million was primarily driven by higher employee compensation costs, including $300,000 of increased stock-based compensation expense as well as higher professional services costs. The net loss was $22.2 million for the first quarter of 2026 compared to a net loss of $20.4 million for the first quarter of 2025. Now turning to the balance sheet. We ended the first quarter of 2026 with cash, cash equivalents and marketable securities of $333.3 million compared to $352.3 million as of December 31, 2025. The $19 million decrease was primarily due to cash used to fund our operating activities. And based on our current plans, we expect our existing cash, cash equivalents and marketable securities will be sufficient to fund our operating requirements into 2029, providing runway to advance pociredir through the next phase of clinical development. And with that, I'll turn it back over to you, Alex. Alexander Sapir: That's great. Thanks so much, Alan. So Fulcrum has reached an important inflection point with the positive clinical data from our PIONEER trial, reinforcing our conviction in pociredir's potential in sickle cell disease. We are focused on the next stage of development and look forward to providing an update on our plans following our upcoming end-of-phase meeting with the FDA. And with a strong balance sheet and a dedicated team, we believe we are well positioned to advance pociredir through the next phase of clinical development. And so with those brief remarks, Shannon, why don't we go ahead and open up the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Joe Schwartz with Leerink Partners. Joseph Schwartz: Alan, congrats on your upcoming retirement, and thanks for your excellent stewardship of the company over the years. Alex, as you reflect on the experience gained through Pioneer, what are the most important things you've learned that you might not have fully appreciated going in? And how will those lessen to shape your Phase III design and execution? Alexander Sapir: Yes. It's a great question, Joe. And I may turn it over to Ian to see who wants to add anything. I mean, I think the 1 thing that I've really learned from Pioneer and talking with a lot of the investigators and hearing from those investigators, the conversations that they've had with their patients is that there continues to be continued high, high, high unmet need in this patient population, especially in the severe patient population that we studied in the PIONEER trial in the severe patient population that we would expect to continue in our next phase of clinical development. I would say that's learning #1. I would say learning #2 is that there is such a strong connection between fetal hemoglobin and reduction of VOCs. And we've known this for a long time, but spending time as much as I have with people like Marty Steinberg, who has spent decades researching the underlying biology of fetalemoglobin. He said that just so succinctly and he's just so simple in his explanation in that if you can increase fetal-hemoglobin you're going to see a reduction in VOCs, you're going to see an improvement in anemia because of an increase in total hemoglobin because you're seeing less hemolysis. And so I think it's really to me, Joe, it's those 2 things taken together, 1 related to the unmet need of the patient population. And secondarily is what we think is a very, very profound and robust induction of fetal hemoglobin that's really, I think, what continues to motivate me and make me excited for the next phase of this asset's journey along the clinical development time line. Iain, you've obviously been pretty deeply involved with Pioneer as well. Anything you would want to add to that? Iain Fraser: I think you captured it very well, Alex. It's the severity of the disease and the manifestations experienced by these patients coupled with the really high unmet need in terms of available therapies for the patients. And I think on a daily basis, we continue to be reminded of that. Joseph Schwartz: Okay. Great. And then as you approach discussions with the FDA, what level of evidence do you think they might require in order to consider HPF as a reasonably likely surrogate endpoint for accelerated approval? And how do you plan to position what you've seen efficacy and safety wise for precede so far in terms of that clinical profile to support your case? Alexander Sapir: Yes, it's a great question, Joe. And obviously, Ian has been very, very deep in those preparation for our upcoming meeting. So I think to answer that, let me turn that 1 over to Iain. Iain Fraser: Yes. Thanks, Alex. Thanks, Joe. I think there's really substantial published literature that demonstrates the association between higher HBF levels and improved clinical outcomes in sickle cell disease. And as we've discussed previously and again today, that biological relationship is really a key part of the underlying rationale for our program overall. Of course, the role that HBF could play in terms of the regulatory framework is 1 that is going to be a topic of discussion with regulators to understand their perspective on the appropriate path forward. Our focus remains on designing a robust study that can meaningfully demonstrate clinical benefit, and we hope to align with the regulators on the optimal strategy around that. Operator: Our next question comes from the line of Anupam Rama with JPMorgan. Anupam Rama: Thanks and Alan best wishes on the retirement man. So at the sickle cell disease research symposium, will there be any new analysis that will be presented relative to the 1Q corporate update for Pioneer? And I know second question, I know that the first patients have been dosed in the OLE portion of the Phase I what portion of the patient from PIONEER went to the OLE? And could we see that update maybe around ASH? Alexander Sapir: Yes. Maybe let me -- I'll answer the second question, and then Iain, I can turn it over to you to answer the first question. Yes. So we have enrolled our first patient in this open-label long-term dosing for pociredir -- right now, Anupam, we're targeting the 17 U.S.-based patients that were enrolled in either Cohort 3b and that was the 12-milligram cohort or Cohort 4, which was the 20-milligram cohort. And so right now, really, our focus has really been on getting those sites activated. Unfortunately, this is not your sort of traditional OLE study where patients roll right over, this is considered a new study. And so it has to go through the same mechanics of any new protocol that gets introduced to an institution. So that obviously takes a bit of time. I think it's a little difficult to project when we would have patients of those 17 patients enrolled in this open-label long-term dosing for pociredir. We don't think we'll get all of them. Some maybe lost a follow-up, some may be in other clinical trials. But I think given what we've heard from investigators in terms of the interest level and going back on therapy, we should expect to see a decent number of that 17%. If you ask me to try to predict is as possible. I'd say it's probably going to be sometime in 2027 before we would have a critical mass of patients enrolled in order to be able to see a duration of therapy that is going to be a meaningful, interesting and new data point. We've seen what happens to this therapy when patients are dosed for 12 weeks. I think what's going to be really interesting is what happens when patients goes for longer 24 weeks or 6 months. And so that would probably be the first data set that we would share with folks. And so more than likely, that probably would happen sometime in 2027 as opposed to ASH 2026. Anupam Rama: There is a second question. Iain Fraser: Yes, yes. This is Iain. I can handle that one. So we've indicated that we expect to provide a full similar parting of the entire PIONEER study. at a medical conference later this year. We have not provided details on that as yet. As we indicated in the press release, the FSCDR symposium oral abstract will include previously disclosed clinical data. Operator: Our next question comes from the line of Kristen Kluska with Cantor. Kristen Kluska: And let me also add my congrats to Alan for a great career in biotech and pharma, including the accomplishments at Fulcrum. The first question I had for you was just on broadly understanding the latest views coming from FDA. I know there's been several workshops, including at ASH. I know the team has met with some thought leaders in Washington, D.C. So bigger picture without specifically honing in on Fulcrum's path forward, what's the latest you've been hearing from these thought leaders about how they're thinking about sickle cell disease as an indication, the unmet need and just receptiveness to hearing about new drug classes. Alexander Sapir: Yes, it's a great question, Kristen. And I'll start, and Ian, you may want to add some thoughts as well. And I'll sort of -- I'll break the question up into 2 pieces. What are we hearing and what are we doing with folks on the hill -- and then what are we hearing and seeing at the I think what we -- and I personally have been spending a lot of time in Washington, D.C., Kristen is referencing a very interesting program that she attended in which we provided a congressional briefing to staffers of senators and congressmen just several weeks ago in Washington, D.C., where we really talked about the unmet need. We had a couple of patients talk about their journey and it was standing room only and towards certain parts of the meeting, there were very few dry eyes in the house. And so I think that what the politicians understand is that sickle cell continues to be a disease with very high unmet need with shortened life expectancy of 20 years, not to mention during their time here, experiencing very debilitating pain crises and organ damage, leg ulcers, I could go on and on. And so I think that it's important that the senators and congressmen on the sickle cell disease caucus on the rare disease caucus, on the dock caucus, they understand that and can help sort of lent their support in terms of how high the unmet need is in this patient population. So I'd say that's, I would say, on the -- more on the Hill side. I think on the FDA side, I would point you to Agios' recent press release that showed that they will be moving forward with filing an NDA in the coming months for sickle cell disease with mitapivat. And we think that what that shows is an understanding of how high the unmet need is and potentially some regulatory flexibility to try to get drugs to patients as quickly as we can. These drugs obviously have to be not only effective, but they need to be safe. And so we're obviously very excited and looking forward to engaging with the FDA in our upcoming end-of-phase meeting. Iain, anything you would want to add to that? Iain Fraser: No, I think you covered the key points really well, Alex. Given the severity of the disease and the unmet need, I think the recent progress in the sickle cell disease landscape is very encouraging for the field, and we look forward to moving forward our program with pociredir. Kristen Kluska: Yes. And then my other question is just focusing in a little bit more on the open-label extension. Obviously, you want to understand the longer-term impacts on both safety and efficacy. But I'm curious if there are any end points in particular, you're really trying to understand the longer-term efficacy. So are there certain endpoints that maybe take a little bit longer for the benefits to occur where a trial longer than 12 weeks potentially might give you some insight. Alexander Sapir: Yes, Kristen, that's a great question. I think to answer that, I will turn that 1 over to Iain, who has been deeply involved in the design as well as the execution of the open-label long-term dosing study that -- for which we've enrolled our first patient. Iain? Iain Fraser: Yes. Thanks, Alex, and thanks, Kristen. So as we've indicated before, at the 12-week treatment duration with pociredir the HBF levels are starting to flatten out, but we don't believe they've reached their peak level at that point. And so 1 of the outcomes of the study that we'll be very much interested in is to see the progression beyond that 12-week mark. And then downstream of the HBF as we've seen with other hematological remarks of hemolysis in particular, but also the increase in total hemoglobin that we've seen. Those are probably not maxed out either at that point and with a longer duration of increased HBF, we would expect to see further improvements in those markets. So I think it's looking at how that response plays out over a longer treatment period. Having said that, I think it is important and Alex alluded to this earlier, that these patients have been off pociredir for some time. So it's not the traditional open-label extension where they roll over immediately into that. So that will be starting from a new baseline, but it's the extended dosing duration in particular, that we're interested in tracking. Operator: Our next question comes from the line of Corinne Johnson with Goldman Sachs. Corinne Jenkins: Congratulations to Alan as well from all of us in terms of the retirement. Maybe a question for us and just kind of the competitive landscape and evolving treatment landscape in sickle cell disease. I guess, could you help us think through the role you expect pociredir play, particularly if there's more kind of oral medications that come to market over the next couple of years? Alexander Sapir: Sure, absolutely. I'll start, and then Iain, you may want to add some additional points that I maybe leave off. So yes, I think the way we think about this, [ Kristin ], is there's sort of -- and it's interesting. This market is 1 that I think will grow exponentially over the next 5 to 10 years. If you look at just the sheer number of drugs in development for the treatment of sickle cell disease. This is a market -- a very large market that has been underserved for years and years. And so I think the way that we see this market evolving is very much towards the oral treatment options. And there's really -- to us, we think about this as sort of 2 different approaches. One is sort of operating downstream on the mature red blood cells like the PK activators to -- and the second is operating more upstream when those red blood cells are being formed in the bone marrow and ensuring that those red blood cells have enough fetal hemoglobin as they're being formed because once those red blood cells have enough fetalemoglobin and our form that do get spit out of the bone marrow. Those red blood cells cannot and will not sickle. They maintain their soft flexible shape, thereby preventing vaso-occlusive crises, they have a lifespan of about 120 days versus a 30-day lifespan for a sickled hemoglobin -- and so for us, we think that really attacking the upstream underlying cause of the disease as we're doing with pociredir -- we believe that, that will ultimately be the treatment of choice as we look over the next 5 to 10 years as this market evolves, now where we are in relation to some of those other fetal hemoglobin inducers. Conservatively, we believe that we have about a 24-month head start over the next closest competitor, and that next close is oral HBF inducer would be BMS's product, BMS 986, which is a wiz a dual degrader Wiz and ZBTB 7(a) or LRF for sure. So there They'll be -- they're currently in the clinic in a Phase I study, and they expect to announce the results of that Phase I study sometime in, I think it's the first quarter, the first half of 2027. So we'll be well underway we believe with our Phase III study, while the next closest competitor, BMS, is reporting out their Phase I study results in 2027. And so maintaining that 2-year head start, so that when we come to market, we can have this market essentially without other oral HBF competitors, we believe that that's an important consideration that we want to make sure that we maintain that 24-month head start. Iain, anything else you would want to add about the competitive landscape and how we see this market evolving over time? Iain Fraser: I think you mentioned the key point, Alex. I think the focus of the PK activators is on the increases in total hemoglobin, resulting from a decrease in hemolysis and agree that the HBF mechanism, I think has emerged as a more central, more upstream mechanism to address more widely manifestations of sickle cell disease. I think we're seeing that reflected in the interest in the clinic in sponsors that are bringing forward oral HBF inducers. Operator: Our next question comes from the line of James Condulis with Stifel. James Condulis: And I'll add micrographs as well, Alan. Maybe just 1 sort of kind of on the competitive landscape and all these regulatory dynamics. Novo recently hit on a VOC endpoint. And -- just curious if you think that changes anything at all as it relates to the potential regulatory path for you? And if a drug were to be approved on VOC, does that sort of change what the FDA may be open to approving as it relates to the endpoints that are not a VOC endpoint? Just curious your perspectives there. Alexander Sapir: Yes, James, great question. Maybe just to orient everybody, they did have co-primary, total hemoglobin and VOCs and they hit on that. It was a 27% reduction in vaso-occlusive crisis. So very similar to the percent reduction in VOC that we saw with another product that's currently approved and generally not widely used a product called El glutamine that's all a 25% reduction in VOC. So I wanted just to make sure that everybody was on the call was oriented to specifically what James was talking about. Iain, maybe I'll have you sort of take the heart of James' question, which is really around if there's any potential sort of read-through with pociredir and our path forward. Iain? Iain Fraser: Yes, I think the fact that VOCs is an important clinical endpoint that I think remains the case. I don't think there's any change in that. I think as we've discussed before, the literature associating increases in fetal hemoglobin with reductions in VOCs certainly remains the case. And given the magnitude of HBF induction that we've seen in the PIONEER study to date, both at the 12 and the 20-milligram doses we would expect that, that would translate into a VOC benefit. And I think that remains an important clinical end point. Operator: Our next question comes from the line of Matthew Biegler with Opco. Matthew Biegler: Congrats to you, Alan as well. Maybe just piggybacking on some of the -- an earlier comment that you made, Alex. I'm thinking about maybe potential future combination strategies here. And you mentioned PKR activators and some of the other downstream treatments where you guys are more upstream and maybe that makes logical sense. So it sounds to me like maybe there might be a better partner for you than hydroxyurea. Have you given any thoughts to that? Alexander Sapir: Yes. It's a really good question, Matt. Ian, I may turn this over to you, but I think just maybe just a couple of initial thoughts. So hydroxyurea has been approved now for coming over 40 years. It is clearly the mainstay. I think that patients at times aren't crazy about it. It doesn't have a great sort of adherence to drug because of some of the side effects associated with it. But despite that, it is very much the main stand. So I think our long-term development strategy has always been to figure out a path forward for us to be used in combination with hydroxyurea. We don't believe that, that will be part of the design that we will reach agreement on with the FDA as part of our upcoming end of phase meeting with them. But we do see that