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Operator: [Audio Gap] Before we begin, I would like to remind you that this conference call may contain forward-looking statements with respect to the future performance and financial condition of Civista Bancshares, Inc. that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures which are intended to supplement, but not substitute the most directly comparable GAAP measures. The press release, also available on the company's website, contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. This call will be recorded and made available on Civista Bancshares' website at www.civb.com. At the conclusion of Mr. Shaffer's remarks, he and the Civista management team will take any questions you may have. Now I will turn the call over to Mr. Shaffer. Please go ahead. Dennis Shaffer: Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our first quarter 2026 earnings call. I'm joined today by Chuck Parcher, EVP of the company and President of the bank; Rich Dutton, SVP of the company and Chief Operating Officer; Ian Whinnem, SVP of the company and Chief Financial Officer; and other members of our executive team. This morning, we reported net income for the first quarter of $15 million or $0.72 per diluted share, which represents a $4.8 million or 47% increase over our first quarter of 2025 and a $2.7 million or 22% increase over our linked quarter. This also represented an increase in pre-provision net revenue of $3.8 million or 29% over our first quarter in 2025 and a $3.2 million or 3.8% increase over our linked quarter. Our first quarter highlights include the successful completion of the core system conversion of the Farmers Savings Bank that we acquired during the fourth quarter of 2025. As a result, our first quarter earnings include what should be the last expenses associated with the acquisition. These onetime expenses impacted our first quarter net income by approximately $400,000 or $0.02 per common share. For the quarter, core deposit funding increased organically by over $60 million. This allowed us to reduce brokered deposits by $25 million. This represents the sixth consecutive quarter in which we reduced the brokered funding. Our net interest margin expanded by 16 basis points to 3.85% as we continued our disciplined approach to managing our asset pricing and funding costs. Our earning asset yield for the quarter increased by 5 basis points over our linked quarter to 5.66%. Our cost of funds was 1.96% for the quarter, down 35 basis points from the first quarter of 2025 and 12 basis points from the linked quarter, while our cost of deposits was 1.81%, down 19 basis points year-over-year and 11 basis points sequentially. Our decline in funding cost was largely attributable to $125 million of brokered CDs that matured in late December that carried a weighted average rate of 4.23%. And we were able to replace and reduce these mature and brokered CDs with $100 million in brokered CDs with a weighted average rate of 3.87%, representing a savings of 36 basis points in addition to reducing the amount of brokered funding. Net interest income for the quarter was $37.8 million, which represents an increase of $5.1 million or 15% compared to the first quarter of 2025 and an increase of $1.4 million or 4% compared to our linked quarter. Despite loan balances being down, we had strong loan production across our footprint during the quarter that was offset by significant payoffs. Our lending teams generated $214 million of new loan production during the quarter that was offset by $83 million in early payoffs in addition to normal principal pay down. Our ROA for the quarter was 1.41%. Our ROE for the quarter improved to 10.97%, and our tangible book value per share improved to $19.70. Our continued strong financial performance and ability to consistently create capital gives us options as we think about the best ways to deploy our capital. Earlier this week, we announced a quarterly dividend of $0.18 per share, which is consistent with our prior dividend and the renewal of our stock repurchase program authorizing management to repurchase up to $25 million in outstanding common shares. During the quarter, noninterest income declined by $453,000 or 4.6% from our linked quarter and increased $1.6 million or 20% over the first quarter of 2025. The primary driver of the decline from our linked quarter was a $336,000 decline in card fees due to the typical elevated spending that comes during the holiday. The primary drivers of the increase in noninterest income over the prior year were a $190,000 increase in service charges, a $1 million increase in net gains on loan and lease sales and a $444,000 increase in other income related to reserves that have been established at our insurance subsidiary for claims that subsequently never materialized. Noninterest expense declined by $1.1 million or 3.6% from our linked quarter and decreased -- or increased $2.7 million or 10% over the prior year. The decline from our linked quarter was a result of a commission accrual adjustment in the fourth quarter of 2025. Our actual commission expense was $1.4 million lower than what had been accrued and was adjusted in the fourth quarter. We are now adjusting all accruals at least quarterly. The primary driver of the increase in noninterest expense over the prior year was a $2.2 million increase in compensation expense associated with increased salaries, commissions and medical expenses. In addition to annual increases, our average FTE employees increased from 520 in the first quarter of last year to 535 in the first quarter of 2026. Much of the increase in FTEs came from the employees that joined us through our recent Farmers acquisition. We also had $400,000 in other expenses that we believe will be the last significant expenses related to the acquisition. Our efficiency ratio for the quarter improved to 60.1% compared to 64.9% for the prior year first quarter. Our effective tax rate was 16.8% for the quarter. Turning our focus to the balance sheet. Strong loan production across our footprint was offset by significant payoffs during the quarter. Our lending teams generated $214 million of new loan production during the quarter that was offset by $83 million in payoffs in addition to normal principal pay down. This compares to the prior year's first quarter, when we originated $181 million in new loans and we experienced $21 million in loan payoffs. We consider these good payoffs, as they were successful real estate projects that were sold or taken to the permanent market. We also had a few loans to operating companies that were sold during the quarter and paid off their loans. Loan production grew with each month's production during the quarter from $49 million in January to $59 million in February to $106 million in March. During the quarter, new and renewed commercial loans were originated at an average rate of 6.52%, and leases were originated at an average rate of 9.03%. Additionally, our undrawn construction lines were $175 million at quarter-end compared to $161 million at year-end. We ended the quarter with a loan-to-deposit ratio of 92%. Loans secured by office buildings make up only 4.7% of our total loan portfolio. As we have stated previously, these loans are not secured by high rise metro office buildings, rather, they are predominantly secured by single or 2-story offices located outside of central business districts. We also have very little exposure to non-deposit financial institutions. As a commercial real estate lending bank, we are mindful of our non-owner occupied CRE concentration and continue to diversify our loan portfolio. At March 31, 2026, our CRE to risk-based capital ratio was 261%. While we experienced a reduction in total loans during the quarter, loan demand remains solid in each of our markets, and our pipelines continue to grow. At March 31, 2026, our residential mortgage loan pipeline was up 25%, and our commercial loan pipeline was up 102% over the prior year. We anticipate growing the loan portfolio at a mid-single-digit rate over the balance of the year. On the funding side, total deposits increased $35.4 million or an annualized growth rate of 4%. However, if we back out the brokered deposits, our core deposit balances grew by $60.4 million or 8% for the quarter. This represents 6 of the last 7 quarters in which we have grown our core deposit balances while reducing our cost of funds. Much of this growth came in interest-bearing demand accounts and in our savings and money market accounts. This increase in lower rate deposits, combined with our continued shift from brokered deposits to more core deposit funding, contributed to an 11 basis point decline in our cost of deposits from the linked quarter. Our deposit base remains fairly granular, with our average deposit count, excluding CDs, approximately $28,000. Other than the $523 million of public funds, which are primarily operating accounts with various municipalities across our footprint, we had no deposit concentrations at quarter-end. Our commercial bankers, treasury management officers, private bankers and retail staff continue to have success gathering additional deposits from our commercial, small business and retail customers, as evidenced by our organic deposit growth. We believe our low-cost deposit franchise continues to be one of Civista's most valuable characteristics, contributing significantly to our solid net interest margin and overall profitability. We view our securities portfolio as a significant source of liquidity. At quarter-end, our securities portfolio totaled $682 million, which represented 16% of our balance sheet, and when combined with our cash balances, represents 22% of our total deposits. Our securities are classified as available for sale and had $49 million or approximately 7% of unrealized losses associated with them. Civista's strong earnings continue to create capital, and our overall goal remains to maintain our capital at a level that supports organic growth and allows for prudent investment into our company. Earlier this week, we announced an $0.18 per share dividend based on the quarter-end market close of $22.79. This represents an annualized yield of 3.16% and a payout ratio of 25%. We view this as a sign of confidence management and our Board of Directors have in Civista's ability to continue generating strong earnings. Additionally, Civista's Board of Directors increased and renewed a $25 million common share repurchase authorization earlier this week. While we have not repurchased any shares over the past several quarters, our regulatory capital and tangible common equity ratios are strong and continue to grow. We continue to believe our stock is a value, and we'll continue to evaluate repurchase opportunities. During the quarter, we made a $768,000 credit to our provision and had net charge-offs of $716,000. The credit to our provision was attributable to lower expected losses due to lower outstanding loans and our continued strong credit metrics. Our ratio of the allowance for credit losses to total loans is 1.26% at March 31, 2026, which is consistent with the 1.28% at December 31, 2025. Similarly, our ratio of allowance to nonperforming loans of 135% was virtually unchanged when comparing the same periods. Other than the general concern over the impact of macroeconomic uncertainties, the economy across Ohio and Southeastern Indiana is showing no sign of deterioration, and our credit quality remains strong. In summary, we are very pleased with the continued expansion in our net interest margin, our ability to generate noninterest income from diversified revenue streams and to control our noninterest expense. We're also very pleased with our team's success in attracting more lower cost funding, which allowed us to continue reducing our dependency on brokered funding and anticipate mid-single-digit deposit and loan growth for the balance of 2026. Overall, 2026 is off to a good start, and our focus continues to be on creating shareholder value. Thank you for your attention this afternoon and in your investment. And now we'll be happy to address any questions you may have. Operator: [Operator Instructions] Our first question comes from the line of Brendan Nosal from Hovde Group. Brendan Nosal: Maybe just starting off here on the loan growth outlook. I totally get the moving pieces this quarter. I mean, it sounds like origination activity is quite strong, but the payoffs were a significant headwind for this quarter. I guess just as you look ahead, what gives you confidence that payoff levels will decline such that you can get back to that mid-single-digit pace of growth? Charles Parcher: We watch those closely. This is Chuck. We watch those closely. We've got a couple of other large ones we know that we're going to look at here in the second quarter, but we still think we're going to see some growth in the second quarter. And we feel like that mid-single-digit outlook is pretty good looking forward. I've got confidence in -- as Dennis mentioned in his comments, our pipeline today is twice as large as it was in the pipeline at the same time last year. And we just got to get those to the closing table. And our -- just based on the production we had in the first quarter, as Dennis also alluded to, our undrawn construction funds are $14 million higher at the end of this quarter than they were at the end of the year. So we feel good about kind of [ prognosticating ] out that mid-single digits. Dennis Shaffer: And first quarter typically is slower for us, too, Brendan, just because we do some construction-type commercial construction loans and stuff. And as Chuck alluded to, I think we put on a lot of balances there towards the end of the first quarter, and some of those were construction projects that we think those funds will draw up. Brendan Nosal: Okay. Okay. Maybe pivoting to the net interest margin. Heck of a lot of margin expansion this quarter, certainly more than I was expecting. Just as we look ahead, if we're in an environment where we don't get any more Fed rate cuts this year, how do you see the margin trending from this quarter's 3.85% level? Ian Whinnem: Brendan, this is Ian. So second quarter, we expect flat to maybe a little bit of expansion, 1 to 2 basis points. And then likely putting that in the mid- to upper 3.80s and then leveling out in the high 3.80s in Q3 and beyond. That's with no rate cuts being planned. If there is a rate cut, we expect that to be maybe 1 to 2 basis points lower. If there's a rate increase at the end of the year, it could be 1 to 2 basis points higher. Dennis Shaffer: And Brendan, we do have about $60 million of loans repricing in the second quarter and I think about $140 million after that for the remainder of the year. So a couple of hundred million dollars of loans will reprice from the 4.75% range to -- reprice today in the 6s. Operator: Our next question comes from the line of Jeff Rulis from D.A. Davidson. Jeff Rulis: Late last year, we had discussions of kind of the bank putting up $0.75 in quarterly earnings towards the end of '26, implying a $3 annual run rate. It kind of seems like you pulled that forward 9 to 12 months, you're basically at that -- at the core level. I guess as you think about where you reorient with kind of the outlook from here, not to put you on the spot of earnings, but I guess, how do you met that opportunity with also as you talked about the buyback? Ian Whinnem: I would say, Jeff, the part of the earnings lift this time was that provision. We didn't have to fund any loan growth. That's going to cost us a couple of cents every quarter, on top of the couple of cents reduction that we got this quarter. So from a normalized basis, that $0.72 is probably more in the mid-60s. So not quite into that run rate of $0.75 yet, but we do still anticipate getting there towards the end of this year, maybe into the first quarter next year. Jeff Rulis: Got it. Appreciate that. And then I guess on the expense run rate, I think we talked previously that as merit increases kind of kick in, in the second quarter, offset by maybe some -- the conversions complete. So just trying to walk through the quarterly progression, do you see sort of flat linked quarter on a core basis and then maybe in -- a little -- some savings? Or how do you see the outlook on run rate? Ian Whinnem: So excluding the nonrecurring items, we're at $29.4 million for the first quarter. So that would include some of the, I'll call them, duplicative operating expenses, pre-conversion, having 2 cores and some staff that's no longer with Civista. So we've also done reinvestment back into the company by hiring some revenue-generating colleagues, some marketing spend and some tech improvements. So with that, we're anticipating second quarter being $29.5 million to $30 million, and then probably a little bit of an expansion maybe to $30 million, $30.7 million in the third quarter and fourth quarter. Dennis Shaffer: But we have merit increases that took effect in the -- took effect April 1. So that's in those expense numbers that Ian's [indiscernible]. Jeff Rulis: Okay. And so any sort of cost saves kind of offset by investment kind of getting to that run rate that you outlined? Ian Whinnem: Yes, that's correct. Yes. It's helping to fund some of those cost investments or spend investments that were just mentioned. Operator: Your next question comes from the line of Adam Kroll from Piper Sandler. Adam Kroll: Yes. Maybe just starting on deposits, some really impressive core deposit growth during the quarter. And just given some of the recent investments you made on the tech side, I was just curious, how large of a contributor was the digital channel to that growth and maybe just overall prospects within that segment? Dennis Shaffer: Well, we think it's helping some. Most of our investments are aimed at making it easier to do business with us. So it is helping that some. We have all set up to do online account opening now with our digital apps and stuff. So we are getting that. The bigger thing that's helping us in some of the deposit growth, at least the organic stuff, is just some of the recent disruption within our marketplace. Ohio has had quite a bit of disruption. And we think by one of the investments we made in the technology and making it easier to do business with us. And then just that disruption, it -- we think we're very well positioned, I think, to attract new clients to the bank and to expand existing relationships. So our teams are doing a fantastic job with their calling efforts. We're being really collaborative, and we're going to market as a team. And I think through their efforts and making -- just making it easier to do business with us and that disruption, that's the reason behind a lot of that deposit growth. Adam Kroll: Got it. I really appreciate the color there. Sticking on the funding side, deposit costs came down quite nicely during the quarter. I was just curious, are you still seeing opportunities to reduce funding costs on both the maturity and non-maturity side if the Fed were to remain on hold? Ian Whinnem: So right now -- this is Ian -- if rates stay flat on the CDs that are maturing, we're renewing those or picking up these fees at about the same. Staying with those brokers, we're not going to see that significant increase that we saw from the Q4 maturities into Q1. So we have some wiggle room on some of our non-maturities. For the most part, I think most of that's passed and we will be staying about the same. Adam Kroll: Got it. And last one for me. Ian, I was wondering if you had the purchase accounting accretion number for the quarter? Ian Whinnem: I will have to follow up with you on that. Operator: Your next question comes from the line of Tim Switzer from KBW. Timothy Switzer: Well, first off, congrats on the retirement announcement, Dennis, and for Chuck on becoming CEO on the exciting news. Dennis Shaffer: Thank you. Charles Parcher: Thank you. Timothy Switzer: Most of my questions have been asked already, but the first one I had is on deposit competition. There's been some chatter about it picking up a little bit. Can you talk about what you guys are seeing in your markets and if there's any specific geographies or deposit categories where it's been a little bit more intense? Charles Parcher: I would tell you -- this is Chuck. I think it's almost equally intense across almost all of our -- at least our major metro markets. Obviously, the most banked of all the cities is Columbus, so we're probably seeing a little bit more pressure there from the rate side. But we've held our own pretty well, as you can tell by the deposit growth that we've had. And we feel like we're priced properly to continue to retain our clients and grow at that mid-single-digit pace. So it is very competitive. We're still seeing some banks with some 4 handles, and we're kind of in the high 3s right now, but we feel good about where we're positioned. Dennis Shaffer: We're really just focused on relationships, growing relationships and providing value and providing solutions for our clients. And again, I think attacking the market from a team perspective by bringing different business lines into meeting a lot of our business customers, I think it's been working for us, and that's really going to be our focus. And with that disruption, I think it gives us opportunity there. Charles Parcher: Yes. To Dennis' point, the disruption, some of the bigger players in our market, Huntington's, Fifth Third's, Park's, First Financial's are all working on acquisitions, not just in Ohio, but in other regions. I feel like their eye is off the ball a little bit on Ohio. Our biggest competition is coming from really, some of the smaller institutions. From a rate perspective, not from a, I guess, competitive perspective, but from a rate perspective. Timothy Switzer: Got it. Very helpful. And then the last question I had was in terms of credit. Any areas that have caused you guys to want to pull back at all, or any levels of concern? And do you have exposure to any end market that could maybe be exposed by the higher oil prices? Charles Parcher: Go ahead, Mike. Michael Mulford: This is Mike. No, we're not seeing anything that's market-specific or industry-specific right now that's causing us any concerns, especially to pull back on any areas. Operator: Your next question comes from the line of Matthew Breese from Stephens. Matthew Breese: I wanted to just touch on the NIM a little bit. I know you didn't have a accretable yield at your fingertips, but maybe you could help me out. To what extent the prepayment fees play a role this quarter in loan yields and the NIM? Was that a factor? And is that a factor in kind of your more stable guide in the back half of the year? Ian Whinnem: This is Ian. No, the payoffs really didn't impact the NIM that way. We got a little bit of fee income on those, just breakage fees, but nothing in the NIM. And as Dennis mentioned earlier, we have a lot of loans that are just going to be repricing in the remainder of the year. So they're going to be moving from these mid 4s into the low 6s. So that's the stuff that we saw come across the first quarter. And we'll continue to see for the remainder of the year, just some NIM lift coming from that. Dennis Shaffer: Yes. The biggest NIM lift again, was the repricing of that brokered CD and the reduction of it. So we reduced to $25 million, then we repriced $100 million and picked up 36 basis points. That was -- that contributed more. And then on the fee income side, it was just really -- most of those fees were generated by our residential mortgage teams and our leasing group, who both had much better production results than we had a year ago. So that's where a lot of the fees came from. Matthew Breese: Understood. You had mentioned just some of the fixed asset repricing. So outside of loans that are pure floating priced off of prime or SOFR, what is kind of the cash flow schedule and maturity schedule for fixed rate and adjustable rate loans for the rest of the year? And new origination yields I'm assuming are kind of in the mid- to high 6s. Is that accurate there? Dennis Shaffer: That's correct. On what's -- the repricing, we're somewhere in that 6.5% range as far as new loans going on and things that would adjust. Most of them are -- the real estate loans are written on 5-year adjustables, and the average margin on those are probably 2.75% over a 5-year treasury or so. Which will take us a little bit, maybe 6.5%, 6.6% today. And we're looking for your -- what was your other question? Matthew Breese: Just the loans that are either fixed rate or adjustable, kind of quarterly maturities or quarterly cash flows. You had mentioned that what's maturing is going from a 4 handle to a 6 handle. I just want to get some sense for how much is going to mature this year. Charles Parcher: I would tell you, over the next 12 months, we got a little over $200 million. Richard Dutton: Yes. $60 million of that -- this is Rich. $60 million of that will happen in the next quarter, in Q2. The balance of it is the rest of the year. Charles Parcher: Right. Matthew Breese: Got it. Okay. And then you had mentioned brokered being a big area of deposit cost pickup. How much of that is maturing over the next 3 quarters? And what are the rates -- or what is the estimated rate on the stuff that's maturing? Ian Whinnem: Yes. So we have some that's maturing in April or is maturing this month. That was at 3.70%, repricing a little bit under 4%. Then we have about another [ $125 million ] maturing still this quarter outside of April. That's in that 3.80% range. And then a little bit in September. Dennis Shaffer: We would stay relatively short on all of that. So it's going to reprice pretty close to where it's at, maybe a little bit higher. But again, our plan is to continue to gather deposits and reduce brokered. That helps offset some of that, too. Matthew Breese: Got it. Okay. Last one for me is just on [ Reg E ] production that you keep for yourselves and put on the balance sheet versus pursue the secondary market and gain on sale. What is kind of the breakdown of that? And did it shift more towards gain on sale this quarter? Just seasonality-wise, I would expect gain on sale to be down this quarter, but you were up modestly. I'm just curious, how that breakdown was? Charles Parcher: Our breakdown by number is usually -- or has been here for the last couple of quarters is about 60% sold, 40% portfolio. And I would tell you that from a balance perspective, that probably runs close to 50-50, just because the stuff that we have to hold on the balance sheet is usually some of our private banking, what I call physician loans and some of the higher balance things, higher balance construction. So dollar volume, 50-50, number, 60-40. And we feel like it's going to probably continue to trend that way. If we get any kind of blip downward in interest rates, we'll see a little bit more refinance action. And that refinance action is normally much more 80-20-ish that would be sold versus held. But that's kind of the run rate we've had here over the last couple of quarters. Operator: Your next question comes from the line of Adam Kroll from Piper Sandler. Adam Kroll: Just a follow-up for me. A pretty strong start to the year on the core fee income side. And I know leasing can kind of jump around, but I'm just curious, how you're thinking about core fee income growth for the remainder of the year? Ian Whinnem: Yes. So for the noninterest income, so as you mentioned, strong first quarter, had a good recovery on the mortgage and CLF when compared to this time last year. We did have a captive reinsurance reserve release that occurred in the first quarter that would be nonrecurring and only a small amount of security gains. So when we adjust for the seasonality of gain on sale, thinking that Q2 comes in between $9.1 million and $9.5 million and then maybe increasing another $0.25 million in the third quarter just due to seasonality on gain on sale. Operator: Your next question comes from the line of Daniel Cardenas from Brean Capital. Daniel Cardenas: Just a quick question. Given the market disruption that we've seen in Ohio, what kind of opportunities is that presenting for you on the talent addition side? Charles Parcher: It's been really good for us, to be honest with you, Dan. I mean, we've had a lot of -- not moving as far as lenders moving out, but we've reassigned some people, people got promoted, et cetera. And we've done a really good job of picking up talent from those institutions that have had some M&A activities with them. The one we still benefit from, even though it's probably the farthest one away, is the whole WesBanco/Premier piece. We've continued to get some talent from that area, but it's probably the one that we've probably got the most talent from in our entire organization. But it's been good. And everybody is sitting around our table right now is continuing to get calls from some of those institutions to see if they got -- if we've got opportunities here. Probably our most recent acquisition came from the Westfield deal that got sold. We just -- our new Treasurer just came over and started a month ago from their institution. So it's been really good for us to be able to upgrade talent. Daniel Cardenas: Excellent. And then I know you just completed the FSB deal, but as you look at future acquisitions, I mean geographically, where do you see yourself targeting? Charles Parcher: You want to take -- I mean, I think we're going to be very similar. Our thoughts are still very similar to what they always have been. Ohio and the adjoining states is probably as far as we would look right now. And obviously, if it's fill in, it would be a little bit more preferable than to an add-on in some of those locations. But I think that we're not going to jump to Tennessee or to South Carolina or whatever. We're going to kind of stick to our knitting and stay within our marketplace right now in Ohio and the adjoining states. Dennis Shaffer: Yes. And I would just say, Dan, that our first priority really is on organic initiatives that create sustainable value for the company. We made -- as I mentioned, those -- we've made a lot of investments in technology that makes it easier to do business with us. And with all that disruption, we think we're really well positioned to attract new clients and deepen those relationships. We continue to maintain pretty good dialogue with a lot of the banks within our footprint here. But anything we would do, I think will need to create great strategic value for us and be financially compelling. But the first -- our main focus really right now is on building capacity from within and prioritizing just some of that organic development. Operator: There are no further questions at this time. I will now turn the call over to Mr. Shaffer. Please continue. Dennis Shaffer: Okay. Well, in closing, I just want to thank everyone for their investment in Civista and for joining today's call. Our first quarter results, I think, were due in large part to the hard work and discipline of our team. I'm very pleased with this quarter's accomplishments, our strong financial results and just the disciplined approach that we have here in managing Civista. And I remain very confident that we are well positioned for long-term future success. So I look forward to talking to you all again in a few months to share our second quarter results. Thank you for your time today. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to today's Amneal Pharmaceuticals Investor Call. I will now turn the call over to Amneal's Head of Investor Relations, Tony DiMeo. Anthony DiMeo: Good morning, and thank you for joining Amneal Pharmaceuticals investor call. This morning, we issued a press release announcing Amneal agrees to acquire Kashiv BioSciences and reporting preliminary Q1 results. The press release and presentation are available at amneal.com. Certain statements made on this call regarding matters that are not historical facts, including, but not limited to, management's outlook or predictions are forward-looking statements that are based solely on information that is now available to us. Please see the section entitled Cautionary Statements on Forward-Looking Statements for factors that may impact future performance. We also discuss non-GAAP measures. Information on use of these measures and reconciliations to GAAP are in the press release and presentation. On the call today are Chirag and Chintu Patel, Co-Founders and Co-CEOs; Tasos Konidaris, CFO; and Jason Daly, Chief Legal Officer. I will now hand the call over to Chirag. Chirag Patel: Thank you, Tony. Today is a defining moment for Amneal. This morning, we announced that Amneal agrees to acquire Kashiv BioSciences, creating a fully integrated global biosimilars leader and positioning Amneal to become the #1 affordable medicines company in the United States. We have long said this was our goal. And today, we're showing exactly how to get there. Turning to Slide 3. I'll begin the call by discussing the strategic fit of the acquisition and the remarkable biosimilar opportunity ahead. Chintu will share more about Kashiv, our combined capabilities and the robust biosimilar portfolio we will have. Tasos will discuss the transaction, our financial outlook and Amneal's very strong first quarter results, which we preannounced this morning. At a high level, Q1 marked another consecutive quarter of strong top and bottom line growth with revenue up 4%, adjusted EBITDA up 19% and EPS up 29%. Our strong start of the year, combined with growth of existing and new products, gives us confidence to raise our stand-alone guidance for 2026. This consistent performance is something investors have come to expect from Amneal and something we take great pride in. On Slide 4, we provide an executive summary of this combination. First, this is a highly strategic transaction that creates fully integrated global biosimilars leader. This unlocks direct access to more than $300 million of worldwide biologic loss of exclusivity over the next decade by bringing together Kashiv's deep R&D and manufacturing capabilities with our proven commercial scale. This combination builds on a longstanding partnership that significantly reduces execution risk. Second, this combination creates immediate scale in biosimilars. We expect multiple launches each year going forward, supported by a robust pipeline of more than 20 biosimilars programs. Third, this adds biosimilars as a key growth pillar within affordable medicines. The transaction further diversifies our business and extends our growth profile well into 2030s, while also creating a footprint to expand internationally over time. And fourth, the deal is structured to create value from day 1. With a balanced mix of upfront consideration, performance-based milestones, we expect significant financial synergies and we maintain a disciplined financial profile with a clear path to deleverage to below 3x by 2028. Let me turn it over to Chintu to share more about Kashiv. Chintu Patel: Thank you, Chirag. Good morning, everyone. Going to Slide 5. Today's acquisition announcement reflects our long-stated goal to be vertically integrated in biosimilars. I want to acknowledge the Amneal and Kashiv teams whose hard work made this possible. Kashiv is a biologics platform built over 12 years with more than $900 million invested, 600-plus employees and 4 R&D and manufacturing sites. It brings proven capabilities, a differentiated portfolio and a global operational footprint in U.S. and India, which provides reliable supply chain and cost efficiencies. Turning to Slide 6. Kashiv adds deep biosimilar development expertise and scaled U.S. and India manufacturing, enabling multiple programs to run in parallel with speed and cost efficiency. The platform can support 3 to 5 biosimilars developments annually and offers end-to-end biologics capabilities from clone development and protein characterization through clinical and regulatory execution. These expertise spans key modalities and the vast majority of biologics, including microbials, monoclonal antibodies, fusion proteins, bispecifics and cytokines. From a manufacturing perspective, drug substance capacity is expected to scale from 26,000 liter in 2026 to 75,000 liter by 2028. Combined with Amneal, this creates a fully integrated global biosimilar platform. I will hand it over to Tasos to share more on the transaction. Anastasios Konidaris: Good morning, and thank you, Chintu. Turning to the transaction overview on Slide 7. As you can see, we have purposely structured this deal to balance upfront value and success-based consideration to ensure alignment of interest. The upfront value of $750 million is a 50-50 mix of cash and equity. The equity portion translates to approximately $29 million of Amneal shares, representing 8% equity dilution. In addition to the upfront value, the deal terms include potential milestones of up to $350 million, contingent upon attaining certain regulatory approval milestones as well as potential royalties over 12 years contingent on achieving certain gross profit levels. Finally, Amneal will fund operations between signing and closing of the deal. We spent a lot of time structuring this transaction to ensure it aligns incentives with the large commercial opportunities ahead of us and doing it in the most balance sheet-friendly way. The transaction will be funded by cash on hand as well as some additional debt, and we expect the combined company's net debt leverage ratio at the end of 2026 to be 3.7x adjusted EBITDA, only a slight increase to the 3.5x adjusted EBITDA at the end of 2025. It is important to note that we expect to resume our deleveraging in 2027 and expect our net leverage ratio to be 3x below adjusted EBITDA -- net debt adjusted EBITDA by 2028. Finally, we expect this highly strategic transaction to close in a few months as we work through annual shareholder approval and customary closing conditions and regulatory approvals. Let me now share our expected combined financial growth profile on Slide 8. First, we're embarking on this acquisition from a position of strength. As you may have seen from our press release this morning, we announced record first quarter preliminary financial results, and we also raised our full year stand-alone guidance. Amneal's ability to deliver solid top line growth and double-digit adjusted EPS growth in a tumultuous macroeconomic environment is a testament to our strategic choices, strong execution and relevancy of our products. Consequently, on a combined basis, including Kashiv, our 2026 view remains largely unchanged aside from a small impact to cash flow related to near-term transaction and integration costs. Importantly, we're maintaining the higher adjusted EBITDA and EPS outlook, which we believe is a clear signal of the underlying momentum and confidence in the trajectory of our business. For 2027 and beyond, we expect the combined company to continue to grow both in terms of top and bottom line performance. And by 2030, we expect revenues to have grown by approximately $1.2 billion or 40% over 2026 and EPS up by approximately $0.70 or 70% over 2026. Finally, we expect substantial operating cash flow growth, which supports our continued deleveraging. While increased financial performance is important, I cannot emphasize enough the impact this acquisition is having in enhancing our diversification, providing us with access to large markets into 2030 and beyond, just like our GLP-1 deal with Pfizer. Let me now hand it back to Chirag. Chirag Patel: Thank you, Tasos. On Slide 9, this transaction fits squarely in our long-term strategy. It adds biosimilars as a key growth pillar and positions us higher on the value curve with greater scale and higher growth. So why now? In looking at Slide 10, it's because we are entering the golden era for biosimilars. The global market is expected to grow from about $40 billion today towards $200 billion by 2035, driven by the largest biologic loss of exclusivity in history over next decade. Advancing to Slide 11. Biosimilars represent the next major wave of affordable medicines, and we are at an inflection point. Physician adoption is accelerating, patient access is expanding and the U.S. regulatory advancements are lowering development time and cost. Today, about half of U.S. drug spend is concentrated in high-cost biologics. Furthermore, biopharma pipelines continue to shift towards biologics with most therapies in development being large molecules. Each biologic is a future biosimilar opportunity. With biosimilars, access expands and cost lowers, delivering meaningful value for patients and the health care system. In 2024, biosimilars were estimated to have saved the U.S. health care system $20 billion. There's a powerful opportunity to improve affordability and expand access because what is the point of innovation if it is not accessible. Turning to Slide 12. Despite this opportunity, there are only a handful of integrated global players. And today, there is no clear U.S. biosimilar leader. Most players have relied on partnerships to date. With Kashiv, we bring together development, manufacturing and commercialization, enabling faster execution, smarter and bigger portfolio choices and ability to capture full economics. We believe this level of vertical integration is a true competitive advantage. I'll pass it back to Chintu to share more on the combined capabilities and portfolio. Chintu Patel: Thank you. Chirag shared with you the strategy on why biosimilars. Let me share with you the clear reason why Amneal. Looking at Slide 13, since our founding, we have built a leading affordable medicine business. We are now #3 in U.S. retail generics with over 280 products across dosage forms with one of the most complex portfolio in the industry. This is a natural extension of our strategy, and we will execute with the same rigor and discipline in biosimilars. On Slide 14, we show how this combination brings together end-to-end biosimilar capabilities. Kashiv adds scientific expertise and in-house development from cell line through approval, along with scaled biologics manufacturing across a global footprint. Amneal brings a proven commercial engine, leveraging our leading affordable medicines business, long-standing customer relationships and the specialty branded infrastructure to drive market access and uptake. Built on a 10-year plus partnership with Kashiv, our capabilities are highly complementary and positions us to execute well. Next, let's look at Slide 15 and the combined portfolio. Together, we have a combined portfolio of 20-plus biosimilars that targets over $100 billion in U.S. opportunity and more globally. First, we expect to have 6 commercial biosimilars by 2027, including biosimilars for Avastin and Denosumab and a biosimilar for XOLAIR, which is pending approval. Second, we expect 6 or more additional approvals from our advanced pipeline by 2030. And third, in 2030 and beyond, we have a deep pipeline of future programs that extend our growth well into the next decade. Strategically, this is a balanced and durable portfolio mix. Many opportunities are biologics with less than 1 or 2 competitors expected and others are widely used products with large markets, creating a durable and scalable growth engine. On Slide 16, we have a clear line of sight to steady cadence of near-term catalysts from Kashiv. First, lanreotide is a high-value partner asset expected to be approved in quarter 3. Second, biosimilar XOLAIR follows with anticipated approval at year-end, which is another Kashiv partnered asset that we now capture full value for. After that, we see a pipeline of additional approvals in 2028 and 2029, including biosimilars for ORENCIA and CIMZIA, each representing meaningful future growth drivers. Let me now pass it back to Tasos. Anastasios Konidaris: Thank you, Chintu. I'm very pleased to share with you our exceptional first quarter preliminary results, our confidence in the strength of our business, which translates to increasing our full year guidance on a stand-alone basis. And finally, our proposed acquisition of Kashiv BioSciences, which positions Amneal as a leader in the large global biosimilars market. Let me first start with our first quarter preliminary financial results, which were characterized by robust top line growth, exceptional bottom line growth and continuing deleveraging. Moving to Slide 22 in the appendix. Total net revenues in the first quarter of $723 million grew 4%. Q1 Affordable Medicines revenue of $423 million grew 2%, driven by strong performance of key women's health and ADHD products due to high market demand and increased Amneal supply. These high-margin products drove Q1 segment gross margin to 47.3%, up 320 basis points versus Q1 of 2025. We continue to expect Affordable Medicines revenue growth of 7% to 8% this year, driven by the strength of new product launches and strong execution by our teams. Q1 Specialty revenue of $133 million grew 23%. First quarter CREXONT revenue of $21 million reflects continued strong market uptake. Earlier this week, we shared with you our additional Phase IV data, which showed CREXONT as having more than 3 hours good downtime versus RYTARY, reflecting the CREXONT's compelling clinical profile. In addition, we're also delighted with the strong launch trajectory of Brekiya for cluster headaches. Revenue in Q1 2026 was $4.6 million compared to $1.6 million in Q4 2025. This rapid adoption as well as feedback from patients and prescribers confirms the substantial