as an important part of the ongoing clinical development program for pociredir. Yes, I think, Iain, maybe if you want to take kind of maybe just beyond HU, is there the idea of possibly combining an HBF inducer with potentially a PK activator or potentially operating on different mechanisms and potentially seeing greater efficacy than either 1 could achieve on their own. Iain Fraser: Yes, absolutely. I mean we've certainly seen that in other fields, and that certainly remains a potential in this disease, which has so many manifestations that are so severe. I think as we think of those, however, our primary objective at the moment really is to generate an interpretable data set with pociredir that will support its registration. And I think understanding in the context of monotherapy is really the first step in that journey so that we really have a full understanding of that and that we could then give serious consideration to how do we evaluate potential combination therapies down the road? Alexander Sapir: Yes, I think that's well said, Iain. Operator: Our next question comes from the line of Gregory Renza with Truth Securities. Gregory Renza: My congratulations to Alan on his service at Fulcrum and in the industry. I know, of course, the focus is on Posera there, but I'm just curious when you see the time being right to potentially advance or nominate some of the discovery programs and think about the novel HBF inducers that you may have in the library. And then maybe secondarily, as we think about the FDA meetings upcoming, can you just give us an update on the engagement plans with respect to EMA and the global development. Joseph Schwartz: Sure. I'll take the first question and Iain. I'll turn the second question over -- actually, Iain, why don't you -- if you want, do you want to take the second question first? Iain Fraser: Yes. Yes, happy to do that. Thanks, Greg. So as we've indicated before, the context of a registrational sickle cell disease study is likely to be a global study and we've indicated that we will be interacting with EMA later this year as part of that process. So that's certainly the first step on looking more globally and getting additional feedback on the program. Alexander Sapir: Yes, it's great. And then yes, I think, Greg, in terms of your first question, our discovery efforts, we're a company of about 60, 65 people, we've got 20, 25 people focused entirely on discovery. And then within their discovery work, they are focused entirely on developing the second, third and fourth generation oral HBF inducer. And so that has really been our key area a focus because we, again, going back to something that I said earlier, we do believe that this is a market that ultimately will be dominated by oral fetal hemoglobin inducers because of the reasons that I mentioned earlier. And so we're thinking about how can we develop a product that potentially could cannibalize pociredir once it's eventually hits it's the market. I think at this point, it's a little bit premature, Greg, to how to estimate when we would start seeing things coming out of our discovery efforts and conducting those IND-enabling studies. But I will say that in the coming years, what we believe we will see is a number of new INDs almost entirely focused on trying to come out with an even better oral HBF inducer than what we currently have with pociredir given how we see this market evolving over the next 5 to 10 years. Operator: And I'm currently showing no further questions at this time. Thank you, everyone, for your participation on today's call. This does conclude the conference. Thank you, and you may now disconnect.
Operator: Greetings, and welcome to the Alliance Resource Partners, L.P. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Cary P. Marshall, Chief Financial Officer of Alliance Resource Partners, L.P. Thank you, sir. You may begin. Cary P. Marshall: Good morning, and welcome, everyone. Earlier today, Alliance Resource Partners, L.P. released its first quarter 2026 financial and operating results. We will review the quarter, discuss our perspective on current market conditions and outlook for 2026, and then open the call to answer your questions. Before beginning, a reminder that some of our remarks today may include forward-looking statements, which are subject to a variety of risks, uncertainties, and assumptions contained in our filings from time to time with the Securities and Exchange Commission and are also reflected in this morning’s press release. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize, or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. Providing these remarks, the partnership has no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events, or otherwise, unless required by law to do so. Finally, we will also be discussing certain non-GAAP financial measures. Definitions and reconciliations of the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures are contained at the end of Alliance Resource Partners, L.P.’s press release which has been posted on our website and furnished to the SEC on Form 8-K. With that, I will begin with a review of our first quarter 2026 results and discuss our updated outlook for 2026 before turning the call over to Joseph W. Craft, our Chairman, President and Chief Executive Officer, for his comments. Overall, the quarterly results came in higher than expected due to record BOE volumes and higher commodity prices that increased oil and gas royalties revenues. Tons produced from our coal operations were on target; however, temporary weather-related disruptions caused approximately 200,000 tons of scheduled shipments to be delayed. For the 2026 quarter, adjusted EBITDA was $155 million, which was higher than expected but 3.1% lower compared to the 2025 quarter, and down 18.9% compared to the sequential quarter. Net income attributable to Alliance Resource Partners, L.P. in the 2026 quarter was $9.1 million, or $0.07 per unit, as compared to $74 million, or $0.57 per unit, in the 2025 quarter. Net income in the 2026 quarter reflected lower coal sales revenue, higher depreciation, an $11.6 million decrease in the fair value of our digital assets, and a $37.8 million noncash asset impairment charge at our Metiki mine following our decision to cease longwall production on account of uncertainty regarding future operations, as discussed in our January 29 press release. We continue to evaluate the appropriate path forward for Metiki, though meaningful uncertainty remains and greater clarity is not expected until later this year. In the interim, our priority at Metiki is to reduce costs while preserving the flexibility and optionality needed to align future operations with customer demand. In the 2026 quarter, total revenues were $516 million, down 4.5% compared to the 2025 quarter and down 3.6% compared to the sequential quarter. Lower coal sales pricing and volume sequentially primarily drove the decline, which was partially offset by higher oil and gas royalty revenues. During the quarter, weather-related river disruptions delayed certain committed deliveries; however, we expect our delayed shipments will be recovered over the balance of the year. Our average coal sales price per ton for the 2026 quarter was $56.40, a 6.5% decrease versus the 2025 quarter and a 2% decrease sequentially. As noted during prior calls, pricing is normalizing as higher-price legacy coal contracts entered into during the 2022 energy crisis continue to roll off and are being replaced at coal pricing levels consistent with our current guidance ranges. Total coal production in the 2026 quarter was 8.0 million tons, compared to 8.5 million tons in the 2025 quarter. Coal sales volumes were 7.9 million tons in the 2026 quarter, up from 7.8 million tons in the 2025 quarter and down from 8.1 million tons in the sequential quarter. In the Illinois Basin, coal sales volumes were 6.1 million tons, up 0.4% compared to the 2025 quarter and down 5.9% compared to the sequential quarter. Volumes declined primarily due to decreased tons sold from our Hamilton mine as a result of an extended longwall move scheduled during the 2026 quarter. While the longwall move at Hamilton reduced production and shipments during the quarter, increased productivity at Riverview and Gibson South helped to offset some of that impact. The longwall at Hamilton is currently anticipated to resume production in May 2026. Illinois Basin coal sales price per ton was $51.05 in the 2026 quarter, a decrease of 7.4% versus the 2025 quarter and an increase of 0.4% compared to the sequential quarter. The decrease versus the 2025 quarter was the result of the expiration of higher-priced legacy contracts. Segment adjusted EBITDA expense per ton in the Illinois Basin was $35.20, an increase of 1.3% compared to the 2025 quarter and up 3.4% sequentially due primarily to the extended longwall move at our Hamilton mine this quarter. In our Appalachia region, coal sales volumes were 1.8 million tons in the 2026 quarter, up 3.6% compared to the prior year due to a longwall move at our Tunnel Ridge mine in the 2025 quarter. Appalachia coal sales price per ton was $74.51, reflecting an expected decrease of 4.8% versus the 2025 quarter, and 11.1% versus the sequential quarter as the percentage of higher-priced Metiki sales volumes were lower, and Tunnel Ridge sales volumes increased during the 2026 quarter. Segment adjusted EBITDA expense per ton in Appalachia was $62.19, a decrease of 10.8% versus the 2025 quarter and a decrease of 1.8% versus the sequential quarter. The year-over-year improvement was driven primarily by increased production at our Tunnel Ridge operation. Alliance Resource Partners, L.P. ended the 2026 quarter with total coal inventory of 1.2 million tons, down 200,000 tons year over year and up 100,000 tons sequentially. In our royalty segments, we delivered strong results during the 2026 quarter. Total royalty revenues were $61.2 million, up 16.1% year over year and up 7.7% sequentially. In our oil and gas royalty segment, we achieved another record quarter. Oil and gas royalty revenues were $41.3 million in the 2026 quarter, up 14.6% year over year. We reported record BOE volumes of 1.0 million, up 16.1% year over year and 3.3% sequentially. Commodity pricing increased sequentially and segment adjusted EBITDA for the oil and gas royalty segment increased to $34.6 million in the 2026 quarter, up over 15% compared to both the 2025 quarter and sequential quarter. Segment adjusted EBITDA for our coal royalty segment was $12.3 million in the 2026 quarter, up 30.6% compared to the 2025 quarter due to higher royalty tons sold primarily from Tunnel Ridge. This was partially offset by lower average royalty rates per ton sold. Our balance sheet continues to be strong. As of 03/31/2026, total debt and finance leases were outstanding in the amount of $507.7 million and our total and net leverage ratios were 0.73 and 0.69 times debt to trailing twelve months adjusted EBITDA. Total liquidity was $431.2 million, which included $28.9 million of cash and cash equivalents on hand and $402.3 million of borrowings available under our revolving credit and accounts receivable securitization facilities. We also held 618 bitcoin valued at $42.2 million at quarter end based on $68,233 per coin. For the 2026 quarter, we invested $95.7 million in capital expenditures and $16.2 million in total oil and gas minerals acquisitions. We reported distributable cash flow of $77.8 million. Based on our $0.60 per unit quarterly cash distribution, distributions paid to partners were $78 million, and our distribution coverage ratio for the quarter was 1.0x. Turning to our updated 2026 guidance, I will highlight three items. First, we are maintaining our overall guidance ranges for coal sales volumes, coal sales price, and segment adjusted EBITDA expense per ton. We will complete planned longwall move activity for the year during the upcoming quarter, and with no additional longwall moves anticipated until 2027, we expect better operational visibility in 2026. As usual, we plan to update investors again when we release second quarter earnings. Second, contracting activity has remained constructive. We layered on 2.6 million net contracted tons for delivery in 2026 and 2027. As a result, our 2026 expected coal sales volumes are now more than 95% committed and priced at the midpoint of our guidance ranges. The remaining open position is concentrated in the second half 2026 and dependent upon summer burn and customer requirements. Finally, the most notable changes to our guidance are in the Oil and Gas Royalty segment, where year-to-date volumes have exceeded our initial expectations. Based on that outperformance, we are increasing our 2026 volume guidance by approximately 5% on a BOE basis. We now estimate 1.6 to 1.7 million barrels of oil, 6.6 to 7.0 million MCF of natural gas, and 875,000 to 925,000 barrels of natural gas liquids. Latest trends in crude oil pricing have improved the near-term outlook, and if current strip pricing is realized, we expect realized BOE prices to be higher than last year supporting stronger segment adjusted EBITDA. And with that, I will turn the call over to Joseph W. Craft for his comments on the market environment and our outlook. Joseph W. Craft: Thank you, and good morning, everyone. Thank you for joining the call today. Alliance Resource Partners, L.P. delivered a solid first quarter with adjusted EBITDA exceeding our internal target due to record BOE volumes and higher commodity prices that increased oil and gas royalties revenues. Our coal operations results were generally in line with our expectations despite weather-related shipment disruptions and the planned extended longwall move at Hamilton. As Cary said earlier, we expect the first quarter shipment disruptions tied to winter storm burn and subsequent high water conditions to be recovered over the balance of the year. During the quarter, our teams executed well across the portfolio, including health and safety results that rank as one of our best quarters over the past five years. In the Illinois Basin, increased production at Riverview and Gibson South helped offset the lower production we expected at Hamilton as a result of the planned extended longwall move. In late March, we also successfully completed the final phase of our multiyear Riverview to Henderson County minor unit transition, bringing the Henderson County mine up to its planned full production capacity of six super sections, and Riverview is now positioned to operate three super sections moving forward. In Appalachia, Tunnel Ridge returned to steady longwall production with production increasing approximately 28% compared to both the 2025 quarter and the sequential quarter. Operationally, these results reflect the value of the recapitalization work we have done across the portfolio over the past several years. Those investments are helping us realize productivity gains, access new reserves efficiently, and maintain a low-cost operating base to serve our customers’ needs well into the next decade. Looking more broadly at the market, several themes shaped conditions during the quarter. First, winter storm firm and the extended freezing weather across the Eastern United States once again highlighted the critical role coal plays in maintaining grid reliability during extreme weather. According to America’s Power, coal-fired generation in several Eastern regions operated at capacity factors approaching 80% during peak periods, materially outperforming natural gas and renewable resources when electricity demand was highest. While storm-related incremental coal burn did not fully offset milder conditions throughout the quarter, utility stockpiles generally remain aligned with our burn projection entering the year, and summer weather will ultimately drive spot market activity for the balance of 2026. Second, the conflict involving Iran briefly improved the previously quiet export market. In the weeks following the conflict, traders reacted quickly to dislocations in API2 pricing, allowing Alliance Resource Partners, L.P. to capitalize on a narrow window for export sales by securing 2.0 million tons of commitments to be delivered over 2026 and 2027. While API2 prices have since softened, the conflict has contributed to higher global oil prices which continues to be supportive of our oil and gas royalty segment. Beyond these shorter-term market dynamics, we continue to see longer-term structural support for coal-fired generation. Load growth remains one of the most significant forces reshaping U.S. power markets, and importantly, it is becoming more tangible. According to S&P, over 100 gigawatts of data center demand is now under contract, with a significant concentration in the Eastern United States. Execution and timing remain the key variables. The magnitude of this commitment represents a clear inflection point. The need for reliable, fuel-secure generation is becoming better understood across the grid, emphasizing the importance of cogeneration capacity, and justifying the decisions to invest capital in the existing coal fleet to keep that capacity running for much longer than anticipated three years ago. Additionally, I would highlight that we are encouraged by a few recent policy developments that also improve the outlook for coal-fired generation. EPA actions on CCR and MAT during the quarter moved the regulatory framework in a more practical direction, lowering compliance costs, increasing operating flexibility, and reducing uncertainty for coal plants. We believe these changes support the reliability and affordability of dispatchable power, and are constructive for our utility customers and for Alliance Resource Partners, L.P. We applaud these and the administration’s continued deregulation efforts. Turning our attention to our royalty segments, our oil and gas business delivered another record quarter driven by growth in volumes from increased drilling and completion activity by our operating partners and contributions from recent acquisitions. With the portfolio unhedged, changes in commodity prices directly impact our realized pricing, underscoring the segment’s operating leverage and cash flow potential. We also continue to grow the portfolio through disciplined capital deployment, investing $16.2 million in acquisitions during the 2026 quarter, and we remain encouraged by a constructive pipeline of additional opportunities. Taken together, these factors continue to support demand for reliable, dispatchable generation—an environment that favors coal producers with scale, contracted volumes, and low-cost reserves. Importantly, our oil and gas royalty segment gives us a second earnings engine that is not weighed down by drilling and operating capital cost, and benefits directly from changes in commodity prices. Demand growth for natural gas and stable demand for domestic oil production continue to reinforce our strategy of reinvesting all after-tax cash generation by our oil and gas royalties into expanding our minerals position. In closing, we believe Alliance Resource Partners, L.P. is well positioned as we invest in this growing energy landscape. Reliable baseload generation, disciplined capital allocation, and operational execution remain at the heart of our strategy. We are committed to investing in opportunities that are strategic to our core businesses, maintaining a strong balance sheet, and returning capital to our unitholders. That concludes our prepared comments and I will now ask the operator to open the call for questions. Operator? Operator: Thank you. We will now open the call for questions. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Cary P. Marshall: Thank you. Operator: Our first question comes from the line of Nathan Pierson Martin with The Benchmark Company. Please proceed with your question. Nathan Pierson Martin: Joe, you noted the Iran conflict briefly opened the U.S. export thermal valve. Alliance Resource Partners, L.P. contracted nearly 2.0 million tons, I think. So should we assume now that that valve is closed, or could there be more opportunity? And then maybe can you remind us what API2 price range Alliance Resource Partners, L.P. needs to incentivize sales to that export market? Thanks. Joseph W. Craft: Yes. Currently, I would say that the domestic opportunities are preferred over the export market. So when we contracted for these volumes, API2 was in a minimum $130 up to $140. It, you know, peaked. Historically and really currently, even with domestic prices—and really it depends a lot on transportation—but primarily, that number is around $120 is where our preferred option would be on how the export market would compare to the domestic market that we see. So I would say the answer is $120. We do believe that with the uncertainty, knowing exactly what is going to happen there, that there still could be possibilities of increased export opportunities. You know, we are sort of in a shoulder period. So when we get to the summer and we have higher demand for cooling demand, there is a potential that we could see that window open again. Our current posture though is to really focus on opportunities that are available to us in the domestic market. So at this moment in time, that is where our guidance is projecting us to be for 2026 and 2027. Nathan Pierson Martin: Okay. Appreciate that, Joe. And that kind of gets into my next question. We talked about largely a more mild winter year over year despite winter storm fern and, you know, the deep freeze that followed. You know, what are you hearing from your customers as far as potential demand as we head into the summer? You made the comment that those evaluations are occurring now. I think you said summer weather will drive spot activity likely. So could we be in a position where utilities could even flex down if the summer is not very hot? Would be great to just get some additional thoughts there. Joseph W. Craft: I think that right now, we are seeing our customers pretty much—you know, we have four or five different solicitations that are currently either in the process of being evaluated or RFPs that are going to happen this month that we anticipate. So we are seeing our customers going out and looking to add to their position for 2026 and then going forward on a longer-term basis. We have reflected in our guidance what we believe any downside optionality would present itself. So right now, we do believe that there is demand for our unsold position to where we should be in a position to be able to sell our production. Weather will be dependent. I think most projections I am seeing or most forecasts are projecting that the summer would be warmer than normal, which would be constructive for demand in the second half of the year. Nathan Pierson Martin: Got it. Thank you for that. And then finally, PJM was in the headlines a couple times over the last few months regarding a possibility that the region could experience a power shortage over the next decade or so as data center growth accelerates demand there. More near term, though, I believe PJM was seeking 15 gigawatts of new power supplies in an emergency backstop there to address potential shortages as early as summer ’27, I think it was. So, Joe, would just be great to get your thoughts around what you are hearing there, conversations maybe that are occurring within that arena, how Alliance Resource Partners, L.P. could possibly participate. Joseph W. Craft: Yeah. As you said, there is a lot of discussion going on in PJM on trying to understand what the markets can do to ensure we have reliable capacity on a going-forward basis at the same time trying to lower cost as much as possible. So there have been a lot of different ideas that have been floated relative to how to ensure that the data center demand and the increased generation capacity is paid for by the data centers. As we try to understand that dynamic, PJM primarily is trying to weigh how do we protect that cost structure but at the same time ensure we keep the existing capacity—coal capacity—viable and available for future demand. So it is hard to predict. I think that we still are of the view that the capacity payments that we have seen recently are going to continue for the next several years because the demand is such that we must keep every coal plant, every gas plant, all generation online to meet that demand, because trying to build new construction to meet that demand is—it is just not moving as fast as it needs to. So when we think of the power capacity, we need everything that we have got available today. And I am speaking more from an eastern coal producer’s perspective that is selling coal to the Eastern markets. We do believe that the existing capacity must stay online. We are seeing announcements continue to try to extend the life of these plants beyond—some plants were designed to close in 2028, and we are hearing more and more that are announcing staying open to 2034 as a minimum. So we just think that is going to continue, and the pricing construct that PJM comes up with is going to have to support that conclusion in our view. Nathan Pierson Martin: All right. Very helpful, Joe. I will pass it on. Appreciate the time, and best of luck in the second quarter. Operator: Our next question comes from the line of Matthew Key with Texas Capital Bank. Please proceed with your question. Matthew Key: Good morning, everyone, and thank you for taking my questions. I wanted to start just kind of on costs in Appalachia. Obviously, the current guidance implies an improvement over the remainder of the year. However, I know you have the longwall move at Tunnel Ridge. So how should we be thinking about costs in the second quarter? And then I imagine the majority of the improvement would be more back weighted to the ’26. Is that fair? Cary P. Marshall: Yeah, Matt, that is fair. In terms of your question around Appalachia, in particular at Tunnel Ridge, we did have a longwall move this quarter. We have already completed that longwall move, so that was accomplished in the first week in April for the most part. So that longwall move is done. It will modestly impact what the quarter is around Appalachia overall, but for the most part, all the longwall moves in Appalachia are completed, so as we look at the balance of the year, we do expect those operations to continue to run well throughout the balance of the year. The longwall has started up well since then, and so productivity and production has been good as a result of that. So we do anticipate, as you mentioned, costs coming down. They will be a little bit higher as we look at Q2 than Q3 and Q4, but you should see fairly meaningful reduction in cost because you are going to have quite a bit more of Tunnel Ridge sales volumes in this quarter versus what we had in Q1. And so we are anticipating—if you just kind of take a look at the volume cadence for the rest of the year from where we were versus the first quarter—we do expect volumes to jump up maybe around 15% or so just in Appalachia, and that should remain fairly consistent for the final three quarters of the year. And so you will see a positive benefit on cost that will be coming down. So we do anticipate a fairly meaningful cost reduction in Appalachia, to the tune of it could be somewhere in that neighborhood of 15–20% quarter over quarter. Matthew Key: Got it. No, that is super helpful. And I want to just touch on major capital allocation priorities in 2026. Obviously, we expect more investment in the oil and gas royalty business this year than maybe the last couple of years. But obviously, Gavin has been a major for you guys. So I want to just see if you could provide any color on what you are seeing in potential acquisitions on the power side. Obviously, as you mentioned in your prepared remarks, there have been a lot of positive changes with the MAT adjustments and that. So does that incentivize you to make, you know, potentially a shot on goal there on the power? And how are you balancing kind of those two major initiatives? Joseph W. Craft: Yes. We are continuing to look at the oil and gas segment. As I mentioned, we are committed to returning our capital—whatever after-tax cash deployment is there—and the last couple of years, we have actually been short of that. So there is the potential to invest more in oil and gas if the right underwriting standards can be met for that. On the power side, we have been very pleased with our investment in Gavin. We continue to believe that demand for energy from coal-fired generation is necessary, like I mentioned a few minutes ago. So if there are those owners of coal plants that are interested in divesting those, we are definitely interested in participating in that on a going-forward basis. So if there are opportunities, yes, we would allocate capital to those two areas of opportunities as we look at those being opportunities for us to grow our business. Matthew Key: Got it. Well, I appreciate the color and best of luck moving forward. Cary P. Marshall: Thank you, Matt. Operator: Our next question comes from the line of Mark Reichman with Noble Capital Markets. Please proceed with your question. Mark Reichman: Thank you. Just to follow up on that last question on the capital allocation. When you think of your coal operations, your royalties expansion, and then your emerging investments—whether that be Gavin or Matrix or some of the others—how are you thinking about that in terms of you think you would go beyond just reinvesting the oil and gas minerals cash flow to fund growth? Do you think you would go beyond that? And just how do you kind of think about the returns across those different areas? Or maybe the way to frame it would be what is your hurdle rate or your criteria for each of those areas? Joseph W. Craft: Yeah. I think that, as we look at the pipeline, we mentioned that we did $16 million in the first quarter. We did $14 million in the fourth quarter. So that is sort of the opportunities that are presenting themselves in what we call the ground game. We have not seen very many packages for larger acquisitions come to the market. I think that it is difficult to understand—I think, from some of the sellers—it is difficult to understand exactly where the war premium is going to be, and so a lot of people that have large portfolios are enjoying pretty high current pricing. So is it possible? Yes, it is possible. Do we anticipate that right now? We are not anticipating that. If you could factor in the past two years in addition to this year, if we just look at those cash flows that we have available to invest—what did you have another part of the question I did not answer? Mark Reichman: Well, I was just also thinking beyond maintenance capital for coal operations, and then of course you kind of answered the oil and gas royalties piece, but then also the emerging investments. What is your criteria or your hurdle rate, or maybe how should investors think about returns across those areas? Joseph W. Craft: Yeah. I think that they are totally two different investment time horizons. On the coal side, we would expect to try to get our cash flow back on a shorter time period—get a payback period at a shorter time period—than on oil and gas. On all our oil and gas opportunities that we look at, most of them are 15–20 years economic life whereas a coal asset is probably 10. So when you think of it that way, that requires you to get a higher return on a coal investment than typically what our hurdle rate would be on oil and gas, and oil and gas is just totally dependent on the amount of PDP near-term cash flows that are identified. So the returns are anywhere from 15–20% depending on the risk profile and the timing of the cash flows that we evaluate on the mineral side. Mark Reichman: Oh, that is helpful. You know, the first quarter results actually came in above our expectations, but I do want to ask on the digital assets. You know, when Bitcoin is going up, that is great. When it is going down, it could be a bit of a distraction. And I was just wondering—I mean, it is not hugely significant to your overall operations—but how are you thinking about that business strategically? I mean, are there some strategic intelligence or advantages that you gain from operating that business beyond the gains and losses that cause you to want to sustain those operations, or just how are you thinking about the Bitcoin operations? Joseph W. Craft: Yeah. We do look at what we believe that projected price will be. We are seeing some rebound in that. I think one of the catalysts could be the Clarity Act that is being considered by Congress this summer. We are seeing, you know, Chairman Worsch in his confirmation hearing talked about how Bitcoin is an asset and a class that he factors in. We are seeing the administration being very supportive. So we do believe that the upside pricing is significant enough that we should hold on to what we have. At the same time, it is opportunistic in one sense, but I think as we look at what it costs us to mine and the position of where we are, we think there is definitely more upside than there is downside. We are looking at the ETF markets, and if you look at the cash flow that is going into the ETF markets, we have seen more inflow of cash—when it was dropping, you saw a lot of outflow—but you are now seeing more inflow into those markets. And again, we are of the view that it has got more upside than downside and therefore we are holding. Mark Reichman: Okay. And then just on the overall results, so you are expecting a stronger second half. You have already kind of talked about the drivers of that, both on the revenue side and the cost side. Is the second quarter—I mean, you are not expecting quite as strong as say the third quarter. That is just kind of a transition to the stronger second half? Cary P. Marshall: Yes, Mark. That is fair. If you look at our overall sales volume, second half should pick up. Hamilton does come online, as I mentioned in my prepared remarks, in May. And so then with no additional longwall moves either at Hamilton or Tunnel Ridge, certainly the back half of the year we are anticipating to be quite a bit stronger than the first half. And so, as you mentioned, the second quarter will kind of be a transition to that because Tunnel Ridge is beyond the longwall move—it will essentially be running virtually the entire quarter—and then Hamilton, as I mentioned, will transition and then begin operating in May. Mark Reichman: That is very helpful. Thank you very much. Operator: Our next question comes from the line of Michael Matheson with Sidoti. Please proceed with your question. Michael Matheson: Morning, and congratulations on the quarter, gentlemen. Joseph W. Craft: Thank you, Mike. Michael Matheson: Turning to my questions, I noticed that the price for Appalachia coal came in above $74, which is above your guidance, and yet guidance remains unchanged. So was pricing in Q1 just a reflection of—or rather your guidance for the remainder of the year just a reflection of—the roll off of old contracts? Joseph W. Craft: Yes. I think that on a going-forward basis, we had the Metiki situation where those sales contracts are rolling off. We did anticipate when we issued the warrant that the contract we had would be totally sold in the first quarter. Some of that has gotten extended beyond the first quarter. But what you are seeing is the lack of that higher-priced contract being in the market in the second half of the year, including the second quarter. So you are seeing, back to what Cary said earlier, a larger percent of Tunnel Ridge production, which means lower cost, but it also means lower revenue compared to what we had at Metiki—higher cost and higher revenue—before the closure of that operation. Michael Matheson: Got it. Thank you. Looking at CapEx in the quarter, on a run-rate basis, it ran about 25% higher than the high end of your guidance. Is that just seasonality, or were there special factors involved? Cary P. Marshall: When you look at the quarter, it was higher. CapEx came in a little bit over $95 million for the quarter. I will say, included within that, we did purchase about $15.5 million of coal reserves within that $95 million number. So if you back that out, it is a little bit higher than what that run rate is. But if you normalize that out, Michael, I think that will account for quite a bit of that difference. Michael Matheson: Okay. Great. Again, very helpful. One other question. I noticed that there were no outside coal purchases in this quarter, unlike much of 2024–2025. Can we expect the same for the balance of the year, or would outside purchases come back into play? Cary P. Marshall: Yeah. Our expectation is no additional outside coal purchases. That tied directly to our Metiki operation. Joseph W. Craft: Right. Okay. Michael Matheson: And one last question if I could squeeze it in. The other income line was $10 million in the quarter, unusually high for you. What drove the big increase? And what should we expect in other income going forward? Cary P. Marshall: Yeah. I think going forward—it is a good question—I think going forward, essentially more in line with where we have been historically, which has just been very minimal other income flowing through that line item, if not a little bit on the expense side of it. For the quarter, we did have a favorable actuarial adjustment that is flowing through that line item. That is about half of what that total is. It is associated with some of the black lung liabilities on our balance sheet. So we did have a favorable adjustment there. The other piece of that relates to one of our other growth investments associated with Infinitum. We did have a favorable adjustment to the valuation of our holdings of Infinitum—just a shade under $4 million associated with that. So those two are the lion’s share of what you see there. We do not anticipate those occurring on a regular basis, so I would normalize those out going forward. Michael Matheson: Great. Very helpful. Well, congratulations again, good luck in the coming quarter. Joseph W. Craft: Thank you, Michael. Operator: Our next question comes from the line of Ed Easton with The Easton Group. Please proceed with your question. Ed Easton: Good morning, gentlemen. Thank you very much for the way you run the business. I love the transparency and the way you conduct everything by just talking about it on the quarterly calls. My question is, it looks to me like most of our capital expenses—the big ones—are kind of a little bit behind us, and the operational should be going down a little bit. What would you think about buying back stock and what do you think about maybe increasing the dividend as that goes forward? Joseph W. Craft: You know, we have evaluated that over time. I think that right now, we are focused on capital allocation and, as Cary mentioned, we are 1.0x this quarter. We need to get our distribution coverage ratio more in line with an expectation of 1.2x to 1.4x on a going-forward basis before we would consider either of those—an answer to do either a buyback and/or an increase in distribution. Joseph W. Craft: Well, thank you. Ed Easton: I am very proud to be a shareholder and I like the way you run the business. Joseph W. Craft: Thank you. Appreciate it, Ed. Operator: We have no further questions at this time. I would like to turn the floor back over to Mr. Marshall for closing comments. Cary P. Marshall: Thank you, operator, and to everyone on the call, we appreciate your time this morning and also your continued support and interest in Alliance Resource Partners, L.P. We look forward to speaking with you again when we report second quarter financial and operating results. This concludes our call for the day. Thank you. 