market need and long-term revenue potential for Brekiya. Turning over to AvKARE, where Q1 revenues of $166 million declined by $6 million or 4% as strong growth in our government channel was offset by expected decline in the low-margin distribution channel. As you recall, this is part of our strategy to enhance profitability, and we're happy to report that AvKARE's gross margin in the quarter grew by 690 basis points versus first quarter last year. Moving to Slide 21. From a bottom line perspective, the strong growth of adjusted gross margins by approximately 500 basis points and thoughtful expense management translated to Q1 2026 adjusted EBITDA of $202 million, up 19% and Q1 adjusted EPS of $0.27, up 29%. Finally, our strong financial performance and discipline continue to reduce leverage and our net leverage ratio in March of 2026 declined to 3.5x adjusted EBITDA compared to 3.9x adjusted EBITDA in March of 2025. So in summary, and before I turn to our acquisition of Kashiv BioSciences, our business fundamentals, financial outlook and balance sheet have never been stronger, which positions us well to consider such a strategic deal. Turning back to the acquisition for a moment, as we outlined on Slide 17, this is a highly synergistic transaction, adding significant value to our commercial and operating business model and providing substantial financial benefits over the course of time. From an integration perspective, we're combining Kashiv's R&D and manufacturing expertise with Amneal's commercial engine. We're strengthening market access, expanding in hospitals and accelerating international growth. With our shared global platform, we accelerate time to market at lower cost. From a financial standpoint, we expect $400 million to $500 million in cumulative financial synergies over time. There are 2 key elements to this. First, we're now capturing full economics from partnered assets by eliminating milestones and profit-sharing obligations that existed as part of prior licensing deals. Second, we also expect to realize substantial tax benefits as well as incentives from the local Indian authorities. Importantly, this deal goes beyond traditional cost synergies. It creates strategic scale and durable value while also avoiding the significant time and capital needed to build a biosimilars platform organically. Let me now hand it back over to Chirag. Chirag Patel: Thank you, Tasos. On Slide 18, since 2019, we have built a stronger and more diversified Amneal, and delivered consistent top and bottom line growth each year. We have done this by executing well across our business. We launched 20 to 30 products annually, expanded especially with CREXONT and Brekiya, entered biosimilars with our first products, established a novel GLP-1 collaboration with Pfizer, expanded internationally and acquired and more than doubled the AvKARE business. That said, the opportunity ahead remains significantly greater than what we have achieved to date. We envision Amneal 2030 as a much larger, more diversified biopharmaceutical company with more than 400 retail and injectable medicines, mostly complex and differentiated, a large pipeline of 20-plus biosimilars and multiple specialty branded products advancing the standard of care, while Amneal fills hundreds of millions of U.S. prescriptions each year. In summary, the key takeaway from today's call are on Slide 19. Today marks a pivotal moment for Amneal, establishing a fully integrated global biosimilars leader, strengthening our diversified portfolio and extending our durable growth profile into 2030s. Our strategy remains clear to become America's #1 affordable medicines company and a leading global provider of essential medicines because innovation only matters when it reaches the patients. With that, thank you, and we will open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Matt Dellatorre with Goldman Sachs. Matthew Dellatorre: Congrats on the deal. I know this was a long time coming, so very exciting. Maybe 2 questions, if I may. First, just on the commercial strategy for the new expanded portfolio. I see you have both the mega blockbusters like OPDIVO and KEYTRUDA and also many sub-$5 billion assets in there. And then also, it's a healthy mix of pharmacy benefit and medical benefit drugs. So could you maybe just speak a bit on how you approach portfolio construction and what type of assets we should expect over time as you all disclose more and the pipeline expands? And then I realize you're primarily focused on the U.S. market, but can you just remind us how you are thinking about the international biosimilars business as well? And then maybe stepping back, a question for Chirag. When you look at this new kind of combined company you all have now, what would you highlight as maybe the 2 to 3 specific things that you're most excited about and which you think could drive upside to this long-term guidance that you're giving today? Chirag Patel: Thank you, Matt. So let me address the portfolio mix first, the Kashiv pipeline. So markets are shifting more towards PBM, as we know. We predict 70%, 75% market to be driven by private label, PBMs, specialty pharmacies and 25% or so percentages will be driven by buy and build. So it's a well-thought-out portfolio. If you look at the disclosed product, there are certain undisclosed product that just like what we did with small molecule, we want to be the big player, relevant player and mostly focused on niche products. So how do we achieve that? That is why we have some of the big products like KEYTRUDA, OPDIVO, DUPIXENT, but each has its own reason why we have selected. Just to give you an example, DUPIXENT requires such a large biologics capacity, we're building it. And at the right time, it will be ready to deliver. Then we have niche products, which we expect 2 to 3 competitors. So if you look at overall in the next 10 years, our portfolio would be probably 70% would be niche, about 30% would be the large molecule that we must have to offer a complete package to the customers. So that is how the portfolio makes very well and obviously, the IP driven, a lot of strategy work goes behind it for the last 10 years, what Kashiv has done, and we love the portfolio. And execution is going to be the key, which Kashiv has executed over the last 25 years. We will bring the same rigor to execute this big platform on the biologics. Your second question on how do I think about U.S. commercialize, I answered most of the products. We will be marketing Amneal directly. We already have a long-standing relationship with big buyers such as CVS, Express Scripts, Cigna, Optum, UnitedHealth. These three are about 80% of the market. We also enjoy a great relationship with smaller customers. So we're well set to commercialize products in the United States with a broad portfolio of small molecule. Don't forget that plays a role as well. It's the same people, same relationship, same trust that we have established. If you ask the Red Oak of the world or Walgreens of the world, they would rank Amneal as the most strategic, the best platform, best values, the most complicated products that we come up with and create a massive patient access at affordable prices. We intend to do the same with biosimilars. International, our strategy has been clear. India, we have started marketing on our own, mostly the unmet need on the branded side and biosimilars. Rest of the world, we enjoy great partnership, as Amneal, Kashiv has also built great partnership with companies as well, which will be disclosed in the near future. So I'm a big believer in a partnership model. So you can -- there is a biosimilar void. There's 118 biosimilars. How do we deliver as an industry on all of that. So partnership will make great sense, and we don't intend to have boots on grounds in Europe or South America or Canada, that's not where we are focused on. We are solely focused on delivering biosimilars at scale, staying in the molecule for a long time, be a champion in America as we have a stated, goal is America's #1 affordable medicines company, and we are on our way to get there, maybe 2030, '32, we have multi-decade strategy. So we are completely focused and internationally, great partners. We look forward to work with them. New -- the last one, I'm sorry, is a long answer, but I'm so excited. The new combined company, what is the most exciting thing. So let's go back. I mean, our core business is performing at a full throttle, it -- the women's health, the hormonal patches demand has gone up, the inhalation products demand, ophthalmic products demand, they're all at a high level. And also the small molecules LOEs are going to double in the next 5 years than it had for the last 5 years. So tremendous growth opportunity in core business by itself. Second, our specialty brands, very exciting. You saw the CREXONT data, amazing. I mean we're getting words from our partners in Europe and India that this would become a first-line therapy because they've been using 40 years old technology platform. The product was made 40 years ago, IR product, Sinemet, which gives you off time every 2 hours, 3 hours, you think of a life of a Parkinson's patient. CREXONT is the best therapy out there for maintaining the daily lives. So very excited about CREXONT and seeing a great outcome on Brekiya. It's a much needed product, useful product for cluster headache patients and severe migraine patients. The third, GLP-1 partnership with Pfizer. As we all know, GLP market is going to keep growing. It's going to become life setting. So tremendous capacity would be -- and capability would be required. This is what we are building with Metsera, then it's with Pfizer. We enjoy a great relationship with Pfizer, a win-win situation, global markets, global demand. We have 18 countries, emerging countries, including India, we've been given the rights to market. Pfizer's branded products, which came from Metsera portfolio. That's a completely unique strategy than fighting over the generics at such a low prices that's been out there in -- just started in India and rest of the world. And we believe this is consumer products, everybody would want less side effect, longer duration, which potentially Pfizer products delivers. And the last one, as we've been talking on this call, is all about biosimilars, huge growth. We've been saying that this is the inflection point. The providers are excited. The 80% now turns into biosimilars. The insurance company, the coverage is becoming better and better. CMS has keep pushing for it. FDA has reduced the regulatory requirements. So this is the perfect time that we integrate this platform and deliver 3 to 5 biosimilars develop and file and commercialize for many years to come. And it also opens up the opportunity for bispecifics, right, the fusion proteins and in the future, ADC as well. So if you -- this is why it's so important for Amneal to now have a complete platform, small molecule platform and large molecule platform. Long answer, but I hope it was helpful, Matt. Operator: Your next question comes from the line of Les Sulewski with Truist Securities. Leszek Sulewski: Congrats on the transaction. So you noted the capacity scaling from 26,000 liters to 75,000 liters. How does this compare to some of your peers? And what's the magnitude of dollar spend to get there? And separately, would you say this is rightsized for that business moving forward? And do you see a further need for capacity expansion beyond the 75,000 liters? And then second, on the gross margin profile, maybe just walk us through the puts and takes around 1Q and how does the remainder of this year look? And then over the long run, how should we think about the margin profile now that the biosimilars business will be integrated? Chirag Patel: Great. Chintu and I will take the first one and pass it to Tasos for the second one. So Kashiv has built the platform manufacturing sites over the last several years, which is -- which coincides with the product approvals timing. So XOLAIR being first, we will be in manufacturing Piscataway, New Jersey and also the backup site is India as well for global supply. So all key molecules will have 2 sites, U.S., which, as you know, we are a U.S. champion. We always believe in U.S. manufacturing. So we keep expanding U.S. manufacturing, and we only have a site in Chicago with Kashiv acquisition, which is for E. coli. So the current capacity is sufficient for first few launches. And then over '27, '28, '29, we're expanding to 75,000 liter, which is, again, matches with the pipeline execution and pipeline approval and launch timing. That is how we see the capacity expansion. And it will be a good problem to have from 2030, '31 to keep expanding. Once we have the infrastructure in the same site, we can expand another -- keep expanding 25,000 liter -- another 25,000 liters as we need, we are always smart about this. We'll keep expanding the capacity. So we never would have issue with capacity. I'll pass it to Chintu to give more lights to this. Chintu Patel: So we have perfectly sized the capacity, and it's not only about how many thousands of liters, it's also about how you design and the number of bioreactors because you need flexibility in your manufacturing and for the execution of the filing products. So I think that's a key differentiator that how we have thought through that on a long-term basis to cater to our goals of filing a few biosimilars every year and the same time also commercially to make sure that we have the excess capacity. And we are -- we have diversified our supply chain from U.S. and India perspective also. So if it's a cost sensitive product, we will have enough capacity in India and also in U.S. So I think we are positioned well to cater to all the 20 products that we have and we have also considered this as a global capacity. So it's not only U.S. specially, we are playing globally in this market. So we are pretty comfortable with the 20 products having 75,000 liters. It's all about the design and how we have thought through that. And we have taken under consideration good market share. So that's also there. About the spend, it's about $30 million, $50 million a year, we'll be spending for next 2, 3 years on the CapEx to get to the 75,000 liter. Anastasios Konidaris: And Les, this is Tasos. Around gross margin. So I'll just speak in annual terms. So if you think about our gross margin in 2025 full year total company, we were at 42.9%. So let's call it 43%, and my gut feel is I think we will finish 2026 at about 45%. So at least at 200 -- we're aiming at a 200 basis points expansion. And that's going to come -- that's going to be driven, a, by all the business units. So our affordable medicines margins will continue to expand as we have continued to evolve the pipeline to more and more complex products with higher price points, right? You've been hearing this from us for the last 6 years now, number one. Number two is we talked about our conscious decision to increase the gross margins in our AvKARE business, which has been -- that acquisition has been a spectacular success and by focusing more on the government, at the expense of the low-margin distribution business. So that continues to pay dividends. And then finally, in our specialty business, which already has low 80s, 81%, 82% gross margins kind of continue to drive that adoption. So those have been the drivers why our gross margin this year should be at about 45% compared to about 43% last year. As you think over the course of time, margins have more room to grow, more room to grow beyond the 45%. If you were here about 5, 6 years ago, you will have heard Chirag and Chintu talking about having gross margins in the old days, almost 50%. So this is where we are driving directionally over the next 10 years. So it takes some time to get there, but we see another -- over the next 3 to 4 years, we're looking at the 45% gross margin to be closer to, call it, 47% gross margin as the portfolio continues to be driven by biosimilars, which have a higher price point than the rest of the business. Operator: Your next question comes from the line of David Amsellem with Piper Sandler. David Amsellem: So I have a few. First, can you just comment and elaborate on the insider ownership of Kashiv? That's number one. Number two is why provide long-term revenue EBITDA targets, not just '27, but also out to 2030? What was the rationale there? And just remind us is the EBITDA margin expansion that you're factoring in between 2027 and 2030, is that -- how much of that is a function of just the elimination of the shared economics on biosims? And then the last question is how much of your revenue base by 2030 do you expect will be from biosims? Anastasios Konidaris: David, I'll take question #2 and #3. If you can just -- can you just repeat question number one for a second, if you don't mind? David Amsellem: Yes, the insider ownership of Kashiv. Anastasios Konidaris: Insider ownership of Kashiv. Okay. Got it. Okay. So well, I'll take the first one. I'll start with the first one. So insider ownership of Kashiv, you can see it essentially in our proxy, which has been owned by the Amneal Group, which has been also a big shareholders at Amneal since the beginning of time. So ownership includes of the Amneal Group, includes both our CEOs who've always been transparent of that as well as people who have been investors in Kashiv and -- investors of Kashiv and also at Amneal for a very long time, and key contributors to what we have built now, which is a great company. So that kind of thing addresses question #1, hopefully. Number two is no CFO that I know likes to provide long-term guidance because it's a Catch-22 as lot of things can happen over the course of time. Having said that, and you got to -- I think you know us long enough to know, we take our long-term guide and financial commitments incredibly, incredibly seriously. So for us to provide long-term guidance, we had to feel pretty confident on our ability to deliver on those commitments, number one. Number two, I think it speaks to the tremendous amount of diligence we have done in this acquisition, which probably expand at least a year's worth of work by tens of people in our R&D group, in our legal group, in our business development group, in our financial group and the commercial group to convince me and convince us as a management team to lay those numbers out for our investors. The final thing is, I would say, why provide long-term guide, to us, it provides a focal point by which we focus 8,000 employees at Amneal and now our brand-new colleagues at Kashiv. So everyone, all of our 8,000-plus employees are singularly focused to a set of financial metrics, so it eliminates ambiguity. So this is what's behind why provide those targets. And also you got to assume we're being prudently conservative, right? No management team, at least that I know, wants to put out numbers which they are at risk of missing. So that's kind of how we thought about and why we provide those long-term targets. Now in terms of revenue and EBITDA expansion, it's a combination. It's a combination of both. I don't have the exact percentages, right? A lot of how much of that is a new acquisition versus how much of that is the existing business. As I mentioned before, we have an existing business. You look at our affordable medicines, every part of our business is growing. So we are doing this deal, not because we need to, because we think this is the right deal to do at the right time with the right risk parameters to drive growth for this business in 2030 and beyond. So you look at our affordable business, and that business is growing this year. We expect it to grow 7% to 8%. That growth will continue, and you can model this and biosimilars will add to that, right? And then in terms of an EBITDA basis, Q1 EBITDA was up 19%, right? Last year's EBITDA growth was 10%, this year. So the base business that is growing at least adjusted EBITDA 10%. We expect this to continue and add on -- the additional add-on we expect to come on biosimilars. So that's how we think of it. It is a highly derisked long-term forecast that is based on the growth of the existing business plus the acquisition and it's conservative in nature. So hopefully, that addressed some of your questions. David Amsellem: Yes. How much of your business do you think is going to be biosimilars? Like what's the revenue base going to be in 2030... Anastasios Konidaris: So... David Amsellem: Footprint now, yes. Anastasios Konidaris: Yes. So if you think about 2030, for example, the guidance we're providing is between $4.3 billion and $4.5 billion, probably about $1 billion -- a little over $1 billion, $1 billion to $1.3 billion, that's going to be biosimilars. Operator: Your next question comes from the line of Chris Schott with JPMorgan. Christopher Schott: Just 2 for me. Maybe just first, a bigger picture question on biosimilars. Can you just talk a little bit more about how you see the competitive landscape evolving as we approach this very large cycle of biologic patent expirations? I know you mentioned there's no clear leader in the space, but do you anticipate there's going to be a more meaningful consolidation of share and there's going to just be a handful of players? Or will this remain a more fragmented market as a whole? And the second one for me is just on a specific product on lanreotide, the Somatuline Depot. Can you just talk a little bit about that opportunity as we think about 2026 in terms of market dynamics and competitive landscape and just how meaningful of a product that could represent for Amneal? Chirag Patel: Yes. Thank you, Chris. Competitive landscape on biosimilars, as we know, the vertically integrated players are taking more market share. Amgen, obviously, one brand company that is still investing in biosimilars. Rest of the brand companies have moved out of favor for biosimilars, as you know, they are more obviously back to the innovative medicines. So that leaves Sandoz obviously clear global leader at this point and a great company. Celltrion is coming in, is a -- from -- a South Korean company, which is expanding in the United States and globally and building a large vertically integrated platform. Samsung is doing both out-licensing mainly and concentrating also different division on biosimilars. India's Biocon has been in the biologics for over 40 years. So they're already in the United States market. And then Kabi with mAbxience ownership and their own, we see them as a vertically integrated player. So the way it would expand is -- this is why it's an inflection point that we, as Amneal got the platform or getting a platform with the manufacturing capacity, with the pipeline that we execute over the next 5 to 7 years. It requires a lot of manufacturing infrastructure, a lot of R&D infrastructure, number of years, even with FDA's Phase III gone, still will be 5-plus years from the timing of starting the clone development all the way to the filing and approval and then the IP negotiation settlement. All those things would take 5, 7 years. So -- and you can't see like in a small molecule, you have 50 companies jumping in from India and China. We don't see that. We see a few companies will come from India, a few maybe from China, but they all have to build these U.S.-oriented infrastructure or regulated markets, which is a different ball game than you've been producing biologics for the emerging markets, because the requirements of FDAs are much at higher standards than those other countries. And Amneal builds everything first with U.S. in mind. So yes, there will be more competitors. The large molecules like KEYTRUDA, OPDIVO, you will see 5 to 10 competitors. Some would be partnered, and niche, this is why we, Kashiv and Amneal will be focused on is in niche molecules where we will see 2 to 3 competitors. So that's how we see the competitive landscape, maybe 8 to 10 players. There are 118 molecules to go after. Big biosimilar void is there. So that is a large, large number of products to work on and not everybody can do every product. As we said, our capacity capability is 3 to 5 per year. Chintu, do you want to add anything? Chintu Patel: I mean there's a lot of high barriers of entry, and science, it's much more complicated than the small molecules. It will cost close to $50 million to $75 million per product. So there are lots of barriers. So I think it still will remain not that competitive plus as Chirag stated, it takes 5, 7 years for a new player to build this platform and have the manufacturing and development expertise and capacity. At Kashiv, we have a fantastic group of 600-plus people. And that experience, I think, gives us the confidence of this 3 to 5 biosimilar. So competition, as Chirag stated, would be these 4, 5 players might be vertically integrated, but still is largely a space for somebody to be a leader and the Amneal will be a leader by 2030. Chirag Patel: And lanreotide, Chris, is -- the market dynamics changed. There was -- Cipla was in the market, had some contract manufacturing issues, so they are no longer in the market. It leaves it only with brand and the product is in high demand. We're getting calls from everybody. So we have requested FDA to expedite the approval and they're working on it, and we could be the first, again, the -- I'm sorry, it's a small molecule, generic lanreotide in the market, and we will supply and create another access for the hospitals and clinics as soon as possible. Chintu Patel: And this is also a global. So we have a pending approval in Europe also, and it's a highly complex product. It's a drug device combination peptide. So we are looking forward to this product and its opportunity. Operator: Your next question comes from the line of Glen Santangelo with Barclays. Glen Santangelo: Just a couple for me. Chirag, I mean, I think everyone would generally agree strategically that a deal like this kind of makes sense. But I'm kind of curious to get your perspective on the operational complexities of sort of what's involved here. Because if you look at the -- we were just talking to Chris' question about the evolution of the competitive landscape. A number of the other players have decided to go more in the partnership licensing route versus the vertical integration route. And maybe that's a function of how complicated or operationally complex it is. And so I'm kind of curious if you worry at all about increasing the risk profile of the company in that way. And then maybe secondarily, I wanted to talk about the 2027 EBITDA guidance that you put out today. And I'm guessing you kind of realize that, that number is a decent amount below what the Street was already forecasting for fiscal '27 and kind of implies some deceleration in the EBITDA growth rate in '27 versus '26. And just sort of given the $400 million to $500 million in synergies we sort of talked about, you had a couple of partnership deals that seem like they're on track and maybe you'll have full ownership of them by the time they come to fruition. I'm just trying to reconcile all the pieces that you've laid out here as it relates to how soon we may see those synergistic benefits in '27 and beyond. Chirag Patel: Thank you, Glen. So let me take the first one. I'll pass it to Tasos for the second question. So the first one, partnering versus full economics or vertically means vertically integrated. Yes, it is complex. This is why it took 10 years for Kashiv to build this platform with significant investment. So this is why we believe it be competitive light compared to obviously the small molecule. And why you can take the large few molecules, right, who could stay in the market, who could take the leadership position and stay all the way until the molecule needs to be delivered and produced. So if we have -- first of all, it gives you full economics. So your margin expands, you have full freedom of selecting products and it's not easy to in-license 20 products. We have 20 products biosimilar basket, and we're going to add more in coming years. So that freedom, the full economics in the United States market, it makes sense to be completely vertically integrated. As I stated before, Glen, that it would -- the partnering would -- is great. And in international market, we look to partner and Kashiv already has partnership with the key players globally who are well set globally. So I see the combined model, but mostly the companies that would be successful if you look back in 2030 or '35 are going to be all vertically integrated. They will not be -- just like in small molecule, there are not any companies that have survived being just the marketing companies. We got to do a lot more than that because the real, real complications is the R&D, is the IP, is manufacturing. I think the PBMs and private labels are making the marketing and sales easier, which is how it should be. I hope that answers the first question. You can -- may have a follow-up, but let me pass it to Tasos. Anastasios Konidaris: Glen, I love financial modeling questions. So let's kind of put things in perspective. So the first point is guidance for 2027 on EBITDA of $820 million is kind of substantially below where the Street is. I'm not sure where the Street is, number one, I think that they are about $835 million. So us providing guidance of $820 million plus compared to $835 million, I don't think it's substantially less than that, kind of point number one. But also, obviously, we don't run our business to kind of satisfy anybody else other than us and our shareholders, kind of point number one. Point number two, this kind of notion of kind of deceleration. This year EBITDA, right, the midpoint is at $755 million is about 10% growth versus prior year. Even if you take the low end of what we gave you for next year of $820 million, that's about 9%. So 9% versus 10%, I don't think it's a big deceleration, number two. And number three, we feel great about growing EBITDA 9%, 10%, even absorbing a strategic deal, which is going to have some dilution next year until it becomes accretive in 2028. So we feel great about being able to give our shareholders a view about next year of adjusted EBITDA up of about at least 9%, number one. And at the same time, fund incremental R&D, right, to maximize the opportunity here of $300 billion plus of branded products going generic over the course of time. That's kind of how we thought of it, and try to give you guidance for 2027, that's a long time away. So I think it speaks to our confidence about telling you what we think we can -- the minimum we can deliver next year. So hopefully, that gives you some perspective. Operator: Your next question comes from the line of Ash Verma with UBS. Unknown Analyst: This is [indiscernible] from UBS. I'm just asking questions on behalf of Ash. So I have 2. The first one, and I apologize, this has been discussed before. So the first one, how do you think about the lanreotide market opportunity? It seems like there's just limited competition in this molecule. So I just wonder like how confident are you about the approval time line in 3Q? And what will be the gating items for the launch? And then my second question on gross margin. So I think like it was discussed before the annual -- like in annual term, it's about like 45%, but in 1Q, I think this quarter it is about 48%. Does that mean we're going to see some gross margin normalization later this year? If you can give some clarification on that, that would be helpful. Chirag Patel: Thank you, [indiscernible] The lanreotide, the gating item is only the FDA approval. We're ready to supply, and it's a great opportunity for Amneal. I'll pass it to Tasos on the gross margin. Anastasios Konidaris: Yes. Our Q1 gross margin follows for a while. It was just a record quarter, which was overall up 510 basis points versus Q1 of last year. So it's just to kind of be able the sustainability of 510 basis points is kind of hard to keep repeating quarter after quarter. So this is why I think we're being -- we have a little bit more modest gross margin expansion for the rest of the year. And this is why, though -- even though with a little, call it, a little bit more modest growth the rest of the year, we still feel confident that overall company gross margins this year in 2026 should be closer to 45%, 45%, maybe a little better compared to about 43% last year. Hopefully, that's helpful. Operator: There are no further questions at this time. I will now turn the call back to Chirag Patel for closing remarks. Chirag Patel: Well, thank you, everyone, and have a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the ASM First Quarter 2026 Earnings Call. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Victor Bareño. Head of Investor Relations. Please go ahead, sir. Victor Bareño: Thank you, operator. Good afternoon, and thank you for joining our Q1 earnings call. With me today are our CEO, Hichem M'Saad; and our CFO, Paul Verhagen. ASM issued its first quarter 2026 results yesterday at 6:00 p.m. Central European Time. For those of you who have not yet seen the press release, it is available on our website together with our latest investor presentation. As always, we remind you that today's conference call may contain forward-looking statements in addition to historical information. For more details on the risk factors relating to such forward-looking statements, please refer to our press releases and financial reports, all of which are available on our website. Please also note that during this call, we will refer to profitability metrics, primarily on an adjusted basis. Reconciliations to reported numbers can be found in the press release and in the investor presentation. And with that, I will now turn the call over to our CEO, Hichem M'Saad. Hichem M'Saad: Thank you, Victor, and thanks to everyone for attending our first quarter 2026 results conference call. We will follow the usual agenda for today's call. Paul will begin with a review of our first quarter financial results. I will then discuss market trends and our outlook followed by the Q&A session. I will now turn it over to you, Paul. Paul Verhagen: Thank you, Hichem, and thanks, everyone, for joining our call today. Let me first walk you through the Q1 financial results. Our revenue in the first quarter of 2026 amounted to EUR 863 million, which was at the high end of our guided range of EUR 830 million plus or minus 4%. On a constant currency basis, revenue increased by 16% year-on-year and by 26% compared to Q4 '25. Equipment sales increased by 14% at constant currency and were led by ALD. Spares & services continued to deliver a very strong performance with a 23% year-on-year growth at constant currency. This was the result of continued expansion of our outcome-based services and strong spares demand in an environment of elevated set utilization rates. In terms of customer segments, revenue was led by logic/foundry, which accounted for the clear majority. For the full year, advanced logic/foundry sales are expected to show significant growth this year. However, due to quarterly phasing, they were down from the very strong first quarter last year. Mature logic/foundry for the large part from customers in China increased compared to Q1 last year and rebounded strongly compared to the relatively low level in Q4. Memory sales showed sequential growth compared to Q4 last year and also expected to grow significantly for the full year, mainly in DRAM. Sales in the memory segment were predominantly driven by applications for high-performance DRAM in HBM-related applications. Sales in the power analog wafer segment increased compared to the first quarter of last year, mostly in silicon-based solutions but from a low base. Gross margin in the first quarter amounted to a strong 53.3%. This was virtually unchanged compared to 53.4% in Q1 of last year, up from 49.8% in Q4. Gross margin was supported by a favorable product and customer mix including an increased sales contribution from China, which rebound strongly compared to the lower level in Q4. The gross margin also benefited from a gradual impact from cost reduction programs that we have been implementing over the past few years. We expect the gross margin to be at the higher end of the target range of 47% to 51% for the full year. SG&A expenses increased by 8% year-on-year at constant currency, mostly due to higher variable expenses, but dropped slightly as a percentage of sales, demonstrating our ongoing focus on cost control. For the full year, we continue to expect SG&A as a percentage of sales to drop below 9%. Net R&D increased 11% year-on-year at constant currency in Q1. We continue to step up R&D investments to support customer transitions to next-generation nodes and to advance our expanding pipeline of opportunities. For the full year, we intend to keep the net R&D within our target range of a low double-digit percentage of revenue. Operating profit increased by a solid 21% year-on-year at constant currency, and the operating margin reached a new record of 33.1%. If you look at the main movements below the operating line, financial results included a currency translation gain of EUR 10 million in Q1 '26 compared to a translation loss of EUR 40 million in the first quarter of last year. As a reminder, we hold a large part of our cash in U.S. dollars and the related translation differences are included in our financial results. Our share of income from investments, reflecting our stake of approximately 25% in ASMPT amounted to EUR 7 million in the first quarter, up EUR 2 million in the year ago periods. Next, the balance sheet and cash flow. ASM's financial position remains [ solid ], and we ended the quarter with a cash position of close to a EUR 1 billion. Free cash flow was EUR 48 million negative mainly reflecting the working capital outflow in the quarter marked by a sharp ramp in activity levels. Days of working capital increased to 69 at the end of March, up from 45 at the end of December. The main driver for the increase was higher accounts receivable due to strong sales increase compared to the relatively low level in Q4 as well as back-end loaded distribution of sales during the quarter. CapEx amounts to EUR 38 million in the first quarter, up from EUR 30 million in the same quarter of last year. And for the full year, we expect CapEx to be around or to be somewhat above the higher end of the guided range of EUR 150 million to EUR 250 million, with the largest part related to the construction of a new site in Scottsdale, which remains on track for completion in Q1 2027. And with that, I'll turn the call back over to Hichem. Hichem M'Saad: Thank you, Paul. Let's now continue with a review of the market trends. The first quarter, again, confirmed that AI is the main driver of semiconductor demand. Customers continue to add capacity to support the ongoing expansion of AI data centers and the broader infrastructure build-out. This is keeping demand strong in the areas where we are most exposed, especially logic/foundry and we saw this demand strengthening further during the quarter. We have also noted a continuing proliferation and diversification of the AI workloads into the CPU and the power markets. For this reason, we see AI driving strength in all segments of our business: advanced logic/foundry, mature logic/foundry, memory and especially DRAM and, to a lesser extent, power, wafer, analog market. Looking ahead, our strategic view remains unchanged. As AI adoption broadens and demand continues to scale, compute capacity is increasingly the limiting factor. In semiconductors, this is translating into tighter capacity needs for advanced logic/foundry and memory devices, driving higher investment intensity and increasing the urgency of tool deliveries. Against this backdrop, our focus is on execution as we continue to support our customers' expansion plans. The pace of demand is putting additional pressure from the supply chain. But so far, we have been able to manage these rising challenges in close cooperation with both suppliers and customers, reflected in the sharp step-up in our quarterly sales from EUR 700 million in Q4 of last year, to a level approaching EUR 1 billion projected for Q2. Turning now to customer segments. Logic/foundry again led our performance in Q1 supported by continued strength at the advanced nodes and a sequential rebound in mature logic/foundry demand. Our view is unchanged that logic/foundry will be a strong driver of our sales in 2026 and also going into 2027. The structural outlook for this segment remains strong. AI-driven compute requirement and the ongoing shift to more complex 3D device architecture and new materials continued to increase ALD and epitaxy and density. As we progress through the year, we expect momentum to build further with ongoing capacity additions as the 2-nanometer technology node accounting for the largest part of advanced logic/foundry sales in 2026. This first generation of gate-all-around device technology is shaping up to be a large node, enabling new applications in high-performance compute, including AI as well as advanced mobile and other leading applications. We continue to benefit from the step-up in our served available market at 2-nanometer supported by a broader position in Epi and sustained strong market share in ALD. In addition, we have seen a healthy uptick in demand related to the nodes from 3-nanometer to 7-nanometer, driven by agentic AI. The demand is outstripping supply which has led to renewed capacity investment. Looking ahead to the industry's next node transition to 1.4 nanometer, we expect pilot-line investment to begin later this year. We are deeply engaged with key customers as they prepare for that transition, and we expect the first meaningful contribution to our sales in the second half of 2026. As we have highlighted before, we expect the SAM uplift at the 1.4 nanometer to be even larger than what we saw at 2-nanometer node. At 2-nanometer, the industry's main priority was to get the first generation gate-all-around architecture and to high-volume manufacturing with gate-all-around now in production and ramping, customer have more room to include additional performance boosters. And for ASM, that translates into more functional there in the transition stack to further optimize power and performance, including additional dipole layers to enable Multi-Vt options. Alongside the higher SAM opportunity, we have already secured several key product penetration which supports our expectation for a higher ALD market share in the 1.4 nanometer node, public disclosure from some leading customers suggest that the 1.4 nanometer node is designed to deliver clear improvement in performance, power efficiency and density versus today's 2-nanometer node. This is well aligned with ever increasing AI token demand and the associated compute and power constraints in data centers. As our customers move toward higher volume manufacturing in 2027 and 2028, we expect 1.4 nanometer to become a meaningful driver for ASM. Next, looking at memory. Demand in Q1 was solid, with robust momentum in the most advanced DRAM technologies used in HBM-related applications. Continued investment in AI infrastructure is keeping demand for high-performance memory strong and supporting ongoing expansion of advanced DRAM capacity. For the full year, we continue to expect healthy growth in our memory business. Looking further out, DRAM remains a meaningful and strategic opportunity for ASM. From a technology perspective, our customer R&D engagement in memory continue to expand, including development work around new ALD and epi applications that support the transition to 4F² and very fantastic DRAM. As we highlighted at Investor Day, the transition to 4F² is expected to drive a step-up in ALD and Epi intensity and expand our served available market by approximately USD 400 million to USD 450 million based on 100,000 wafer start per month capacity. Turning over to power, analog, wafer market segment. The contribution in Q1 remained relatively low, reflecting the soft market condition in broader parts of automotive and industrial. That said, we have seen some pockets of strength in selected areas, particularly in power applications for AI data centers. For 2026, our view is unchanged that this segment should recover gradually from a low base. We remain well positioned to benefit once demand conditions improve more broadly. Moving on to China. The increase in Q1 was largely driven by the mature logic/foundry segment, where we saw higher activity across a broader set of customers, reflecting improving market conditions and to a lesser extent, the power, analog segment. In addition, I'd like to highlight ASM's ongoing success in winning new positions which also contributed to our strong performance in China. This demonstrated the continued competitiveness of our solution and the strength of our local team. Based on current visibility, we expect sales in China to increase for the full year with a stronger contribution in the first half. Now let's talk about advanced packaging. As we have discussed during the Investor Day, we are looking into advanced packaging as another midterm growth area for ASM. We believe that this market is ripe for disruptive solution in new materials and interface engineering playing into ASM's strength. We are engaged with multiple customers on advanced packaging, and we are seeing some encouraging traction for our innovative solutions. That brings me to the outlook. At current currency, we project revenue to increase in Q2 2026 to EUR 980 million plus or minus 5%, and we continue