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: Ladies and gentlemen, thank you for joining us, and welcome to the LendingClub Q1 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Artem Nalivayko, Head of Investor Relations. Please go ahead. Artem Nalivayko: Thank you, and good afternoon. Welcome to LendingClub's First Quarter 2026 Earnings Conference Call. Joining me today to talk about our results are Scott Sanborn, CEO; and Drew LaBenne, CFO. You can find the presentation accompanying our earnings release on the Investor Relations section of our website. On the call, in addition to questions from analysts, we will also be answering some of the questions that were submitted for consideration via e-mail or through the Say Technologies platform. Our remarks today will include forward-looking statements, including with respect to our competitive advantages, demand for our loans and marketplace products for future business and financial performance. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are described in today's press release and earnings presentation. Any forward-looking statements that we make on this call are based on current expectations and assumptions, and we undertake no obligation to update these statements as a result of new information or future events. Our remarks also include non-GAAP measures relating to our performance, including tangible book value per common share and return on tangible common equity. You can find more information on our use of non-GAAP measures and a reconciliation to the most directly comparable GAAP measures in today's earnings release and presentation. Finally, please note all financial comparisons in today's prepared remarks are to the prior year period unless otherwise noted. And now I'd like to turn the call over to Scott. Scott Sanborn: All right. Thank you, Artem. Welcome, everyone. We had a great start to 2026, delivering 31% year-on-year growth in originations to $2.7 billion, while achieving record pretax earnings of $67 million and a return on tangible common equity of 14.5%. We're not just growing, we're growing profitably. In addition to the strong financial results, we're also delivering our key strategic priorities, including expanding into the new home improvement vertical, driving AI-enabled operating efficiency and introducing the upcoming rebrand to Happen Bank. Our new brand better reflects what we have become and why we exist to clear the way for people going places. Happen Bank is centered around our members who we call the motivated middle, millions of high FICO, high income consumers who are digitally savvy, value conscious and focused on making progress. They are active users of credit and are looking for products that deliver reliable value, are easy to understand and are effortless to use, products that clear the way for what's next and help them make it happen. That's exactly what we're designed to do, and it's why we've been successful in attracting and retaining this desirable audience. Feedback from members, prospects, partners and employees has been enthusiastic because the brand speaks not only to our broad ambitions but also to our promise. Beyond that, it also signals a clear visual and emotional differentiation from tired conventional banking norms. The motivated middle used credit intentionally as a strategic tool to achieve meaningful life goals, and they're just as intentional and disciplined in how they pay it back. Our focus on this customer supported by our advanced underwriting models and enormous data advantage has allowed us to sustain more than 40% credit outperformance relative to our competition for more than 5 years. That translates to meaningful value for our members and compelling returns for our marketplace investors. These strong returns are supporting growth in our marketplace with new buyers coming on board across all of our sales channels. Despite the noise in the environment, we remain oversubscribed with an ability to sell more loans than we are generating. And average loan sales prices improved further in the quarter as it has in 8 of the last 9 quarters. Our strong funding and proven ability to underwrite loans through a seamless experience is extensible to other categories where the motivated middle is able to make responsible use of credit. Through our major purchase finance business, we're increasingly present with them at the point of decision, whether they're getting braces for their kids or trying to start a family with fertility treatments, we provide seamless embedded financing supported by our proprietary underwriting to generate affordable payment options for the member and immediate funding to the provider. That model has proven successful in driving meaningful growth with strong credit outcomes. In fact, major purchase finance delivered its third consecutive quarter of record issuance. We're now bringing our powerful capabilities to bear in the $0.5 trillion home improvement market, where we believe we have a clear right to win. As of this month, we started underwriting and issuing home improvement loans through our inaugural partnership with Wisetack, an embedded platform that reaches over 40,000 contractors. The benefits are clear. Homeowners get instant offers in real-time approvals that allow them to make their projects happen, and contractors get timely funding and better close rates, especially on larger projects. Home improvement represents a powerful new opportunity to attract, delight and engage the motivated middle in moments that matter and allows our members to use credit responsibly to add value to their home. Beyond Wisetack, we're seeing strong interest from additional partners, which gives us confidence in the category's growth over time. As we add new partners, the Mosaic code base we acquired last year will allow us to deliver our proprietary capabilities through rapid onboarding, integration and management of direct relationships with contractors and partners. Our lending business delivers meaningful value to the motivated middle, an average 700 basis point savings on credit card refinancing and average $2,500 lifetime savings on auto refinancing and affordable point-of-sale financing for life's major purchases. Our deposit offerings deliver similar value. Our award-winning level of checking and savings accounts are designed to align positive financial outcomes for members with positive financial outcomes for LendingClub, a win-win dynamic that's all too uncommon in traditional banking. For example, level up checking rewards borrowers with 2% cash back for on-time loan payments, encouraging good financial behavior and benefiting credit performance. We've seen a 6x increase in checking account openings over our prior product with 60% of those accounts coming from borrowers. We're also seeing a tenant year-over-year growth in the number of loan payments coming from LendingClub checking account. Our level of savings account rewards ongoing savings behavior with a higher rate. It might surprise you to know that nearly 1 in 4 of these accounts are being opened by borrowers. Furthermore, for borrowers who have paid off their loan, they've built an average savings of about $19,000, which represents tremendous financial progress for members who originally came to us with roughly that same amount in credit card debt. You can see how our lending and banking products work together in a system aligned by design to deliver more value for both members and our business. Now let me turn to how we're leveraging AI for improvements in both efficiency and customer experience and the tangible benefits we're already seeing. Over 90% of loan issuance is now fully automated, requiring no human intervention. We have reduced the time needed to submit a debt consolidation application by nearly 60%, we delivered record low production cost per issued personal loan in the first quarter. We have numerous AI initiatives underway across the organization and our pace of AI-enabled change is accelerating and we expect that to result in continuing improvements in both experience and operating efficiency. In close, our year is off to an outstanding start. We're delivering strong growth and profitability, continuing to outperform on credit, expanding into new markets and preparing to launch a brand that reflects the true scale of our ambition. At the same time, we remain mindful of the broader environment. Our emphasis on disciplined underwriting, responsible growth and focused and efficient execution positions us well to navigate uncertainty while continuing to deliver for our members and shareholders. Before turning it over to Drew, I want to thank the LendingClub team for making it happen. It's an exciting time to be at the company with a new brand on the way, an incredible new headquarters building in San Francisco and a lot of momentum in the business. Employees are buzzing, and we're seeing that excitement reflected in our results. Okay. Over to you, Drew. Andrew LaBenne: Thanks, Scott, and good afternoon, everyone. 2026 is certainly off to a dynamic start. Let's get into the details of our first quarter. . Turning to Page 11 of our earnings presentation. Loan originations grew by 31% to $2.7 billion, above the high end of our guidance range. All of our consumer businesses showed strong growth, supported by the compelling experience and value we deliver. Our industry-leading credit performance remains a key differentiator where we have continued our outperformance across 5 years of quarterly vintages. This is a key reason we were able to sell loans without any need to provide credit enhancements or loss protection. Now let's turn to revenue on Page 12. Net interest income increased 18% to $176 million, another all-time high, supported by a larger portfolio of interest-earning assets and continued funding cost optimization. Turning to noninterest income. As a reminder, with our move to fair value option for all newly originated held for investment loans, noninterest income now includes the loan origination fees, which were previously deferred under CECL and have a positive benefit to revenue. Conversely, the impact of loan sales prices in credit now reduces noninterest income in the fair value adjustments line. Impacts from credit previously would have been captured as provision expense under CECL. As we previewed last quarter, total fair value adjustments were approximately double fourth quarter 2025 levels driven by 4 factors. First, more volume receiving a day 1 fair value adjustment as we transition 100% of all newly held for investment originations to fair value option at the start of the year. Second, a greater mix of longer duration major purchase finance loans, which carry a higher discount rate and therefore, a higher day 1 fair value adjustment. Third, larger date to fair value adjustments, driven by a higher average balance of loans carried under fair value during the quarter. Lastly, the higher benchmark rates observed later in the quarter also increased fair value adjustments which were not expected when we provided our outlook in January. These higher benchmark rates increased the discount rate on our held-for-sale portfolio to 7.3% from 7.1% at year-end. For the held for investment portfolio, the discount rate was 7%, reflecting the specific product composition of that portfolio. With all this in mind, noninterest income was $76 million, up 12% year-over-year and down sequentially due to the move to fair value option despite marketplace sales prices improving and solid credit performance. The sequential reduction was more than offset by lower provision, which I will cover later. A useful way to evaluate revenue performance under this accounting transition is risk-adjusted revenue or revenue less provision for credit losses which grew 58% to $252 million due to the revenue growth I just described and the materially lower provision for credit losses under fair value options. For net interest margin on Page 14, I will refer to the sequential changes which provide better context on the quarter. The net interest margin expanded to 6.3%, up 30 basis points over the prior quarter primarily driven by 2 factors: first, lower interest expense contributed approximately 20 basis points, reflecting a 13 basis point benefit from lower deposit costs plus an additional 7 basis points from a lower day count this quarter. Second, we aligned our interest income recognition on the previously purchased held for investment fair value portfolio to the same methodology as the newly originated loans under fair value. Previously, credit impact was coming through the average yield and will now come through fair value adjustments. This benefit was approximately 14 basis points of net interest margin and explains the sequential yield increase in our loans held for investment at fair value. With the market now predicting no additional fed rate cuts this year, we expect our net interest margin on a go-forward basis to return to around 6% as we progress through 2026. Now let's move on to credit where performance remains excellent. As Scott mentioned, we continue to outperform the industry with delinquency rates well below our competitive set. Provision for credit losses was less than $1 million, reflecting the impact of our move to fair value option accounting for newly originated held for investment loans, combined with strong credit performance on the remaining legacy portfolio under CECL accounting. Our net charge-off ratio for the total held for investment portfolio improved meaningfully to 3.5%, down from 6.1% driven by continued strong performance as well as portfolio aging dynamics, which will normalize over time. It is important to note that these charge-offs and delinquency metrics now include all held for investment loans on the balance sheet, inclusive of both fair value and CECL portfolios for all reported periods. We're continuing to improve the profitability of the company, and that is allowing us to invest in critical initiatives to drive future growth. These include developing new marketing channels, supporting the rebrand and building out home improvement. Overall, expenses on Page 15 were $185 million, up 28% year-over-year. The majority of the increase was due to higher marketing spend reflecting both our continued investment in paid acquisition channels to drive originations growth as well as the impact of fair value option under which marketing expense for held for investment loans is now fully recognized at origination rather than deferred and amortized. Of the $10 million sequential increase in marketing spend, the impact of the accounting change was approximately $7 million. Compensation and benefits expense was up 12% year-over-year, reelecting headcount growth to support new business verticals, including home improvement and continued expansion in our core businesses. Other noninterest expense also increased 13% year-over-year. Our pretax profit margin reached a new high of 27%, reflecting a strong pull-through of revenue growth to the bottom line. We're excited about our step-up in profitability and our capacity to reinvest in the future growth initiatives while growing profit margin. Overall, pretax net income was $67 million, which more than quadrupled compared to a year ago and reflects a new high watermark for the company. Diluted earnings per share was $0.44 above the high end of our guidance range and more than quadrupled from the prior year. Our return on tangible common equity was 14.5% and our tangible book value per share increased to $12.49. Turning to the balance sheet. Total assets grew to $11.9 billion, up 14% year-over-year. We ended the quarter at $10.2 billion in deposits, which was also an increase of 14% compared to the prior year, and we continue to see healthy deposit trends across our product offerings. Our balance sheet remains a competitive strength, allowing us to generate recurring revenue through retained loans while maintaining the flexibility to scale marketplace volume as loan investor demand grows. We ended the quarter well capitalized with strong liquidity and positioned to fund future growth. I'd also like to provide a brief update on the $100 million share repurchase and acquisition program we announced at our Investor Day in November. Since inception and through the first quarter, we have utilized $38 million and reduced our average diluted share count by 1.5 million shares compared to the previous quarter. Now let's turn to our outlook. We entered 2026 with a tremendous amount of momentum. Even considering the new rate outlook, our outperformance to date gives us confidence to maintain our full year guidance with the assumption of a stable consumer and rate environment. As a reminder, we were assuming 75 basis points in cuts when we entered the year, which was a tailwind for both loan sales prices and net interest margin, which we no longer expect to benefit from. For the full year, we continue to expect originations of $11.6 billion to $12.6 billion and diluted EPS of $1.65 to $1.80 consistent with the 13% to 15% near-term return on tangible common equity target we shared at Investor Day. For Q2 2026, we expect to deliver loan originations of $3.0 billion to $3.1 billion, representing 23% to 27% year-over-year growth. On earnings for Q2 2026, we expect to deliver diluted earnings per share of $0.40 to $0.45. We're pleased with our execution. Our strategy is working, and we remain encouraged by the underlying fundamentals of the business. With that, we'll open it up for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Tim Switzer with KBW. Timothy Switzer: So the first one I have is, on the announcement you guys had along with earnings about launching the home improvement loans. And your comment in there -- I know you guys have started in April, but your comment about there's additional interest from other potential partners, a significant amount. Could you maybe talk about like how large these partners are relative to Wisetack and like how quickly do you think these opportunities could be realized? Scott Sanborn: Yes. So as we mentioned, post our announcement, we have gotten quite a bit of inbound interest. I'd say there is a desire in the market for a combination of a stable bank balance sheet because there were certainly some experiences by some partners during the rate and inflation cycle that they lost funding partners. So stable bank balance sheet, combined with the flexibility of a fintech to pursue deeper integrations as well as maybe customize the product for the specific use cases and delivery channels. So we've been pleased with that. Getting the first deal live is obviously the biggest tech builds and now that those kind of pipes are laid, I'd say, implementing additional partnerships, we're anticipating will be roughly less than half the work of what we had to do to get here. I think in terms of on sizing, we haven't given any guide outside of the broader guide we gave at Investor Day of how much we think major purchase finance will contribute over the medium term. What I would say, it's is a pretty seasonal business. So we're in -- Q2 and Q3 are the big season. So it's our push internally to at least try to get a couple of these live going into Q3, so we can really learn, right? Does the product we're starting with is are applying our models to the category. But over time, we need not only the distribution but also the product features and constructs to really fully penetrate this market, things like the ability to make multiple disbursements over time or to multiple parties, the ability to have a promotional product, all of that. So I'd say the bigger contribution will really be next year. This year will be kind of laying the pipes, get them opened up and making sure we have the right product and experience for those partners to really be ready for the key period next year. Timothy Switzer: Got it. Okay. Yes, that was interesting, Scott. And then [ switching ] subjects here a little bit, looking at the marketing expense outlook, how should we think about that as you go over the course of the year? I know it's a little seasonal, but how should we think about it, I guess, as a percent of originations year-over-year? How does that change? And then are you able to put quantify at all expectations in terms of how much the rebrand and the investments associated with that and the marketing and all that will cost this year. Maybe to help us just give an idea of how some of that could fall off in '27? Scott Sanborn: Yes. So I'll start with the rebrand. We haven't broken it out separately, but what we did say and is in our outlook is there are several investments we're making this year to really lay the foundation for future growth. Obviously, the engineering and business team we're carrying on home improvement is one, which we've got to get the volume coming in to offset that. And the second is the rebrand this year, the costs around the rebrand, we'll call them primarily sort of operational in nature. We've got thousands of e-mails and call center scripts and web pages and mobile app and all of that needs to be repurpose together with some communication to the consumer. I know, Drew, you want to take kind of the broader question on marketing efficiency for the year. Andrew LaBenne: Yes. Outside of the rebrand spend, marketing should ramp roughly with volume as we go up. And as a reminder, Q2 and Q3, at least in our core personal loan business, are the strongest quarters seasonally speaking. So as you saw in our guide, we expect volume to increase and marketing to increase at similar ratio to what we're spending today. . Timothy Switzer: Great. Okay. All right. That's good to hear. And then last one for me. In terms of like the credit outlook, I know it's a little early, but have you guys seen any change in customer behavior since Iran war started and you start to see oil prices creep up? . Scott Sanborn: No. We haven't seen anything in leading indicators with the customer, again, that we're underwriting reminder we moved up credit back in '22 and are maintaining that discipline right now. That's not to say it doesn't require active management, meaning we're not static. We're always evolving and optimizing, but no broad-based kind of leading indicators we're seeing, as you can see in all the data that we're putting out there today, the consumer underwriting is continuing to look great. But acknowledge your point, which is we're still early, how long does this persist? And what what's the kind of blast radius outside of oil prices? And how might that affect the broader inflationary cycle and impact on consumers is something that we'll be carefully watching. Operator: Your next question comes from the line of Bill Ryan with Seaport Research Partners. [Operator Instructions] William Ryan: First question, I want to go back to some comments you talked about loan sales pricing improving in the first quarter. And obviously, there was a lot of action in the private credit markets during the quarter. So if you can maybe talk about that over the course of the quarter. What was the trend? Did it end a little bit better than it began the quarter at? How did it vary at all? And then what did the mix of buyers? Did that change at all during the course of the quarter? Andrew LaBenne: Yes. So Bill, what I'd say just overall is that there's been a lot of noise out there, but loan buyers have been very steady as we've gone through time. So private credit, insurance ramping up. We've definitely seen stability there, and we expect to see stability as we go into Q2 as well in terms of the amount of loans and the demand -- the 1 point I'd make on price is that all the deals that we priced in Q1 were priced before the Iran war. And so since benchmarks have moved up since then, if no change to rates from here, we would expect prices to come down solely because of the changes in benchmarks, the 1.5-year, 2-year [ point on ] treasury. And that's factored into our guidance for Q2 and for the full year as well. William Ryan: Okay. And following up on that, the retained versus sale mix, how should we be thinking about it going forward? I think obviously, you retained a bit more this quarter relative to, I think, what consensus expectations were. Is that something you're going to kind of manage with the earnings outlook that you provided? Andrew LaBenne: Yes. I think when you're looking at retained -- you're just talking about HFI retention versus the extended seasoning portfolio, right? William Ryan: Correct. Andrew LaBenne: Yes, correct. So we will put more into HFI similar to the amounts and probably a little bit increasing to what we did this quarter. Pure marketplace sales, excluding extended seasoning also increased by a small amount from Q4 to Q1. And so as we're growing issuance, we're going to look to increase both of those buckets going forward. Operator: And your next question comes from the line of Vincent Caintic with BTIG. Vincent Caintic: Going back to maybe the questions about guidance. So if I look at guidance for the second quarter and the full year, it kind of implies that earnings power remains relatively flat each quarter for the rest of this year. I was wondering if you could help us out maybe talking about that in more detail, maybe about the components of earnings growth. Like should we -- is that primarily the expense ramp-up that we should be expecting kind of with the rebrand and everything? Or is -- or if you could maybe talk about revenues or so forth as that's rolling through. Andrew LaBenne: Yes. Great. Well, listen, I think, obviously, Q1, we had some really strong results out of the gate. Some of that was aided by very solid consumer credit on the back book as well. As we go into the rest of the year, what we're looking at right now is we had come into the year assuming we were going to have 3 Fed cuts. We now assume we are going to have 0 for the remainder of the year. And obviously, that can change based on world events based on the new Fed chair, a lot of other things, but our assumption going forward is no Fed cuts. And so that's a headwind to revenue that we have to fight through. And we're -- on the flip side, we're seeing very solid unit economics in terms of what we're originating going forward, which is helping to offset that headwind. Having said all that, we're going to continue making investments in all the things we talked about in the prepared remarks. And we're only one quarter in. We still feel pretty good about the range we put out there for EPS for the full year. Vincent Caintic: Okay. Got it. And then switching gears, maybe you could talk about your share repurchase and the right capital level. So it's nice to see the share repurchase to start this quarter. if you could talk about, is this the sort of pace we should be expecting and remind us what your target levels for capital are. Andrew LaBenne: Yes. Great. No, I think -- well, this is actually our second quarter of repurchasing now -- I guess it was our first full quarter of repurchasing, but we've been in it since after Investor Day in November. And so listen, we love picking up shares at an attractive price, and we'll evaluate that going forward with the Board each quarter in terms of how we deploy capital. As far as target capital levels, we haven't put anything out there. But obviously, we've said the amount of share buyback, sort of the amount of capacity we have for the share buyback, which we view as excess capital. So we still have room in the ratios from where they're at today. The other thing I'd note is that there's some new capital rules under discussion and an NPR with the regulators that we'll see if they're passed as is. And if they are, we probably don't assume they really go into effect until 2027. But 2 of those rule changes, one, the risk weighting on consumer assets and 2 the risk weighting on senior securities are both very beneficial to our capital levels going forward. And if passed as proposed, those would free up $100 million plus of rent cap in the future, which is nothing to sneeze at. Operator: And your next question comes from the line of Kyle Joseph with Stephens. Kyle Joseph: Just wanted to follow up on the originations, as we think about some of the new products, I know you mentioned that there's an impact on the fair value mark because of some of the larger loans. But just thinking about any other impacts as the product shift primarily focused on gain on sale margins? Like what are the margins on HELOC. How do those compare to kind of the personal loan side? And how should we think about that impacting the model? Andrew LaBenne: Yes. Yes. So duration is a factor, right? If you're having an upfront mark or upfront discount on a 1-year duration versus a 3-year duration, you're roughly going to be 3x as much in terms of the mark that you're taking on that loan. So duration matters. I'd say also product structure matters as well in terms of the marks, right? If I have a product that has a larger MDR, but a lower coupon such as we could potentially see in home improvement, you're going to see that MDR come through the origination fee. but you're going to see the mark on that coupon -- on that loan with the coupon come through a fair value. So there's different dynamics for the different products and mix will certainly play a factor as well in terms of how those marks evolve in the portfolio over time. Kyle Joseph: Got it. Very helpful. And then just a quick follow-up on the NIM. I know you guys talked about some tailwinds this quarter from the transition to fair value, but kind of hovering back towards that 6%. But do you still get the uplift if we're looking at it on a year-over-year basis, just trying to kind of triangulate where you're telling us NIM should be trending over the next few quarters? Andrew LaBenne: Yes. Well, the first thing top line to take away from the comments is if the Fed is on pause for [indiscernible] rates going forward, we will trend down towards 6% throughout the year based on what we know today. What's happening year-over-year is, first of all, a very positive benefit in terms of deposit funding cost. how we responded to fed cuts and how that's flown through the total interest-bearing deposits and liability line, 31 basis point improvement year-over-year on that. And then the one-timer on the loans HFI at fair value, that 12.62% yield, we will -- that effect will continue, but that portfolio with the legacy portfolio is shrinking. So that benefit will come down over time. That's all factored into the move back down to 6, all else being equal. Operator: And your next question comes from the line of David Scharf with Citizens Capital Markets. David Scharf: Just a couple more to add here. First off, I just want to make sure on the fair value mark, going forward, obviously, you highlighted higher benchmarks is going to be a little bit of a headwind versus the 3 rate cut assumption prior. But on the flip side, is there any -- was there any change to the actual credit related fair value mark? Obviously, the amortized cost portfolio outperformed on provision notably. And just trying to get a sense how we should think about potential positive marks just on credit going forward within the net change in fair value line? Andrew LaBenne: Yes. I'd sum it up as all credit is looking good. The back book which is really the legacy CECL portfolio is where we saw the most outperformance, the newer vintages, which are a little bit of CECL portfolio, but mostly the fair value portfolio. It's still early days on those and credit looks good, but it -- it takes about 6 to 7 months on book before we get more firm read on the vintage in total. But in the quarter, yes, there was no substantial moves. David Scharf: Got it. No, no, that's helpful color. And then just lastly, on marketing and marketing channels, you've talked about expanding investment in more channels. You highlighted it back in the Investor Day. I hate to toss around the buzz phrase of the week of the month of the quarter. But could you talk a little bit about how you're thinking about agenetic either commerce or lending and specifically, whether the company how it's approaching investments with AI-type search versus traditional? And specifically, I was just typing in how do I get a $10,000 personal loan and it just gives you the typical Google paid search listing of whoever shows up, then I said what's the best $10,000 loan for me and it did the typical [ NERDWallet ] shows up. But going forward, when somebody types in, a year from now, what's the best $15,000 personal loan for me into either Chat or Claude, can you talk us through either some of the risks or opportunities you see in terms of these AI engines making more qualitative assessments and not just traditional search assessments? Scott Sanborn: Yes. So it's a great question. And while it is a buzzword, it is also -- that does not take away from the fact that the changes underway are very real, and we are pursuing them, as I mentioned in the prepared remarks, across really all departments and all aspects of the company. Specific to marketing, I would say we feel, on balance, pretty well positioned there because if you think about our value proposition, our big obstacle is inertia, right? It is not the direct people we're competing with, it's all the consumers who aren't taking action. Like why would you leave your money in a money center bank account when we're going to pay you 400x more? And why would you carry a balance on a credit card when we're going to save you 700 basis points, right? So inertia is really the thing we're trying to overcome. So if the agents evolve not only to replace Google search, but potentially to act on behalf of consumers, we think we're a net beneficiary. But you're right, it is as a percentage of web traffic right now, it is quite small. That said, it is high intent. And so as that percentage grows, we need to be there for it. All of the protocols are not established exactly what the -- as I'm sure you know, there are many, many, many firms that are engineering themselves around how to optimize for Google's ever-changing algorithm that same thing will be true for agentic search, and we are going to be going after that the same way we will sort of core organic search and think we're set to benefit. Right now, that means likely increasing the amount of content we produce to get out there. We're already in the site. We're obviously in the places you mentioned. We're in NerdWallet Best Of, I think, on both sides of our balance sheet. So we're already there. But we need to be getting some of our content out on our own to help with that. So we'll be -- we're pushing behind that throughout this year. That's definitely on our plan. Operator: And your next question comes from the line of Giuliano Bologna with Compass Point. [Operator Instructions] Giuliano Anderes-Bologna: Congratulations on the great results. I think I'd be curious about, and I realize you've touched on marketing, but I'm curious when you think about reopening the marketing channels that were previously dormant and seeing the yield kind of improve over time in those channels, I'm curious where you think you are in that kind of evolution of reopening dormant channels? And how much more room there is to continue pushing those channels and to continue expanding into those channels and getting -- improving your marketing efficiency? Scott Sanborn: Yes. Thanks, Giuliano. So I would say we are exactly on track. We've completely rebuilt the team. We have overhauled the technology infrastructure, the data, tracking attribution. And as I think I shared before, kind of marching in order of fastest path to revenue based on how quickly out of the gate will get to success. So for something like direct mail, we're on the X version of the response models creative. That's like a core part of the program. Paid search is, I'd say, up and humming and we're still in the development mode for things like digital and connected TV and testing our way into those. But I'd say that we still feel like there's a decent amount of upside in front of us in all of those channels. What I'd also say is we're feeling good about our product initiatives and product road map. I touched on the call that we're seeing strong conversion rate and great customer feedback and how we're continuing to evolve the product experience to really streamline it, make it much, much easier. The lower friction process is just pulling more people through the door, and the people we want to have, we're continuing to optimize in this environment, especially with some concerns about inflation for having control over the use of proceeds of the loan, not opting for cash, but paying off cards, paying a contractor, paying a dentist, paying a fertility doctor as opposed to just depositing money into the accounts. So our ability to make those experiences faster and easier, I think, is benefiting us as well. Giuliano Anderes-Bologna: That's very helpful. And as a slightly different question, you've obviously pushed some growth in the held-for-sale or [indiscernible] book. Is there any expectation around starting to sell down that book or keeping it flat versus growing going forward? And along the same lines, I'm curious how you think about balance sheet growth in '26. Andrew LaBenne: Yes. So definitely expect to sell out of that portfolio. And in fact, we sold $200 million out in early April to a bank that took advantage of the CECL accounting change that we had been discussing for a while. So that was a good win to -- we thought that would be a lever for banks. That was our first and hopefully more to come down the road, although I'll remind everyone, it's a process to get the banks in. So in summary, yes, Giuliano, we plan to sell out of that portfolio. I think we'll try to keep it roughly around a similar size to make sure we have inventory going forward, but it won't be -- most of the production that we keep on balance sheet will either go into HFI or it will come back on as [ A notes ] from the structured certificate sales. Now in terms of balance sheet growth, I think we're -- Correct, we're tracking right now to where we expected to be. We obviously put some growth goals out for the medium term at Investor Day and I don't see any reason why we're off track from those medium-term goals. Giuliano Anderes-Bologna: That's very helpful. And then maybe just 1 quick final one. I'm curious, obviously, with the transition to fair value. Is there much thought or kind of desire to increase interest rate hedging? And I'm just curious what your objective is there and how you're thinking about that? Andrew LaBenne: Yes. We actually did some moves on hedging this quarter and in fact, we did all -- almost all of them before rates went up with the Iran War. So that was good timing. A few of -- we now have $2 billion out in notional split between caps and swaps. And we also [ dedesignated ] our swaps, so we are under hedge