to expect revenue in the second half of 2026 to be higher than in the first half. As mentioned, China sales are expected to be first half weighted. This means that our other business segments are expected to strengthen from the first to the second half, including continued solid momentum in advanced logic/foundry higher sales in memory and a gradual recovery in power analog. While it's too early to provide specific guidance for the full year, based on our guidance in Q2 and a further increase in the second half, it should be clear that 2026 is going to be a strong year for ASM. And with that, we have finished our introduction. Victor Bareño: Thank you, Hichem. Let's now move on to the Q&A to ensure that everyone has an opportunity to participate please limit your questions to no more than two at a time. Operator, we are ready for the first question, please. Operator: [Operator Instructions] First question is from Andrew Gardiner, Citi. Andrew Gardiner: Hichem, just sort of pick up on the point you were making at the end of your prepared comments there. You're saying you will have growth in the second half of the year versus the first half, but obviously, the visibility is perfect to quantify it for us yet. Previously, you've been willing to talk about your performance relative to the wafer fab equipment market broadly and that ASM would outperform that. Clearly, WFE expectations are moving quite rapidly as well at the moment. Could you give us an update on how you see the broader market in terms of WFE? And can you confirm that you will still outgrow that in 2026? Hichem M'Saad: Thank you very much for the questions. Yes, we talked about that in our previous conference call that we're going to at least perform as good as the wafer fab equipment market or better. Yes, we have seen improvement in the WFE market. I mean we follow very closely what Gartner and VLSI are talking about. And we can reconfirm again that our growth in our market, in our revenue in 2026 will at least outgrow the WFE market again. So as I mentioned, we see strength in the market and our revenue is strengthening, and we are very confident that we'll be able to at least grow at least at the WFE market or beat that in 2026. Andrew Gardiner: Okay. And just a clarifying question, the point you were making on China. In the second half, so is that China down second half on first half? Or down year-on-year or perhaps it's both? Hichem M'Saad: No. I think China is really up year-on-year. So the -- what we talked about that we see right now that China is lower in the second half of 2026 versus the first half of 2026, saying this, and I want to repeat it again. China visibility is not that great as we talked about it, okay? So from that point of view, if there is anything, that second half China business that we see right now might also increase eventually. But right now, what we see very strongly that the second half would be a little bit slower than the first half. But again, that might strengthen in the second half. We don't know. Operator: Next question is from Nigel Van Putten, Morgan Stanley. Nigel van Putten: I want to follow up on the previous question on China. Perhaps for the full year, there are some limited visibility. But can you provide us a revenue or China revenue as a percentage of overall revenue for the first half at least? And how that maybe compares to the full year '25 when you said it's going to be -- or it came in a little bit over 30%. That is my first question? Hichem M'Saad: Nigel, thank you for your question. Nigel, maybe there's a misunderstanding that about the visibility -- low visibility of China. Right now, okay, our visibility for 2026 is very good, okay? China or no China, okay? Because I mean, it's really clear everywhere in our market, okay? So that's why we are really confident about the market. If there's anything in China, the revenue is going to increase further in the second half, okay, from where we see it right now. So, but China business has been good, and we feel very confident about it. Paul Verhagen: So maybe to add to what Hichem is saying, what we see in is now, at this moment, at least, is an accelerated demand. And in China, we have a higher H1 expectation. And H2, which might still change, we don't know, as Hichem has indicated. Possibly, that is because of concerns on export controls, we don't know. One thing is for sure that the overall sentiment is very good, like in the rest of world, also AI related. That's itself positive. Two, we also won some more layers in itself is a positive. But yes, there is clearly an acceleration going on, which, of course, customers are on tariffs, but which could be triggered by concerns around export controls and how that will develop further, I think, at this stage, and nobody knows. Then on the full year, based on everything we know today, I think the equipment revenue as a percentage of total sales will be similar to last year. But again, it's really too early to tell, so this might change because for all the reasons that we already mentioned. Nigel van Putten: Got it. That's really helpful. Then now maybe switching to the advanced logic customers which I understand are providing increased visibility maybe 8 quarters on a rolling basis. Question would be, do you see any sort of broadening on the horizon, sort of it's clear that the main customer remains very strong, but how are the other two doing maybe today? And how do you see that developing into the second half of the year? Hichem M'Saad: No, I think, Nigel, I think we see -- we're working right now with all customers in advanced node for both of the 2-nanometer node and 1.4 nanometer node. And then we see that gate-all-around is a technology that's going to be adopted by more customers. And we feel very confident that that's going to be the case. Of course, okay, some customers have better yield or performance than the other ones. But we think that gate-all-around is going to be really a broad technology node and for a variety of customers. Operator: Next question is from Didier Scemama, Bank of America. Didier Scemama: Just a follow-up actually to the previous question on the boarding of the customer base in advanced logic. Obviously, your largest customer is doing terrific. On the two smaller ones, is that supposed like expected to strengthen in Q2? Or is that more of an H2 driver? And I've got a follow-up. Paul Verhagen: Yes, let me take that question. I think what I can say on that. I don't want to be specific on Q1 and Q2 or Q3 when it comes out both down to customers. But what I can say is at least that based on current visibility that all those customers are expected to grow year-on-year. And of course, there is a significant difference with regard to the size of the various customer and the absolute amount of growth as a result of that. But we expect all three for the logic part, all three of them to grow year-on-year. Didier Scemama: Okay. And for my follow-up for Q2, would you expect China to be up sequentially or flat? Or how should we think about that relative to your overall sequential growth guidance? Paul Verhagen: What we've said indeed is that for next quarter, we expect EUR 980 million plus or minus 5%. We also said that for H1, we see an accelerated demand for China coming in for various reasons I just discussed in the call before. So I think it's reasonable to assume that also Q2, China will be pretty good. Didier Scemama: Should we expect, therefore, the gross margins in Q2 to remain at sort of above the long-term guidance given the mix? Paul Verhagen: You know that I'm not going to specifically guide on a quarterly basis for the margin, but the margin will be good that I can say China is accretive, as you know. But also, I think what is also not unimportant. I also want to highlight that is that the other product mix that we've seen actually in the last few quarters has been very strong. So that also helps. And last, but not least, the structural cost improvements that we're working on, which will every year add a little bit also play a role. But having said that, yes, higher share of China typically is accretive, yes. Operator: Next question is from Francois Bouvignies, UBS. Francois-Xavier Bouvignies: I have a question for 2027, actually. So if we look at your '26 growth drivers. I mean if I look at the different drivers, I don't see much layers increase in '26 as a growth driver, because I think it's mostly capacity, [indiscernible] was already adding a lot of capacity last year. So from a year-over-year point of view, you don't have a lot of incremental layers. Now if you look at '27, it looks like you will have a lot of layers opportunity that you laid out at your Capital Markets Day. So I was wondering, if we think about this dynamic of layers increasing, is it fair to say that '27, if we assume the same capacity increase that '26, that should be a higher growth than '26? You have more drivers on top of the capacity in '27 than you had in '26. Is that the right way to look at it, if you understand my question? Hichem M'Saad: Yes. I think we understand your question. I think it really depends both on the end demand from that point of view. But we -- as the technology node transition from 2-nanometer to 1.4 nanometer, we see the adoption of 1.4 nanometer starting in the second half of 2026. And we see the 1.4 nanometer bias to increase in 2027 for final production in the first half of 2028. And with the 1.4 nanometer node, there's more ALD and more Epi. And as we mentioned, these ALD layers are mainly in the front end of line for performance level. And that's where we have many more -- a lot of strength, and that's where we're going to have many more ALD layers. So we are really very happy with -- we'll be very happy with the 1.4 nanometer transition, because of the higher ALD intensity. Also, we have more ALD layers in molybdenum. I think that as we mentioned in our last press release that we are very happy to be in production, high-volume production at the 2-nanometer node with our moly ALD. And with the transition to the 1.4 nanometer, we also have won some process of record layer in molybdenum. So overall, the transition to 1.4 will be very accretive to us, and we'll be very excited with that transition in the future. Francois-Xavier Bouvignies: And the memory side -- Yes, go ahead. Paul Verhagen: I think you said it, but I want to make it a little bit more explicit that just for you guys to be clear that already in this year with the pilot for 1.4, which is also, of course, increased layers, as you know, we already see a very, very meaningful contribution of 1.4. So that's not only in '27, but it's already starting in '26. Francois-Xavier Bouvignies: Good to know. And maybe you didn't address maybe the memory layers and maybe for '27. And then you mentioned market share higher in A14. So can you maybe explain a bit the higher share here? I mean, is it because just your time is getting higher than the others? Or you just have more layers than you expected? -- more than before? Hichem M'Saad: Yes. So the 1.4 nanometer, what's the difference between the 1.4 nanometer node and the 2-nanometer node. So they are both gate-all-around. But for the 2-nanometer node, that's an architecture change. So customers didn't want to be very aggressive in putting many functional layers because of the change in architecture. But once we move to 1.4, they have added many goodies, which we call performance layers. And those layers are really mainly ALD layers. And they are all in the front end of line, where we play significant. That's where our strength is. Yes. So definitely, we see more ALD layers in 1.4 nanometer. Second thing, as you shrink, those -- and with the gate-all-around structure, as you shrink those layers become much more difficult because of the 3D nature and the shrinking. And with that, the since every layer becomes much more difficult, that also slows down the process. And with that, you need more equipment from that point of view. The other thing we see is that also there is a higher epitaxy intensity going forward. So overall, that's very positive. Operator: Next question is from Stephane Houri, ODDO BHF. Stephane Houri: Yes. To come back on the Q2 guidance, which is about EUR 100 million of what the consensus was expecting. So I'm just trying to understand what led to this acceleration, if it's more advanced logic or memory. And if you could comment also on the lead time at the moment if they are increasing? And is there a difference between the two different segments? And I have a follow-up. Hichem M'Saad: I think that the acceleration is happening in mainly in the 3-nanometer to 7-nanometer node. in addition to the gate-all-around node. So what we have seen lately is that Agentic AI is becoming more important. And with that, that tends to favor using the CPU instead of GPU. So the 3 to 7-nanometer node is really mainly driven with CPU. And we see much more demand from our customer in that node, and that's really happening super fast at this point in time. We also see strength in memory continuing. So overall, the market is really strong in the leading edge, both logic and mainly logic and foundry, that's really the highest part of the market. Second is really also DRAM is also increasing. Stephane Houri: And about the lead time, sorry. Hichem M'Saad: So regarding the lead time, I mean, lead time has increased because of the supply chain constraints right now. I mean there's a huge demand everywhere. So yes, the supply chain has increased, and that's really the customer specific. We've been able to expect that to happen. That's why we can -- we have increased our capacity to from like EUR 700 million per quarter in Q4 of last year to about EUR 1 billion per quarter this year. And it's going to continue to increase in the second half, as we have mentioned. Stephane Houri: Okay. And that's exactly my follow-up. I mean you're going to be at least EUR 1 billion per quarter in the second half run rate and there's probably some additional growth coming in 2027, given what you said and what we see in the market. So at what point will you fill all your plants and notably the Singapore plant and that you will have to again increase the capacity? Hichem M'Saad: I think our manufacturing capacity is -- can take care of our business. I think we have expensive manufacturing capacity in Singapore and Korea. So we're ready for much higher volume. I think what's limiting -- if there's any limit is really the supply chain that's limiting the capacity than anything else. But I think that we'll be able to manage that in the second half. So that's why we're confident of increased volume in the second half of 2026. Operator: Next question is from Sandeep Deshpande, JPMorgan. Sandeep Deshpande: Maybe you can give a comment on what has changed in your customer behavior versus what you were -- you had seen from your customers the last time you reported in -- reported your results. Has something substantially changed given your very strong guidance into the second quarter? And then I have a small follow-up. Hichem M'Saad: I think that the market is really strong all over. Has there been any significant change? I think the change that we have seen is really on the PC part where for -- on the CPU part where it used to be that AI is mostly driven by GPU, but we see that CPU part becoming more important than before. And we see that's the strength we see in the 3-nanometer to 7-nanometer node, which was not there before. So that's really the strength we see. It's mainly the CPU-driven part for artificial intelligence. Sandeep Deshpande: And then when you look at the WFE, I mean you had said 15% to 20% at last results. I mean, given your guidance for the second quarter and your indication on the second half of the year, it looks like you're going to grow well over 20%. So what is your perception on WFE at this point for this year? And I mean, despite your lower exposure in the memory market, you are growing incredibly well. And so is this mainly associated with the second half ramp also with 1.4 nanometer where your content is growing, your number of layers you have is growing very substantially. So this is essentially share gain in the WFE market? Paul Verhagen: Yes. Let me take that, Sandeep. So yes, to give you a very short answer, that's part of it, absolutely. But also basically, I think as Hichem already said, but maybe in different words, we're firing in all cylinders. Every segment of the market is growing significantly. I mean, advanced logic/foundry, mature logic/foundry, memory of which, in particular, DRAM, we see a high growth and even power with analog for power-related AI data center applications from a low base, but as a percentage, still high growth. And of course, also pilots 1.4, that I started with, adds a decent amount for this year already, yes. Operator: Next question is from Adithya Metuku, HSBC. Adithya Metuku: Firstly, I wanted to talk about 2027. I know you gave these targets of EUR 3.9 billion to EUR 4.6 billion, top line at a EUR 125 billion WFE number. So call it EUR 4.2 billion midpoint. If you look at WFE numbers now, people are depending on whose numbers you take 40% to 50% higher than that EUR 125 billion in 2027. So my first question is, should we assume that, that EUR 4.2 billion could be maybe 40% to 50% higher from 2027? What are the nuances we need to keep in mind when we think about where WFE is going and how your revenues might go in 2027, you've clearly talked about outperforming WFE, I presume that will continue. So just any pointers you can give around how we should think about these targets you gave at the CMD 40% higher, 50% higher? And I've got a follow-up. Paul Verhagen: Yes. Let me take that. So indeed, I think we said EUR 3.8 billion to EUR 4.7 billion at CMD, where we assumed EUR 120 billion WFE, which today's view is indeed significantly higher, but there's one big difference. The assumption that we took at that time, which was somewhere September last year on the composition of the mix is very different from what we see today. So we had by far the largest part of the total WFE basically logic/foundry, while now the relative share of memory is significantly larger than what we assumed. And although we grow a lot in memory, but still our relative share of memory in our business is still relatively small. So that's why you will not see the full benefit of that increased WFE dripping down into our numbers. Having said that, based on everything we see today, we believe that '27 will be a strong year. But adding 40% to 50%, I would not recommend you to do that. That would give some distorted figure. At the same time, it's a very wide range, EUR 3.8 billion to EUR 4.7 billion is almost EUR 1 billion range. So also even within that range, there's still a lot of room to maneuver. And more than that, at this stage, I don't like to say. Adithya Metuku: Got it. Okay. We'll leave 40% or 50% of side go with 30% then. And just quick follow-up. On the MATCH Act, can you give us some color on how you're thinking about any potential impact for you guys as you think about your China revenues? Yes. Any color you can give around how you might be affected? I know it's hard to quantify numbers, but any qualitative color would be great. Paul Verhagen: Yes. So the MATCH Act indeed is being discussed as we speak. If it will happen or not is uncertain. It might or it might not. In what shape it will happen is also uncertain because at the end of the day, it is important, literally the point and the commerce are very important there, especially in relation to how to interpret what is exactly restricted. We're in, of course, discussion with relevant authorities, as you can imagine. So it's very hard, and I would love I could give you some more color to give decent color at this stage. Obviously, if something like that were to happen, it's not a positive, that might be clear. But how much, I'm really not in a position yet. It's too -- it's literally too unclear and too uncertain still on what might happen. So I don't like to speculate on that. Operator: Next question is from Tammy Qiu, Berenberg. Tammy Qiu: So the first one is regarding your very strong short-term momentum. You mentioned that just now it's all driven by the CPU-related incremental demand. I just want to confirm that, have you seen any customer from both logic and memory perspective, pulling forward? Are you asking you to accelerate the shipment of equipment because end market demand is coming so dramatic in the short term. So therefore, it's like a pull forward from 2027 at all? Hichem M'Saad: I think every customer wants the tools now instead of tomorrow. I think the demand is really high. And for us, it's which customer we ship to first than the other one. So I think like we mentioned, we are fully booked for this year. From that point of view, we have a strong demand in all parts of our business, really every part of our business very high demand. And yes, we see customers the demand is even increasing. So I mean, we -- our book is full. So we have to do our best to be able to satisfy the demand that we're getting right now. Tammy Qiu: Okay. And the second one is, last quarter, we discussed that the 1.4 nanometer is mainly driven by one customer versus others have been having discussion with you, but still a bit distant away from pilot production, et cetera. I'm just wondering where is the status of those remaining customers? Are they getting closer to make the decision on pilot production? Or are they still further down the line? Hichem M'Saad: So as we mentioned that we see -- we are working with all customers to the 1.4 second generation with a 1.4 nanometer technology node. And we see that business strengthening in all the customers from that point of view. Some of them is at a marginal increase and the other have a higher increase, but I'm not here to speculate on which customer, which, but we see at least a marginal strength in some and a significant strength in other customer. But saying this, I think more likely, like I mentioned that 1.4 nanometer would be more than one customer. Tammy Qiu: Just to confirm, have you seen any progress during the quarter, i.e., all of them have moved forward or just one of them moved forward comparing to last quarter. Hichem M'Saad: Can you repeat your question, please? Tammy Qiu: So basically, the time line of the 1.4 nanometer, last quarter, you mentioned that one is active preparing for pilot production, remaining two is still in discussion firmly at this stage. I'm just wondering, this is three months after, have you actually seen other customers together with a leading customer or moved forward in the time line for 1.4 nanometer? Or just one customer has moved forward instead of all three of them? Hichem M'Saad: I'm going to repeat my answer, where we see 1.4 nanometer strengthening broadly with some strengthening marginally in some customers and significant increase in other customers. Operator: Next question is from Jakob Bluestone, BNP Paribas. Jakob Bluestone: I want to come back to Adi's question around your ability to sort of take part in growth in memory. And my question is, when do you anticipate the transition to 4F² and FinFET for the cell periphery in DRAM to impact your revenues? So is this something that would impact in '27? Is it '28? Or do you think it's further out? Paul Verhagen: I can take that question. Yes, I think because I think last time already, we mentioned that the pace of adoption customer by customer is different. There might be even a customer that might completely skip it. We don't know yet, but that's to be seen. And I think for us, based on what we see and think we know today, I think you should take into account '28 as the first year where we start to see a positive contribution related to 4F². [ Might ] -- maybe a little bit earlier, I don't know yet, but I would -- I mean time line is still a little bit uncertain and very different from customer to customer. So I think the best color I can give right now is in '28. Hichem M'Saad: So add to what Paul has mentioned here, we see a strength in memory in 2026 and also increasing for us in 2027 and beyond. The biggest increase for us will happen really in the move into 4F², where we have more ALD layers and more also Epi intensity. But also we've seen some customers put in FinFET in their node in their road map. And with that, we're working with them and we might -- and since we have been very prominent in our FinFET technology in logic. So that we see some customers really pulling in that technology node. And with that, we probably will get some more layers as customer put in their FinFET technology node. So the biggest increase would be '28 and beyond, but also we see some increase in 2027. Jakob Bluestone: Understood. If I can just ask a quick follow-up as well. You mentioned a few times the sort of pickup in 3 to 7-nanometer transition, and I don't know if you can give any color on whether that's your largest customer or kind of more broad-based? Hichem M'Saad: Which transition, are you talking about, sorry? Jakob Bluestone: 3 to 7? Hichem M'Saad: Yes, I think it's really broad based. That's really broad-based. It's not only one customer, it's very broad-based. Operator: Next question is from Ruben Devos, Kepler Cheuvreux. Ruben Devos: I just had one on Epi in HBM. I believe you talked about significant Epi engagements with another HBM customer and expect good news this year. So of course, curious whether two months on has anything firmed up on that additional qualification? And would that be, let's say, fully incremental to your memory plan in '26? Hichem M'Saad: Okay. So to answer your question, yes, we talked about that, and we are engaging with our customer on epitaxy. There's really nothing else to say right now, but we'll let you know if there's any news from that point of view. It's really working with customers on a couple of customers on epitaxy. And hopefully, we can share some good news with you in the next investor call meeting. Ruben Devos: Okay. And then second one, really to just get a feel of maybe the aftermarket sales, right? I mean you've had a stretch of very good performance in the last few quarters, again, 23% up the past quarter. Outcome-based is about 25% of the mix. So it looks like, I mean, the target you said at the Investor Day of 12% CAGR is becoming more of a floor. I was curious whether you could talk a bit about, yes, the extended visibility you might have now in aftermarket sales. And I can imagine a margin uplift to realize if you manage to make a transition more towards outcome-based. But also besides that, are you able to sort of have the customer pay more per tool for the servicing packaging in general? Hichem M'Saad: I think that for service market, okay? What I mentioned, the service market is really good as you transition in a newer technology node because of process complexity. It's very important to -- a customer need more support from us and for the more advanced node. And with the advanced node also, we see a transition to much tighter specification on wafer-to-wafer and also repeatability on chamber-to-chamber matching and also on system-to-system matching. And with that, we have to provide a new solution to customers to improve the uptime and the availability. So we are very really -- we think that the surface business is going to increase in the future as you transition to tighter and tighter technology node. And we see that happening in the area of automation, in the area of robotics, in the area of optics. And those are really the solution that we're providing our customers. So the growth is going to be good in that part of the market. You mentioned that 12% growth. To be honest with you, right now, every part of the market is growing a lot. This year, the market is growing over 20%. I mean, latest, you see Gartner talking about 25%. So everything is great. It's really just spending my time, okay, to make sure that we can execute on getting customers the tools in time and make sure that the availability and the execution is top notch. Operator: Next question is from Timm Schulze-Melander, Rothschild & Co Redburn. Timm Schulze-Melander: First one for Hichem, please. Just looking at the technology execution and just trying to scale maybe how much upside there is to that? If I look at your long-term revenue guide, the high low range is kind of 20%, 25% between the low and the high. Obviously, part of that is the strength of the cycle. Maybe part of that is also conversion of existing evaluations and layer wins. Maybe could you just share how much of that is upside potential from layer wins? So if you could just think about that in the context of your go-forward revenues? And then I had a follow-up. Hichem M'Saad: You said the percentage I didn't hear you well on the percentage, which percentage are you talking about, please? Timm Schulze-Melander: Yes. So if we look at your EUR 3.8 billion to EUR 4.7 billion revenue guide, so part of that is going to be cyclical. Part of that's going to be your execution in terms of technology wins. I'm just trying to think is that half off, but some kind of scale of that? Hichem M'Saad: If you look into the business and where we are, one thing I can tell you, I'm really very excited about our technology road map. I think that things are going in our direction. If you look into logic, you see more and more layers coming in with 2-nanometer and also with 1.4 nanometer. ALD intensity is increasing and [indiscernible] intensity is increasing, and we're winning share in that part of the market. If you look into memory, memory is moving more and more into FinFET more and more in 4F², which needs more Epi, needs more ALD. So we're going to have more layers, and we feel very confident about it. And if you look into logic -- if you look into power, wafer, analog, we are really -- if you look at the power, wafer, analog, the power part of the market is the only part of the power, wafer, analog that's strong right now. And that's being driven by data centers, power devices for data center. If the wafer part and the analog part goes up, it's going to be even accretive to us. So the service business is also good. In the service business, we're going more and more by automation. And we really -- we're getting some -- getting into even robotics and that customer and leading customer, we're even selling them, okay, some robots to improve the system availability and so on. If you look into advanced packaging, that's an area that we mentioned that we have entered last year. It's a new area for us. I can tell you that we have so many -- believe me, so many interactions with customers. And we have to prioritize which one to do and some customers tell them, guys, maybe we don't have -- we cannot really help you there. And -- but with the customers that we're really engaging right now, I can see that they really like to work with us as a company because we're looking into the advanced packaging through a different option. We're looking into that as, okay, what can we do to disrupt the technology? What can we do to provide a solution that's better than what it is right now. How can we -- a solution to make sure that, okay, we reduce the -- to reduce the thermal mass on advanced packages coming with a new material that improve thermal conductivity. We're working with customers to make sure that we can seal the devices much better. So there is no moisture going in the packages. We're working with customers to actually improve the speed of connection between one chip to the other one, working with them on some innovative photonic layers. So I'm sure that with all of this really, we feel very confident where things are are going to go from that point of view. And depending where the market is going to go, I'm very confident that we're going to at least match the WFE market growth or actually have a higher growth than WFE. It's a great time for ASM right now. And we -- I see customers really want to work with us. I think our execution has improved. I think our competitiveness is getting even better than before. And what I can tell you, it's the best time to be in semiconductor. Timm Schulze-Melander: A very impressive runway. Maybe just a quick follow-up for Paul, just some housekeeping, actually. You talked about rising utilization rates, but actually Q1 aftermarket sales were down sequentially. And on your guide, I think last quarter, your guidance range was plus minus 4%. This time, you've widened that range to plus minus 5%, which doesn't maybe sit that well with a sort of improving visibility. Just wondered if there's any color you could share in terms of what you're seeing. Paul Verhagen: Yes. So actually, the range is, I think, already referred to is related to supply chain challenges. So far, we've been able to manage it. But at the same time, we have to be on top of it to make sure that we get what we need to deliver what we need as per our customer preferred COD customer request date. So that's a little bit where the range comes from, Timm. It's not so much demand. It's more what can we deliver on time given the supply chain constraints that so far manageable again. But yes, we have to be on top of it and nothing can go wrong here. Timm Schulze-Melander: So that's what was in the aftermarket in Q1 and maybe there's some catch-up in Q2? Paul Verhagen: I don't know if there's catch-up in Q2. I mean I think had a very good Q1. I think we delivered more or less what we wanted to deliver, and we will target to do the same in Q2. Victor Bareño: Thank you, Timm. We still have a number of participants in the queue, but we are running out of time. So let's take one final question. Operator, can we have the last caller? Operator: Final question is from Javier Correonero, Morningstar Equity Research. Javier Correonero Borderia: In the interest of time, I will just ask one. So your Axus acquisition 3 months ago, it is small, but I think there is a lot to unpack there when you think longer term. So Axus is specialized in silicon carbide processing. So I was wondering if you could explain a little bit more what's the rationale of the acquisition here? Is it like more silicon carbide content as we move into the 800-volt data center? Or is it TSMC potentially adopting silicon carbide interposers in the next few years or both? And of course, it is very early and small acquisitions, but do you have an estimate of what service of addressable market this acquisition could open once it is properly integrated with ASM [indiscernible]? Hichem M'Saad: Okay. So thank you very much for the question. So yes, we have acquired this company called Axus Technology, which is -- we're very excited about the acquisition in CMP. They have a very great CMP technology and very innovative, to be honest with you. And the -- like we mentioned, we have acquired this for the advanced packaging market because advanced packaging is -- needs more and more CMP layer, many, many, many more CMP layer. So there is room for another player. Also, it's a technology that's all about interfaces. And I think that we have some -- we do have some knowledge in interface engineering so that we will be able to really put our print there. It also CMP helps us with our new materials that we're developing for advanced packaging that I just talked about a few minutes ago because I mean, you deposit the film, but also you need to CMP. So we want to understand what's the interaction about the material that we're depositing the new material that we're depositing and the CMP, because CMP also has a slurry. There's a new -- with a slurry that means we're talking about new chemicals and so on and so forth. So it would help us also develop better materials in ALD, but at the same time, also good polymerization, which is extremely important for advanced packaging. So that's really why we made that acquisition. And then we're working right now on developing the product for advanced packaging, and it's going to increase our SAM absolutely. It is going to increase our SAM and we're in the process of doing R&D and so on in this part of the market. Victor Bareño: Okay. That concludes the Q&A. Thank you all for attending our call today, also on behalf of Hichem and Paul. Thank you. Goodbye. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.
Operator: Good morning, and welcome to United Airlines Holdings Earnings Conference Call for the First Quarter 2026. My name is Regina, and I will be your conference facilitator today. [Operator Instructions] This call is being recorded and is copyrighted. Please note that no portion of the call may be recorded, transcribed or rebroadcast without the company's permission. Your participation implies your consent to our recording of this call. If you do not agree with these terms, simply drop off the line. I will now turn the presentation over to your host for today's call, Kristina Edwards, Managing Director of Investor Relations. Please go ahead. Kristina Munoz: Thanks, Regina. Good morning, everyone, and welcome to United's First Quarter 2026 Earnings Conference Call. Yesterday, we issued our earnings release, which is available on our website at ir.united.com. Information in yesterday's release and the remarks made during this conference call may contain forward-looking statements, which represent the company's current expectations and are based upon information currently available to the company. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release, Form 10-K and 10-Q and other reports filed with the SEC by United Airlines Holdings and United Airlines for a more thorough description of these factors. Unless otherwise noted, we will be discussing our financial metrics on a non-GAAP basis on this call, and historical operational metrics will exclude pandemic years. Please refer to the related definitions and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures at the end of our earnings release. Joining us today to discuss our results and outlook are Chief Executive Officer, Scott Kirby; President, Brett Hart; Executive Vice President and Chief Commercial Officer, Andrew Nocella; and Executive Vice President and Chief Financial Officer, Mike Leskinen. We also have other members of the executive team on the line available for Q&A. And now I'd like to flip the call over to Scott. Scott Kirby: Thanks, Kristina, and good morning, everyone. I'd like to congratulate the United team on a strong first quarter. We're building the #1 brand loyal airline in the world, and our financial results are indicative of the structural, permanent and irreversible changes that have happened at United and across the industry. Our first quarter results are just the latest proof point in our strategy to build a decommoditized brand loyal airline that's setting a new standard for what is possible for customers in air travel. We've proven that the winning strategy is to make travel easier and better for all customers, and while all of us at United are deservedly proud of the brand we've built, we aspire to go farther, and we want to set a new higher standard by revolutionizing air travel for our customers. More immediately, of course, we're managing through the impact of jet fuel prices that have doubled. Industry stress events seem to happen every 5 to 6 years. While we didn't know exactly what or when it would be, we knew something would happen. The best thing we could do was to prepare United in advance. To that end, we have, one, tripled our cash balance; two, moved to the top of the industry and profit margins; and three, strengthened our balance sheet. In fact, we ended 2025 with our highest credit rating in almost three decades. Advanced preparation allows us to stay focused on the long term while making near-term tactical adjustments to account for elevated fuel prices. At the moment, our goal is to do whatever it takes to recover 100% of the increase in jet fuel prices as quickly as possible and to achieve double-digit pretax margins next year. Oil is incredibly volatile right now, but because we think we're moving towards 100% pass-through, it allows us to have confidence in both our near- and medium-term earnings trajectory enough so that we can still provide guidance. For United, here's how we're thinking about our goals to get to 100% pass-through and achieve double-digit margins in 2027. One, to recover 100% of fuel costs, yields need to increase by about 15% to 20%, and we are assuming that fuel may remain higher for longer. Two, as yields increase, there will be an elasticity effect on demand that we're estimating will lead to less overall demand. While we haven't actually seen that decline yet, [ ECON 101 ] makes us believe it's coming. Three, less demand means that we should be supplying fewer seats to the market. For United, that means we're targeting capacity to be flat to up 2% for 3Q and 4Q on a year-over-year basis. It simply doesn't make sense to fly marginal flights that will lose cash in a higher fuel price environment. Mike will provide more details behind our 2026 outlook, but our view for 2027 is that we're targeting a pretax margin of at least 10%. We obviously have some time to see what happens, but if jet fuel remains elevated compared to our pre-war levels as we think it might, we'd once again expect to require less capacity growth in 2027 than we were planning just two months ago. Realistically, there probably isn't enough time to make up 100% of the fuel price increase this year. But I feel very good about 100% recovery and getting to double-digit margins in 2027. And because we've positioned United for success, we can make tactical adjustments to manage what we need to in the short term while also staying focused on our long-term plan. I'm also more convinced than ever that our decade-long strategy to build a great brand loyal airline that is obsessively focused on making travel easier and better for all customers is the winning strategy. Finally, there's been a lot of press coverage regarding consolidation rumors. We've not commented specifically on those reports and aren't going to start today. So you can ask me about it if you'd like, but you won't be getting anything new from me on it today. And with that, I'll hand it over to Brett. Brett Hart: Thank you, Scott, and good morning. During the first quarter of 2026, United carried a record number of passengers while also navigating a challenging operating environment. The quarter experienced elevated weather events and geopolitical disruptions, but our teams remain laser-focused on recovering from these events swiftly and delivering top-tier reliability for our customers. In the first quarter, we continued our streak of ranking first in on-time departures among the 8 largest U.S. carriers. During the quarter, United's per seat cancellation rate averaged 44% lower than the next two largest U.S. carriers. Solid operational performance is the backbone of the airline and helped drive our highest first quarter on-time Net Promoter Score since the pandemic. During the quarter, customers increasingly engaged with our self-service tools, allowing us to drive more personalization throughout their journey. Day of app usage reached a record 86%, supported by continued mobile enhancements such as improved bag tracking and live TSA wait times. Additionally, I would also like to take a moment to thank the TSA employees, who showed up to keep us safe during the government shutdown. We have also improved our disruption communications by embedding live maps directly within customer messages. These tools and redesign help us recover faster and make it easier for customers to navigate disruptions. Another reason United remains differentiated and why we continue to build brand loyalty. Late last week, the FAA issued an order regarding the summer 2026 schedule at Chicago O'Hare. We are currently reviewing the FAA order and we'll share additional information, including any next steps as soon as our review is complete. We are pleased to reach a tentative agreement during the quarter with our flight attendants represented by the Association of Flight Attendants. This agreement includes well-deserved industry-leading wages and other meaningful improvements for our flight attendants who play an essential role in caring for our customers and representing United every day. Voting concludes on May 12. On April 6, United celebrated its 100th birthday, a meaningful milestone for our airline, the generations of employees who have built it and our loyal customers who continue to choose to fly the friendly skies on United. I want to thank all of our employees for the care and commitment they bring each day to our customers and to one another. As we recognize this milestone, we remain firmly focused on the future and on building an even better airline through continued investment in our product, our people, our network and our operation. With that, I will hand it over to Andrew to discuss the revenue environment and our other industry-leading commercial initiatives. Andrew Nocella: Thanks, Brett. Consolidated total operating revenue in Q1 increased 10.6% year-over-year to a record first quarter of $14.6 billion. TRASM increased by 6.9% year-over-year. All regions had positive PRASM in the quarter. I'd like to -- I'd describe the start of the year as strong for all customer types and all regions. For January and February, prior to any impact from the war, we saw ticketing for business revenues up approximately 12%, while leisure was up a healthy 6%. Looking back at Q4, business ticketed revenues were up 6% and leisure was up only 