accounting treatment to be mark-to-market as well. So that helps with the quarterly volatility, but really that's not what we're solving for, what we're solving for is to hedge our economic risk on the balance sheet, meaning we're hedging to keep our NIM as constant as we can at different rate environments. Operator: And your next question comes from Crispin Love with Piper Sandler. Crispin Love: Just on credit, net charge-offs improved in the quarter and your credit commentary seems positive and it has been for some time. But can you just discuss some of your expectations here and just recent performance -- recent quarters has been outperforming our expectations. And then I believe you've discussed in the past that net charge-offs may normalize to the 5% or so range. So curious on the current outlook and if that's changed at all in the current environment. Andrew LaBenne: Yes. What I'd say, generally speaking, as you saw it in the back -- the CECL back book, our charge-offs are coming in better than we expected. I note we're seasonally in the best part of the year as well in Q1 and then Q2 with tax season. So that certainly helps the metrics. And as I said in the commentary, as we've been adding to the portfolio, there is some timing on the age of the portfolio that's beneficial. So I do think, over time, we will move back up towards 5%. It will take probably through the rest of this year. And it also just depends on how we -- how and what pace we add to the balance sheet. . Crispin Love: Great. Appreciate that. And then just on AI and AI-powered automation. You were definitely early here, but I'm curious on how you're hiring and hiring needs have changed or shifted due to AI? What skill sets are you looking for most to drive the -- drive the AI at the company forward, types of people, kind of certain skill sets that you're adding or able to pull back from. I'm just curious on your philosophy here and if anything has changed, then just on the broader efficiencies you can gain. Scott Sanborn: Yes. I mean there's -- definitely, there are certain roles that are evolving quite materially. I mean, just giving a simple one because it's easy to wrap your head around would be the old way you did QA in a call center was you sampled a few calls against the checklist. The new way you do QA is AI listens to every single call, scores every single call. You know exactly why everybody called. And so the job becomes much more analytical and also much more incumbent on them not to give individual coaching, but to actually identify real customer bottlenecks and friction points. So we're actually -- there are places where near term, it creates more work in order to create less work down the road. I'd say, within places like engineering and in some of our other key areas like compliance or audit, what we're finding is it isn't so much the new talent. I mean things are changing so quickly. Assuming you're going to hire somebody who is great at applying AI to function X, but they don't know the company, they don't know our systems, they don't know our tools. What we're finding is it's more effective to identify the internal champion and kind of create capacity for them. So backfill them, if you will, so that they've got the ability to focus more on how to apply it in our environment. So we're certainly doing more of that across the company. Operator: There are no further questions at this time. I will now turn the call back to Artem Nalivayko, for a few additional questions. Artem Nalivayko: All right. Thank you, Kevin. So Scott and Drew, we have a few additional questions here that were submitted by retail investors via the Say technologies and email. The first question is on originations. So the question is, when do you plan to get back to your historical peak originations levels? Scott Sanborn: Yes. Well, we expect to get beyond our historical -- I would point you, if you haven't had a chance to see it to our IR website to look at the Investor Day materials, where we lay out a medium-term target of getting to $20 billion in annual originations, together with kind of a waterfall byproduct and initiative of how we expect to get there. So I'd say we're on our way, and we're on our way while really maintaining this credit outperformance, which we think is critical both for us and our balance sheet, but also for the marketplace buyers. Artem Nalivayko: Okay. Great. Second one, you've touched on a little bit already, which is the product road map. Any additional insights beyond home improvement that you wanted to share. Scott Sanborn: Yes. So as I mentioned on the call, we're live in home improvement. We're not done. I mean we'll never be done anywhere. We're always innovating and optimizing and exploring new ideas. But there's still quite a bit to do even on the product front there to get the right set of products to meet the individual needs. So that will really tie up a good part of our energy this year. Beyond that, you can imagine we are -- this line of business will attract a certain type of motivated middle and that's homeowners. Right now slightly less than half of our customers are homeowners coming through home improvement, there will be more given that we'll be increasing the percentage of homeowners having products that speak to homeowners, things like mortgage and HELOC will make sense for us. We plan over time to be a credit-centric bank that offers consumer lending, consumer credit products across the spectrum. That one is the logical next step. We've already started doing some testing there and have been very, very pleased with the consumer response but we're staging our investments. So that will be something we'll likely talk about once we get home improvement really up and humming. Artem Nalivayko: Okay. And the last question, any appetite for acquisitions this year and next...? Scott Sanborn: So we are always looking and connecting with the market on ways to accelerate our road map and better serve the customer that we serve. We've looked at really quite a bit over the last 12 months. We are staying disciplined on price. It's got to -- the economics have to make sense for shareholders and for the company. You've seen the transactions that we have executed Mosaic, [ Cushion AI ], Tally, have all been companies that we talked to prior to -- not all many cases prior to them achieving difficulty in us being able to acquire them, I think, at favorable prices. So I'd say we're always looking. We're open to accelerating the road map, but it's got to make financial sense. Artem Nalivayko: great. Thank you. So with that, we'll wrap up our first quarter 2026 earnings conference call. Thank you for joining us today. And if you have any questions, please e-mail us at ir.lendingclub.com. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning, and welcome to Verizon's First 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 call over to Colleen Ostrowski, Senior Vice President, Investor Relations. Colleen Ostrowski: Thanks, Brad. Good morning, and welcome to our first quarter 2026 earnings call. I'm Colleen Ostrowski and on the call with me this morning are our Chief Executive Officer, Dan Schulman; and Tony Skiadas, our CFO. Before we begin, I'd like to point you to our safe harbor statement, which can be found in the earnings presentation and on our Investor Relations website. Our comments this morning may include forward-looking statements, which are subject to risks and uncertainties. Factors that may affect future results are discussed in our SEC filings. This presentation also contains non-GAAP financial measures, and you can find reconciliations of these measures in the materials on our website. Finally, as a reminder, the results of Frontier Communications are included in our financial and operating results beginning on January 20, 2026, the date we closed the Frontier acquisition. With that, I'll turn it over to Dan. Daniel Schulman: Thank you, Colleen, and good morning, everyone. When I joined Verizon, I have a simple but ambitious goal. I wanted Verizon to reclaim its market leadership. Obviously, there are a lot of things we need to do, right, to make that happen. We need to delight our customers and put them at the center of everything we do. We need to drive consistent and fiscally responsible subscriber and revenue growth. We need to keep more of our customers, as measured by our churn rate and convert that into stronger, more predictable cash generation for our shareholders. With all of that in mind, we ended last year with our strongest quarter of mobility and broadband net adds in 6 years, and we entered 2026 with a clear set of priorities, a step function improvement in guidance and a realistic plan. Today, our first quarter results show that our turnaround is not only progressing, it is gaining momentum powered by a comprehensive transformation program that is reshaping how we operate and serve our customers. I'm also very pleased that our East unions recently ratified a new 4-year contract that we believe will enable us to better serve our customers. Let me start by saying we delivered a strong quarter across our core operating metrics, and we translated that performance into solid operational and financial outcomes, some of which we haven't seen in over a decade. I'll briefly review the key highlights of the quarter, including the impact of the network outage we experienced earlier in January. Then I'll walk through 3 key themes: how we will continue to drive healthier growth second, how we will accomplish that with meaningfully better customer economics and finally, how that leads to improved cash generation. I'll close with how these results and the transformation work underway, supporting increase in our 2026 guidance for both our adjusted EPS growth and our postpaid for net adds. In the first quarter, total revenues grew 2.9% to $34.4 billion, while our reported mobility and broadband service revenue grew below our annual guided range. Our reported growth includes a onetime pressure of 80 basis points on our wireless service revenues from customer credits and other impacts related to our network outage. We ended the quarter with momentum with March mobility and broadband service revenue growing in the middle of our guidance range, with Consumer wireless service revenue approximately flat year-over-year. We anticipate Q1 mobility and broadband service revenues will be the low point of 2026. The and we are highly confident that our forecast for mobility and broadband service revenue growth is in line with our 2% to 3% guidance for the year. Importantly, the quality of our revenue is improving. We are purposely shifting our mix towards durable recurring service revenues and away from low-margin, highly promotional activity. We are prioritizing customer lifetime value over short-term revenue maximization. The benefits of that approach are obvious when looking at the combination of positive postpaid phone net adds better churn, lower acquisition and retention costs and higher free cash flow and adjusted EPS. We added 55,000 postpaid phone net adds in the quarter. That represents an improvement of over 340,000 postpaid phone net adds versus the same period a year ago and it's the first time in 13 years that Verizon has set positive postpaid phone net adds in Q1. Both consumer and business had significant improvements in postpaid phone net adds Overall, we delivered almost 0.5 million net adds across our mobility and broadband platforms. This is a strong continuation of the momentum we established in Q4 of last year, and it is happening while we are also improving the overall quality and economics of our customer relationships. I'm particularly pleased to see the early results of our transformation efforts on our customer retention. Consumer postpaid phone churn in the quarter was 90 basis points, a sequential improvement of 5 basis points from Q4. Importantly, churn improved throughout the quarter. And in March, consumer postpaid phone churn improved further to below 85 basis points. That is a significant improvement both sequentially from Q4 and within the quarter, and it reversed the upward pressure we had seen in churn over the past several years. As expected, when we stop imposing blunt price increases without corresponding value on our customers and begin to remove friction from the end-to-end customer experience, they reward us with their loyalty. At the same time, we are acquiring and retaining customers far more efficiently. Our cost of acquisition and retention in March was down approximately 35% relative to the end of Q4 and we expect to maintain a lower cost of acquisition and retention as we look forward. I would point out that we accomplished these meaningful cost reductions while still delivering increasingly positive postpaid phone net adds versus a year ago. In other words, we are no longer predominantly reliant on expensive promotions to drive our growth. We are growing, and we are doing so in a much more disciplined, repeatable and fiscally responsible manner. We, of course, retain the flexibility and conviction to defend our base and have a large war chest, if necessary, to react to competitive moves in the market. These trends in churn and unit economics are listing, our consumer lifetime value and are already flowing through to the bottom line and to our free cash flow. I'd also point out that a lower cost of acquisition will benefit our future revenue growth as the headwinds of promotion amortization finally begin to subside. Adjusted earnings per share for the quarter were $1.28, up 7.6% year-over-year, our highest adjusted EPS growth rate in over 4 years. Free cash flow was approximately $3.8 billion, up 4% year-over-year and represents a strong start to the year. Our performance is consistent with and in a few key areas ahead of the guidance we laid out for 2026 driven by a better customer experience and operating efficiency. It is also the foundation for the capital allocation priorities we have outlined, investing to maintain our network excellence and our overall value proposition, maintaining our ironclad commitment to our dividend, steadily reducing our leverage and returning capital to our shareholders. Now let me come back to the 3 themes I mentioned earlier, healthier growth better economics and stronger cash generation. First, healthier growth. The story in mobility and broadband is that we are now consistently adding more of the right customers at the right economics. The dramatic year-over-year improvement in postpaid phone net adds over the past 2 quarters with continued momentum into Q2, all reinforce that our offers and our go-to-market strategies are working. We are leaning into converged value, mobility plus broadband, a simplified customer experience and features that matter to customers rather than chasing every promotion in the market. We are also beginning to see the benefits of our transformation efforts, which make it easier for customers to do business with us and reduce friction in their interactions with us. In fact, I'm very pleased to say that our consumer customer service team delivered its best quarter on record for customer satisfaction, driven by improved resolution, fewer handoffs and faster response times. In broadband, we continue to aggressively expand our footprint, increase penetration and position those assets as a core part of our long-term growth story. We are solidly on track to have more than 32 million fiber passings by the end of this year. We are early in the journey of fully monetizing the combination of best-in-class mobility and a growing fiber and fixed wireless access footprint. But we already see in our net adds and in our improved churn that customers value having more of their connectivity needs met by a single trusted permitter. Our Frontier integration is on track and I'm extremely pleased with the level of teamwork and focus from go-to-market execution to network integration and all with a keen focus on driving convergence and delivering on our more than $1 billion of run rate operating cost synergies by 2028. Now let me turn towards our second theme, which revolves around driving better economics. The improvements in churn, acquisition costs and retention costs are not one-off events. They are the result of specific choices we have made over the past 200 days and the early benefits of a broader transformation we have launched across the company. We have put in place an ambitious company-wide transformation built around 10 major work streams. These work streams span everything from becoming an AI-first company to reducing friction in every step of the customer journey to reexamining outdated internal policies and procedures that slow us down and add to bureaucracy. We aim to simplify our products and services, apply micro segmentation to better match offers to customer needs and drive towards our goal of being the most efficient telco in the world. Each work stream has a dedicated cross-functional tiger team with clear monthly and annual targets in a disciplined governance process that reviews progress, unblocks issues and reallocate resources where needed. This program is changing how we run the company day to day. As I've mentioned before, we will not rely on empty across-the-board price increases that create short-term financial gains that erode the long-term trust of our customers. Instead, we aim to delight customers. A central pillar of our upcoming new value proposition is the end-to-end redesign of our customer experiences to ensure we delight each customer in every interaction. Our commitment to customer value and trust is becoming part of our corporate DNA embedded in how we design offers, how we communicate with our customers and how we measure success internally. We are in the final stages of extensive market research that will inform a new generation of offers built around the principles of transparency, simplicity and genuine value delivery. We have begun to embed AI and automation into our operations and customer interactions, which is already significantly improving customer experiences and lowering costs. We will encourage more volume into digital sales and service channels, which lowers cost, increases engagement and leads to higher customer satisfaction and we have begun to see meaningful cost benefits from our transformation efforts as we take out legacy structural costs from the business. Consequently, we are well on our way towards our OpEx savings target of $5 billion in 2026. Churn is the clearest measure of whether our efforts are resonating with our customers. When we achieve the kind of churn benefits we did during the first quarter, it has profoundly positive implications for our business model. Every cohort now contributes more revenue, more margin and more cash. That affects compounds over time. Lower churn also makes our marketing dollars work harder because we are not simply replacing customers who leave, we are adding to a more stable base. Our advertising is also evolving as exemplified by our Connor story brand advertisement which resonated powerfully across social media and focus on our service and our network, not promotions or handsets. The same is true for acquisition and retention economics. We were able to meaningfully drive year-over-year improvement in our postpaid phone net adds while driving the cost of acquisition and retention lower by approximately 35%. Obviously, this fundamentally changes the return on investment we make to attract and keep our customers. And as I mentioned, the less we spend on promotions to lower our amortization headwinds, enabling a step function change in our future revenue growth. These improvements come from the