2% year-over-year, creating a nice sequential increase in the first 2/3 of the quarter. Premium demand remains strong with Q1 premium revenues up 13.6% on 4.4% increase in capacity. Premium RASMs were up 8.9% year-over-year, leading main cabin by 4 points. It is clear that consumers continue to seek elevated experiences. Business demand was strong in Q1 with revenues up 14% year-over-year and strength across all verticals. Headlines about TSA wait times did suppress demand between March 23 and April 1, but they have fully recovered since. Our loyalty business continued to outperform and total loyalty revenue was up 13% in the quarter. Acquisitions and spend were both very healthy and supported by updates we made to the MileagePlus program. Late in the first quarter, we implemented 5 broadly successful price increases, along with an increase in baggage fees that began to offset the increase in the price of jet fuel. Price increases in response to the increase in jet fuel have been significant and across the board. However, global long-haul increases have been a bit stronger than domestic. In January and February, United's selling ticket yields were up 4% year-over-year. In the first half of March, that increased to 12% and further increased to 18% for the second half of March. So far in April, this trend has continued in the last week, sell-in yields for all future travel are now up 20% year-over-year. As you would expect, we sold 23% of our Q2 and 8% of our Q3 capacity at lower price points prior to the rise in jet fuel costs. We remain confident in our ability to fully recapture the fuel cost increases over time. And in 2Q, we expect to recover between 40% and 50% of the current increase. In response to higher fuel cost environment, we've begun to adjust capacity downward by approximately 5 points throughout the rest of the year. We now expect Q3 and Q4 capacity to be flat to up approximately 2%. Our adjustments removed marginal capacity on off-peak days and flight times such as red eyes, which we believe will fuel our recovery of fuel price increases in the second half of 2026. Our current sell-in schedule is up just over 4% in the summer, but those capacity adjustments will be loaded in the next week or so to get the capacity out there selling appropriately. On our January call, I hinted about new commercial initiatives that we believe will drive brand loyalty, choice and increase revenue for United over the medium and long term. We have now formally announced these initiatives, and I will summarize them today for you. To be clear, these changes have been in the works for years and they were made across all aircraft, all cabins and in many different areas of the commercial business. First and maybe of greatest importance, we've made the largest change in a decade to how we display and sell products on united.com and in our app. Internally, we described this change as nested selling. Nested selling took years to research, program and test and is now active in our digital channels. We can now properly merchandise our grown product lineup. We have already seen large increases in upselling because of these website changes. We simply were unable to show all of the products we had for sale easily on the old website display. Second, as part of the website evolution, we've introduced base fares in our premium cabins, Base fares come with less checked luggage, no early seat assignments and different club access features. To be clear, everyone on a base fare will be able to secure a seat assignment at any point via an ancillary purchase or for free during the check-in window. These base fares allow consumers more control over their experience by choosing what services they want to include on their journey and were a tremendous success in the economy cabin with basic economy. Third, we announced that 50 A321 Coastliners are planned to join our fleet. With the Coastliner, we can extend our award-winning Polaris brand for the first time on all United flights from New York to Los Angeles and San Francisco. Fourth, we unveiled United's new Airbus A321 XLR onboard products. These products on each XLR are consistent with the Coastliner. However, we've modified certain aspects of each XLR for the unique needs of an 8-hour Atlantic Crossing versus a transcontinental flight, including the larger snack bar, more lavatories, more galley space and less main cabin seating density. Combined between the Coastliner and the XLR, we expect to have a fleet of 100 A321s equipped with 20 lay flat beds and 12 premium plus seats, a commitment to this unique narrow-body platform unmatched by others. Premium plus seats will be for the first time deployed on domestic routes at scale. Fifth, to be a premium brand, we needed to have a consistent product no matter what plane you fly on or where you're going. United redefined service to smaller communities a few years back with the CRJ550, and we've now extended that idea into what we're calling the CRJ450. Sixth, we announced Relax Row, our latest product innovation for young families on global routes a few weeks ago. Relax Row is a main cabin product that transforms three seats into a flat surface and includes bedding and pillows. And seventh, we said we would change MileagePlus to accelerate United's earn-in, and we have. Members will now be awarded more miles when they fly if they hold our co-branded credit card versus members who do not hold the card. We also announced discounts for redemption only available to credit card holders. All these actions will increase the value of being a MileagePlus member and holding our credit card. While we continue to work under a long-term co-brand contract with our partners from Chase, we're making changes to what we can control today. In due course, we expect to have a new contract optimized for all stakeholders to the current market dynamics. Turning to our fleet. We have taken delivery of four high premium Boeing 787-9s with up to 16 more expected to be added in 2026 and a total of 33 planned over the next two years. The interior of our new 787-9 has something for everyone, and we believe further strengthens our premium brand. All of our commercial initiatives announced over the last few weeks have been years in the making, tested with countless customers and employee focus groups and are ready for prime time. Our launch plan is bold, quick and designed to increase customer choice, revenues and brand loyal customers. These new initiatives plus previous initiatives like Signature Interiors and Starlink are additions expected to be largely rolled out in two years. The future is now. United is now on final approach towards our product and premium vision that it completely transformed United versus pre-pandemic for all customers. I could not be more proud of the United team that has spent countless years and hours planning these product changes. These are the type of changes and product improvements across all cabins and for all customers that we believe genuinely differentiate United. We will continue to watch the demand and pricing environment very carefully in the coming weeks and quarter to refine as necessary our approach to this rapidly changing environment. With that, I'll hand it over to Mike to discuss our results and our outlook. Mike? Michael Leskinen: Thanks, Andrew. The first quarter has been a reminder that successfully managing the airline for the long term requires being prepared for short-term shocks. We've accomplished that at United by earning brand loyal customers. That strategy has led to margins at the top end of our industry and the best balance sheet we've had in almost 30 years. The financial strength that's created reinforces our ability to make the right long-term decisions. The latest challenge in our industry is the massive run-up in fuel prices created by the conflict in Iran. Fuel prices remain volatile, and we're monitoring the situation closely. We delivered resilient results with first quarter earnings per share of $1.19 within our initial guidance range of $1 to $1.50 and up 31% year-over-year, even with a $340 million higher fuel bill in the quarter. Our pretax margin was 3.4%, a 40 basis point expansion versus the first quarter of last year. Demand for the United product was already robust going into this heightened fuel environment. We believe we have the ability to pass on the increase in fuel due in large part to our brand loyal customers, continued demand strength and preference to fly United even at higher fares. In this elevated fuel environment, we began to swiftly adjust capacity in addition to pulling our Tel Aviv and Dubai flights, which together were 1.5 points of our capacity. These close-in cancellations from low CASM markets, along with significant storm-related capacity reductions throughout the quarter, pressured our unit costs. And as a result, our CASM-ex for the first quarter was up 5.9% year-over-year. As discussed, we are also proactively removing about 5 points of capacity for the rest of the year that we don't believe can cover the elevated cost of fuel. We expect capacity in the back half of the year to be flat to up 2%, several points lower than our original plan. That will continue to pressure our CASM-ex, but we expect it will improve profitability and cash flow for the remainder of the year. This is precisely why we don't manage to CASM-ex but to long-term profits and cash flow. Looking ahead, we expect second quarter EPS to be between $1 and $2, anchored by an all-in fuel average price of approximately $4.30 per gallon. For the full year, we are providing an updated and widened guidance range to encompass multiple scenarios. As we've experienced over the last two months, the world can change quickly, but in both higher and lower fuel price scenarios, we expect to recapture 40% to 50% of the increased fuel cost in the second quarter, 70% to 80% in the third quarter and 85% to 100% by the fourth quarter. We expect to deliver full year 2026 EPS in the $7 to $11 range. The demand environment to date remains strong, and we expect will support a double-digit increase in RASM in the second quarter and for the full year. If fuel prices remain on a downward trend, we expect to be in the upper half of the guidance ranges. And if fuel reescalates, we would expect to be in the lower half of the guidance ranges. With that said, United remains in a strong financial position. Our resilience in a high fuel price environment as well as our relative position in the industry provides further confidence in our long-term target of achieving double-digit pretax margins as soon as next year. Our proactive approach to managing the network in this environment is helping us achieve this outcome. Turning to the balance sheet. We continue to march towards our goal of being investment grade. In the quarter, we took actions to make further progress towards this goal and paid down more than $3.1 billion in debt, unencumbering more assets by accelerating our repayment of $2 billion of our notes that were secured by our slots, gates and routes while also prepaying $400 million of near-term maturity or higher cost aircraft debt. Additionally, the first quarter marked United's return to the unsecured market as we raised $2 billion across two unsecured bonds, our first unsecured issuance since 2019. The 5-year bonds priced at [indiscernible], while the 3-year bonds came in under 5% at [indiscernible]. We successfully reset the credit curve for United, compressing the gap in our credit spreads with investment-grade peers to historically low levels. This was the first high-yield bond issued with a coupon below 5% since Ford did it 4 years ago. Our execution exceeded our initial expectations as the market responded with incredible demand. This is the strongest evidence yet that the buy side appreciates that we're knocking on the door of investment grade. In the first quarter, we generated $2.9 billion in free cash flow. And while our free cash conversion in the near term will be pressured as fuel prices remain elevated, we remain committed to generating durable and growing free cash flow. To wrap up, our first quarter performance remained resilient. We are managing the business with the expectation that jet fuel remains elevated in the medium term. We're nimbly adjusting the network and cutting capacity that doesn't cover fuel costs, all while continuing to invest in our people and our hard product. As we look to the future, United is positioned to deliver stable double-digit pretax margins, strong free cash conversion and strong EPS growth on the other side of it. I'll now turn it to Kristina to kick off the Q&A. Kristina Munoz: Thanks, Mike. We will now take questions from the analyst community. [Operator Instructions] Regina, please describe the procedure to ask a question. Operator: [Operator Instructions] Our first question will come from the line of Jamie Baker with JPMorgan. Jamie Baker: So Scott, the CNBC interview where you articulated the idea of a larger brand that would capture passenger flows that are currently flying foreign competitors. It sounds like this is an idea that's still under development at United. But I'm curious, could you envision a world where United might operate its own hub in Europe the way that Pan Am once did? And second, do your existing partnerships with Star Alliance members, do those relationships factor in at all to your thinking in this regard? I mean, I think the idea of capturing foreign flows is fascinating. I'm just trying to think through how you might get there and maybe consolidation is the only way. Scott Kirby: Well, thanks, Jamie. I thought you were going to get through that without saying the C word. You almost. But first, I think it's extremely unlikely that we'll open a foreign hub anywhere in the [ foreign. ] Our Star Alliance partnerships are great. They enable global reach and breadth. They enable us to fly to lot -- give our customers the ability to fly to lots of cities around the globe that are never going to be big enough for United Airlines on our own to fly to and use frequent flyer miles to go to those kinds of places. And so those are all great. And really, everything that I've said today are -- I said on CNBC and Bloomberg this morning are all things that I've said in the past, I know people are now viewing it in a different light because of the rumors that came out last week. But everything that I said are things that I have said in the past. And it really comes from -- we've had this vision to build a great brand loyal airline, and it just worked incredibly well. Like you look at our first quarter results like with this kind of increase in fuel prices to deliver those kind of results to be able to look through to the full year with fuel prices doubling and still have reasonable confidence in $7 to $11 of earnings and stay focused on the long term. It's just -- it is dramatically different here at United than it was in the past. In the past, this would have been furloughing and deferring aircraft orders and cost-cutting exercises and just all kinds of stuff to try to manage through the near-term noise. And it's dramatically different. And we've won by winning customers in all classes of service, by the way. We invest nose to tail. Like most of our investments apply to all customers, Starlink, seatback entertainment and every seat, WiFi, the best app in the world. They apply to every single customer on the airplane. And because that strategy has worked, I thought it would work, but it's worked even better than I thought. And you can see in our financial results, you can see it in the market share data and in all of our hubs where we had big competitors, same things happened everywhere. It's not unique to competing with any one airline. It's happened everywhere. You can see it in the data. And it's worked even better than I thought, which -- because it's worked even better than I thought it would, it allows us to raise the bar on ourselves and aspire to something even bigger. And I think there is this big global trade deficit in the U.S. We compete with some really good airlines in the Middle East and Asia, and they have some advantages that we don't have. And like I actually haven't said what it takes to do it, and I don't even know the answer. Anything that it might be an answer comes with complications, and there's no certainty that any of them get there on their own. But it's an aspiration that we have at United. I've sort of talked about it and hinted at it at least in the past. It is an aspiration that I think United uniquely is in a position to take a run at. Dream big. That's the way you accomplish big things. Jamie Baker: Okay. And for my quasi-related follow-up, it's on the tape that the administration is readying a $500 million rescue package for Spirit. I've been with you for the last couple of years in terms of permanent and irreversible structural change. But how does the industry continue to evolve if the government chooses to prop up failing businesses whose failures have nothing to do with fuel? Scott Kirby: Yes. Well, first, I don't know what's going to happen there. And I think that we're proving right now that well-run airlines like United Airlines can even be profitable and certainly don't need bailouts in a time like this. And to your point, Spirit was -- I feel bad for the people of Spirit, but it's been pretty obvious that Spirit's business model was fundamentally flawed and the airline was not going to be able to make it or ever cover their cash operating costs. So I hope that doesn't happen. But if it does, we're going to keep focused on winning brand loyal airlines like -- this is brand loyal customers. For us, I don't think that this is nearly as big a deal as for others that are in the more commoditized space. If I was working at one of the airlines that depended on more commoditized travel, I'd be irate probably about this. But for us, like I think we've so distanced ourselves from the rest of the industry that I [indiscernible] policy. But I don't think it's going to have -- whether Spirit fails or keeps flying, I don't think it has much effect on United one way or another, to be honest. Operator: Our next question will come from the line of Conor Cunningham with Melius Research. Conor Cunningham: I'm pretty happy that I don't need to ask the Spirit question. In a world where fuel remains elevated for a long period of time, just curious on how that changes your management style of a hub or just like your general view on profitability to the overall system. I assume you're refreshing that analysis for yourself all the time. Are you doing that for your competitors as well as you look for opportunities more broadly? Andrew Nocella: Yes. I think the answer is affirmative on all the above. We look at this daily, weekly, quarterly, monthly, you name it. As fuel prices go higher, the question is how will demand react. And at this point, we can tell you that the price increases are going well and demand is hanging in there really strong. What we've done is proactively canceled flights, particularly on off-peak days and off-peak times, expecting that there could be some demand weakness in those channels. We'll see. So we think we're ahead of the curve here, and we'll continue to watch it and monitor it. But so far, so good, and demand is hanging in. Conor Cunningham: Perfect. And then maybe just on the demand destruction commentary a little bit. I'm trying to unpack it a little bit because in the past, you've talked about demand being somewhat inelastic to price. And I realize you're not seeing it fall off now, but there's a lot of speculation that may happen. So as you run your scenarios, like can you just talk a little bit about like how you expect premium, maybe the business traveler to change? Or I assume that the demand destruction really comes from the leisure side of the equation. So if you could just talk about how you -- how the scenarios kind of play out within your 2026 guidance. Andrew Nocella: I think we're a bit in uncharted territory. I think we can tell you right now that all types of customers remain particularly strong. Like just in the last week or so, our yields are now up 20% year-over-year. But even more importantly, the business part of our business, business traffic is over the last two weeks, up 25%, business revenue up 25%. And that's accelerated from up 16% in quarter one and 9% late last year. So these price points are being absorbed and passed through and volumes are increasing. And for United, you'll recall, we had the unique headwind last year related to [ Newark, ] which we're going to lap in about 10 days, I believe. So it will create easier comps for at least United and maybe harder comps for others. But the numbers look really fantastic over the last few weeks. Now we'll have to keep watching it, particularly as summer ends. And like in order to maintain these type yields at United, I felt like we needed less capacity on Tuesdays, Wednesdays and Saturdays and off-peak times, and we've done that. But look, business traffic is strong. Leisure traffic is bouncing in the mid-single digits right now, which I think I'm happy with. And so we'll continue to watch it. It is uncharted territory given the massive amount of changes we've done, but we've had 5 broadly successful price increases. And right now, we are passing on yields that are up 20% year-over-year. Michael Leskinen: Conor, this is Mike. I just want to pile on because you asked about the guidance policy. We've long had a guidance policy of building in an act of God into the guidance. And so we -- what you're hearing from Andrew, what you're hearing from Scott, there's nothing in our bookings that suggests there's demand destruction. But I believe it's prudent to be prepared for that. But we are not seeing it. We're hopeful that we won't see it. The economy seems robust. The stock market is indicating the economy is robust. And it may be that, that is an act of God we did not need to be prepared for. But that is our policy, and we need to be prepared for lots of scenarios. Operator: Our next question will come from the line of Ravi Shanker with Morgan Stanley. Ravi Shanker: Just on fuel, it appears -- the debate appears to be moving from fuel inflation to fuel availability. Just trying to get a sense of what kind of visibility you guys might have, especially out in Asia or Europe regarding potential fuel shortages and what the plan B might be in that case? Michael Leskinen: Ravi, it's a great question. We've got really good visibility for 4 or 5 weeks. And you are right to say that this issue is centered on Europe and Asia. It's much less of an issue in the U.S. We don't see a lack of availability being an issue at all in the U.S. It's a price issue. However, even in Europe and Asia, as we sit here today, we think it is a price issue, not an availability issue. We think that as prices rise, and you're seeing the price of jet rise much more than the price of Brent as crack spreads widen out. And so we think that price is going to be a rationing function. That means there will not be spot outages, but we're watching it closely. The longer the strait remains closed, the more that is a risk, and it is of risk in the regions you noted, Asia and Europe, not so much the U.S. Ravi Shanker: Great. That's very helpful color, Mike. And maybe as a quick follow-up, Scott, your first response, you said that you compete with some really good airlines in the Middle East. Obviously, they're having a little bit of an issue right now. Do you see any structural share gain opportunities in transatlantic or even longer haul from some of those challenges? Or vice versa, do you expect them to be aggressive when the situation settles down? Scott Kirby: I think it's temporary. And I think you look at like what Dubai, not just Emirates, but Dubai, City State of Dubai have accomplished is remarkable and impressive. And if I had to make a bet, I'd bet on Dubai. I think it's going to come back fully. It won't come back immediately. It's temporary, but we'll come back fully. Operator: Our next question comes from the line of Scott Group with Wolfe Research. Scott Group: So Scott, maybe this is a naive question, but why does the industry need a crisis to start pushing through such higher yields? Why can't we do it more sustainably? And then maybe just I'll lump it on to like one question. When I take your 10% pretax margin for next year, it sort of gets you to roughly $18 of earnings. I know you don't want to get into specifics, but just at a high level, as fuel hopefully starts to normalize lower, do you assume you hold on to this higher yield? Or do we have to give some of that back? Scott Kirby: So I will actually answer that first question. Maybe I'll try the second one. I've watched this for at least 25 years now and have come to the conclusion that -- I guess I'll start with the conclusion. Every airline CEO should have to have spent two years at a reasonably senior position in revenue management, understand it. And it's core, most of them haven't. That's the reason it's harder to get fares up. And I think what happens at airlines is the math geeks that are really smart that run revenue management. I'm looking at one of them in the room, sorry to call you geek, Dave, he's awesome. But I'm one of them, too, know that air travel demand is inelastic and that there's room to price more appropriately for our cost of capital and to return our cost of capital. But the people in marketing and government affairs are better at telling the CEO, like that's a bad message. And so they're much better communicators to CEOs. And so the pressure internally in the organization is really hard to raise fares. I mean it's even crazy right now. A couple of airlines that are raising fares like crazy and then they run a fare sale every week. Like just the marketing team disconnected from the revenue management team and the marketing team are better marketers. And so they tend to win is really what happens. And so you see it in a crisis. And by the way, like another like sure bet -- almost sure bet is in late October, November every year, there's going to be fare increases. And I eventually figured this out 20, 25 years ago that in October, the teams finished the budget and they rolled up to the CEO and the CFO who pound the table and say that's an unacceptable result. And they say, go raise fares, which they do. But it takes -- that's not exactly a crisis, but it takes something like that. And it's goofy to me that that's the way it happens. It's nonsensical. But I actually think that's the reason that it happens, and I thought that for a long time, and a crisis caused it to go up more. Now as to the question of does this hold next year? I think actually that this -- a situation like this at least has the potential to be different and for pricing to hold more. First, like as I said earlier, I think -- or I said somewhere today, I forget where I've talked, that airfares in real terms are down 27%, 2025 versus pre-pandemic. And that had put a bunch of airlines either losing a lot of money or sort of breakeven is really kind of only a couple of airlines returning their cost of capital. And everyone has to eventually return your cost of capital. And so I think it is more likely than not this time. And certainly, the longer this lasts, the higher the probability goes that the pricing increases hold. And we probably won't hold 100% if we normalize as I told the team earlier today, and it's just my guess that if things went back to mid-February normal, I think we get -- keep 20% of the price increase next year. And I think that's going to move towards 80%. And every day, it's ticking up longer as this goes on. So we're not going to give guidance for next year, but I do think that we'll be double-digit margins next year. And your analysis is not unreasonable. Operator: Our next question will come from the line of Brandon Oglenski with Barclays. Brandon Oglenski: Scott, I'm wondering if you could elaborate on winning brand loyal share and specifically as it equates to your Chicago O'Hare hub, especially now that there's a proposed FAA summer cap on operations there. I guess, A, how are you faring versus your competitor? And then, B, how do you anticipate complying with that? Scott Kirby: So I'm answering more questions today than I like, but I'll do it. In Chicago, we're still reviewing the order, but it does appear that we're not going to get to grow as much as we and our customers would like. But the real point is one you make, like we've won brand loyal share here in Chicago, and it's never been about the number of flights or the number of gates. Number of gates and flights were the output of what was happening with brand loyal customers. And we have by far the best technology. We have by far the best service, the best reliability, by far the best product. And customers have overwhelmingly voted -- not -- this isn't unique to Chicago, by the way. This has happened in all of our hubs. Customers in all of our hubs have voted overwhelmingly for United. We got three big hubs where we have three different big competitors. Each of which we've won about 20 points of market share. And here in Chicago, we've actually won 38 points of market share with business travelers. So customers care about quality. Quality really matters. And we give great value to all customers and so the brand loyal customers have switched. And absolutely nothing about that changes here in Chicago. But it does look like the FAA is going to not let us grow as much as we and our customers would have liked. And I wish we could grow more, but we can't. We've got other places we can grow, and I look forward to someday being able to grow more here. But nothing changes about the sort of structure here in Chicago and the decade that we've spent winning brand loyal customers by creating a great airline for them. Operator: Our next question will come from the line of Andrew Didora with Bank of America. Andrew Didora: Maybe changing gears a little bit, throw this one out for Mike. Just diving into cost a little bit more on the maintenance side. Just trying to think about how this kind of trends. I know it can be lumpy throughout the year, but particularly as it trends as you cut 5 points of capacity throughout the rest of the year. I would think you get some leverage on the maintenance side? Or am I not thinking about that the right way? And just from a long-term kind of maintenance cost perspective, is this something we should think about growing maybe a couple of points more than your capacity growth? Just curious on that line item. Michael Leskinen: Thanks, Andrew, for the question. And I'll make a few points. Firstly, you should broadly expect our CASM-ex trends to move inversely with the amount of capacity that we take out. I think that's maybe obvious, but that's what happened in Q1. That's what you should expect for the remainder of the year. Number two, the sooner you take out flights, the further out those flights are, the more you can variabilize the cost. There's no doubt about that. But at United, we're winning brand loyal customers by investing in this business. And nothing about this crisis is long term, and so you can expect us to continue to invest in the business. The final point I'll make, you made around maintenance. I think at United, we have some unique opportunities to fight that trend where maintenance cost is expanding as a percentage of our costs. Part of that is gauge, but part of that is what we're doing in global procurement and how we are working with the great tech ops team that we have. So I'm very optimistic we will not face that same trend that much of the industry faces. Andrew Didora: Got it. And then just my second question, certainly it seems like you were busy at the start of the year on the balance sheet. But just on the buyback, you had stepped it up this time last year in all the market volatility, but 1Q this year, very similar to the last few quarters. Just curious your thoughts on how you thought about the buyback. Michael Leskinen: Look, I think it's a great question, and it's valid. But we have two objectives with our buyback and our capital management. Number one, we are committed, absolutely committed to getting to investment grade. And so we need to balance our buyback and our opportunism around buying shares when they're below intrinsic value with our commitment to getting investment grade. And so what you saw in the first quarter was another example of how we're balancing that. I'm really proud of the team for what we did with the two unsecured offerings. And I just want to reiterate that we are going to get to investment grade in all scenarios. Operator: Our next question will come from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe another question for the revenue management geeks out there. You're removing 5 points of planned capacity through the end of the year. How do you think about what range fuel would need to settle in for United to return to that mid-single-digit capacity growth in the second half? And how do you think about irrational capacity coming back online? And how do you manage costs in that environment as well as you continue to invest? Andrew Nocella: That's a lot of questions. Sheila Kahyaoglu: Sorry. Just take one, if it's okay. Andrew Nocella: Look, I think we're going to watch demand really carefully. We know how price is created in the business, and we've cut this off-peak capacity because we want to make sure that we can sustain these type of yield increases that we see right now. And we'll continue to watch demand, and we're going to manage the business to hit the financial targets and margins that we have out there. And so if we can do that with more capacity, we'll gladly bring it back online. But where we are today would just -- and the economic lesson that Scott gave you at the opening would say that there should be some level of demand reduction related to a 20% fare increase. We haven't seen it yet. And if we don't, it's a really great outcome, but we're planning for that. If it doesn't turn out to be the case, we'll appropriately adjust our plans. Operator: Our next question will come from the line of Tom Fitzgerald with TD Cowen. Thomas Fitzgerald: I just want to ask a multipart question of Andrew about the commercial initiatives. If we bucket them into maybe merchandising, fleet and MileagePlus, would you mind just walking us through the margin uplift you're kind of contemplating over the longer term from some of these initiatives that they pan out? Like just in terms of thinking of putting some of those Airbus aircraft on those routes, like how they compare to the aircraft they're replacing, things like that? Andrew Nocella: Yes. I'll keep it really high level, but -- and I'm glad you asked the question because the current conditions are super interesting. But we've been working literally years on the 7 initiatives that I had in my script earlier, and we are really proud of all of them. We think all of them are material. But properly merchandising our products and being able to sell them, like we were unable to sell certain products is valued in hundreds of millions of dollars per year. And the new aircraft we bring on that are optimally configured for the premium demand that we're seeing is also a gigantic number. I'm going to avoid assigning values to each of them individually. Maybe we'll do an Investor Day someday where we can talk about it in more detail. But all of those initiatives, and there are 7 of them, and they're really all 7 of them were very, very significant, are about setting our future up to reach not only double-digit margins, but ultimately mid-teen margins as we've talked about. And we are well on our way. We've got it dialed in. We've, I think, figured this recipe out. We've segmented really effectively, and we're not done is also what I would tell you. We have other ideas in the works and plan another media day next year to talk about. Because we're really proud of all this. And the RM stuff, the segmentation stuff, the willingness to pay, all of it giving customers in all cabins more choices is incredibly effective, and we're winning share all the time. So hopefully, that answers your question appropriately, but I'm going to say it's just really materially significant to lay the proper foundation for the future. Operator: Our next question will come from the line of Michael Linenberg with Deutsche Bank. Michael Linenberg: Just one question here. Just on revenue recapture. I mean, thanks for outlining the progressions for the year. What gives you confidence that you're going to get to 100%? And do you actually need maybe outside help, whether it's other carriers cutting capacity? And maybe just give us a sense of how you recovered Russia, Ukraine, how quickly you were able to recover it back in 2022 when we had the last major fuel spike. Andrew Nocella: I'm not going to count on other airlines for anything, that's for sure. But from our perspective, the fact that we've already gotten to a 20% yield increase. And what we've done is we've cut off the capacity to make sure that we can sustain these higher yields. I feel really confident. And I would -- look, before this fuel situation happened, I would tell you, fuel is a pass-through. And so I feel really confident we're passing it through. Demand is hanging in there. We've made the appropriate capacity adjustments for United to make sure that we can get to full recovery by the end of the year, and we're well on our way already between 40% and 50%. And -- but the most optimistic thing is the fact that within a matter of 7 or 8 weeks, we went from yields being up 2% to 3% to yields being up 18% to 20%. It's pretty darn remarkable. Michael Leskinen: Mike, the underlying point is that for a growing portion of our customer base, this is a decommoditized business. The brand loyalty at United. You get a better experience, you get better value. And I think the results speak for themselves. Operator: Our next question will come from the line of John Godyn with Citigroup. John Godyn: I wanted to just follow up on the fuel pass-through. I think that commentary and that guidance was great. If we could maybe get a little bit of geographic color kind of how pass-throughs are evolving in your opinion, internationally versus in the domestic market. The capacity trends are very different. The fuel surcharge activity is very different. The hedging of the competitors is different. Maybe a little bit of color there would be helpful. Andrew Nocella: Look, I think the color I would add is I thought that the domestic would be quicker to move than international, and I was wrong. The international environment pricing -- well, both are strong. I want to be really clear. But the international environment is actually better than domestic that the price increases have been more substantial and are covering more of the fuel burden than they are domestically. And I think that's really remarkable. I think there's been changes in the overseas pricing behavior that have actually surprised me, quite frankly, given that -- I don't want to go into every detail, but given what I know about the industry. So I'm really pleased with that. And I do think these fares are going to be up. And as Scott said, depending on how long this lasts, the longer it lasts, the higher they'll be up and the longer it will stick, in my opinion. But the international environment is better than the domestic environment at this point. Michael Leskinen: John, I can't help myself, but you mentioned hedging by foreign carriers. If they hedge Brent, they're not hedging jet fuel. The biggest portion of the move in jet fuel has been crack spreads. So I think this experience has proven once again that hedging is a poor policy. John Godyn: That's great color, guys. And if I could just follow up with one more on the pass-through through the end of the year. It sounds like the assumptions embedded in that are status quo. Like you're not expecting all the other carriers to slash capacity or something like that driving your pass-through. Is it safe to say that? Or are there other kind of industry dynamics that you're looking for to kind of drive 100% pass-through by the end of the year? Andrew Nocella: Look, I can't speak for other airlines. We've engaged in self-help. We know what it takes to pass on these price increases by what we're going to fly. And we're out here to hit our financial targets and hit a double-digit margin next year, as Scott said. So I don't know what the goals and motivations and missions of the other airlines are. I won't speak for them, but that's ours, and we're going to manage our capacity to achieve our goals independent of what the industry does. Operator: Our next question will come from the line of Chris Wetherbee with Wells Fargo. Christian Wetherbee: Maybe just sort of sticking on the theme of the fuel pass-through and ultimately, retention rates. You talked about holding on to 20% and maybe that going to 80% over time. I just want to understand the mechanism behind that. Is it just simply duration? Is it the sort of competitive actions around capacity that others take? Is it other price actions you could use like bag fees or other ancillaries that kind of stick even when fuel prices come down? I just want to understand that dynamic of how you can hold on for longer. Andrew Nocella: Well, I think the longer the price of fuel remains in this range and the longer consumers pay these prices and airlines get used to this revenue stream, the more likely it is to stick. That's the simple perspective on it. I do think that international is running really well above domestic, as I said a few minutes ago. So it will be interesting to see if that normalizes. But the environment right now, I think airlines want to return their cost of capital and particularly here in the United States, most don't and that is unsustainable in the long run. So something had to change. It's unfortunate it had to be an oil crisis, but here we are. Operator: Our next question will come from the line of Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: Just on the mileage plan changes, which seem like they were motivated to get more people to sign up. Can you speak to the changes you're seeing in credit card uptake since you've made those? And I wonder if you could give us your current thinking about the time line for a new comprehensive agreement. Andrew Nocella: Look, we've been working on the MileagePlus changes for well over a year. We thought we would engage in whatever activities we could control outside of a new contract. And the numbers, the uplift, the spend has been incredible. We're really, really happy with that. Let's -- it's really new. So hopefully, in a few quarters, I can still describe it as incredible. I expect I will be able to do so. But these are changes that I think are really motivating for our frequent flyers, and we're at a record penetration rate of cardholders that are premier members at United. So I'm really happy with it. I think the details regarding our deal with Chase are largely confidential, but I think you can Google the expiration date and know that it's not tomorrow, but it's not that far off. And we're working with Chase. They're a great partner and run a really sophisticated program, which is required by United given the size and magnitude of our co-brand portfolio. We look forward to what the future brings. Operator: Our next question will come from the line of Michael Goldie with BMO Capital Markets. Michael Goldie: By the end of the year, your aircraft count will be up some 8%. How do you think about the operating leverage of these assets in a recovery versus the decremental drag if flight activity remains constrained? And then related, how are you thinking about managing labor requirements as you take on this new equipment while managing capacity? Michael Leskinen: Michael, I'll take the fleet question, and I'll try to answer the labor question. In an elevated fuel environment, it only exacerbates the advantage of new fuel-efficient equipment versus older equipment. And so you can see in our fleet plan, we expect to continue to take delivery. We're really pleased with Boeing increasing production rates on the narrowbody. They've been a great partner to us. It is financially advantageous to take the new aircraft, both from a margin and a return on invested capital standpoint. So you will see that. Now at the other end of the spectrum, our older aircraft. There's an opportunity to fly those aircraft in a capital-efficient way by managing the maintenance at the end of the life to maximize the value we get out of those aircraft. You can bring the utilization down, have extra spares and have additional flexibility to fly the golden hour and to manage peaks. So I think we're in an enviable position from a fleet standpoint. You shouldn't see us change anything. When it comes to managing labor and labor efficiency around that fleet, we've got a very sophisticated team, and we make sure we are hired across all work groups at the appropriate level to make sure that we're managing -- while we invest in the customer, we're investing in the hard product, we're investing in our people. We need to make sure that we manage the workforce very efficiently. And I think we do that very, very well here at United. Operator: And we will now switch to the media portion of the call. [Operator Instructions] Our first question will come from the line of Leslie Josephs with CNBC. Leslie Josephs: Just on the Spirit potential bailout, I guess, at this point, it looks like the administration is moving towards that. One, what's your comment on that? And two, does that change any of your assumptions for capacity? Or do you think there's going to be more capacity than you expected out in the market just because there was a liquidation risk earlier this year or in recent weeks? And then second, just had a demand question, if there's any geography where you are seeing a pullback. I think you mentioned that international was a bit stronger than domestic, at least on yield. So curious if there's been any softness in any area. Scott Kirby: Leslie, I'll briefly -- I just said earlier in the call, you may not have been on, but it's a more fulsome answer, I suppose. But in brief on Spirit, well-run airlines are still solidly profitable even in this environment. As you can see from United, I don't think this crisis is anywhere near big enough to cause the need for an airline bail out. And my record, you got lots of quotes from me over the past several years going back into the last administration that the Spirit business model is fundamentally flawed and it's going to fail. And I feel bad for the people. A lot of them will land jobs of the airlines every time that we have a new hire flight class and I go talk to them, I ask where people are from, and there's a lot of Spirit hands that get raised in the room. But I don't think it's necessary -- I also don't think it's terribly relevant to a brand loyal airline one way or another like United. Andrew Nocella: On demand, look, putting the Middle East aside, we're seeing strength everywhere. But what I'll point out is we're really seeing strength in premium cabins going forward into Q2, particularly across the Pacific and across the Atlantic. We're teeing up to, I think, a really strong performance. And United had already gone into the summer season with a pretty conservative global long-haul capacity number, I think, actually down year-over-year. So I think we're actually really set up to produce some very good numbers, and we have very good business demand going into the Polaris cabins is my answer. Operator: And I will now turn the call back over to Kristina Edwards for closing comments. Kristina Munoz: Thanks, Regina. As always, we don't control the environment, but we do control how we perform in it. I appreciate your interest today, and we will see you next quarter. Operator: Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.