work our teams are doing in our transformation streams, smarter channel mix, less friction, better tools and modeling the beginning of AI and naval processes and a tighter focus on fiscally responsible offers that drive profitable growth. We expect these more efficient levels to be sustainable under our current strategy, and we see additional opportunities to further improve our trends as our transformation matures. Finally, our third theme revolves around stronger cash generation. The combination of healthier subscriber growth and better economics is evident in our first quarter free cash flow results and we are confident in our annual guidance of approximately 7% or more growth. We are seeing the benefits of a more disciplined capital program. where we continue to invest in capacity, coverage and reliability, but do so with sharper prioritization and better utilization of the assets we already have. We are also continuing to execute on our operating expense initiatives, which are delivering a substantial war chest to continue our investments in driving our end-to-end value proposition while driving continued shareholder returns. We see room for further meaningful efficiencies in the years ahead while simultaneously advancing our primary goal of delighting our customers and by doing so, driving long-term sustainable revenue growth. We have also discussed in our previous earning calls that we aim to drive incremental margin by eliminating sunsetting or creating structures to dramatically reduce our exposure to noncore assets. We are well underway in this journey, and we look forward to sharing more details shortly. All of that brings me to our updated outlook. On the back of our first quarter performance, the leading indicators we see in our business and the traction we are seeing in our transformation work streams. We are raising our guidance for adjusted EPS growth to 5% to 6% versus the prior range of 4% to 5%. We also now anticipate our postpaid phone net adds to be in the upper half of our $750,000 to $1 million range. We are reaffirming the balance of our guidance, mobility and broadband and service revenue growth of 2% to 3% with Q1 being the low point of 2026 and free cash flow growth of approximately 7% or more versus last year. We are making these changes early in the year because the data supports a higher level of confidence. We are ahead of pace on postpaid phone net adds and doing so with lower churn, better unit economics and record customer satisfaction scores. We have clear line of sight to the remaining cost and capital efficiency actions that underpin our free cash flow target. And the transformation program gives us additional levers as the year progresses. At the same time, we are far from assuming a perfect environment. We operate in a dynamic and rapidly changing landscape. Our revised guidance continues to reflect a prudent view of competitive dynamics and the macro political and economic environment. Our capital allocation priorities remain unchanged. We will continue to invest in our network, our platforms and our people to deliver the reliability and experiences our customers expect. We will, of course, maintain a strong and sustainable dividend, reflecting the cash-generating nature of our business. And as Tony will discuss, we are delivering on our commitment to return capital to shareholders. We will continue to use excess cash to strengthen our balance sheet over time, giving us flexibility as markets and opportunities evolve and we remain on track to return to our target leverage ratio in 2027. To summarize, in the first quarter of 2026, Verizon grew underlying mobility and broadband service revenue in line with our annual guidance. delivered positive postpaid phone net adds in Q1 for the first time in 13 years, reduced churn meaningfully quarter-over-quarter, and exited the quarter with consumer postpaid phone churn below 85 basis points, all while significantly lowering both acquisition and retention costs, driving our best adjusted EPS growth in 4 years and delivering strong free cash flow. We did all of this by addressing a significant network event transparently and decisively. At the same time, we have launched and are executing against the [indiscernible] transformation program that is making Verizon an AI-first simpler, more efficient and more customer-centric company. On the strength of that performance, the transformation work already underway and the trends we see in the business. We are raising our adjusted EPS growth outlook to 5% to 6%, and we anticipate our postpaid phone net adds will be in the upper half of our guided range, while we maintain our free cash flow and mobility and broadband service revenue guidance. We still have much to accomplish, and we are far from our longer-term aspirations, but the direction of travel is clear. we are growing. Our customers are staying longer. We are serving them more efficiently by executing on a disciplined transformation agenda and we are converting all of that into stronger, more durable cash generation for our shareholders. With that, I'll turn it over to Tony to provide more detail on the quarterly results, and then we will take your questions. Anthony Skiadas: Thanks, Dan, and good morning. Our first quarter results reflect a strong start to the year. We've built upon the operational momentum from the fourth quarter and continued executing on our transformation efforts to deliver on both volume and financial growth. Dan has discussed our plan to deliver long-term sustainable financial and operational growth, and our first quarter results show the early impacts of that plan. We're on track to deliver our 2026 guidance, including increased guidance for postpaid phone net adds and adjusted EPS growth. In mobility, we are pleased that for the first time since 2013, we generated a positive first quarter total postpaid phone net additions. Our first quarter results of 55,000 included significantly better performance from both our consumer and business segments. Consumer postpaid phone net losses were $35,000, a $321,000 improvement year-over-year, driven by a higher mix of new to Verizon gross adds. In total, the year-over-year improvement of $344,000 reflects our consistent and disciplined go-to-market approach solid execution of our volume growth strategy and steady progress of churn. While there is more work to be done with customer experience, which is the largest component of our transformation plan, we're pleased to see early signs of progress towards our goals. Total postpaid phone churn was down 5 basis points sequentially to 0.97% for the first quarter. Consumer postpaid phone churn was 0.90%, down 5 basis points sequentially and improved throughout the quarter as we took actions to delight and retain our customers. In prepaid, we grew our customer base for the seventh consecutive quarter. We delivered 115,000 net adds, driven by our visible and total wireless brands, demonstrating the continuing strength of our prepaid business and our segmentation approach. We look forward to optimizing the value of each of these brands as we continue our transformation. Shifting to broadband. We continue to take share in the first quarter and delivered 341,000 broadband net adds. This includes 214,000 fixed wireless access net adds and 127,000 fiber net adds. We now have approximately 16.8 million broadband subscribers. We are confident in the long-term success of our broadband strategy. Frontier accelerates our opportunity to grow our broadband subscribers as well as our converged offerings, a key enabler to growing wireless share in underpenetrated frontier markets. In the first quarter, in addition to Frontier, we've also closed a Starry transaction, an investment that will enable us to drive further broadband growth opportunities in multi-dwelling units within urban areas. Overall, we're pleased with our operating results for the first quarter as we have seen significant improvement in our net adds. We look forward to continuing our commercial momentum throughout the year. Now let's turn to our consolidated financial results. Our first quarter financial results show our disciplined execution is directly translating into operating leverage. We are driving financial growth and strong free cash flow even as we undergo a transitional year for revenue. Mobility and broadband service revenue was $22.9 billion for the first quarter, a 1.6% increase year-over-year. This result includes $20.6 billion of wireless service revenue, which was down 1% year-over-year. Customer credits associated with the network outage reduced first quarter wireless service revenue by approximately 80 basis points. As previously communicated, we continue to absorb elevated promotional amortization pressures and are lapping approximately 180 basis points of pricing impacts implemented in the prior year. We expect to improve on our first quarter's wireless service revenue performance by maintaining low churn, being disciplined around cost of acquisition and cost of retention, and continuing to drive net adds. Additionally, we continue to see strong performance with perk adoption, continued growth in premium base mix and prepaid. Given these factors, we are confident we will achieve our full year revenue guidance and expect to have an even stronger and more sustainable revenue profile by the end of 2026. Our disciplined. Our disciplined financial approach and targeted actions led to strong profitability this quarter. Consolidated adjusted EBITDA was $13.4 billion, a 6.7% increase in the prior year. adjusted EBITDA margin of 38.9% expanded by 140 basis points. This represents our highest ever reported adjusted EBITDA performance, and we expect it to be an industry-leading result. We are growing responsibly with healthy economics in both the cost of acquisition and cost of retention. We are also making significant tangible progress with our cost efficiencies. During the quarter, we realized substantial savings in key areas, including advertising, network operating expenses and workforce-related costs. A significant portion of these savings dropped directly to the bottom line while we simultaneously reinvested a portion back into the customer experience. Our integration of Frontier operations is progressing well. We are on track to deliver over $1 billion in runway operating cost synergies by 2028. While there is more work ahead to drive further efficiencies, our first quarter performance puts us on track to deliver on our $5 billion of operating expense savings target for 2026. Our focus on the customer and our cost discipline drove adjusted EPS of $1.28, up 7.6% year-over-year, even as we incurred the incremental depreciation and interest expense associated with the Frontier acquisition. Our performance reflects our responsible growth and our actions taken to streamline the business to make us more agile in serving our customers. This gives us the confidence to raise our guidance for adjusted EPS growth for the full year to 5% to 6%. Now let's turn to our cash flow and balance sheet. Our financial foundation has never been stronger. Our cash flow generation remains a cornerstone of our financial strength and a testament to our high-quality earnings. Cash flow from operating activities was $8 billion for the first quarter. We achieved this strong result even after absorbing severance payments of approximately $1.1 billion related to our restructuring efforts, incurring costs associated with the Frontier integration and delivering higher gross add volumes. We're on track to achieve our CapEx guidance of $16 billion to $16.5 billion for the full year. Capital expenditures for the quarter were $4.2 billion. We continue to invest strategically for network excellence and future growth opportunities in a disciplined way by prioritizing our wireless and fiber builds. As Dan mentioned, we expect to end the year with more than 32 million fiber passings. Free cash flow for the quarter was $3.8 billion, up 4% year-over-year. We expect our free cash flow performance to ramp as we further realize the full run rate of our operating expense savings and grow volumes responsibly. We are on track to deliver our full year free cash flow guidance of $21.5 billion or more. Our robust cash flow enables the seamless execution of our capital allocation framework, including investing in our business maintaining a strong dividend, strengthening our balance sheet and returning additional value to shareholders through stock buybacks. Our net unsecured debt to consolidated adjusted EBITDA ratio increased due to the acquisition of Frontier to approximately 2.6x at the end of the quarter. We are making good progress and have paid down about half of the frontier debt since the acquisition closed, and we expect to repay substantially all of Frontier's debt by the end of the year. We remain firmly on track to achieve our target net unsecured leverage ratio of 2.0 to 2.25x during the 2027 time frame. Lastly, we are delivering on our commitment to enhance shareholder returns. In January, we declared an annualized dividend increase of $0.07 per share, up 2.5% from our prior annual dividend rate. This marks the 20th consecutive year of dividend increases, a track record we're extremely proud of. In addition, our stock buyback program is off to a strong start. We successfully completed $2.5 billion in share repurchases during the first quarter. We are in a position of significant financial strength, generating the cash necessary to invest in our future, reward our shareholders and maintain a healthy balance sheet. In summary, our customer-centric approach has generated a step function change in our performance trajectory. We delivered positive first quarter total postpaid phone net adds for the first time since 2013 and raised our full year phone net add outlook. We achieved our best adjusted EBITDA in history, and we also delivered our best quarterly adjusted EPS growth rate since 2021 and raised our full year adjusted EPS guidance. We returned a significant amount of capital to our shareholders, including commencing our first share buyback in over a decade. Our first quarter results demonstrate that our transformation is gaining momentum, and we're delivering on our plan. This is the new Verizon playing to win. With that, I'll now hand the call over to Colleen to take your questions. Colleen Ostrowski: Thank you, Tony. Brad, we are now ready to take questions. [Operator Instructions] Operator: [Operator Instructions] Your first question will come from Michael Rollins of Citi. Your line is open, sir. Michael Rollins: Congratulations on the early progress. Curious if you could discuss the performance of accounts and ARPA with the dense in the quarter as well as what that means for the go-forward outlook for these measures including how the current promotional environment and your pricing strategy are influencing the performance. Daniel Schulman: I think I'll jump on that, Mike, and then we'll -- Tony can add color if he so desires. Look, I think if we take a step back, clearly, we're now orienting everything we do around a customer-centric approach. And just by definition, that means that we're thinking about accounts and not just lines and I would say previously, the company predominantly focused on lines, and that's just not our approach going forward. And as a result of that focus, our trajectory is moving in the right direction. Account net adds improved year-over-year in both consumer and total retail postpaid and that's in the same quarter we delivered our best postpaid net adds in 13 years, and that's not the coincidence. A customer-centric approach is driving our progress on both fronts. The net adds we're adding are higher quality than those that are rolling off. Our new accounts are being added with more lines per account or percent of new to Verizon continues to climb, and that's a leading indicator of where our account number is headed next. But we're also very focused on driving higher revenue with every line. We are no longer giving away lines for freight. Our entire approach is to grow our accounts and lines and overall ARPA. And I think there are a lot of different ways that we can do that. We can do that through convergence. Clearly, as we are more disciplined in our COR and our COA. We believe we're going to start to see the headwinds of promotion and amortization on our revenue growth rate start to flip and become tailwinds. And the majority of the ARPA declined in the first quarter came from our decision to do the right thing for customers on the network outage and to immediately give them credits because we absolutely always want to do the right thing for customers, and we value the long-term relationship with our customers. And so we feel really good about the way we reacted to our network outage. But obviously, that's a onetime event and doesn't come and follow us through the rest of the year. So I would say, in general, we expect to see account net adds continue to improve as well as ARPA as we go through 2026 and as we go to 2027. Anthony Skiadas: Yes. I'd just add a couple of things to that, Mike. We exited the quarter with good momentum. The team is focused on writing good business and the new to Verizon is up 150 basis points, which is great to see. We see a lot of opportunity with convergence, and we saw that in the quarter with bringing Frontier to the fold. And then also, we've done a lot of work on bringing value to customers, things like perks. We've seen significant uptake in perks step-ups and of course, in FWA. So as Dan mentioned, we do expect improvements in ARPA as the year progresses. And as we continue to reduce our reliance on expensive promotions, that will obviously reduce the headwind per amortization that we move ahead. So that's how we're thinking about it. Operator: The next question will come from Michael Ng of Goldman Sachs. Michael Ng: I wanted to ask about upgrade rates and the changing approach to device subsidies. What are you expecting around upgrade activity for the rest of the year? And how do you balance improved profits on some of these lower device subsidies versus opportunities to use devices to drive gross adds given that it should be a strong device for fresh year? Daniel Schulman: Yes. Well, I would say both on our cost of acquisition and our cost of retention. The improvements that we saw throughout the quarter. These are structural changes. They're not onetime or seasonal. We would expect that based on micro segmentation really understanding what our customers exactly want and what our customized offer to them will be will result in us being able to be much more disciplined in how we think about retention. Not every retention is going to be a free handset. In fact, quite the opposite. I mean, I think our industry has been too dependent on free handsets being the solution for everything. And I think all of us, and I know for sure, Verizon can be much more profitable when we start the micro segment really listen to what a customer wants and not just give them a free handset for everything. So I'll give you an example of that. If a customer calls us and says that they're having a difficulty with service in their home, previously, what we would have done is send them a free handset so that they wouldn't churn. And what happened at that point is a customer who have a new handset and still have poor service at their home. So we just spent like $1,000 and did not solve the customers' issues. If we have listened and sent a femto cell to be installed at the house, we could have done that at 1/3 the cost and made the customer happy. And so that's what's happening right now. We're listening what customers really want. We're customizing offers to exactly their needs and we are moving away from just, I think, one tool in our toolbox becoming much more sophisticated. And as we continue the micro segment, we're going to become much, much better at this. And so I think we will continue to be ferociously focused on retention an acquisition, but doing it in a smart fiscal micro segmented manner that should really improve our unit economics going forward. Anthony Skiadas: Yes. And then, Michael, just a couple of other things to add to that. So obviously, the strong capital generation that we have in the business gives us a lot of optionality and scenario planning. In the quarter, we were able to absorb about 6% higher upgrade volumes year-over-year, being more surgical, as Dan mentioned, with retention offers and also having strong cash flow. And the one thing I can say is the rate of growth in upgrades has slowed the last couple of months and into the second quarter, and that's both reflective of the work we're doing, particularly on retention and being very segmented in our approach and very disciplined and also customer choice, customers choosing to hang on to their phones for longer periods of time. Obviously, we don't guide on this, but we'll see how it plays out, but we're being very disciplined in our approach. Operator: Next question will come from John Hodulik of UBS. John Hodulik: Maybe 2, if I could. First, on the cost cutting, maybe for Tony, the -- any color on sort of how much of the $5 billion in OpEx savings we've seen thus far and how it ramps for the year? And then a lot of sort of bullish commentary on volume trends in the wireless business. How should we expect the fixed wireless and fiber broadband in terms to sort of play out through the year as you sort of digested fiber assets and get the converged offering sort of up to speed? Anthony Skiadas: Sure. So on the cost transformation, let me just start big picture. So obviously, we're making significant progress on the transformation work and the cost work and it's showing up in the EBITDA and as we said in the prepared remarks, we expect EBITDA to grow at a faster rate than adjusted EPS when you factor in both the Frontier acquisition interest expense, which is about $1 billion and also the depreciation from the asset base, which is about $1.5 billion. And obviously, we had good acceleration and really good operating leverage. And to your question, we're off to a great start on the $5 billion of cost transformation. And we're seeing proof points in the quarter. Maybe I break down between the first quarter and also what's in progress and coming ahead. So in terms of what we're seeing right now, first and foremost, on the network side and network operating costs. The team is doing a great job in continuing to decommission legacy elements in the network, and that includes copper and recycling that copper and also monetizing that copper as well as optimizing our third-party access costs with our larger footprint and there's a lot more we can do here when you think about Frontier coming into the fold. Second, from an advertising and marketing parking perspective, continued efficiencies in our spend, including use of digital. And then Dan mentioned our cost of acquisition called the retention, structural improvements there since year-end and particularly on cost of retention really being targeted with our retention spend. And then from a workforce perspective, we're exiting the first quarter. We're running leaner with the 13,000 reduction behind us as well as reduced third-party contract to outsource spend. And then in terms of what's the opportunities ahead and things that are underway, we talked about in the prepared remarks around customer experience, and that is the largest part on the largest facet of our transformation program, and that's addressing customer pain points as Dan mentioned, reducing complexity and call volumes. If you think about both the IT and the real estate, continuing to rationalize IT platforms, including AI enablement along with reducing the real estate footprint, both on the work side and the admin side. And then from a frontier perspective, the integration work is well on track. And we said we expect at least $1 billion of operating expense run rate synergies by 2028, and the synergies ramp as we execute on our integration plans. And as we continue through the cost transformation, the expectation is that we'll continue to reduce -- to further reduce costs beyond 2026. And then when you put that together, the EBITDA and the cost reductions allow us to do a number of things. First is run a lot more efficiently. Second is to absorb the transitional year that we have in service revenue. Third is to invest in the customer experience, and that includes defending our base if we need to do so. And lastly, returning a significant amount of capital to shareholders. And overall, we see a great path to both adjusted EBITDA and EPS growth for the year, and that gave us the confidence to raise the EPS guide for the year and then I'll hand to the broadband question over to Dan. Daniel Schulman: Thanks for the question, John. So convergence, obviously, it's one of our key vectors of growth. We intend to fully leverage our growing fiber footprint, as I mentioned in the last earnings call, we are still very focused on driving our fiber footprint $40 million to $50 million over the medium term. We made good progress this quarter towards that and expanding our fixed wireless access capacity. In Q1, we continue to take broadband share. We have absolutely no intention to slow down, in fact, quite the opposite. We have a huge cross-sell opportunity. Only 20% of our base has broadband. And so we see a large go-to-market opportunities for us there. Look, fiber has inherent advantages over FWA, and we're going to prioritize it where we have coverage. And therefore, you should expect a mix shift from where we've previously been. We have very positive owner's economics on both our broadband and our wireless churn is almost 30% less on converged offers and has a higher both LTV and ARPA. However, be sure we're going to continue to drive FWA. And we entered the year with more available capacity in our network for fixed wireless access than when we began 2025, and we intend to take advantage of that. Q1 is seasonally our slowest quarter, but even so, we added 31,000 broadband subscribers. And by the way, that excluded the first 20 days of January for Frontier. You can probably do the math on what our numbers could have been on broadband had we had a full quarter of Frontier in our numbers. So we're quite pleased with where we are in our broadband net additions, and we expect to see that accelerate as we go forward. We're going to continue to invest heavily in broadband. We're going to have at least 32 million passings. We're looking at more partnerships, potential acquisitions to speed the number of homes passed. There's no question. We think that fiber is a key differentiator against competitors who don't have it. And I'd also point out that our attachment rate of wireless when a customer has broadband, I think it's best in the industry at 55% right now. So expect that you'll see improvement in our broadband numbers as we go through the year, and we're looking for the optimal and most efficient way to deliver broadband to the home. Operator: The next question will come from Sebastiano Petti of JPMorgan. Sebastiano Petti: Just a quick follow-up to John's question there. Just in regards to your FWA commentary, I mean, should we still anticipate $8 million to $9 million FWA subs by 2028? Is that still a target for the management team? That's my first question. And then, Tony, the buyback is $25 billion great to see in the quarter. You're not surprised given the momentum. How should we think about the expectations for buyback in 2026? I think you previously talked about $3 billion, clearly seems conservative at this point. And I didn't see any commentary in the press release, but I mean how should we think about the, I guess, phasing or cadence of buybacks from here over the multiyear period? Daniel Schulman: Yes. I'll first jump on the FWA question. No, I don't think you should really adjust any of your thoughts around that. We're going to drive quite aggressively on the broadband front. Again, there may be more of a shift to fiber than FWA. We've had a lot of progress on FWA over the years, and we'll continue to drive it. Anthony Skiadas: Yes. And then Sebastian on your question on capital allocation. I mean, look, as we said in the remarks earlier, that the pillars are the same. Our first priority is still investing in the business, and you see us doing that with our capital program of $16 million to $16.5 million in our acquisition of Frontier as well. The dividend is still iron clad for us, and we raised the dividend $0.07 back in January, and that's the 20th consecutive year. And the third is having a strong balance sheet and paying down debt. And as we said, there's no change to our long-term leverage targets and we said we'd be there in the 2027 time frame. We've also paid down about half of Frontier's debt stack already. So we're well on our way there. And then fourth, as you mentioned, we have our share buyback curve underway. We did $2.5 billion of share repurchase in the first quarter. So we're off to a great start, and that reflects the strong cash generation and the conviction -- our conviction in the value of the stock at current levels, right? In terms of your question, I can't talk about hypotheticals. Look, if we have additional excess cash flow beyond our plan and maintain our leverage commitments and invest in the business and things like that. We would have the ability to do more. But our plan of at least $3 billion is appropriate at this time. But the overall goal doesn't change. It's generating strong cash flows and being able to execute across all 4 pillars of our capital allocation strategy and doing that simultaneously. As you saw, we returned a significant amount of capital to shareholders. It was $5.4 billion in the first quarter. And we're doing all of this while we're executing on our transformation plan as well. Operator: The next question comes from Sean Diffley of Morgan Stanley. Sean Diffley: Dan, you spoke recently about AI transforming the economy and impacting jobs. I was hoping you could elaborate a bit on how you think about the ability to take out more costs across the business. Obviously, you referenced it a bit on the OpEx commentary. But any tangible examples of AI use cases that are being implemented at Verizon? How you think about total head count growth over time? And then one on CapEx. Can you elaborate on investing in wireless versus fiber? And anything to say on spectrum acquisition interest going forward? Daniel Schulman: Sean, it's like 12 questions. Let me jump on the AI piece of it. Obviously, I'm quite outspoken about the time we live in. It's one of ferocious technological change, not just AI, quantum coming in the next 3 years, humanoid robotics coming after that. I think it's important we openly talk about it and talk about the implications or potential implications of it. I also feel it is absolutely essential that Verizon uses the tools of this era to compete. I want us to be not an AI-first company. I want us to be an AI-native company. And I think there are 3 areas Were you going to see us utilize AI to its fullest. One is around operational efficiency, taking out costs, improving productivity, delivering more value to customers. The second, really important, I'll give some examples of this is customer satisfaction improvements. How can we better serve our customers through the use of AI? And then finally, how do we fully ingest AI capabilities into our value proposition? How do we take that so that we micro segment down to every single customer? We have an initiative inside the company. We call it every customer has a name, and that is about full microsegmentation. And that is where we will fully ingest all of our data, structured, unstructured, external data into creating customized propositions for every individual customer. Our AI tech stack has 4 different layers to it right now. We have a data and intelligence layer where we're taking, again, formatting all of our data, and we have a huge amount of data that's both structured and nonstructured bring it into the right format layering on top of that, both LOMs and SLM. We've got a second layer, which is our development factory layer, which is kind of our middleware. It's where we gen up agents where we have agent building capabilities. We have a third layer to our stack, which is what we're calling runtime engines, which is where we deploy agents, we deploy business features and impact how we serve customers. And then surrounding all of that, we have a control plane, which looks at security, identity, guardrails, safety, observability, traceability, those kinds of things. We are going to be substantially complete with that entire AI tech stack by July, and we hope to be fully done by November. I would say we've recruited quite a number of AI savvy individuals into the company over the last 7 months or so. We've done more in the last 3 months than we've done in the last 3 to 4 years around this. We had a previous project on this that had a 4-year completion date. We, again, will be substantially complete on all of this by July. We are working very closely with Google and Anthropic and other best-of-breed AI players to bring this to life. This isn't our own stack. We are using best-of-breed to go and make it happen. We're very close. Obviously, with Anthropic, we are part of glass wing. We are working with Mythos and have been for some time across all of our cybersecurity efforts, and it has given us great insight in terms of what we need to do to continue to have the world's most reliable, secure and safe network. We have been now for the past 3 months, you saw some of those results happen in this quarter. Looking at working with Sierra, ElevenLabs, Google, to start to put into place of voice agents into some of our customer service operations. Again, we are testing these models, and we are fine-tuning them. But what we are seeing already is a 1,280 basis point improvement in customer SAT scores year-over-year. I mean these are quite astonishing step-ups in our ability to satisfy our customers. We're deploying quad code across our software development life cycle. This is not just around coding, but across the entire life cycle. We see opportunities to do an increase in our delivery by 40% plus, and we spend a ton of money on vendor support here, and we see our way to reducing those costs by over 70% as a result of what we're doing with AI. And in the network we have really deployed quite extensively inside our network. 85% of all of our issues right now are autonomously resolved. That means we are resolving issues for our customers even see them. We used to have in our network by the bill of material, it was over like 1 million different combinations. Think about the cost and the complexity around that using AI, we've driven that down now to about 20 kits. And so our ability to deploy save costs because of this is radically improved. We already have over $200 million of energy savings as a result of deploying AI into the network and looking how we can optimize on energy, and we're doing things now at industrial scale. And so I'm quite pleased with the amount of progress we've made in a short period of time. And I would also point out on the commercial side, we are in quite deep discussions right now with hyperscalers with alternative cloud providers, large enterprises to integrate our fiber, both dark and lit and our 5G assets to support their AI infrastructure efforts. And that can include data center connectivity, ability to help them with their training and inference. And that is the potential for multibillions in revenues, quite frankly. We'll have more specifics on that in the next 3 to 6 months. But the world is moving towards edge computing towards data connectivity, and we are in a real good place to play inside that AI infrastructure revolution that's going on. Colleen Ostrowski: Brad, I believe we have time to take one more question. Operator: Your final question will come from Michael Funk of Bank of America. Michael Funk: So Dan, one for you. Theme of the call has clearly been customer lifetime value and micro segmenting as well. So just kind of curious about the save budget as part of that micro segmenting and churn reduction effort. And how much you've improved or increased the save budget how that might impact the repricing of the back book? And one follow-up. Do you still expect your postpaid phone net adds to be 10% to 15% of the net new? Daniel Schulman: Okay. A lot of different questions in there. One on our postpaid phone net adds. Yes. I mean I still think that's probably a good estimate of the 10% to 15% of new. We'll have to see where the industry comes out, what is new, what's real in those numbers. One thing I would say though on that, that we haven't really talked about is I think it's obvious now that at least as, if not more than half of our net adds are going to come from improvements in churn. And what that means is that the amount of dollars that we will spend on driving our net add number will be reduced because the bottom of our funnel is tightening. We're at 95 bps in Q4, 90 bps overall in Q1, 85 bps at the end of the quarter. And so that obviously is an extraordinarily important element and a demonstration of how putting the customer at the center of everything you do when you stop raising prices with no corresponding value when you start improving the customer experience, which, by the way, is very difficult to do and is a differentiating thing hard for others to follow. You put out a price plan, people can follow that, you put out a promotion people can follow but the hard work of improving the customer experience that comes day by day. One initiative after another to make that happen. And that's why I really am pleased to see an all-time record of our customer satisfaction when people interact with our customer service teams on our consumer side. On cost of retention, the cost of retention and cost of acquisition have come down substantially through the quarter. We believe that those lower levels will continue to play out through the year. And that really has to do with micro segmentation and really understanding what a customer needs. The era of just the free handset, that's gone right now. We are looking at what does the customer need. They have a handset that is last year's model that's been refurbished. Do they need a new handset, many of them because of the economy are keeping their handsets longer right now. And so I believe that you're going to continue to see COR and COA at reduced levels. But of course, as Tony mentioned, we have a substantial war chest, and we will defend our base whenever we see any competitive activity on that. But we think right now that the competitive intensity in the industry is moderating quite frankly. And I think everybody is thinking about how do we look at acquisition, how do we look at retention in a much more segmented and much more fiscally responsible way than maybe we were several years ago. So I appreciate the question. Colleen Ostrowski: That's all the time we have for questions. Thank you all for your time today. Operator: This concludes the conference call for today. Thank you for your participation and for using Verizon Conference Services. You may now disconnect.
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