Operator: Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to Pegasystems 1Q 2026 Earnings Call and webcast. [Operator Instructions] I would now like to turn the call over to Peter Welburn, Vice President of Corporate Development and Investor Relations. Please go ahead. Peter Welburn: Thank you, Carly. Good morning, everyone, and welcome to Pegasystems' Q1 2026 Earnings Call. Before we begin, I'd like to read our safe harbor statement. Certain statements contained in this presentation may be construed as forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, plans, believes, will, could, should, estimates, may, forecasts and similar expressions are intended to identify these forward-looking statements. These statements speak only as of the date the statement was made and are based on current expectations and assumptions. Because these statements relate to future events, they're subject to certain risks and uncertainties that could cause actual results to differ materially from our current expectations for fiscal year 2026 and beyond. Factors that could cause such differences are described in the company's press release announcing our Q1 2026 results and our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2025, as well as other recent SEC filings. Investors are cautioned not to place undue reliance on these forward-looking statements as there can be no assurances that the results contemplated will be realized. Except as required by law, we undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. In addition, non-GAAP financial measures discussed on this call should be considered in conjunction with and not a substitute for our consolidated financial statements prepared in accordance with GAAP. Constant currency measures are calculated by applying the March 31, 2025, foreign exchange rates to all periods presented. Reconciliations of GAAP to non-GAAP measures can be found in our earnings press release. And with that, I'll turn the call over to Alan Trefler, Founder and CEO of Pegasystems. Alan Trefler: Thank you very much, Peter. I've just gotten back from a few weeks on the road across EMEA and the U.S. and including an AI conference last week. And it's interesting because I think we're pretty practice at separating it from what's real, but there is a lot of confusion out there. Nonetheless, I'm hearing consistent themes from leaders of clients and prospects and partners. In a world of constant disruption, clients want and need innovation without sacrificing reliability. They want solutions to reimagine how their businesses work while still running them predictably and delivering measurable results. This means platforms architected for scale, interoperability and continuous change, where AI is governed, explainable and harnessed in workflows rather than bolted on. That's what Pega provides, a harness for enterprise AI. Blueprint to help reimagine how work should run and have people rethink their businesses and then the Pega platform to operationalize it with confidence and evolve it as regulatory demands evolve. There's a lot of noise about the future of the software industry itself, and it's creating some real confusion and some real moments of doubt and bias. Some investors I've met aren't sure what the future looks like and are even questioning the long-term viability of enterprise software vendors. But we think AI will be good for some and bad for others. And for Pega, it will be good. The reality is that enterprises don't succeed based on the alternative of coding fast using AI. They succeed based on whether they can design the right outcomes, execute them predictably and evolve safely over time. The assumption that AI-generated code can replace architecture is backwards. In mission-critical enterprises, AI increases the value of platforms that are architected for predictability, governance, interoperability and continuous change, and that's us. When outcomes matter with customers, regulators and systems that must evolve for decades, AI-generated code still needs structure. Certainly, for the types of things we do, we have very small things. You can just bind code together. But AI doesn't replace the need to have a business system. Alternatively, if people are using AI to just dynamically reason each process over and over, what we're seeing that's now running up costs and giving nondeterministic outcomes. At the moment you weaken your enterprise platform, you make your whole business weak. Putting AI in the middle in an ungoverned way, that's, I think, just a recipe for disaster. So whether you use AI to generate code that you want to be able to orchestrate and pull together, whether you use AI to be able to run or handle certain parts of your business where you want the creativity of agent-to-agent interactions or whether you want Pega, or whether you want these AI to be able to pull together and orchestrate multiple business functions with a harness like Pega driving that. In all of those cases, Pega adds tremendous value. So let's talk about how mission-critical enterprise software is built. Enterprise applications has always been around a continuous life cycle regardless of technology. It's not a single build moment. You need to design and align on what the software must do and how it must perform. And that design really can involve collaboration for many parties and having a collaborative environment like Blueprint that brings the power of the Internet, the power of Pega best practices and the power of a customer and/or partners thinking all together in a way that they can understand the experience and improve is absolutely central to get it to a great outcome. You got to build it. And there are lots of ways to build it, but the great news about something you've done in Blueprint is basically both. You need to be able to execute or operate it to run it at scale, secure, make sure that it's performance that's being watched and managed. And with Pega Cloud, which you'll see is really, really continuing to grow beautifully, we give our customers a price to execute that is without parallel. And then you need to be able to evolve it and respond to change if the cycle starts again. And this cycle is high stakes, and it's absolutely critical to get businesses not just what they want to get done in 2 weeks or 4 weeks or 6 weeks, but to get them to operate over the years of the business. The Pega model, which is at the heart of the Pega system is the key to most of these key factors. It's the same that lets you design it, let you collaborate, it makes the build trivial. It actually executes it and orchestrates the AI. And best of all, it lets you go back to it and have a structure that you can look at, you can understand and you can direct change from. And that ultimately to us is how this life cycle operates in this new AI orchestration age. While LLMs dramatically accelerate the build, they don't replace these other key factors nor are they going to be able to. That's why clients see Pega. Some people are going, well, why don't we just get software. And certainly, AI can generate code quickly. But prompts to code alone falls short. It doesn't tell the enterprise what should change. And the gap we have isn't coding speed. It's understanding what's there and making sure you don't accidentally change something with unintended consequences. When you're operating at the speed of the prompt, it's actually easier to do that, not harder, particularly if you haven't put out a nice solid architecture that makes what's going on visible. Now we do want it to some people who say that they believe in AI-only execution. Why do I need a workflow engine at all? Why do I need a harness at all? Why don't you just simply turn everything over to general purpose AI agents and manage it and just have, say, a control power that watches what's going on and reports out and keeps things in line. But I'll tell you, this great systems that are difficult to test, expensive to run and nearly impossible to evolve safely. LLMs are incredibly sensible, effective to even the tiniest bits of additional data. And a new version of the LLM, and let's look at how quickly they're coming out, can often behave differently from the one you used just the day before. I think it's safe to say that for many kinds of work, in provision, in propagation is not a reasonable business strategy. People want predictability and reliability. But the other thing which really broke last week is that this approach to AI reasoning is becoming cost prohibitive. I hear growing discussion about the cost of GenAI and how teams are bouncing between token matching in which they try to tell the team to use as many tokens as possible to rationing tokens to usage caps to supplying bills. The concerns are real, but they reflect the misapplication of AI using the wrong AI at the wrong time. When you ask GenAI to reason and run time over and over, again, for processes you've already validated, every interaction becomes a new experiment and consumes tokens. You end up paying repeatedly for the same thinking, which is expensive, unpredictable and hard to scale. Instead, do what Blueprint AI does, do the super heavy reasoning at design time, where GenAI can brilliantly explore options, math work for close, let you collaborate and pressure test decisions. Then use the right AI for the execution, focusing on consistency and speed. Costs become predictable and value scales with governance. GenAI isn't expensive, but misapplication is, and the smart organizations will stop paying the LLM to relearn their business every 5 minutes. Success in the enterprise doesn't come from AI reasoning everything on the fly. It comes from executing redesigned work, reimagined work within clear governance structures. Our architecture uniquely allows enterprises to design intelligence into how work gets done, not bolted on afterwards. Now since we last spoke, we introduced new vibe coding tooling into Pega Blueprint. And this combines the speed of AI augmented design with security and predictability that Blueprint gives. You can try it out on Pega.com/Blueprint. Remember that Blueprint facilitates the reimagination of critical work, not just the development of applications. And that reimagination goes beyond process alone. It includes redefining roles, decision rights, skills and experiences. AI can be applied intentionally to these rather than accelerating what already exists. Users interact with Blueprint designs in natural language now, describing changes by typing or speaking. And the result are enterprise-ready governed workflows. We received continued validation of Pega's leadership across the industry from clients, partners and analysts who see and work with Blueprint AI. Recently, Forrester named Pega as a leader in customer service solutions, recognizing Pega Customer Service, Pega Blueprint and Pega Process Mining for automation and agentic capabilities. So we're also winning awards for our software. We've already this year received 4 awards for innovation related to how we're leveraging AI, including a Product of the Year award. Now we love receiving awards for our work. But personally, it's even better seeing our clients win awards for the work that they do with our software. Just last month, the National Health Service, which provides 24-hour digital and telephone-based health service to Scotland's 5.5 million citizens, received the public sector award for work leveraging Pega software. These sorts of recognitions reinforce our strength and the need to be able to orchestrate complex service journeys and apply AI predictably. Now this is not theoretical at all. If you take a look at how this is playing out, we recently had one of our customers, Proximus, Belgium's largest telecommunications operator, use Pega to modernize a mission-critical B2B installations application, moving from a fragile legacy tool to an orchestrated cloud-ready solution. They built their first prototype Blueprint in 15 minutes and went live in weeks. And numerous other great names, [indiscernible] Vodafone, National Australia Bank have really been able to drive change include a redesign and include extensive automation, all AI-powered. I love the customers are excited about this and that they're going to be coming to PegaWorld in quantity to talk in detail about what they're doing. And these same stories that you just heard and others will be shared to PegaWorld in June in Las Vegas because the way that I think we all learn is by seeing what other clients are doing. And it is such an honor and it's wonderful that customers are willing to come and do that. It's from June 7 to 9, and I would say it's a must-see event, a chance to interact with thousands of transformation leaders from around the world and see incredible new developments at over 200 different AI-powered demos. We have these exciting keynotes lined up with nearly 100 more customers from 60 organizations presenting detailed breakout sessions. MetLife will show how a highly regulated insurer moved from AI experimentation to AI at scale. Unum will discuss large-scale legacy modernization, leveraging Pega Blueprint and AWS transform to rearchitect decades of legacy core system. And I would say that what is also exciting is the breadth of industries. Wells Fargo will talk about how they highlight AI-driven decisioning across billions of customer interactions. So we're going to have great customer stories, but I'm also going to tell you that this year, we're going to have a tremendous product agenda that we're going to be releasing because this is going to be a very substantial year for the product. You've already seen what Blueprint has done. And Blueprint AI has fundamentally changed the upfront design and the reimagining of how people should work with systems. What we're doing this year and what you'll see us be able to show at Pega is how Blueprint AI is moving into the entire development and support suite, so that, that interface, that AI-driven guidance and that power will operate from the moment of visualization and inception that you get from Blueprint, all the way through to how you complete a system and how you support a production system. I think this is the most consequential change to the underlying technology that I have seen and it's there to support the Agentic process fabric technology we have that then allows all of your Pegasystems and even non-Pegasystems to be able to operate as a connected orchestrated network for the next generation of technology. I think only Pega has the efficient runtime intelligence, the deep design time skills, the experience with these key workflow harnesses and is going to be able to put in your hands the way for you to make our harness yours. We look forward to continuing the conversation, and we can continue the investor conversation on Monday, June 8, at noon in Las Vegas, we're also hosting an investor session. So thank you all. We are working hard. And for the numbers, let me turn it over to Ken. Kenneth Stillwell: Thanks, Alan. As discussed last quarter, the rhythm of our business was expected to return to a more typical seasonal pattern in the Q1 of 2026. We entered the year knowing the first quarter would also be a challenging comparison given the $60 million of net ACV add in the first quarter of 2025, which was very much an outlier and roughly 20% higher than any other quarter last year. It's no doubt, and it's an interesting start to 2026. With all of the AI experimentation that Alan mentioned, the federal government shutdown, 2 wars, both in Europe and in the Middle East, clearly puts pressure on the entire environment. So it's not surprising as well that Q1 did have a lower growth rate. We continue to believe in the durability of demand for our platform, especially for our cloud offering. Pega Cloud in the first quarter of -- Pega Cloud revenue in the first quarter of 2026 increased year-over-year from $151 million to $205 million and also grew 30% if you look at that Pega Cloud revenue growth on a trailing 12-month basis. Pega Cloud ACV grew 29% year-over-year as reported, and 27% in constant currency to just over $900 million, an over $200 million jump. It's very exciting to see Pega Cloud ACV now rapidly approach the $1 billion mark. As we've said, ACV growth and mix is reflective of the evolution of our business. Pega Cloud ACV now represents about 56% of total ACV. Our focus on growing Pega Cloud puts pressure on both term and maintenance ACV as well as revenue. Naturally, as Pega Cloud ACV continues to grow as a percentage of overall ACV, it will impact near-term and in-quarter revenue for term and maintenance. Moving to free cash flow. Free cash flow reached $207 million in Q1 of 2026, marking a strong start to the year. As a reminder, our free cash flow is primarily driven by our operating efficiency and our ACV growth, which serves as a proxy for subscription billing growth. We remain confident in our strategy to drive free cash flow and ACV growth for several reasons. First, expansion within our existing client base remains a core go-to-market motion with our sales team continuing to successfully cross-sell and upsell into our installed base. Second, we're accelerating new logo pipeline build with Pega Blueprint as a key enabler. Blueprint makes it easy for sellers to showcase the power of the Pega platform while enabling buyers to reimagine their legacy mission-critical workflows. As a result, Blueprint is already driving meaningful pipeline creation across both new logo and existing clients. We expect this new pipeline will begin converting into ACV in the second half of the year as deals progress through the sales cycle with a faster motion, thanks to Blueprint. This is also an unusually high level of new logo pipeline growth, which is just awesome to see. Third, we're already seeing early proof of Blueprint's ability to accelerate time to value. Last month, I met with a large healthcare organization. This existing client of ours use Blueprint to design and build 2 new applications, one going live in 92 days and a second in 70 days, a strong example of what our platform can do powered by Blueprint. Fourth, we're seeing renewed interest in legacy transformation as more enterprises look to leverage AI and the cloud to modernize their operations. Blueprint is unlocking these legacy transformation opportunities by simplifying how clients reimagine and redesign their workflows to drive growth, reduce costs and improve customer experience. Together, Blueprint and Pega Infinity create a powerful combination, Blueprint to design and reimagine the work and Infinity to run it, reinforcing Pega's position as the platform of choice for large-scale mission-critical workflow transformation. Unlocking legacy transformation is just one way Blueprint is transforming our business. Early signals show Blueprint is accelerating pipeline growth and helping us capture new clients. For example, in Q4, we signed a new financial services logo, leveraging Blueprint's new legacy transformation capabilities with plans to migrate more than 30 applications from a legacy application platform to Pega Cloud. Blueprint is also driving meaningful go-to-market efficiency, where deals once required a full bench of supporting roles, today, our client executives can now cover far more ground with our clients when leveraging Blueprint. Finally, we're seeing R&D benefits as well. Our new Agentic engineering approach will enable us to execute our product road map more efficiently, allowing us to increase our pace of innovation. Since Blueprint runs on Pega Cloud, we can deliver new features and capabilities rapidly to clients and prospects. We're excited to share more about this new approach with you at our upcoming investor session in June. Moving to capital allocation. We continue to maintain a balanced approach, prioritizing investments in long-term ACV growth while returning capital to shareholders as appropriate. In Q1, we returned more than 80% of our free cash flow to shareholders, repurchasing 3.5 million shares for $167 million under our repurchase program and paying $5 million in quarterly dividends. As of March 31, 2026, our shares outstanding decreased from the end of 2025 by 1.6 million shares. Looking ahead, we will continue to opportunistically return capital while maintaining strategic flexibility. Our buyback reflects our unwavering confidence in the durability of our cash flow. As you know, these buybacks are accretive to earnings and also combat stock-based compensation dilution. They are made possible by this strong and durable cash flow. Next, a few thoughts on modeling. We provide full year guidance at the start of the year, and we typically do not issue quarterly guidance or update our outlook during the year. As I mentioned earlier, our renewal portfolio is back-end loaded this year, which means we expect to have higher level of business activity in the second half of the year. The shape of our pipeline also influences the timing of term license revenue, which is largely recognized upfront in the quarter a client contract is renewed. As a result, we expect term license revenue to be more heavily weighted towards the second half of 2026. At the same time, our focus on driving Pega Cloud ACV growth also puts pressure on term and maintenance ACV. The success of our Pega Cloud sales efforts is already reflecting this shift, and we expect it to continue as Pega Cloud ACV scales to 75% or more of our total ACV over time. Put simply, a portion of our Pega Cloud ACV growth is displacing term and maintenance ACV as intended, and we expect this dynamic will persist as we march toward our cloud mix goal. In addition, we're beginning to see a meaningful change in how enterprise clients are thinking about AI. The economics of AI are changing. Frontier models providers are tightening monetization. And in the era of low-cost subsidized all you can use experimentation seems to be coming to an end. As a result, AI usage is increasingly treated as what it is, a true operating expense. Every API call must be justified with clear business value. Given this change, buyers are moving out of the experimental phase of AI into the ROI stage. This transition to profitable AI plays directly to our strengths. Pega has always been focused on delivering measurable business value. AI is not just about efficiency. It's about generating tangible returns, and that's exactly what Pega is built to do. Importantly, our pricing model is aligned with the shift toward outcomes. Pega prices based on cases, which is a measure of the amount of work that the Pega platform executes, tying our economics directly to the business value delivered rather than on users or seats. This stands in contrast to many model providers where pricing is driven by usage metrics like tokens or API calls. As AI costs come under greater scrutiny, we believe our outcome-based pricing model provides a clearer and more efficient path for clients to generate and measure return on their AI investments. As Alan mentioned earlier, we're holding our annual investor session at PegaWorld on Monday, June 8, at the MGM Grand in Las Vegas. During the investor session, we look forward to providing you with additional color on several of the topics that I discussed today. We also plan to provide more insight into how we envision clients driving legacy transformation with Pega and how we're progressing against the long-term targets we laid out last year. We also plan to give you insights into several key Blueprint metrics, including the impact of pipeline build and deal progression and what is most interesting of some of the metrics around new logo momentum. In closing, we look forward to seeing you on the road at conferences and non-deal roadshows over the next few months and at our investor session at PegaWorld in June, which we encourage all of you to join us. Please also note that we plan to participate in the NASDAQ opening bell ceremony on Monday, July 13, at NASDAQ Marketplace in New York to celebrate the 30th anniversary of Pega's initial public offering. With that, operator, please open the line for questions. Operator: [Operator Instructions] your first question comes from Alexei Gogolev with JPMorgan. Alexei Gogolev: Ken, would you mind providing a bit more color on acceleration of ACV growth through the year? I remember you talking about client compelling events and renewal cycles driving potential uplift in the back half of '26? Kenneth Stillwell: Yes. So there's 2 different factors to that. One is our renewal cycle is tipped towards the back end of 2026, which is more -- that's more the usual distribution than unusual. But in 2025, that was reversed. There was not as many compelling events in the back half of the year. So that's one factor. When there are renewal cycles, that is typically an event where clients, if they're going to expand their relationship, tend to do it around that renewal cycle. So that's one factor. The second factor is we've put a renewed interest in new logo focus with Blueprint. And as we build pipeline, that will naturally grow and the conversion of that pipeline will grow the opportunity tends to sit towards the back end of the year as well. So there's 2 different factors that really tip our business momentum towards the back end of the year, which is very different than last year where we had a very, very unusually tipped towards the front end of 2025. Alexei Gogolev: And Alan, in the past, you spoke about AI adoption disconnect. Can you talk a bit more about what you're seeing in terms of the narrative in the industry and update us on the trends from Q1 in terms of agentic adoption? Alan Trefler: Yes. I think that there's some things that looked at properly, you have to really laugh or cry as the case may be. I talk to people -- I spent my whole time out in the field talking to people about what they're doing. So much going on when people talk about LLMs, people talk about the word agentic, people talk -- we talk a lot about LLM technology as we make very heavy use of vector databases, which is a way to use LLM technology but to do it in a very cost-effective fashion. And what I encounter is there are some people who actually article about this, where they think that they will be at their most successful when they use the LLMs for as much as possible. And I'll be honest, that's just crazy. The LLMs do magical things. But what you want to do is use them for the right things, not for the parts of this problem that are statistical and not for the parts of the problem that should be planned out in advance. The be planned out with an LLM that the blueprint does, but should not be just planned and wean and pay this incredible tax for rethinking what you already know. But some people are just so enamored with the LLMs that they're in love with it. And I think some of the enterprises out there have told their teams, hey, we just want you to use this stuff. And I can appreciate that if they're trying to get people to understand it, that's not going to be remotely what ends up sticking, not just cost, but also lack of reliability. And it's like most ungreen thing you could do in terms of the electricity use and all of that. So I think understanding proper use of LLMs is absolutely key. And to be honest, I think we've nailed it. And what I see with the others, structurally different path in just about all cases. Operator: Your next question comes from Raimo Lenschow with Barclays. Raimo Lenschow: I just wanted to stay on that new logo focus that we have, like if I look at you guys over the years, you have been really the high-end provider, very good for complex scenarios, et cetera. But on the new logo side, that was always like a bit of a question. You had a really big installed base. Talk a little bit more about that new focus on new logos. I can see how Blueprint is really going to help you here, but I just want to understand a little bit better on that one. And then the -- Ken, one for you also on the maintenance side. I hear you that the push towards Pega Cloud will impact maintenance. The numbers we saw this quarter, are they indicative of what we see for the year? Or is that -- was there other factors in Q1 that we should be aware of? Kenneth Stillwell: I'll touch on the maintenance one. I think you will see, as we continue to move towards Pega Cloud, you will see maintenance go down over time, and you will see term license be flat to down as well. Even though some clients will still continue to run on client cloud, I think you will start to see that shift, not -- certainly not 100% at any point in the near -- in the foreseeable future, but it will move in that direction. I'll touch on the first question that you asked because -- so the way we think about it, and this is just a framework. If you look at a company like Gartner, they have something like 15,000 clients. I think Forrester has slightly less than that, but still many thousands, probably approaching 10,000 clients. The types of companies that would go and seek advice from a Gartner or Forrester clearly have enterprise spend of some level of size. We believe all of those organizations are an opportunity for Pega. There are others that don't actually subscribe to Gartner as well. But we think the universe is very large. We're not talking about going down to tiny organizations to get that opportunity. There's just a lot of companies that we've not historically sold to. It is a newer motion for us, but not a brand-new motion. We have always added a few new logos. It's just that Blueprint completely changes the dynamic of how fast we can engage with a new logo and the speed at which we can validate if there's interest. And that was the reason why we never really pushed hard on that in the past because we didn't -- in some cases, it might be a 2-year sales cycle to see if there was momentum. And that was the reason why we were very thoughtful about new logos. With Blueprint, that really changes the game. Alan Trefler: Yes. And Blueprint is a great starter, but the thing for that. But a couple of other things we've done that also changed that game. First, Blueprint let you design things that you would have had to be a lead system architect, have had years and decades of Pega experience and some to really do. And now it just happens. We've got a lot of that expertise built in. And every month, we build in more. So we've radically changed the training required curve. We've radically changed the expertise required curve. And candidly, all of these also adjust the cost curves as well at the same time that the improved speed of delivery. We've added this Socratic education, which is a way that we can now make it easier to teach people about their gaps as opposed to having them to go to big formal courses. So there's been a huge simplification. And when we think and we talk about how we want to go from the like 850-ish companies that we would really sell to and have as customers in double, and we're going to continue to really try to do great work for them there to, say, 10,000 as a much more easily acceptable population of multibillion firms that we can go after. We now have a tool that's well equipped for that. And between the fact now that it runs on Pega Cloud and that Pega Cloud is tied in to our predictive diagnostic cloud, which does a lot of self-maintenance, a tremendous amount of making sure performance runs, handle scalingfully on Kubernetes. We're just in a position where we can really go after this. So it's not just a choice to go after, it's also years of product evolution and business evolution that has made this possible. Operator: Your next question comes from Steve Enders with Citi. Steven Enders: To see everybody last week at our conference. I guess I wanted to start on kind of the AI discussion and the focus on becoming a harness for enterprises. I guess I want to understand a little bit better about maybe what this means candidly for your customers in terms of use cases that you see as you kind of try to become that harness layer, kind of how you're thinking about that adoption curve within some of these bigger customers that you have? Alan Trefler: Yes. What I see is that customers, think of Proximus as we just mentioned, think of some of the others look to the use of our AI powered by Blueprint, but still able at critical points in the workflow to call even a non-Pega agent. The idea is that we can actually use our agents, customers' agents, but it all is in the context of a business objective that they were able to think out and design. That, I believe, gives the customers a level of reliability and auditability that they can't come close to with any of the other alternatives there. So I see customers who take the moment to understand that they don't want to read everything all the time. You guys probably all use Claude and Gemini and OpenAI. I was using Claude this morning, putting some questions in, and it starts explaining to me that it's reasoning. It uses terms like frolicking, canoodling. Well, when it's doing that, it's feeding itself tokens. I mean we're paying for these journeys of intellectual research that it's doing. I am thrilled to do that when it's not the exact same stuff that was done that morning. And people who think that they're going to handle credit card disputes by turning them over to a LLM to figure out the detail and nuance for each individual customers are missing the chance to bring stability and efficiency into those operations. And when we explain the harness concept, I think customers really get that. Kenneth Stillwell: I'll just add one additional thought there. If you think about the value that Alan mentioned of the concept of Pega functioning as a harness, you got the efficiency, you've got the risk management that Alan mentioned. You also have the resiliency aspect because we're using multiple models and being able to actually use the right -- the models are -- they have variability in their performance and their speed in the context. So I think we're able to really create this best of all of the models in terms of leveraging it when providing that value at design time and selectively at run time. Steven Enders: Okay. That's helpful context there. Maybe just on ACV dynamics here. I think it would be helpful to kind of know kind of what the net new ACV was if we look at kind of forward FY 2025 constant currency, like what that was for the quarter? And then I guess, on the levels that came in this quarter, I guess, did this kind of come in as you were expecting? Like was that the level you were assuming when you guided for the year? Or does this maybe change how you think about what the ACV growth for the year will look like? Kenneth Stillwell: Yes. So we -- I'll talk about Q1, and I'll also actually mention kind of the first half that we had talked about at the beginning of last quarter. First half last year, we had a significant amount of net of -- everything I'm saying is in constant currency, Steve. We had a significant amount of constant currency growth last year in the first half of the year. That was unusual and will not -- I mentioned will not repeat this year. We were going to be more back-end loaded. So the constant currency growth in Q1 was somewhere around $20 million. I would say it was in a few million dollars of where I thought it would be. It's probably a couple of million dollars lower than what I thought it would be, but pretty close. It was, I would say, more of a rounding error than something that was significant in terms of the growth. And I would say Q2, once again, we don't -- Q2 is not a big renewal quarter either. It's really Q3 and Q4. So that's -- I think the year is not that different than the way that I envisioned it playing out in terms of just the numbers. And we knew that cash flow was going to be stronger in Q1 because Q1 is typically a strong cash flow quarter. So I would say kind of across the board, it wasn't dramatically different than our plan. Operator: Your next question comes from Rishi Jaluria with RBC. Rishi Jaluria: Maybe 2 for me. Ken, let me start with you. In your prepared remarks, you talked a little bit about some of the macro or at least the macro backdrop that we've been seeing and obviously, with everything with government and geopolitical tension and obviously, the prevailing AI side. There's a lot going on there. Maybe can you be a little bit more or expand a little bit more in terms of what have you seen so far this year as a result of kind of all of these? And let's put AI aside for a second because obviously, we spent a lot of time on that. But very specifically around some of the geopolitical stuff, government, et cetera, how has that impacted your business so far? And as you think about things going forward, I know you're not updating guidance, and that's in line with kind of your historical practices. But just how should we be thinking about that potential impact on your business for the rest of the year? And then I've got a follow-up. Kenneth Stillwell: Okay. So once again, I'll follow your lead and leave AI off to the side. I think on government and the government shutdown and some of the changes the government has made, there were a few deals and a renewal or 2 that actually did slip out of Q1. We don't believe that those are like lost deals. It's just more that the process by which we go through like procurement changes in the government definitely has caused a little bit of confusion in Q1, specifically more in March. So that's -- I don't suspect that will extend for a very prolonged period of time, but probably Q2 might still be a little bit of confusion as like GSA starts to take deals more directly, et cetera. So that's -- there's no doubt that there's some backlog of work that needs to process through the government that happened in Q1. On the war, I think that -- look, the war is -- 2 wars, by the way, not 1, both of those wars are very impactful for Europe, right? And 30% or so of our business comes from Europe. So I think that it would be accurate to say that there are people -- there's a potential for a derisking that would happen just because of the impact of higher oil prices, temporary inflation, goods flow being disrupted, et cetera, into not just the Asia Pacific area, but also parts of Europe that are dependent on those same regions. So I think government, yes, some delays. I think that will probably clean up through the rest of the year. The war and how long that stays outstanding will has a risk of hurting the spending environment across IT and all and everything else. I mean, just because of the disruption in supply chain. So -- and we started to hear some conversations that I wouldn't say that I could point to deals in Q1 necessarily, but I think it is definitely something we're watching. Alan Trefler: I think there's been more of a push to go for some of these "sovereign clouds" which AWS, for example, is working on one. But just having that as an extra complication just has the ability to drag things out. Kenneth Stillwell: Yes. Now thankfully, we have cloud choice, and we have the ability to work with different hyperscalers in regions. But there's definitely some tension between U.S. providers and other parts of the world. And we just have -- we have to do our best to manage through that as this war continues -- these wars, I should say, continue on. Steven Enders: Okay. That's very helpful. And then maybe, Ken, I wanted to expand, and this is for both of you. Ken, you talked about this idea of maybe the kind of era of subsidized unlimited tokens might be doing. And I think everyone's experiences with Claude and the likes has kind of shown that as they've been a little bit more -- at least throttling some of the usage a lot. And I think that makes sense. But just to maybe expand on that, can you talk a little bit about as that kind of trend plays out, number one, what does that do to your own cost structure with Blueprint and where you are using the LLM for the design and ideation side, not necessarily in run time as you've been speaking about? And then number two, does that maybe change the nature of some of the conversations where maybe in the past, customers have said, hey, we're going to try AI for everything, whether it makes sense to do it or not or use ours for everything, whether it makes sense to do it or not. And maybe that can change the nature of conversations and has that been showing up yet? Alan Trefler: Yes. I was really seeing those last week actually after Anthropic announced its price changes. It's going to be fabulous for us because Blueprint -- yes, Blueprint is as consumptive as anything else. But when you design something wrong once and run it 200,000 times, the design cost is not really relevant. So that's really nailing it. I do think it's great that the tokens have started to approach closer to reality. They're still very, very heavily subsidized. And I think that subsidy will persist because people are trying to push the numbers up to one of you guys take them public. Operator: Our next question comes from Devin Au with KeyBanc Capital Markets. Devin Au: Maybe just for Ken, on the first one, I know you mentioned some geopolitical disruption in EMEA that's ongoing. But when I look at your revenue performance in the U.S. and APAC in the quarter, it seems like both regions were down quite notably. I know revenue isn't the best metric to assess the business quarter-over-quarter, but I would love to just get some more color on kind of what drove the downtick specifically for those regions in the quarter. Kenneth Stillwell: That's solely just the timing of term license revenue, Devin, and how that compares year-over-year and quarter-over-quarter from Q4 and Q1. In terms of the business activity, I don't believe we've seen any impact kind of bookings or new business in either of those regions. My comment was more -- it would be reasonable to think they would be under pressure. But we have -- the revenue is just related to term license revenue. It's not structural. It's just the timing of accounting. Alan Trefler: And we hate that revenue behaves the way it does. Nothing would make us happier than just be able to report everything on a recurring rate. Devin Au: Understood. Yes. I appreciate the context. And then just a quick follow-up. I know you've kind of talked about a little bit on your remarks on the new bide coding capability that got released to Blueprint. I would love to just speak to -- for you to speak to how kind of usage engagement have kind of trended since that release came out for Blueprint. I mean has that -- have you seen any sort of early signs or signals on greater expansion activity from users using that vibe coding tool? Alan Trefler: Yes, we're getting great comments on it. It's right on the face of Blueprint. There's a little panel on the left of Blueprint. It's an AI assistant. And on any of the pages, if you say, hey, add an insurance policy to this travel request, it will design the data structures and the fields and everything right into the Blueprint. And so you don't have to get it right upfront. Peter would be thrilled to get all that to you. But anybody can just go on to do it. It's absolutely central to what we're doing and great feedback. Operator: Your next question comes from Patrick Walravens with Citizens. Patrick Walravens: Great. Alan, 2 for you. So you talked in your script about the long-term viability of enterprise software vendors and you said, well, we think AI will be good for some and bad for others. What is it going to be bad? That's my first question. Alan Trefler: Well, we've seen it be really bad for it. There are some products that generative AI has just made a feature. For example, we used to -- there was a company we used to license their document processing software. And if a customer wants to, for example, peel feels off of a physical document, they're really good. Now you can just do that by having the customer call the LLM. And so there are what I would describe as point features that massively changed or gone away. I think that there are also -- a lot of the low-end workflow companies, guys like Asana and Monday have really, I think, suffered in the market. They were called work management companies, which was a moniker sometimes applied to us. But I would tell you, we never really competed with them because the types of things we do are so fundamentally different. I think the types of things they do, which often tend to be kind of a small little system for a 10-person work group are going to be the types of things that somebody might be able to just code. Ramping that up to do work across even a 500-person company a 5,000-person company, which is our bread and butter. I think AI just adds a tremendous amount of value to that and doesn't really open us up to risk, as I said. Steven Enders: And then the second question is a little out of left field, but I'm sure you have a point of view on it, and I am feeling it fits into your remarks somewhere. So SpaceX buying Cursor or maybe buying Cursor with -- through $60 billion with a $10 billion breakup fee. What does that tell us about what is going on in the AI world? Alan Trefler: I think I would have to rely on guys like you to tell me, look, I think there are so many -- last week, I was driving up 101, and there was a billboard after billboard of AI company after AI company that I have not heard of many of them. We've got this enormous, enormous collection of code writers, some of whom have become instant unicorns. And what that tells me is AI is in parts of it are in the bubble phase, and that will all shake out. Whether SpaceX makes Cursor one of the few survivors, there'll be a couple of survivors, whether Claude go kills them all, I don't know. I'm not fighting in that brain. So I have no interest to get thrown into it. Kenneth Stillwell: I'll just give one little point that we heard last week at the AI conference we were at Pat, which is Cursor is sort of a harness, right? And so I do think that maybe [indiscernible] for programmers. But I do think it kind of like suggests that like the AI models really need to be governed in different ways for different use cases. Alan Trefler: So when I use the word harness, which is the word somebody else used, but I kind of like it, it's really thinking about being a harness at run time. It is a hard move, but it's a harness design time guys decide, make sure you think about the design the right way, things in the right structure in order, et cetera. But I think you need a design time harness and a run time harness. And I would agree, Cursor is a good design tool. Kenneth Stillwell: It's guardrails for the AI models, right? So I think that's the one thing I could read into that. Operator: Your next question is from Mark Schappel with Loop Capital Markets. Mark Schappel: Ken, a question for you. Could you just talk about what portion of your pipeline is now, say, AI-driven versus more traditional platform ACV? Kenneth Stillwell: So I think I'm going to reframe your question because I think what you're suggesting is how much of our pipeline is led by Blueprint. And I would say almost all of our new pipeline growth is connected to a use of Blueprint in some way, which I would put in the AI camp. In terms of our AI accelerators that we have, like we talked about like Knowledge Buddy, Coach, et cetera, some of the specific run time AI accelerators that we have, we typically think about those as a premium markup, so to speak, on the value of activity that happens through the platform. But if you want to think about all of our new pipeline that's been added, certainly, any new logos, any new workflows, those are led by Blueprint and led by Pega AI. Mark Schappel: Okay. And then, Alan, I was wondering if you could just comment on how the -- how demand for the legacy scale modernization programs you're seeing is evolving, especially in the government and regulated industries. Alan Trefler: So we're engaging. It's slow, but we actually have a number of these legacy transformation projects going on now. And I'm pretty excited about it. It's such a big, big, big market. So we're building up our expertise. We're getting some good examples. And when you come to PegaWorld, you'll be able to see some pretty amazing things in support of that. Operator: This concludes the Q&A portion of our call. I'll now turn the call back over to Alan for any closing remarks. Alan Trefler: Thank you very much, everybody. We're working hard. We appreciate our investors. And I really, really hope to see all of you at PegaWorld. You should fire up your AI agents and have them book your reservations from June 7 to 9 in Las Vegas. And as Ken -- as we mentioned, on the 8th, we're going to have a very, very good and very important investor session, and we have a lot of new things to show. So it should be awesome. See you there. Thanks. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good afternoon. This is the conference operator. Welcome, and thank you for joining the GTT First Quarter 2026 Activity Update Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Francois Michel, the company's CEO. Please go ahead, sir. Francois Michel: Good afternoon, everyone, and welcome to GTT's activity update for the first quarter of 2026. I am sitting here in Paris with Thierry Hochoa, our CFO. And together, we will walk you through the usual key business highlights, but also our revenue for the first quarter. The agenda for the presentation today is the usual one. I am sure that you have noticed that we now go with a new setup, hence, first introductory point to further explain what lies behind the One GTT brand. I will then provide you with a business update for our key activities, meaning the GTT Energy and GTT Marine divisions. Thierry will elaborate on our revenue for the first quarter, and I will then share with you closing remarks before we can open the floor to your questions. So first, the One GTT brands. This new organization, which is as you know emphasizes the fact that GTT is now at a turning point following the very successful acquisition of Danelec last year and taking into account our ambition, which we have explained to further develop the core business, but also associated services. It was very important for us and for our customers to bring all teams together under a clear vision, but also a clear structure. So the creation of 2 divisions, GTT Energy on the one hand and GTT Marine on the other, thus provides greater clarity on our activities to our customers and to our staff. It fosters the execution of our strategy to, of course, keep the core business running but also to ensure the success of our service approach to the shipping industry, in particular, in the LNG. I have already set very clear operational targets for these 2 divisions. For GTT Energy, it is 3 priorities: accelerate innovation, strengthen our service offer and revamp our LNG as a fuel and onshore offers. For GTT Marine, the priority is to deliver on the synergies, combining the hardware and software solutions that we have now in this division, and you will see the first results of this strategy. We have also put in place a hub of advanced technologies to put together in the same -- under the same roof, all breakthrough technologies and venture capital. Let's turn now to our first activity, GTT Energy, very much in line with our expectations and with the messages that I had delivered at the annual results and in line with the growing need for new LNG carriers. In Q1, our order intake continued its upward trend. We have announced 29 LNGC orders in the first quarter. It marks our second best Q1 commercial performance after the 2022 record year. We are close to that level. We have also received 2 orders for very large ethane carriers, each of 100,000 cubic meters capacity and one onshore storage tank. This momentum, which I had announced, has continued despite the situation in the Middle East. We have registered 8 LNGC orders just in March and the momentum, I can tell you, continues to date in April. We are, of course, closely monitoring the current situation in the Middle East. To date, and I will come back to this point, this conflict has no direct impact on GTT's business activity, meaning on orders and on deliveries. And if you look at deliveries year-to-date in Q1 22, LNGCs have been delivered versus 23 last year, so a level which is totally equivalent. Now let's turn to the impact of the current situation in the Middle East on LNG global production capacity. As we all know, the closing of the Strait of Hormuz has heavily disrupted the energy and the shipping markets because about 20% of production volumes are nonavailable today. But if I now look at the production capacity, today, only about 3% of the production capacity in LNG has been damaged with the drone attacks on Ras Laffan. As you know, 2 liquefaction trains have been hit. We know that this infrastructure will restart. It will take perhaps a couple of years. Some people say between 3 and 5 years. It could be faster than that, but who knows. I would like to underline, however, a couple of things that, first of all, the situation does not slow down or undermine the need for new vessels to export future volumes associated to FIDs. And if I look at the additional capacity, which is expected to come online by 2030, it represents 180 million tonnes per annum of additional capacity, which is 40% more than the production level today, most of this coming from the U.S.A. And of course, all of this will require new vessels. Now if I look at the FIDs that can come on top of this already high level of FIDs that have been taken, you have the list on the screen. The list of FIDs that are likely to reach -- to be taken this year or in '27 confirms the greater exposure of the overall LNG production to the U.S.A. and to other regions than the Middle East. And as a reminder, this year, 23 million tonnes per annum of FIDs have been taken, including in Qatar and in the U.S.A., and we start the year after a record level in 2025. Now if we look at the shipping routes and the shipping intensity, what you see is that the war confirms that energy security risk will remain persistent. Indeed, the closure of the Strait of Hormuz calls for greater flexibility to ensure energy security and all this at the most reasonable price possible. And we know that some countries with significant exposure to Qatar such as India, Pakistan, Bangladesh; I could mention Taiwan, Singapore, Korea, China, but also in Europe, Italy, will need to diversify their source of LNG. So looking ahead, what we anticipate is that we anticipate that heightened scrutiny on the LNG supply diversification, which could possibly result into a higher shipping intensity over the long run. But we also anticipate the need to create more buffers in the LNG capacity in storage in particular. Now let's move on to our second activity, GTT Marine. The GTT Marine division won new contracts, very good contracts, both in the Performance Solutions and in the safety units. As for safety, GTT Marine has secured new accreditation from 2 new oil majors, which is a prerequisite to expand its addressable offshore fleet, very good news. And second, we start to leverage our broad customer base to sell more of the systems in performance, so for performance solutions, meaning adding performance and voyage optimization to initial data collection. And consistent with the strategy, we have, in particular, signed a new contract, a very good contract with Petrobras a new customer to equip up to 120 vessels with combined hardware and software solutions. Third point for this new division, the integration of Danelec in the GTT Group is progressing as planned, and we are well on track to deliver the synergies that we have announced. Let me now hand over to Thierry Hochoa, our CFO. Thierry Hochoa: Thank you, Francois. Good afternoon, everyone. Now moving on to the financial part of the presentation. Let's start with the order book. Continuing the commercial dynamic seen in the fourth quarter of 2025, GTT recorded a total of 32 orders in the first quarter of 2026. They include 29 orders for new LNG carriers and 2 VLEC, very large ethane carriers and 1 onshore storage. Their delivery is scheduled between the second quarter of 2028 and the fourth quarter of 2029. This is our second best first quarter commercial performance. Over the period, 22 LNG carriers were delivered, a similar level with the first quarter of 2025, around -- not around, but 23 LNG carriers delivered last year for the first quarter. Finally, our backlog at the end of Q1 2026 remains very solid with 297 units for the core business and 46 units for LNG as a fuel. Let's look into more details at revenue by activity at the end of Q1 2026. Total revenues at EUR 193 million are up 1% compared to Q1 2025 and driven by new builds standing at EUR 173 million, meaning minus 4% compared to last year and mainly impacting from lower order intake in 2025, driven by revenues from services increased by 28% at EUR 5.4 million, thanks to a higher level of assistance to vessels in operations and pre-engineering studies. Regarding GTT Marine, revenues increased by 208%, thanks to the contribution of Danelec acquired last July. I now hand the floor back to Francois for the outlook and the key takeaways. Francois Michel: Thank you, Thierry. So in the absence of any significant order delays or cancellations, we can confirm today our 2026 objectives. Our estimated 2026 consolidated revenue ranging between EUR 740 million and EUR 780 million, our estimated EBITDA ranging between EUR 490 million and EUR 530 million. And of course, we can confirm that the dividend policy will remain unchanged. So a couple of takeaways after this first quarter and before we move on to your questions. The first quarter is very well in line with our expectations and I think what we had announced at the annual results. We have seen a sustained level of orders recorded at the end of 2025 continued despite the geopolitical situation. And in fact, it even accelerated. We saw revenue for the first quarter slightly up versus last year, which is somewhat good news, but well on track. And we also saw a growing contribution of GTT Marine with commercial wins consistent with our combined offering, combining hardware and software solutions. Again, as of today, and we are cautious, but as of today, the conflict in the Middle East has no direct impact on GTT's business activity. Thank you for your attention, and we are very happy to take your questions. Operator: [Operator Instructions] The first question is from Matt Smith of Bank of America. Matthew Smith: I had a couple, please. I think last time we spoke, you talked to around 150 orders to come through over the next few years, perhaps next couple of years as a result of FIDs already taken on LNG projects. I guess my question really was, have your assessment on the pace of those orders coming through. I think you referenced largely in a 2-year time period. Has that assessment changed at all? Does the excess of Qatari vessels make any difference to your assessment there? That would be the first one, please. And then the second one would be turning to digital on Marine. You point out that this is now 7% of group revenue, so quite significant. I just wondered if you could add some color, latest thinking how material could this be by 2030, perhaps in terms of group contribution? Or what's the sort of growth rate that we could see with the benefit of the acquisitions, the synergies? Any additional color there would be useful, please. Francois Michel: Thank you. So regarding the pace of the order intake, we have no information whatsoever today regarding a slowdown of the pace of those orders following the FIDs of last year. And the majority -- what I can say is that the majority of the ships related to the FIDs of last year still need to be ordered. So after the end of Q1, and of course, it's a little bit difficult for us to mark exactly where the -- for which FID the ships are ordered, sometimes we don't know. But from the 29 ships that have been ordered in the first -- Q1, we know that 10 ships are nonchartered, 19 ships are chartered. And from those chartered ships, only 5 are related to the FIDs from last year. So the majority of the volume that we have discussed about still needs to be ordered in the coming 2 or 3 years, I mean, with the usual uncertainty. Second, regarding digital, we are exactly on track with our budget after the first quarter. We will report on this Marine division because it includes, in fact, Marine hardware and digital solutions at the end of the first half of this year. And we are also on track to deliver the synergies of EUR 25 million to EUR 30 million expected at the end of 2030. So today, our vision is that this division, of course, without M&A, but could represent 10% to 15% of the group revenue, perhaps a little bit more, but that's the vision today. Operator: The next question is from Guilherme Levy of Morgan Stanley. Guilherme Levy: The first one, just thinking about secondary implications to your business from the current conflict. If we think about an environment in which the oil prices stay higher for longer, how would you think that could increase demand from shipowners for performance improvement solutions on your Marine business? And then secondly, maybe a question related to that, but on LNG as a fuel, what could be the potential in the first years if oil prices stay, say, at spot over a prolonged period of time? Francois Michel: Thank you for the questions, which are hard questions. In our view over the long run, it is clear that there will be longer LNG routes and also longer periods of storage and buffer storage that will increase the need for low boil-off rate and additional performance solutions, as you point out. I am not -- at least this is what we assess at the Board level. I am not yet able to put specific figures based on that, but this is the trend that we see. And I hope that I can give more specific indication after the first half of this year. Regarding LNG as a fuel, today, we believe that the move towards LNG as a fuel is primarily due to environment concerns and that this trend will continue. I have asked the teams to totally revamp our offer of systems, including to be able to have prefabricated systems delivered on the shipyards, but also turnkey solutions, including fully installed solutions. And so the question for us is probably less a question of market evolution than a question of penetration of our solution, where I believe we can get a lot of business. So it can be very significant, but it will take me a couple of quarters to revamp the offer and to present it -- to present a fully revamped offer, new technology and new commercial systems before the end of the year. That's for sure. Operator: The next question is from Richard Dawson of Berenberg. Richard Dawson: Two from me. So good to see no direct impact from -- on GTT from the Middle Eastern conflict yet. But is there a risk that this could change if the duration of the conflict extends further? So can we maybe see some of the Middle Eastern clients asking for construction or deliveries on those vessels to pause as those LNG projects start-ups are delayed. So particularly the Qatari volumes from [ NFS and NFE ]. Is that potentially at a risk? And then secondly, just going back to the structuring of the business. So what does that really mean from an operational point of view? Will there be separate management teams running GTT Energy and Marine, for example? And can we maybe get more disclosure on profitability between the 2 segments? Francois Michel: I would say -- so thank you for all your questions. Regarding the direct impact, what I mean is that today, for instance, you have very indirect impacts on our ability to conduct business, such as logistic constraints to travel to the region, for instance, to engage with customers. And so of course, if the situation were to stay -- to last for a very prolonged time, at some point, we could expect some logistic delays or just issues in interacting with customers or supporting the customers in the region. But it's very important to see that today, there has been absolutely no indication whatsoever of any slowdown of construction, no cancellation of FIDs nor of ships. And to the contrary, the indications that we have received from Qatar is that they ask more the engineering companies to be able to restart as soon as possible the construction and the buildup of the capacity in Qatar so as to offset at least partly even in the short run, the capacity that has been damaged. So we have no indication whatsoever that there is a long-term delay. If there was a delay, it would be -- an impact, it would be, in my view, very indirect such as disruptions in the supply chain, in particular, in electronic components because to deliver ships, you need electronic components, but we are not yet there, I believe so and far from there. Second, yes, in terms of new organization, for me, it means 2 business units, of course, one which is very much larger than the other one as we speak. But the Marine activity is a fully operational business unit with its management well in place with clear operational priorities. We will report on the results. It has a CEO, a CFO and a management team. Regarding GTT Energy, for the moment, because of the size of the business, in practice, I run this division myself together with the management team of the group. Operator: The next question is from Kevin Roger of Kepler Cheuvreux. Kevin Roger: The first one is a kind of follow-up on the order intake dynamic. Basically, Q1 has been very good, and you implicitly say that you still need to have a lot of orders for 2025 FID project. So do you expect in a sense to be able to replicate the Q1 commercial performance over the next few quarters? Just to understand what you expect as a dynamic, which is quite important in a way for the share price reaction. And the second one is also on the, let's say, long-term outlook because when we look at the implicit comment that you made from the Middle East, which is basically new LNG project, diversification, possible increase in vessel intensity, more buffer, et cetera. Can you give us a bit of color on what it makes as an impact on the 10-year market outlook? And if you can, in a way, precise a bit the famous EUR 450 million plus, plus number that you provided at the full year earnings. If you have a bit of sense or a bit more color on where you think this number can land? Francois Michel: Thank you for your questions. So regarding the order intake dynamic, as you know, we cannot guide on orders and certainly not on a quarterly basis. But explicitly, I can say that the vast majority of the ships that need to be ordered after 2025 record level of FIDs, and in fact, the FIDs of this year, have not been ordered yet. And I still expect today those ships to be ordered in the coming 2 to 3 years with the usual pace. So yes, I would not be surprised if the implication of that would be good quarters in the coming years. So that is mechanical. But I cannot guide on a specific level or normalized level quarter-by-quarter, in particular, in the current context because some orders could shift from one quarter to another, and that would have no material implications regarding our medium-term business model. Regarding the need for more diversification and more buffers. We know talking directly to governments in Asia, I just come back from Asia. We know that when we talk to the Indians, for instance, we know that there will be more buffers from those countries, meaning more storage. This is clear. So there will be more floating storage and more onshore storage, more strategic storage of LNG in the region, but also a need to diversify the sources of gas. If you take a country like India, 60% of the Indian gas is coming today from the Middle East. It's, of course, a situation that must be controlled with more buffers, but also with more diverse routes. And so that implies a number of additional ships to be ordered over the medium term. That is our assessment today. And it's -- this effect is material. So it's not a marginal effect on the overall volume of ships. Now can I revise the overall estimate of how many ships will need to be ordered over the next decade? We, of course, have an idea, but it would be, let's say, not cautious for us to release the figure today in the midst of the crisis in the Middle East. And so we will do it most likely, I believe, in the first half of next year when the crisis is over and when the situation is completely stabilized because we are looking at a long-term cushion. Operator: The next question is from Henri Patricot of UBS. Henri Patricot: Two questions from my side. The first one, following up on LNG as a fuel. Just wondering if you can give some comments on the outlook for orders for this year. I mean you mentioned that you're in the middle of revamping your offers. Does that imply that we shouldn't expect many orders this year or perhaps more coming next year? And then secondly, to follow up on the comments on the long-term outlook. Do you have any concern that the current events and disruption to LNG flows coming quite soon after the disruption that we saw back in 2022 with the Russia-Ukraine war could have a negative impact on the long term on LNG demand as the fuel is perhaps not seen as reliable as it could be for some of the buyers? Francois Michel: We are working on a good number of projects for LNG as a fuel as we stand today. So we have a good technology, which many shipyards can use. And so we are working very actively. What is true is that we would like to increase the penetration further because we know that in the majority of cases, LNG as a fuel can be used with membrane containment system, which is not our historical market share. So it is more, let's say, a plan to win aggressively market share in this area. And yes, of course, I expect an acceleration of the sales between this year and next year and the year after. So yes, that's totally true. Second, regarding the long-term outlook, for me, the question is less the question of LNG that it is the question of investment in the Middle East. The Middle East, in general, has been seen as a haven, as a very safe place to invest, not only for energy, but also in a couple of other areas. It's clear that people will take a buffer when they source energy from the Middle East, not only gas. But what we try to show in the presentation is that, in fact, the largest dynamic that we see in the coming years is indeed coming from the U.S.A. And so we see that the implications -- the overall implications of the situation can be a much more diverse source of LNG, much less concentrated. Clearly, no country is buying 100% of their gas from a single country, whatever is this country, but also longer shipping routes and more buffers. This is our situation now. I have not heard of any country, in particular in Asia, which is the largest dynamic in demand that they are thinking about not investing anymore in gas. That's not at all the situation today. It's not the situation. Operator: The next question is from Jamie Franklin of Jefferies. Jamie Franklin: Just one left from me. So if I look at your order intake through the first quarter, obviously, about half of those were announced prior to Middle East conflict escalation, about half after that during March and onwards. But presumably, a lot of these were already in advanced stages of discussion prior to the conflict. Could you help us give us -- get a sense of kind of how many of the 1Q orders were from discussions that started post conflict? Or in other words, if you've seen any sort of acceleration or deceleration in inquiries for new orders? Francois Michel: Thank you. It's a good question. The majority of those orders, of course, have been discussed for a couple of weeks or a couple of months, in fact. So the cycle for us is long, and we don't see any deceleration of the discussions regarding the pace of orders. And so we don't expect a slowdown of orders in the coming quarters, if that answers your question. I hope it [ doesn't ]. Operator: [Operator Instructions] The next question is from Jean-Luc Romain of CIC CIB. Jean-Luc Romain: I've got 2. The first is about the adoption of your new GTT NEXT1 technology. In light of the evolving needs of your customers and your clients, do you see this technology as possibly adopted faster? And the second question is regarding the map you show on Slide 10. I don't think it was -- I saw -- I didn't see Russia, but I think I guess it's in other producers. So just one question. Francois Michel: Okay. So over the medium term -- thank you for your question. Over the medium term, what we believe is that if we have longer routes of shipping and in general, longer storage and people will invest in general on systems with a low boil-off rate, and as you know, NEXT1 one has been developed as a platform, in fact, to reach a very, very low levels of boil-off. So we believe that the overall environment is conducive to an acceleration of low boil-off rate systems, including NEXT1. Yes. Thierry Hochoa: And regarding your second question, the map. Okay, answered. Operator: The last question is from Jean-Francois Granjon of ODDO BHF. Jean-Francois Granjon: Yes. You probably already answered my 2 questions. Nevertheless, I will come back on the first one on the Middle East, taking into account the situation, do you expect a slowdown for the future FID? I think, for the ship owner, it's not very interesting to invest immediately on the new vessel, new LNGCs. So do you expect some potential risk to see a slowdown for the future orders with probably lower FIDs from the Middle East area? And the second question, I will come back on the LNG as a fuel. You mentioned in the press release some more and more competition. So could you explain more or give us some more color about that? What do you expect? And do you consider that it will be more and more difficult to develop your own technology, membrane technology? And are you more cautious regarding the trend expected for your business in this market? Francois Michel: So thank you for your questions. On the Middle East, what I think is important to see is that, of course, for, let's say, consumers of LNG, in particular, in Asia Pacific, but also from the Middle East perspective, it is a crisis, but for other continents, in particular, for the U.S. and for exporters of LNG, which are not in the Middle East, this crisis is very unfortunately, but it is an opportunity. And so if anything, we don't see at all a slowdown of orders of LNGC. We don't anticipate it from the non-Middle East part, if you want. We also don't anticipate a slowdown in FIDs from the non-Middle East part. There will be in the short run, volatility and uncertainty regarding everything that comes out of the Middle East, meaning FIDs, but also LNGC orders perhaps in the very short run. But beyond those short-term effects, what we anticipate is that it will be more than compensated by additional investments outside of the Middle East. Regarding your second question, LNG as a fuel. Well, I think what I think is, first of all, the trend towards LNG as a fuel will continue for, again, primarily for environment concerns, but also because it's -- it has really become the fuel of choice for large container ships and for cruise ships. So I don't expect any disruptions in this trend. But what we also believe is that for many reasons, but including because of rising labor cost, lower labor availability, lower qualified labor availability, we must industrialize our membrane containment systems more to bring them in, let's say, more easy to do business with directly to the yards, which is something that GTT has not done historically. We have been a little bit shy at providing solutions in a turnkey fashion and in a prefab fashion together with partners. And this is the core of what we are working on. And I have absolutely no doubt that -- and from my experience in the yard, I have no doubt about the fact that by making our solutions easier to do -- to use directly in the yards, we will increase the penetration of our solution. So I'm optimistic regarding this market. Operator: Gentlemen, there are no more questions at this time. Francois Michel: Thank you all for your various questions and for your attention. We look forward to continuing the discussions with you and to seeing you soon. Thierry Hochoa: Thank you. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.
Operator: Good afternoon. This is the conference operator. Welcome, and thank you for joining the GTT First Quarter 2026 Activity Update Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Francois Michel, the company's CEO. Please go ahead, sir. Francois Michel: Good afternoon, everyone, and welcome to GTT's activity update for the first quarter of 2026. I am sitting here in Paris with Thierry Hochoa, our CFO. And together, we will walk you through the usual key business highlights, but also our revenue for the first quarter. The agenda for the presentation today is the usual one. I am sure that you have noticed that we now go with a new setup, hence, first introductory point to further explain what lies behind the One GTT brand. I will then provide you with a business update for our key activities, meaning the GTT Energy and GTT Marine divisions. Thierry will elaborate on our revenue for the first quarter, and I will then share with you closing remarks before we can open the floor to your questions. So first, the One GTT brands. This new organization, which is as you know emphasizes the fact that GTT is now at a turning point following the very successful acquisition of Danelec last year and taking into account our ambition, which we have explained to further develop the core business, but also associated services. It was very important for us and for our customers to bring all teams together under a clear vision, but also a clear structure. So the creation of 2 divisions, GTT Energy on the one hand and GTT Marine on the other, thus provides greater clarity on our activities to our customers and to our staff. It fosters the execution of our strategy to, of course, keep the core business running but also to ensure the success of our service approach to the shipping industry, in particular, in the LNG. I have already set very clear operational targets for these 2 divisions. For GTT Energy, it is 3 priorities: accelerate innovation, strengthen our service offer and revamp our LNG as a fuel and onshore offers. For GTT Marine, the priority is to deliver on the synergies, combining the hardware and software solutions that we have now in this division, and you will see the first results of this strategy. We have also put in place a hub of advanced technologies to put together in the same -- under the same roof, all breakthrough technologies and venture capital. Let's turn now to our first activity, GTT Energy, very much in line with our expectations and with the messages that I had delivered at the annual results and in line with the growing need for new LNG carriers. In Q1, our order intake continued its upward trend. We have announced 29 LNGC orders in the first quarter. It marks our second best Q1 commercial performance after the 2022 record year. We are close to that level. We have also received 2 orders for very large ethane carriers, each of 100,000 cubic meters capacity and one onshore storage tank. This momentum, which I had announced, has continued despite the situation in the Middle East. We have registered 8 LNGC orders just in March and the momentum, I can tell you, continues to date in April. We are, of course, closely monitoring the current situation in the Middle East. To date, and I will come back to this point, this conflict has no direct impact on GTT's business activity, meaning on orders and on deliveries. And if you look at deliveries year-to-date in Q1 22, LNGCs have been delivered versus 23 last year, so a level which is totally equivalent. Now let's turn to the impact of the current situation in the Middle East on LNG global production capacity. As we all know, the closing of the Strait of Hormuz has heavily disrupted the energy and the shipping markets because about 20% of production volumes are nonavailable today. But if I now look at the production capacity, today, only about 3% of the production capacity in LNG has been damaged with the drone attacks on Ras Laffan. As you know, 2 liquefaction trains have been hit. We know that this infrastructure will restart. It will take perhaps a couple of years. Some people say between 3 and 5 years. It could be faster than that, but who knows. I would like to underline, however, a couple of things that, first of all, the situation does not slow down or undermine the need for new vessels to export future volumes associated to FIDs. And if I look at the additional capacity, which is expected to come online by 2030, it represents 180 million tonnes per annum of additional capacity, which is 40% more than the production level today, most of this coming from the U.S.A. And of course, all of this will require new vessels. Now if I look at the FIDs that can come on top of this already high level of FIDs that have been taken, you have the list on the screen. The list of FIDs that are likely to reach -- to be taken this year or in '27 confirms the greater exposure of the overall LNG production to the U.S.A. and to other regions than the Middle East. And as a reminder, this year, 23 million tonnes per annum of FIDs have been taken, including in Qatar and in the U.S.A., and we start the year after a record level in 2025. Now if we look at the shipping routes and the shipping intensity, what you see is that the war confirms that energy security risk will remain persistent. Indeed, the closure of the Strait of Hormuz calls for greater flexibility to ensure energy security and all this at the most reasonable price possible. And we know that some countries with significant exposure to Qatar such as India, Pakistan, Bangladesh; I could mention Taiwan, Singapore, Korea, China, but also in Europe, Italy, will need to diversify their source of LNG. So looking ahead, what we anticipate is that we anticipate that heightened scrutiny on the LNG supply diversification, which could possibly result into a higher shipping intensity over the long run. But we also anticipate the need to create more buffers in the LNG capacity in storage in particular. Now let's move on to our second activity, GTT Marine. The GTT Marine division won new contracts, very good contracts, both in the Performance Solutions and in the safety units. As for safety, GTT Marine has secured new accreditation from 2 new oil majors, which is a prerequisite to expand its addressable offshore fleet, very good news. And second, we start to leverage our broad customer base to sell more of the systems in performance, so for performance solutions, meaning adding performance and voyage optimization to initial data collection. And consistent with the strategy, we have, in particular, signed a new contract, a very good contract with Petrobras a new customer to equip up to 120 vessels with combined hardware and software solutions. Third point for this new division, the integration of Danelec in the GTT Group is progressing as planned, and we are well on track to deliver the synergies that we have announced. Let me now hand over to Thierry Hochoa, our CFO. Thierry Hochoa: Thank you, Francois. Good afternoon, everyone. Now moving on to the financial part of the presentation. Let's start with the order book. Continuing the commercial dynamic seen in the fourth quarter of 2025, GTT recorded a total of 32 orders in the first quarter of 2026. They include 29 orders for new LNG carriers and 2 VLEC, very large ethane carriers and 1 onshore storage. Their delivery is scheduled between the second quarter of 2028 and the fourth quarter of 2029. This is our second best first quarter commercial performance. Over the period, 22 LNG carriers were delivered, a similar level with the first quarter of 2025, around -- not around, but 23 LNG carriers delivered last year for the first quarter. Finally, our backlog at the end of Q1 2026 remains very solid with 297 units for the core business and 46 units for LNG as a fuel. Let's look into more details at revenue by activity at the end of Q1 2026. Total revenues at EUR 193 million are up 1% compared to Q1 2025 and driven by new builds standing at EUR 173 million, meaning minus 4% compared to last year and mainly impacting from lower order intake in 2025, driven by revenues from services increased by 28% at EUR 5.4 million, thanks to a higher level of assistance to vessels in operations and pre-engineering studies. Regarding GTT Marine, revenues increased by 208%, thanks to the contribution of Danelec acquired last July. I now hand the floor back to Francois for the outlook and the key takeaways. Francois Michel: Thank you, Thierry. So in the absence of any significant order delays or cancellations, we can confirm today our 2026 objectives. Our estimated 2026 consolidated revenue ranging between EUR 740 million and EUR 780 million, our estimated EBITDA ranging between EUR 490 million and EUR 530 million. And of course, we can confirm that the dividend policy will remain unchanged. So a couple of takeaways after this first quarter and before we move on to your questions. The first quarter is very well in line with our expectations and I think what we had announced at the annual results. We have seen a sustained level of orders recorded at the end of 2025 continued despite the geopolitical situation. And in fact, it even accelerated. We saw revenue for the first quarter slightly up versus last year, which is somewhat good news, but well on track. And we also saw a growing contribution of GTT Marine with commercial wins consistent with our combined offering, combining hardware and software solutions. Again, as of today, and we are cautious, but as of today, the conflict in the Middle East has no direct impact on GTT's business activity. Thank you for your attention, and we are very happy to take your questions. Operator: [Operator Instructions] The first question is from Matt Smith of Bank of America. Matthew Smith: I had a couple, please. I think last time we spoke, you talked to around 150 orders to come through over the next few years, perhaps next couple of years as a result of FIDs already taken on LNG projects. I guess my question really was, have your assessment on the pace of those orders coming through. I think you referenced largely in a 2-year time period. Has that assessment changed at all? Does the excess of Qatari vessels make any difference to your assessment there? That would be the first one, please. And then the second one would be turning to digital on Marine. You point out that this is now 7% of group revenue, so quite significant. I just wondered if you could add some color, latest thinking how material could this be by 2030, perhaps in terms of group contribution? Or what's the sort of growth rate that we could see with the benefit of the acquisitions, the synergies? Any additional color there would be useful, please. Francois Michel: Thank you. So regarding the pace of the order intake, we have no information whatsoever today regarding a slowdown of the pace of those orders following the FIDs of last year. And the majority -- what I can say is that the majority of the ships related to the FIDs of last year still need to be ordered. So after the end of Q1, and of course, it's a little bit difficult for us to mark exactly where the -- for which FID the ships are ordered, sometimes we don't know. But from the 29 ships that have been ordered in the first -- Q1, we know that 10 ships are nonchartered, 19 ships are chartered. And from those chartered ships, only 5 are related to the FIDs from last year. So the majority of the volume that we have discussed about still needs to be ordered in the coming 2 or 3 years, I mean, with the usual uncertainty. Second, regarding digital, we are exactly on track with our budget after the first quarter. We will report on this Marine division because it includes, in fact, Marine hardware and digital solutions at the end of the first half of this year. And we are also on track to deliver the synergies of EUR 25 million to EUR 30 million expected at the end of 2030. So today, our vision is that this division, of course, without M&A, but could represent 10% to 15% of the group revenue, perhaps a little bit more, but that's the vision today. Operator: The next question is from Guilherme Levy of Morgan Stanley. Guilherme Levy: The first one, just thinking about secondary implications to your business from the current conflict. If we think about an environment in which the oil prices stay higher for longer, how would you think that could increase demand from shipowners for performance improvement solutions on your Marine business? And then secondly, maybe a question related to that, but on LNG as a fuel, what could be the potential in the first years if oil prices stay, say, at spot over a prolonged period of time? Francois Michel: Thank you for the questions, which are hard questions. In our view over the long run, it is clear that there will be longer LNG routes and also longer periods of storage and buffer storage that will increase the need for low boil-off rate and additional performance solutions, as you point out. I am not -- at least this is what we assess at the Board level. I am not yet able to put specific figures based on that, but this is the trend that we see. And I hope that I can give more specific indication after the first half of this year. Regarding LNG as a fuel, today, we believe that the move towards LNG as a fuel is primarily due to environment concerns and that this trend will continue. I have asked the teams to totally revamp our offer of systems, including to be able to have prefabricated systems delivered on the shipyards, but also turnkey solutions, including fully installed solutions. And so the question for us is probably less a question of market evolution than a question of penetration of our solution, where I believe we can get a lot of business. So it can be very significant, but it will take me a couple of quarters to revamp the offer and to present it -- to present a fully revamped offer, new technology and new commercial systems before the end of the year. That's for sure. Operator: The next question is from Richard Dawson of Berenberg. Richard Dawson: Two from me. So good to see no direct impact from -- on GTT from the Middle Eastern conflict yet. But is there a risk that this could change if the duration of the conflict extends further? So can we maybe see some of the Middle Eastern clients asking for construction or deliveries on those vessels to pause as those LNG projects start-ups are delayed. So particularly the Qatari volumes from [ NFS and NFE ]. Is that potentially at a risk? And then secondly, just going back to the structuring of the business. So what does that really mean from an operational point of view? Will there be separate management teams running GTT Energy and Marine, for example? And can we maybe get more disclosure on profitability between the 2 segments? Francois Michel: I would say -- so thank you for all your questions. Regarding the direct impact, what I mean is that today, for instance, you have very indirect impacts on our ability to conduct business, such as logistic constraints to travel to the region, for instance, to engage with customers. And so of course, if the situation were to stay -- to last for a very prolonged time, at some point, we could expect some logistic delays or just issues in interacting with customers or supporting the customers in the region. But it's very important to see that today, there has been absolutely no indication whatsoever of any slowdown of construction, no cancellation of FIDs nor of ships. And to the contrary, the indications that we have received from Qatar is that they ask more the engineering companies to be able to restart as soon as possible the construction and the buildup of the capacity in Qatar so as to offset at least partly even in the short run, the capacity that has been damaged. So we have no indication whatsoever that there is a long-term delay. If there was a delay, it would be -- an impact, it would be, in my view, very indirect such as disruptions in the supply chain, in particular, in electronic components because to deliver ships, you need electronic components, but we are not yet there, I believe so and far from there. Second, yes, in terms of new organization, for me, it means 2 business units, of course, one which is very much larger than the other one as we speak. But the Marine activity is a fully operational business unit with its management well in place with clear operational priorities. We will report on the results. It has a CEO, a CFO and a management team. Regarding GTT Energy, for the moment, because of the size of the business, in practice, I run this division myself together with the management team of the group. Operator: The next question is from Kevin Roger of Kepler Cheuvreux. Kevin Roger: The first one is a kind of follow-up on the order intake dynamic. Basically, Q1 has been very good, and you implicitly say that you still need to have a lot of orders for 2025 FID project. So do you expect in a sense to be able to replicate the Q1 commercial performance over the next few quarters? Just to understand what you expect as a dynamic, which is quite important in a way for the share price reaction. And the second one is also on the, let's say, long-term outlook because when we look at the implicit comment that you made from the Middle East, which is basically new LNG project, diversification, possible increase in vessel intensity, more buffer, et cetera. Can you give us a bit of color on what it makes as an impact on the 10-year market outlook? And if you can, in a way, precise a bit the famous EUR 450 million plus, plus number that you provided at the full year earnings. If you have a bit of sense or a bit more color on where you think this number can land? Francois Michel: Thank you for your questions. So regarding the order intake dynamic, as you know, we cannot guide on orders and certainly not on a quarterly basis. But explicitly, I can say that the vast majority of the ships that need to be ordered after 2025 record level of FIDs, and in fact, the FIDs of this year, have not been ordered yet. And I still expect today those ships to be ordered in the coming 2 to 3 years with the usual pace. So yes, I would not be surprised if the implication of that would be good quarters in the coming years. So that is mechanical. But I cannot guide on a specific level or normalized level quarter-by-quarter, in particular, in the current context because some orders could shift from one quarter to another, and that would have no material implications regarding our medium-term business model. Regarding the need for more diversification and more buffers. We know talking directly to governments in Asia, I just come back from Asia. We know that when we talk to the Indians, for instance, we know that there will be more buffers from those countries, meaning more storage. This is clear. So there will be more floating storage and more onshore storage, more strategic storage of LNG in the region, but also a need to diversify the sources of gas. If you take a country like India, 60% of the Indian gas is coming today from the Middle East. It's, of course, a situation that must be controlled with more buffers, but also with more diverse routes. And so that implies a number of additional ships to be ordered over the medium term. That is our assessment today. And it's -- this effect is material. So it's not a marginal effect on the overall volume of ships. Now can I revise the overall estimate of how many ships will need to be ordered over the next decade? We, of course, have an idea, but it would be, let's say, not cautious for us to release the figure today in the midst of the crisis in the Middle East. And so we will do it most likely, I believe, in the first half of next year when the crisis is over and when the situation is completely stabilized because we are looking at a long-term cushion. Operator: The next question is from Henri Patricot of UBS. Henri Patricot: Two questions from my side. The first one, following up on LNG as a fuel. Just wondering if you can give some comments on the outlook for orders for this year. I mean you mentioned that you're in the middle of revamping your offers. Does that imply that we shouldn't expect many orders this year or perhaps more coming next year? And then secondly, to follow up on the comments on the long-term outlook. Do you have any concern that the current events and disruption to LNG flows coming quite soon after the disruption that we saw back in 2022 with the Russia-Ukraine war could have a negative impact on the long term on LNG demand as the fuel is perhaps not seen as reliable as it could be for some of the buyers? Francois Michel: We are working on a good number of projects for LNG as a fuel as we stand today. So we have a good technology, which many shipyards can use. And so we are working very actively. What is true is that we would like to increase the penetration further because we know that in the majority of cases, LNG as a fuel can be used with membrane containment system, which is not our historical market share. So it is more, let's say, a plan to win aggressively market share in this area. And yes, of course, I expect an acceleration of the sales between this year and next year and the year after. So yes, that's totally true. Second, regarding the long-term outlook, for me, the question is less the question of LNG that it is the question of investment in the Middle East. The Middle East, in general, has been seen as a haven, as a very safe place to invest, not only for energy, but also in a couple of other areas. It's clear that people will take a buffer when they source energy from the Middle East, not only gas. But what we try to show in the presentation is that, in fact, the largest dynamic that we see in the coming years is indeed coming from the U.S.A. And so we see that the implications -- the overall implications of the situation can be a much more diverse source of LNG, much less concentrated. Clearly, no country is buying 100% of their gas from a single country, whatever is this country, but also longer shipping routes and more buffers. This is our situation now. I have not heard of any country, in particular in Asia, which is the largest dynamic in demand that they are thinking about not investing anymore in gas. That's not at all the situation today. It's not the situation. Operator: The next question is from Jamie Franklin of Jefferies. Jamie Franklin: Just one left from me. So if I look at your order intake through the first quarter, obviously, about half of those were announced prior to Middle East conflict escalation, about half after that during March and onwards. But presumably, a lot of these were already in advanced stages of discussion prior to the conflict. Could you help us give us -- get a sense of kind of how many of the 1Q orders were from discussions that started post conflict? Or in other words, if you've seen any sort of acceleration or deceleration in inquiries for new orders? Francois Michel: Thank you. It's a good question. The majority of those orders, of course, have been discussed for a couple of weeks or a couple of months, in fact. So the cycle for us is long, and we don't see any deceleration of the discussions regarding the pace of orders. And so we don't expect a slowdown of orders in the coming quarters, if that answers your question. I hope it [ doesn't ]. Operator: [Operator Instructions] The next question is from Jean-Luc Romain of CIC CIB. Jean-Luc Romain: I've got 2. The first is about the adoption of your new GTT NEXT1 technology. In light of the evolving needs of your customers and your clients, do you see this technology as possibly adopted faster? And the second question is regarding the map you show on Slide 10. I don't think it was -- I saw -- I didn't see Russia, but I think I guess it's in other producers. So just one question. Francois Michel: Okay. So over the medium term -- thank you for your question. Over the medium term, what we believe is that if we have longer routes of shipping and in general, longer storage and people will invest in general on systems with a low boil-off rate, and as you know, NEXT1 one has been developed as a platform, in fact, to reach a very, very low levels of boil-off. So we believe that the overall environment is conducive to an acceleration of low boil-off rate systems, including NEXT1. Yes. Thierry Hochoa: And regarding your second question, the map. Okay, answered. Operator: The last question is from Jean-Francois Granjon of ODDO BHF. Jean-Francois Granjon: Yes. You probably already answered my 2 questions. Nevertheless, I will come back on the first one on the Middle East, taking into account the situation, do you expect a slowdown for the future FID? I think, for the ship owner, it's not very interesting to invest immediately on the new vessel, new LNGCs. So do you expect some potential risk to see a slowdown for the future orders with probably lower FIDs from the Middle East area? And the second question, I will come back on the LNG as a fuel. You mentioned in the press release some more and more competition. So could you explain more or give us some more color about that? What do you expect? And do you consider that it will be more and more difficult to develop your own technology, membrane technology? And are you more cautious regarding the trend expected for your business in this market? Francois Michel: So thank you for your questions. On the Middle East, what I think is important to see is that, of course, for, let's say, consumers of LNG, in particular, in Asia Pacific, but also from the Middle East perspective, it is a crisis, but for other continents, in particular, for the U.S. and for exporters of LNG, which are not in the Middle East, this crisis is very unfortunately, but it is an opportunity. And so if anything, we don't see at all a slowdown of orders of LNGC. We don't anticipate it from the non-Middle East part, if you want. We also don't anticipate a slowdown in FIDs from the non-Middle East part. There will be in the short run, volatility and uncertainty regarding everything that comes out of the Middle East, meaning FIDs, but also LNGC orders perhaps in the very short run. But beyond those short-term effects, what we anticipate is that it will be more than compensated by additional investments outside of the Middle East. Regarding your second question, LNG as a fuel. Well, I think what I think is, first of all, the trend towards LNG as a fuel will continue for, again, primarily for environment concerns, but also because it's -- it has really become the fuel of choice for large container ships and for cruise ships. So I don't expect any disruptions in this trend. But what we also believe is that for many reasons, but including because of rising labor cost, lower labor availability, lower qualified labor availability, we must industrialize our membrane containment systems more to bring them in, let's say, more easy to do business with directly to the yards, which is something that GTT has not done historically. We have been a little bit shy at providing solutions in a turnkey fashion and in a prefab fashion together with partners. And this is the core of what we are working on. And I have absolutely no doubt that -- and from my experience in the yard, I have no doubt about the fact that by making our solutions easier to do -- to use directly in the yards, we will increase the penetration of our solution. So I'm optimistic regarding this market. Operator: Gentlemen, there are no more questions at this time. Francois Michel: Thank you all for your various questions and for your attention. We look forward to continuing the discussions with you and to seeing you soon. Thierry Hochoa: Thank you. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.
Operator: Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the ASM First Quarter 2026 Earnings Call. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Victor Bareño. Head of Investor Relations. Please go ahead, sir. Victor Bareño: Thank you, operator. Good afternoon, and thank you for joining our Q1 earnings call. With me today are our CEO, Hichem M'Saad; and our CFO, Paul Verhagen. ASM issued its first quarter 2026 results yesterday at 6:00 p.m. Central European Time. For those of you who have not yet seen the press release, it is available on our website together with our latest investor presentation. As always, we remind you that today's conference call may contain forward-looking statements in addition to historical information. For more details on the risk factors relating to such forward-looking statements, please refer to our press releases and financial reports, all of which are available on our website. Please also note that during this call, we will refer to profitability metrics, primarily on an adjusted basis. Reconciliations to reported numbers can be found in the press release and in the investor presentation. And with that, I will now turn the call over to our CEO, Hichem M'Saad. Hichem M'Saad: Thank you, Victor, and thanks to everyone for attending our first quarter 2026 results conference call. We will follow the usual agenda for today's call. Paul will begin with a review of our first quarter financial results. I will then discuss market trends and our outlook followed by the Q&A session. I will now turn it over to you, Paul. Paul Verhagen: Thank you, Hichem, and thanks, everyone, for joining our call today. Let me first walk you through the Q1 financial results. Our revenue in the first quarter of 2026 amounted to EUR 863 million, which was at the high end of our guided range of EUR 830 million plus or minus 4%. On a constant currency basis, revenue increased by 16% year-on-year and by 26% compared to Q4 '25. Equipment sales increased by 14% at constant currency and were led by ALD. Spares & services continued to deliver a very strong performance with a 23% year-on-year growth at constant currency. This was the result of continued expansion of our outcome-based services and strong spares demand in an environment of elevated set utilization rates. In terms of customer segments, revenue was led by logic/foundry, which accounted for the clear majority. For the full year, advanced logic/foundry sales are expected to show significant growth this year. However, due to quarterly phasing, they were down from the very strong first quarter last year. Mature logic/foundry for the large part from customers in China increased compared to Q1 last year and rebounded strongly compared to the relatively low level in Q4. Memory sales showed sequential growth compared to Q4 last year and also expected to grow significantly for the full year, mainly in DRAM. Sales in the memory segment were predominantly driven by applications for high-performance DRAM in HBM-related applications. Sales in the power analog wafer segment increased compared to the first quarter of last year, mostly in silicon-based solutions but from a low base. Gross margin in the first quarter amounted to a strong 53.3%. This was virtually unchanged compared to 53.4% in Q1 of last year, up from 49.8% in Q4. Gross margin was supported by a favorable product and customer mix including an increased sales contribution from China, which rebound strongly compared to the lower level in Q4. The gross margin also benefited from a gradual impact from cost reduction programs that we have been implementing over the past few years. We expect the gross margin to be at the higher end of the target range of 47% to 51% for the full year. SG&A expenses increased by 8% year-on-year at constant currency, mostly due to higher variable expenses, but dropped slightly as a percentage of sales, demonstrating our ongoing focus on cost control. For the full year, we continue to expect SG&A as a percentage of sales to drop below 9%. Net R&D increased 11% year-on-year at constant currency in Q1. We continue to step up R&D investments to support customer transitions to next-generation nodes and to advance our expanding pipeline of opportunities. For the full year, we intend to keep the net R&D within our target range of a low double-digit percentage of revenue. Operating profit increased by a solid 21% year-on-year at constant currency, and the operating margin reached a new record of 33.1%. If you look at the main movements below the operating line, financial results included a currency translation gain of EUR 10 million in Q1 '26 compared to a translation loss of EUR 40 million in the first quarter of last year. As a reminder, we hold a large part of our cash in U.S. dollars and the related translation differences are included in our financial results. Our share of income from investments, reflecting our stake of approximately 25% in ASMPT amounted to EUR 7 million in the first quarter, up EUR 2 million in the year ago periods. Next, the balance sheet and cash flow. ASM's financial position remains [ solid ], and we ended the quarter with a cash position of close to a EUR 1 billion. Free cash flow was EUR 48 million negative mainly reflecting the working capital outflow in the quarter marked by a sharp ramp in activity levels. Days of working capital increased to 69 at the end of March, up from 45 at the end of December. The main driver for the increase was higher accounts receivable due to strong sales increase compared to the relatively low level in Q4 as well as back-end loaded distribution of sales during the quarter. CapEx amounts to EUR 38 million in the first quarter, up from EUR 30 million in the same quarter of last year. And for the full year, we expect CapEx to be around or to be somewhat above the higher end of the guided range of EUR 150 million to EUR 250 million, with the largest part related to the construction of a new site in Scottsdale, which remains on track for completion in Q1 2027. And with that, I'll turn the call back over to Hichem. Hichem M'Saad: Thank you, Paul. Let's now continue with a review of the market trends. The first quarter, again, confirmed that AI is the main driver of semiconductor demand. Customers continue to add capacity to support the ongoing expansion of AI data centers and the broader infrastructure build-out. This is keeping demand strong in the areas where we are most exposed, especially logic/foundry and we saw this demand strengthening further during the quarter. We have also noted a continuing proliferation and diversification of the AI workloads into the CPU and the power markets. For this reason, we see AI driving strength in all segments of our business: advanced logic/foundry, mature logic/foundry, memory and especially DRAM and, to a lesser extent, power, wafer, analog market. Looking ahead, our strategic view remains unchanged. As AI adoption broadens and demand continues to scale, compute capacity is increasingly the limiting factor. In semiconductors, this is translating into tighter capacity needs for advanced logic/foundry and memory devices, driving higher investment intensity and increasing the urgency of tool deliveries. Against this backdrop, our focus is on execution as we continue to support our customers' expansion plans. The pace of demand is putting additional pressure from the supply chain. But so far, we have been able to manage these rising challenges in close cooperation with both suppliers and customers, reflected in the sharp step-up in our quarterly sales from EUR 700 million in Q4 of last year, to a level approaching EUR 1 billion projected for Q2. Turning now to customer segments. Logic/foundry again led our performance in Q1 supported by continued strength at the advanced nodes and a sequential rebound in mature logic/foundry demand. Our view is unchanged that logic/foundry will be a strong driver of our sales in 2026 and also going into 2027. The structural outlook for this segment remains strong. AI-driven compute requirement and the ongoing shift to more complex 3D device architecture and new materials continued to increase ALD and epitaxy and density. As we progress through the year, we expect momentum to build further with ongoing capacity additions as the 2-nanometer technology node accounting for the largest part of advanced logic/foundry sales in 2026. This first generation of gate-all-around device technology is shaping up to be a large node, enabling new applications in high-performance compute, including AI as well as advanced mobile and other leading applications. We continue to benefit from the step-up in our served available market at 2-nanometer supported by a broader position in Epi and sustained strong market share in ALD. In addition, we have seen a healthy uptick in demand related to the nodes from 3-nanometer to 7-nanometer, driven by agentic AI. The demand is outstripping supply which has led to renewed capacity investment. Looking ahead to the industry's next node transition to 1.4 nanometer, we expect pilot-line investment to begin later this year. We are deeply engaged with key customers as they prepare for that transition, and we expect the first meaningful contribution to our sales in the second half of 2026. As we have highlighted before, we expect the SAM uplift at the 1.4 nanometer to be even larger than what we saw at 2-nanometer node. At 2-nanometer, the industry's main priority was to get the first generation gate-all-around architecture and to high-volume manufacturing with gate-all-around now in production and ramping, customer have more room to include additional performance boosters. And for ASM, that translates into more functional there in the transition stack to further optimize power and performance, including additional dipole layers to enable Multi-Vt options. Alongside the higher SAM opportunity, we have already secured several key product penetration which supports our expectation for a higher ALD market share in the 1.4 nanometer node, public disclosure from some leading customers suggest that the 1.4 nanometer node is designed to deliver clear improvement in performance, power efficiency and density versus today's 2-nanometer node. This is well aligned with ever increasing AI token demand and the associated compute and power constraints in data centers. As our customers move toward higher volume manufacturing in 2027 and 2028, we expect 1.4 nanometer to become a meaningful driver for ASM. Next, looking at memory. Demand in Q1 was solid, with robust momentum in the most advanced DRAM technologies used in HBM-related applications. Continued investment in AI infrastructure is keeping demand for high-performance memory strong and supporting ongoing expansion of advanced DRAM capacity. For the full year, we continue to expect healthy growth in our memory business. Looking further out, DRAM remains a meaningful and strategic opportunity for ASM. From a technology perspective, our customer R&D engagement in memory continue to expand, including development work around new ALD and epi applications that support the transition to 4F² and very fantastic DRAM. As we highlighted at Investor Day, the transition to 4F² is expected to drive a step-up in ALD and Epi intensity and expand our served available market by approximately USD 400 million to USD 450 million based on 100,000 wafer start per month capacity. Turning over to power, analog, wafer market segment. The contribution in Q1 remained relatively low, reflecting the soft market condition in broader parts of automotive and industrial. That said, we have seen some pockets of strength in selected areas, particularly in power applications for AI data centers. For 2026, our view is unchanged that this segment should recover gradually from a low base. We remain well positioned to benefit once demand conditions improve more broadly. Moving on to China. The increase in Q1 was largely driven by the mature logic/foundry segment, where we saw higher activity across a broader set of customers, reflecting improving market conditions and to a lesser extent, the power, analog segment. In addition, I'd like to highlight ASM's ongoing success in winning new positions which also contributed to our strong performance in China. This demonstrated the continued competitiveness of our solution and the strength of our local team. Based on current visibility, we expect sales in China to increase for the full year with a stronger contribution in the first half. Now let's talk about advanced packaging. As we have discussed during the Investor Day, we are looking into advanced packaging as another midterm growth area for ASM. We believe that this market is ripe for disruptive solution in new materials and interface engineering playing into ASM's strength. We are engaged with multiple customers on advanced packaging, and we are seeing some encouraging traction for our innovative solutions. That brings me to the outlook. At current currency, we project revenue to increase in Q2 2026 to EUR 980 million plus or minus 5%, and we continue to expect revenue in the second half of 2026 to be higher than in the first half. As mentioned, China sales are expected to be first half weighted. This means that our other business segments are expected to strengthen from the first to the second half, including continued solid momentum in advanced logic/foundry higher sales in memory and a gradual recovery in power analog. While it's too early to provide specific guidance for the full year, based on our guidance in Q2 and a further increase in the second half, it should be clear that 2026 is going to be a strong year for ASM. And with that, we have finished our introduction. Victor Bareño: Thank you, Hichem. Let's now move on to the Q&A to ensure that everyone has an opportunity to participate please limit your questions to no more than two at a time. Operator, we are ready for the first question, please. Operator: [Operator Instructions] First question is from Andrew Gardiner, Citi. Andrew Gardiner: Hichem, just sort of pick up on the point you were making at the end of your prepared comments there. You're saying you will have growth in the second half of the year versus the first half, but obviously, the visibility is perfect to quantify it for us yet. Previously, you've been willing to talk about your performance relative to the wafer fab equipment market broadly and that ASM would outperform that. Clearly, WFE expectations are moving quite rapidly as well at the moment. Could you give us an update on how you see the broader market in terms of WFE? And can you confirm that you will still outgrow that in 2026? Hichem M'Saad: Thank you very much for the questions. Yes, we talked about that in our previous conference call that we're going to at least perform as good as the wafer fab equipment market or better. Yes, we have seen improvement in the WFE market. I mean we follow very closely what Gartner and VLSI are talking about. And we can reconfirm again that our growth in our market, in our revenue in 2026 will at least outgrow the WFE market again. So as I mentioned, we see strength in the market and our revenue is strengthening, and we are very confident that we'll be able to at least grow at least at the WFE market or beat that in 2026. Andrew Gardiner: Okay. And just a clarifying question, the point you were making on China. In the second half, so is that China down second half on first half? Or down year-on-year or perhaps it's both? Hichem M'Saad: No. I think China is really up year-on-year. So the -- what we talked about that we see right now that China is lower in the second half of 2026 versus the first half of 2026, saying this, and I want to repeat it again. China visibility is not that great as we talked about it, okay? So from that point of view, if there is anything, that second half China business that we see right now might also increase eventually. But right now, what we see very strongly that the second half would be a little bit slower than the first half. But again, that might strengthen in the second half. We don't know. Operator: Next question is from Nigel Van Putten, Morgan Stanley. Nigel van Putten: I want to follow up on the previous question on China. Perhaps for the full year, there are some limited visibility. But can you provide us a revenue or China revenue as a percentage of overall revenue for the first half at least? And how that maybe compares to the full year '25 when you said it's going to be -- or it came in a little bit over 30%. That is my first question? Hichem M'Saad: Nigel, thank you for your question. Nigel, maybe there's a misunderstanding that about the visibility -- low visibility of China. Right now, okay, our visibility for 2026 is very good, okay? China or no China, okay? Because I mean, it's really clear everywhere in our market, okay? So that's why we are really confident about the market. If there's anything in China, the revenue is going to increase further in the second half, okay, from where we see it right now. So, but China business has been good, and we feel very confident about it. Paul Verhagen: So maybe to add to what Hichem is saying, what we see in is now, at this moment, at least, is an accelerated demand. And in China, we have a higher H1 expectation. And H2, which might still change, we don't know, as Hichem has indicated. Possibly, that is because of concerns on export controls, we don't know. One thing is for sure that the overall sentiment is very good, like in the rest of world, also AI related. That's itself positive. Two, we also won some more layers in itself is a positive. But yes, there is clearly an acceleration going on, which, of course, customers are on tariffs, but which could be triggered by concerns around export controls and how that will develop further, I think, at this stage, and nobody knows. Then on the full year, based on everything we know today, I think the equipment revenue as a percentage of total sales will be similar to last year. But again, it's really too early to tell, so this might change because for all the reasons that we already mentioned. Nigel van Putten: Got it. That's really helpful. Then now maybe switching to the advanced logic customers which I understand are providing increased visibility maybe 8 quarters on a rolling basis. Question would be, do you see any sort of broadening on the horizon, sort of it's clear that the main customer remains very strong, but how are the other two doing maybe today? And how do you see that developing into the second half of the year? Hichem M'Saad: No, I think, Nigel, I think we see -- we're working right now with all customers in advanced node for both of the 2-nanometer node and 1.4 nanometer node. And then we see that gate-all-around is a technology that's going to be adopted by more customers. And we feel very confident that that's going to be the case. Of course, okay, some customers have better yield or performance than the other ones. But we think that gate-all-around is going to be really a broad technology node and for a variety of customers. Operator: Next question is from Didier Scemama, Bank of America. Didier Scemama: Just a follow-up actually to the previous question on the boarding of the customer base in advanced logic. Obviously, your largest customer is doing terrific. On the two smaller ones, is that supposed like expected to strengthen in Q2? Or is that more of an H2 driver? And I've got a follow-up. Paul Verhagen: Yes, let me take that question. I think what I can say on that. I don't want to be specific on Q1 and Q2 or Q3 when it comes out both down to customers. But what I can say is at least that based on current visibility that all those customers are expected to grow year-on-year. And of course, there is a significant difference with regard to the size of the various customer and the absolute amount of growth as a result of that. But we expect all three for the logic part, all three of them to grow year-on-year. Didier Scemama: Okay. And for my follow-up for Q2, would you expect China to be up sequentially or flat? Or how should we think about that relative to your overall sequential growth guidance? Paul Verhagen: What we've said indeed is that for next quarter, we expect EUR 980 million plus or minus 5%. We also said that for H1, we see an accelerated demand for China coming in for various reasons I just discussed in the call before. So I think it's reasonable to assume that also Q2, China will be pretty good. Didier Scemama: Should we expect, therefore, the gross margins in Q2 to remain at sort of above the long-term guidance given the mix? Paul Verhagen: You know that I'm not going to specifically guide on a quarterly basis for the margin, but the margin will be good that I can say China is accretive, as you know. But also, I think what is also not unimportant. I also want to highlight that is that the other product mix that we've seen actually in the last few quarters has been very strong. So that also helps. And last, but not least, the structural cost improvements that we're working on, which will every year add a little bit also play a role. But having said that, yes, higher share of China typically is accretive, yes. Operator: Next question is from Francois Bouvignies, UBS. Francois-Xavier Bouvignies: I have a question for 2027, actually. So if we look at your '26 growth drivers. I mean if I look at the different drivers, I don't see much layers increase in '26 as a growth driver, because I think it's mostly capacity, [indiscernible] was already adding a lot of capacity last year. So from a year-over-year point of view, you don't have a lot of incremental layers. Now if you look at '27, it looks like you will have a lot of layers opportunity that you laid out at your Capital Markets Day. So I was wondering, if we think about this dynamic of layers increasing, is it fair to say that '27, if we assume the same capacity increase that '26, that should be a higher growth than '26? You have more drivers on top of the capacity in '27 than you had in '26. Is that the right way to look at it, if you understand my question? Hichem M'Saad: Yes. I think we understand your question. I think it really depends both on the end demand from that point of view. But we -- as the technology node transition from 2-nanometer to 1.4 nanometer, we see the adoption of 1.4 nanometer starting in the second half of 2026. And we see the 1.4 nanometer bias to increase in 2027 for final production in the first half of 2028. And with the 1.4 nanometer node, there's more ALD and more Epi. And as we mentioned, these ALD layers are mainly in the front end of line for performance level. And that's where we have many more -- a lot of strength, and that's where we're going to have many more ALD layers. So we are really very happy with -- we'll be very happy with the 1.4 nanometer transition, because of the higher ALD intensity. Also, we have more ALD layers in molybdenum. I think that as we mentioned in our last press release that we are very happy to be in production, high-volume production at the 2-nanometer node with our moly ALD. And with the transition to the 1.4 nanometer, we also have won some process of record layer in molybdenum. So overall, the transition to 1.4 will be very accretive to us, and we'll be very excited with that transition in the future. Francois-Xavier Bouvignies: And the memory side -- Yes, go ahead. Paul Verhagen: I think you said it, but I want to make it a little bit more explicit that just for you guys to be clear that already in this year with the pilot for 1.4, which is also, of course, increased layers, as you know, we already see a very, very meaningful contribution of 1.4. So that's not only in '27, but it's already starting in '26. Francois-Xavier Bouvignies: Good to know. And maybe you didn't address maybe the memory layers and maybe for '27. And then you mentioned market share higher in A14. So can you maybe explain a bit the higher share here? I mean, is it because just your time is getting higher than the others? Or you just have more layers than you expected? -- more than before? Hichem M'Saad: Yes. So the 1.4 nanometer, what's the difference between the 1.4 nanometer node and the 2-nanometer node. So they are both gate-all-around. But for the 2-nanometer node, that's an architecture change. So customers didn't want to be very aggressive in putting many functional layers because of the change in architecture. But once we move to 1.4, they have added many goodies, which we call performance layers. And those layers are really mainly ALD layers. And they are all in the front end of line, where we play significant. That's where our strength is. Yes. So definitely, we see more ALD layers in 1.4 nanometer. Second thing, as you shrink, those -- and with the gate-all-around structure, as you shrink those layers become much more difficult because of the 3D nature and the shrinking. And with that, the since every layer becomes much more difficult, that also slows down the process. And with that, you need more equipment from that point of view. The other thing we see is that also there is a higher epitaxy intensity going forward. So overall, that's very positive. Operator: Next question is from Stephane Houri, ODDO BHF. Stephane Houri: Yes. To come back on the Q2 guidance, which is about EUR 100 million of what the consensus was expecting. So I'm just trying to understand what led to this acceleration, if it's more advanced logic or memory. And if you could comment also on the lead time at the moment if they are increasing? And is there a difference between the two different segments? And I have a follow-up. Hichem M'Saad: I think that the acceleration is happening in mainly in the 3-nanometer to 7-nanometer node. in addition to the gate-all-around node. So what we have seen lately is that Agentic AI is becoming more important. And with that, that tends to favor using the CPU instead of GPU. So the 3 to 7-nanometer node is really mainly driven with CPU. And we see much more demand from our customer in that node, and that's really happening super fast at this point in time. We also see strength in memory continuing. So overall, the market is really strong in the leading edge, both logic and mainly logic and foundry, that's really the highest part of the market. Second is really also DRAM is also increasing. Stephane Houri: And about the lead time, sorry. Hichem M'Saad: So regarding the lead time, I mean, lead time has increased because of the supply chain constraints right now. I mean there's a huge demand everywhere. So yes, the supply chain has increased, and that's really the customer specific. We've been able to expect that to happen. That's why we can -- we have increased our capacity to from like EUR 700 million per quarter in Q4 of last year to about EUR 1 billion per quarter this year. And it's going to continue to increase in the second half, as we have mentioned. Stephane Houri: Okay. And that's exactly my follow-up. I mean you're going to be at least EUR 1 billion per quarter in the second half run rate and there's probably some additional growth coming in 2027, given what you said and what we see in the market. So at what point will you fill all your plants and notably the Singapore plant and that you will have to again increase the capacity? Hichem M'Saad: I think our manufacturing capacity is -- can take care of our business. I think we have expensive manufacturing capacity in Singapore and Korea. So we're ready for much higher volume. I think what's limiting -- if there's any limit is really the supply chain that's limiting the capacity than anything else. But I think that we'll be able to manage that in the second half. So that's why we're confident of increased volume in the second half of 2026. Operator: Next question is from Sandeep Deshpande, JPMorgan. Sandeep Deshpande: Maybe you can give a comment on what has changed in your customer behavior versus what you were -- you had seen from your customers the last time you reported in -- reported your results. Has something substantially changed given your very strong guidance into the second quarter? And then I have a small follow-up. Hichem M'Saad: I think that the market is really strong all over. Has there been any significant change? I think the change that we have seen is really on the PC part where for -- on the CPU part where it used to be that AI is mostly driven by GPU, but we see that CPU part becoming more important than before. And we see that's the strength we see in the 3-nanometer to 7-nanometer node, which was not there before. So that's really the strength we see. It's mainly the CPU-driven part for artificial intelligence. Sandeep Deshpande: And then when you look at the WFE, I mean you had said 15% to 20% at last results. I mean, given your guidance for the second quarter and your indication on the second half of the year, it looks like you're going to grow well over 20%. So what is your perception on WFE at this point for this year? And I mean, despite your lower exposure in the memory market, you are growing incredibly well. And so is this mainly associated with the second half ramp also with 1.4 nanometer where your content is growing, your number of layers you have is growing very substantially. So this is essentially share gain in the WFE market? Paul Verhagen: Yes. Let me take that, Sandeep. So yes, to give you a very short answer, that's part of it, absolutely. But also basically, I think as Hichem already said, but maybe in different words, we're firing in all cylinders. Every segment of the market is growing significantly. I mean, advanced logic/foundry, mature logic/foundry, memory of which, in particular, DRAM, we see a high growth and even power with analog for power-related AI data center applications from a low base, but as a percentage, still high growth. And of course, also pilots 1.4, that I started with, adds a decent amount for this year already, yes. Operator: Next question is from Adithya Metuku, HSBC. Adithya Metuku: Firstly, I wanted to talk about 2027. I know you gave these targets of EUR 3.9 billion to EUR 4.6 billion, top line at a EUR 125 billion WFE number. So call it EUR 4.2 billion midpoint. If you look at WFE numbers now, people are depending on whose numbers you take 40% to 50% higher than that EUR 125 billion in 2027. So my first question is, should we assume that, that EUR 4.2 billion could be maybe 40% to 50% higher from 2027? What are the nuances we need to keep in mind when we think about where WFE is going and how your revenues might go in 2027, you've clearly talked about outperforming WFE, I presume that will continue. So just any pointers you can give around how we should think about these targets you gave at the CMD 40% higher, 50% higher? And I've got a follow-up. Paul Verhagen: Yes. Let me take that. So indeed, I think we said EUR 3.8 billion to EUR 4.7 billion at CMD, where we assumed EUR 120 billion WFE, which today's view is indeed significantly higher, but there's one big difference. The assumption that we took at that time, which was somewhere September last year on the composition of the mix is very different from what we see today. So we had by far the largest part of the total WFE basically logic/foundry, while now the relative share of memory is significantly larger than what we assumed. And although we grow a lot in memory, but still our relative share of memory in our business is still relatively small. So that's why you will not see the full benefit of that increased WFE dripping down into our numbers. Having said that, based on everything we see today, we believe that '27 will be a strong year. But adding 40% to 50%, I would not recommend you to do that. That would give some distorted figure. At the same time, it's a very wide range, EUR 3.8 billion to EUR 4.7 billion is almost EUR 1 billion range. So also even within that range, there's still a lot of room to maneuver. And more than that, at this stage, I don't like to say. Adithya Metuku: Got it. Okay. We'll leave 40% or 50% of side go with 30% then. And just quick follow-up. On the MATCH Act, can you give us some color on how you're thinking about any potential impact for you guys as you think about your China revenues? Yes. Any color you can give around how you might be affected? I know it's hard to quantify numbers, but any qualitative color would be great. Paul Verhagen: Yes. So the MATCH Act indeed is being discussed as we speak. If it will happen or not is uncertain. It might or it might not. In what shape it will happen is also uncertain because at the end of the day, it is important, literally the point and the commerce are very important there, especially in relation to how to interpret what is exactly restricted. We're in, of course, discussion with relevant authorities, as you can imagine. So it's very hard, and I would love I could give you some more color to give decent color at this stage. Obviously, if something like that were to happen, it's not a positive, that might be clear. But how much, I'm really not in a position yet. It's too -- it's literally too unclear and too uncertain still on what might happen. So I don't like to speculate on that. Operator: Next question is from Tammy Qiu, Berenberg. Tammy Qiu: So the first one is regarding your very strong short-term momentum. You mentioned that just now it's all driven by the CPU-related incremental demand. I just want to confirm that, have you seen any customer from both logic and memory perspective, pulling forward? Are you asking you to accelerate the shipment of equipment because end market demand is coming so dramatic in the short term. So therefore, it's like a pull forward from 2027 at all? Hichem M'Saad: I think every customer wants the tools now instead of tomorrow. I think the demand is really high. And for us, it's which customer we ship to first than the other one. So I think like we mentioned, we are fully booked for this year. From that point of view, we have a strong demand in all parts of our business, really every part of our business very high demand. And yes, we see customers the demand is even increasing. So I mean, we -- our book is full. So we have to do our best to be able to satisfy the demand that we're getting right now. Tammy Qiu: Okay. And the second one is, last quarter, we discussed that the 1.4 nanometer is mainly driven by one customer versus others have been having discussion with you, but still a bit distant away from pilot production, et cetera. I'm just wondering where is the status of those remaining customers? Are they getting closer to make the decision on pilot production? Or are they still further down the line? Hichem M'Saad: So as we mentioned that we see -- we are working with all customers to the 1.4 second generation with a 1.4 nanometer technology node. And we see that business strengthening in all the customers from that point of view. Some of them is at a marginal increase and the other have a higher increase, but I'm not here to speculate on which customer, which, but we see at least a marginal strength in some and a significant strength in other customer. But saying this, I think more likely, like I mentioned that 1.4 nanometer would be more than one customer. Tammy Qiu: Just to confirm, have you seen any progress during the quarter, i.e., all of them have moved forward or just one of them moved forward comparing to last quarter. Hichem M'Saad: Can you repeat your question, please? Tammy Qiu: So basically, the time line of the 1.4 nanometer, last quarter, you mentioned that one is active preparing for pilot production, remaining two is still in discussion firmly at this stage. I'm just wondering, this is three months after, have you actually seen other customers together with a leading customer or moved forward in the time line for 1.4 nanometer? Or just one customer has moved forward instead of all three of them? Hichem M'Saad: I'm going to repeat my answer, where we see 1.4 nanometer strengthening broadly with some strengthening marginally in some customers and significant increase in other customers. Operator: Next question is from Jakob Bluestone, BNP Paribas. Jakob Bluestone: I want to come back to Adi's question around your ability to sort of take part in growth in memory. And my question is, when do you anticipate the transition to 4F² and FinFET for the cell periphery in DRAM to impact your revenues? So is this something that would impact in '27? Is it '28? Or do you think it's further out? Paul Verhagen: I can take that question. Yes, I think because I think last time already, we mentioned that the pace of adoption customer by customer is different. There might be even a customer that might completely skip it. We don't know yet, but that's to be seen. And I think for us, based on what we see and think we know today, I think you should take into account '28 as the first year where we start to see a positive contribution related to 4F². [ Might ] -- maybe a little bit earlier, I don't know yet, but I would -- I mean time line is still a little bit uncertain and very different from customer to customer. So I think the best color I can give right now is in '28. Hichem M'Saad: So add to what Paul has mentioned here, we see a strength in memory in 2026 and also increasing for us in 2027 and beyond. The biggest increase for us will happen really in the move into 4F², where we have more ALD layers and more also Epi intensity. But also we've seen some customers put in FinFET in their node in their road map. And with that, we're working with them and we might -- and since we have been very prominent in our FinFET technology in logic. So that we see some customers really pulling in that technology node. And with that, we probably will get some more layers as customer put in their FinFET technology node. So the biggest increase would be '28 and beyond, but also we see some increase in 2027. Jakob Bluestone: Understood. If I can just ask a quick follow-up as well. You mentioned a few times the sort of pickup in 3 to 7-nanometer transition, and I don't know if you can give any color on whether that's your largest customer or kind of more broad-based? Hichem M'Saad: Which transition, are you talking about, sorry? Jakob Bluestone: 3 to 7? Hichem M'Saad: Yes, I think it's really broad based. That's really broad-based. It's not only one customer, it's very broad-based. Operator: Next question is from Ruben Devos, Kepler Cheuvreux. Ruben Devos: I just had one on Epi in HBM. I believe you talked about significant Epi engagements with another HBM customer and expect good news this year. So of course, curious whether two months on has anything firmed up on that additional qualification? And would that be, let's say, fully incremental to your memory plan in '26? Hichem M'Saad: Okay. So to answer your question, yes, we talked about that, and we are engaging with our customer on epitaxy. There's really nothing else to say right now, but we'll let you know if there's any news from that point of view. It's really working with customers on a couple of customers on epitaxy. And hopefully, we can share some good news with you in the next investor call meeting. Ruben Devos: Okay. And then second one, really to just get a feel of maybe the aftermarket sales, right? I mean you've had a stretch of very good performance in the last few quarters, again, 23% up the past quarter. Outcome-based is about 25% of the mix. So it looks like, I mean, the target you said at the Investor Day of 12% CAGR is becoming more of a floor. I was curious whether you could talk a bit about, yes, the extended visibility you might have now in aftermarket sales. And I can imagine a margin uplift to realize if you manage to make a transition more towards outcome-based. But also besides that, are you able to sort of have the customer pay more per tool for the servicing packaging in general? Hichem M'Saad: I think that for service market, okay? What I mentioned, the service market is really good as you transition in a newer technology node because of process complexity. It's very important to -- a customer need more support from us and for the more advanced node. And with the advanced node also, we see a transition to much tighter specification on wafer-to-wafer and also repeatability on chamber-to-chamber matching and also on system-to-system matching. And with that, we have to provide a new solution to customers to improve the uptime and the availability. So we are very really -- we think that the surface business is going to increase in the future as you transition to tighter and tighter technology node. And we see that happening in the area of automation, in the area of robotics, in the area of optics. And those are really the solution that we're providing our customers. So the growth is going to be good in that part of the market. You mentioned that 12% growth. To be honest with you, right now, every part of the market is growing a lot. This year, the market is growing over 20%. I mean, latest, you see Gartner talking about 25%. So everything is great. It's really just spending my time, okay, to make sure that we can execute on getting customers the tools in time and make sure that the availability and the execution is top notch. Operator: Next question is from Timm Schulze-Melander, Rothschild & Co Redburn. Timm Schulze-Melander: First one for Hichem, please. Just looking at the technology execution and just trying to scale maybe how much upside there is to that? If I look at your long-term revenue guide, the high low range is kind of 20%, 25% between the low and the high. Obviously, part of that is the strength of the cycle. Maybe part of that is also conversion of existing evaluations and layer wins. Maybe could you just share how much of that is upside potential from layer wins? So if you could just think about that in the context of your go-forward revenues? And then I had a follow-up. Hichem M'Saad: You said the percentage I didn't hear you well on the percentage, which percentage are you talking about, please? Timm Schulze-Melander: Yes. So if we look at your EUR 3.8 billion to EUR 4.7 billion revenue guide, so part of that is going to be cyclical. Part of that's going to be your execution in terms of technology wins. I'm just trying to think is that half off, but some kind of scale of that? Hichem M'Saad: If you look into the business and where we are, one thing I can tell you, I'm really very excited about our technology road map. I think that things are going in our direction. If you look into logic, you see more and more layers coming in with 2-nanometer and also with 1.4 nanometer. ALD intensity is increasing and [indiscernible] intensity is increasing, and we're winning share in that part of the market. If you look into memory, memory is moving more and more into FinFET more and more in 4F², which needs more Epi, needs more ALD. So we're going to have more layers, and we feel very confident about it. And if you look into logic -- if you look into power, wafer, analog, we are really -- if you look at the power, wafer, analog, the power part of the market is the only part of the power, wafer, analog that's strong right now. And that's being driven by data centers, power devices for data center. If the wafer part and the analog part goes up, it's going to be even accretive to us. So the service business is also good. In the service business, we're going more and more by automation. And we really -- we're getting some -- getting into even robotics and that customer and leading customer, we're even selling them, okay, some robots to improve the system availability and so on. If you look into advanced packaging, that's an area that we mentioned that we have entered last year. It's a new area for us. I can tell you that we have so many -- believe me, so many interactions with customers. And we have to prioritize which one to do and some customers tell them, guys, maybe we don't have -- we cannot really help you there. And -- but with the customers that we're really engaging right now, I can see that they really like to work with us as a company because we're looking into the advanced packaging through a different option. We're looking into that as, okay, what can we do to disrupt the technology? What can we do to provide a solution that's better than what it is right now. How can we -- a solution to make sure that, okay, we reduce the -- to reduce the thermal mass on advanced packages coming with a new material that improve thermal conductivity. We're working with customers to make sure that we can seal the devices much better. So there is no moisture going in the packages. We're working with customers to actually improve the speed of connection between one chip to the other one, working with them on some innovative photonic layers. So I'm sure that with all of this really, we feel very confident where things are are going to go from that point of view. And depending where the market is going to go, I'm very confident that we're going to at least match the WFE market growth or actually have a higher growth than WFE. It's a great time for ASM right now. And we -- I see customers really want to work with us. I think our execution has improved. I think our competitiveness is getting even better than before. And what I can tell you, it's the best time to be in semiconductor. Timm Schulze-Melander: A very impressive runway. Maybe just a quick follow-up for Paul, just some housekeeping, actually. You talked about rising utilization rates, but actually Q1 aftermarket sales were down sequentially. And on your guide, I think last quarter, your guidance range was plus minus 4%. This time, you've widened that range to plus minus 5%, which doesn't maybe sit that well with a sort of improving visibility. Just wondered if there's any color you could share in terms of what you're seeing. Paul Verhagen: Yes. So actually, the range is, I think, already referred to is related to supply chain challenges. So far, we've been able to manage it. But at the same time, we have to be on top of it to make sure that we get what we need to deliver what we need as per our customer preferred COD customer request date. So that's a little bit where the range comes from, Timm. It's not so much demand. It's more what can we deliver on time given the supply chain constraints that so far manageable again. But yes, we have to be on top of it and nothing can go wrong here. Timm Schulze-Melander: So that's what was in the aftermarket in Q1 and maybe there's some catch-up in Q2? Paul Verhagen: I don't know if there's catch-up in Q2. I mean I think had a very good Q1. I think we delivered more or less what we wanted to deliver, and we will target to do the same in Q2. Victor Bareño: Thank you, Timm. We still have a number of participants in the queue, but we are running out of time. So let's take one final question. Operator, can we have the last caller? Operator: Final question is from Javier Correonero, Morningstar Equity Research. Javier Correonero Borderia: In the interest of time, I will just ask one. So your Axus acquisition 3 months ago, it is small, but I think there is a lot to unpack there when you think longer term. So Axus is specialized in silicon carbide processing. So I was wondering if you could explain a little bit more what's the rationale of the acquisition here? Is it like more silicon carbide content as we move into the 800-volt data center? Or is it TSMC potentially adopting silicon carbide interposers in the next few years or both? And of course, it is very early and small acquisitions, but do you have an estimate of what service of addressable market this acquisition could open once it is properly integrated with ASM [indiscernible]? Hichem M'Saad: Okay. So thank you very much for the question. So yes, we have acquired this company called Axus Technology, which is -- we're very excited about the acquisition in CMP. They have a very great CMP technology and very innovative, to be honest with you. And the -- like we mentioned, we have acquired this for the advanced packaging market because advanced packaging is -- needs more and more CMP layer, many, many, many more CMP layer. So there is room for another player. Also, it's a technology that's all about interfaces. And I think that we have some -- we do have some knowledge in interface engineering so that we will be able to really put our print there. It also CMP helps us with our new materials that we're developing for advanced packaging that I just talked about a few minutes ago because I mean, you deposit the film, but also you need to CMP. So we want to understand what's the interaction about the material that we're depositing the new material that we're depositing and the CMP, because CMP also has a slurry. There's a new -- with a slurry that means we're talking about new chemicals and so on and so forth. So it would help us also develop better materials in ALD, but at the same time, also good polymerization, which is extremely important for advanced packaging. So that's really why we made that acquisition. And then we're working right now on developing the product for advanced packaging, and it's going to increase our SAM absolutely. It is going to increase our SAM and we're in the process of doing R&D and so on in this part of the market. Victor Bareño: Okay. That concludes the Q&A. Thank you all for attending our call today, also on behalf of Hichem and Paul. Thank you. Goodbye. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.
Operator: Greetings, and welcome to the ASGN Incorporated First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press 0 on your telephone keypad. It is now my pleasure to introduce your host, Kimberly Esterkin, Vice President of Investor Relations. Thank you. You may begin. Good afternoon. Kimberly Esterkin: Thank you for joining us today for ASGN Incorporated’s soon-to-be Everfor’s First Quarter 2026 Conference Call. With me are Theodore S. Hanson, Chief Executive Officer, Sadasivam Iyer, President, and Marie L. Perry, Chief Financial Officer. Before we get started, I would like to remind everyone that our commentary contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties, and as such, our actual results could differ materially from those statements. Certain of these risks and uncertainties are described in today’s press release and in our SEC filings. We do not assume any obligation to update statements made on this call. For your convenience, our prepared remarks and supplemental materials can be found in the Investor Relations section of our website at investors.asgn.com. Please also note that on this call, we will be referencing certain non-GAAP measures such as adjusted EBITDA, adjusted net income, and free cash flow. These non-GAAP measures are intended to supplement the comparable GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in today’s press release. I will now turn the call over to Theodore S. Hanson, Chief Executive Officer. Theodore S. Hanson: Thank you, Kimberly, and thank you for joining our first quarter 2026 earnings call. Today marks an important milestone for our company. This will be our final earnings call under the ASGN Incorporated name, and on Friday, we will officially begin operating as Everport and trading under our new stock ticker e f o r e four. This transition reflects the continued transformation of our business, bringing our capabilities together under the Everforth brand to support a more integrated operating model focused on higher-value solutions and deeper client relationships. By pursuing this path, we will unlock further scale and increase our cross-selling opportunities. As part of this evolution, we are also updating our commercial segment reporting to more clearly reflect how we are evolving the business, which is by industry rather than mode of delivery. This change is intentional and aligns with our next wave growth strategy, an industry-led approach which we previewed at our Investor Day this past November. Ultimately, the delivery structure of our engagements is much less meaningful than the outcomes we drive and the strong value we create for our clients. We will, therefore, provide color through the lenses that matter most to how we compete in the commercial space: our five industries and our six solution capabilities. In addition, to help track demand for our higher-value work and our ability to win in the marketplace, we will disclose our commercial consulting book-to-bill consistent with what we have shared in prior quarters. With that background, let us discuss our first quarter results. Revenues for the first quarter were $968.3 million, in line with the prior year and our guidance. Commercial segment revenues were driven by demand in AI and data, cloud and infrastructure, and application engineering and modernization. Our AI and data and cloud and infrastructure pipelines continue to build, reinforcing momentum in these areas of our business. Commercial consulting book-to-bill was 1.1 times on a trailing 12-month basis. Federal segment new contract awards totaled $151.3 million, or a book-to-bill of 0.7 times on a trailing 12-month basis. Federal contract backlog was approximately $2.8 billion at quarter end, or a coverage ratio of 2.4 times the segment’s trailing 12-month revenues. Similar to the commercial segment, AI and data work was a solid contributor to revenues, bookings, and pipeline within our federal business. Cybersecurity contracts also nicely contributed to revenue and bookings in the quarter. We are beginning to see award activity in many government agencies pick up following the passage of the federal budget in early February. That said, we experienced some funding delays at the Department of Homeland Security, which is navigating both a shutdown and a leadership transition. Importantly, we have not seen any disruption to award funding related to the conflict in Iran. Instead, we are seeing evolving requirements of partner collaboration, particularly around cyber threat analysis and data management and analytics, as agencies seek to strengthen decision-making expertise. While our revenues were within guidance, adjusted EBITDA margin of 8.6% was below our expectations for the quarter. This was driven largely by business mix related to lower-than-expected contribution of some of our higher-margin solutions within the commercial segment. Nevertheless, we continue to closely manage our expenses. As discussed during our Investor Day, we are making strategic pivots in our business that will position us well for the long term. Those changes are being shaped by how our clients themselves are evolving and the expectations they have for partners that can support them through that change. Our clients are navigating a very volatile macro environment with continued uncertainty around how technologies such as AI and enterprise software will ultimately impact the technology landscape and influence their IT spending. While this dynamic can create some near-term variability, we are focused on strengthening our foundation by building a more unified brand, enhancing our go-to-market approach, and maintaining disciplined expense management and capital allocation. These actions give us conviction that we are building a stronger, more resilient platform aligned with client demand and positioned to drive top-line growth and margin expansion. Against this backdrop, I want to step back and revisit our next wave growth strategy. We continue to make progress executing our long-term initiatives, and during the first quarter, we took several important actions that reinforced our strategic priorities. First, we announced key leadership appointments across both our commercial and federal government segments to support our next phase of growth. We welcome Ashish Janyal as President of Commercial North America, Sangeetha Singh as President of Indian International, and Donnie Scott as President of our federal government segment. Each leader brings deep experience scaling global service organizations, driving AI-enabled digital transformations, and building delivery platforms designed for long-term value creation. Collectively, this team enhances our ability to execute our strategy while building on the solid foundation already in place. We also successfully closed the acquisition of Quinox, marking another important milestone in advancing our strategy toward enhancing our solutions capabilities and margins. Quinox meaningfully expands our ability to deliver technical, end-to-end application engineering and modernization solutions for our commercial clients, while establishing a strong foundation for our offshore delivery platform in India. Although still early, integration is progressing well, and we are already co-selling their services. Ultimately, these actions enhance our ability to support growing client demand for AI-led transformation, scalable delivery, and outcomes-based solutions across industries. We remain focused on executing with discipline and building a higher-value, more integrated Everfor. With that, I will turn the call over to Sadasivam Iyer. Thanks, everyone. Sadasivam Iyer: Good afternoon, everyone. As Theodore noted, we go to market through a combination of industry and solutions expertise. We believe industry is the most meaningful lens for understanding where client demand is emerging and how our customers are prioritizing their IT investments. With that in mind, I will begin with our industry performance for the first quarter. Within our commercial segment, we delivered year-on-year growth in the healthcare, consumer and industrial, and TMT industries, reflecting broad-based demand in AI and data, cloud and infrastructure, application engineering and modernization, and enterprise platforms. Healthcare grew at a high single-digit rate driven by increased engagement from healthcare payers, while the consumer and industrial and TMT industries achieved mid single-digit growth supported by software, utilities, and industrial customers leveraging our capabilities across AI and data, cloud, experience, and cybersecurity. Though the financial services industry—one of the biggest spenders on IT—declined mid single digits year over year, we saw high single-digit growth amongst insurance customers where application engineering and AI engagements continue to gain traction. Consistent with the typical first quarter seasonality in which certain projects conclude at year end, most industries softened sequentially with TMT relatively flat. That said, we saw pockets of strength within several industries. In consumer and industrial, for example, utilities delivered low single-digit growth supported by demand in application engineering, cloud and infrastructure, and AI and data. Turning to our federal segment, we track our federal revenues across four customer types, including defense and intelligence, national security, civilian, and other clients. Defense, intelligence, and national security customers continue to comprise approximately 70% of our total federal revenues, the remaining balance coming from civilian agencies, government-sponsored entities, state and local agencies, and select commercial customers. National security customers delivered the strongest growth for the segment both year over year and sequentially. This was primarily driven by cybersecurity work supporting the Continuous Diagnostics and Mitigation, or CDM, service program within DHS. We also saw mid single-digit growth in our other clients year over year, led by the USPS, where we deployed a purpose-built AI application designed to significantly reduce undeliverable mail and improve operational efficiency. Building on the industry discussion, I would like to transition to our solutions performance, which provides a clear view of where the client demand is strongest today and how it is evolving. AI and data remain a significant driver of demand across our portfolio. Our clients are increasingly focused on modernizing data foundations to support analytics, AI-enabled decision-making, and operational agility. Let me provide a few examples. In the consumer industry, we partnered with a leading global athletic apparel and footwear company to design and deploy a unified analytics platform powered by Databricks Genie, an agentic AI interface that enables secure access to governed data. By consolidating product assortment planning, demand, bookings, and sales into a single governed experience, our client improved product creation decisioning and speed to market, while also establishing a reusable foundation to scale across broader demand planning and supply chain use cases. Databricks is one of our core strategic partners, and during the quarter, our commercial business was recognized as a Databricks Silver Tier Partner. Leveraging that partnership, our industrial team supported a Fortune 100 energy and utilities company in migrating from legacy architectures to a Databricks-based integration. This effort aligned the client with enterprise data strategy, while also reducing long-term risk and strengthening governance. Following the success of this project, our client is engaging our teams to support legacy migrations into Databricks across other areas of the organization. We are also helping customers unlock the full value of modern hyper AI services in the cloud. In the TMT vertical, for example, our AI and cloud teams partnered with AWS to support a Fortune 50 media company in building a digital twin of its streaming platform. This solution combines advanced cloud engineering with AI cloud simulations to help our client identify performance risks ahead of some of the largest global streaming sporting events that commonly draw over 100 million viewers. A successful project, we now have a repeatable use case that can be extended across TMT clients with similar streaming and gaming environments. As AI adoption and data volumes accelerate, cybersecurity has become an increasingly integral component of nearly every client engagement. In the healthcare industry, we secured an extension with a large national insurance payer to modernize their identity governance using SailPoint. This work established a central identity framework that supports regulatory compliance, while safeguarding sensitive patient and member data. Alongside this modernization work, we continue to provide ongoing SailPoint platform support, reinforcing our long-term client relationship. In the federal market, we are supporting the Cybersecurity and Infrastructure Security Agency, or CISA, through the aforementioned CDM program by delivering security information and event management as a service. This capability standardizes security data collection across federal agencies and enables real-time threat detection and rapid response. We also delivered a first-of-its-kind ATO-accredited development environment for the U.S. Navy—a secure, government-approved workspace where teams can safely build, test, and manage software and data. By combining our dev labs and software factory with Elastic’s cloud infrastructure and AI-enabled automation, we created a development environment that aligns with the DOD’s zero trust requirements. Enterprise platforms also remain central to our clients’ digital transformation, particularly as organizations look to embed AI into their systems of record. We continue to advance co-selling and co-development efforts across our partner ecosystem, with a focus on accelerating time to value through automation, data readiness, and agent-enabled workflows. In our commercial business, we are helping clients embed agentic capabilities across core data platforms, hyperscaler cloud environments, and enterprise systems of record. During the quarter, we became a Snowflake’s Cortex Code Preferred Partner, working closely with Snowflake to build hands-on labs, develop AI readiness case studies, and create customer-facing applications leveraging Cortex, Snowflake’s native agentic engineering capability. Similarly, with AWS, we are partnering to build a Workday data learning agent that combines AWS’s agentic technology with TopLog’s proprietary Smart Loader tools. With Salesforce, we are investing in Agentforce to enable AI-driven digital work that supports faster delivery cycles and improved testing outcomes. And with ServiceNow, we were one of the top 10 global partners selected for the launch of EmployeeWorks, a new offering that integrates AI assistance with workflow automation. Although we are seeing progress in our enterprise platforms work, we are operating in a more deliberate buying environment. Decision cycles have lengthened as customers take a more measured approach to large, long-term initiatives while they assess how AI fits into their broader technology road maps. The enterprise software market is also undergoing change, from evolving go-to-market models focused on consumption rather than per-seat to organizational realignments with changes in sales and executive leadership. That said, we view this as a moment in time. While customers are being more deliberate about how, when, and where they invest, we do not see them stepping away from enterprise platforms, nor do we see AI displacing these systems of record. In fact, AI is increasing their relevance. Enterprise platforms remain where data, workflows, and governance reside, and without that foundation, AI lacks context and scale. Our role is to help clients modernize, integrate, and optimize these platforms while enabling practical AI applications that drive measurable business outcomes. As spending normalizes and IT programs move forward, we are well positioned to support our clients across this ecosystem. With that, I will turn the call over to our CFO, Marie L. Perry, to discuss our first quarter 2026 performance and second quarter guidance. Marie L. Perry: Thanks, everyone. For the first quarter, revenues totaled $968.3 million, within our guidance range and consistent with the prior-year period. Given the timing of the acquisition close, Quinox contributed less than one month to the quarterly results. Revenues from our commercial segment were $675.5 million, an increase of 0.5% compared to the prior year. Revenues from our federal government segment were $292.8 million, a decrease of 1.1% year over year. Turning to margins, gross margins for 2026 Q1 were 27.5%, a decrease of 90 basis points from the prior year. Commercial segment gross margins totaled 31%, a decrease of 140 basis points year over year. Gross margins for the federal government segment were 19.6%, an increase of 10 basis points year over year, but slightly lower than our expectations due to a higher-than-anticipated contribution of cost-plus revenues in the quarter. As Theodore mentioned, this decline in margin was primarily driven by business mix related to a lower-than-expected contribution from some of our higher-margin solutions within the commercial segment. We also experienced a headwind from changes in our foreign exchange rates related to our delivery center in Mexico. SG&A for the quarter was $224.4 million compared to $214.5 million in 2025. SG&A expenses included $12.8 million in integration and strategic planning expenses that were not included in our previously announced guidance estimates. Excluding these expenses, SG&A expenses were relatively consistent with prior year. For the first quarter, net income was $5.5 million, adjusted EBITDA was $83.6 million, and adjusted EBITDA margin was 8.6%. Adjusted EBITDA margin was below our guidance range due to the lower gross margin just discussed. In addition, our estimates assumed an effective tax rate of 28% for the quarter; the effective tax rate was 48.1%, reflecting one-time discrete items not included in our guidance. As previously noted, in March we completed our acquisition of Quinox for $290 million. We also deployed $39 million in cash to repurchase 800 thousand shares at an average share price of $47.69. At quarter end, we had approximately $934 million remaining under our $1 billion share repurchase authorization. Cash and cash equivalents were $143.6 million at quarter end. We had approximately $160 million available on our $500 million senior secured revolver. Our net leverage ratio was 3.1 times at the end of the quarter. We are committed to reducing our debt over time in order to bring our net leverage ratio closer to our 2.5 times target. We will continue to opportunistically balance capital deployment with organic investment and share repurchase, and have remained active in buying back our shares in the second quarter. Free cash flow was $9.1 million. While free cash flow is generally seasonally softer in the first quarter, it was lower than we typically see in past quarters primarily due to an increase in DSO. Turning to guidance, our financial estimates for 2026 Q2 are set forth in our earnings release and supplemental materials. These estimates are based on current market conditions and assume no further deterioration in the markets that we serve. As we execute against our strategic plan, we expect some continued upfront investments. Our second quarter estimates include $8 million to $10 million in strategic planning expenses related to the implementation of our Next Wave growth strategy, which we expect will decline over the coming quarters. Alongside these investments, as we highlighted at Investor Day, we are implementing targeted initiatives that will generate meaningful structural cost savings for the business. These efforts are progressing as planned. With that as background, for 2026 Q2 we are estimating revenues of $970 million to $1 billion, net income of $8 million to $13.7 million, adjusted EBITDA of $85 million to $95 million, and adjusted EBITDA margin of 8.8% to 9.5%. Thank you. I will now turn the call back over to Theodore. Theodore S. Hanson: Thanks, Marie. As we step back from the quarter, the most important takeaway is the consistency between our strategy and our actions. The projects Sadasivam walked through today illustrate how our industry depth and solution capabilities are translating into meaningful outcomes for clients navigating increasingly complex environments. The acquisition of Quinox strengthens our ability to deliver end-to-end application engineering and modernization at scale, while the leadership additions we made earlier this year further align our company to execute our next wave growth strategy. These are deliberate actions focused on building a higher-value, more unified company positioned for durable, long-term growth and expanded margins. This long-term orientation is a central theme in our annual shareholder letter, which will be released later this week. This letter discusses the evolution of enterprise technology and how those shifts are shaping our strategic priorities. As AI moves from experimentation towards broader enterprise adoption, it is driving greater integration and modernization across IT environments and increasing the need for sophisticated services to support that transition. Solution providers that can modernize data and embed AI into real-life business processes and workflows are best positioned to succeed. And these are the areas where we have a clear position and right to win. Our diversified client base, differentiated delivery models, deep industry relationships, and portfolio of in-demand solutions collectively create structural advantages in an AI-driven world. Before we open the call for questions, I want to thank our employees for their dedication this past quarter. Your adaptability and commitment to our clients is the foundation of our progress and our future. As I noted at the start of today’s discussion, this call marks an important transition as we prepare to operate and report as Everfor. I look forward to continuing the conversation with you next quarter under our new name. We will now open the call for questions. Operator: Thank you. We will now be conducting a question-and-answer session. 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 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Jeffrey Marc Silber with BMO Capital Markets. Please proceed with your question. Jeffrey Marc Silber: Thank you so much. A couple of times in your prepared comments you talked about lower-than-expected contribution from some higher-margin commercial solutions. Can we get a little bit more color on that? And I am just curious because you typically have really good visibility. I am just still wondering what happened here. Theodore S. Hanson: Thanks, Jeff. Coming out of the fourth quarter, you naturally have certain projects come to their conclusion and you have a start-up of new work during the first quarter. In this quarter, while that is always a thing, the ramp-up of higher-margin solutions, especially in our enterprise software areas, was slower and later into the quarter than what our expectation was when we set the guidance. So really what we are seeing here in terms of the EBITDA margin miss is a gross margin issue; it is not an expense issue. We were, on an adjusted basis, below our expectations on the cash SG&A side, but on the commercial side within our consulting business, we did see a larger change than normal of the profile of the margin of the projects that contributed during the quarter. Second piece of that, Jeff, was in our federal business, we overperformed the revenue expectation, and the meat of that was in the cost-plus area. You have heard us say before that cost-plus contracts come in at lower gross margin. Typically, we run 20% to 20.5% gross margins overall; those cost-plus contracts can be high single-digit to low double-digit gross margins. And so that was certainly an influence. While we did a good job on the revenue on the federal side, the gross margin came in lower than what our expectations were at the forecast. And then, as Marie said, we had a little bit of contribution of negative impact from FX. So it is really the sum of those three things. Jeffrey Marc Silber: Okay. That is helpful. Let me play devil’s advocate here. You mentioned some softness in the enterprise software area, and I know the stock market seems to view a lot of AI disruption risk there. How do we know that is not a structural issue? Theodore S. Hanson: We came out of the fourth quarter with what I would call record bookings, especially in the Workday area, and solid bookings in ServiceNow and Salesforce—our three primary enterprise software practices. We just did not see the conversion to revenue at historical rates. Those are our highest-margin solution areas, and the delta between what we expected through the quarter and what actually happened was that the ramp-up of those was a lot slower from the bookings that we came out of the fourth quarter with. I do think the customers are watching very closely the AI story and making sure that if they are doing a new implementation or a significant upgrade or taking on new SKUs, that is money well invested. What we saw exiting the quarter and into April is a little bit more normal patterns in terms of both getting bookings and beginning to see the conversion of that. I think it was temporary, Jeff, because there was a lot of negative commentary and, obviously, a lot of negative play on those enterprise software stocks, and I think customers reacted accordingly. We are looking for better contribution here. The first few weeks of the quarter here in April are telling us that will be the case. I do not think it is going to be a rubber band, but I think it will build, and we will see a better margin profile. We gave you a better margin profile in our Q2 guidance, which is solely on the back of improving gross margins in both commercial consulting and federal consulting in the second quarter. Jeffrey Marc Silber: Alright. Appreciate the color. Thanks so much. Operator: Thank you. Our next question comes from the line of Maggie Nolan with William Blair. Please proceed with your question. Maggie Nolan: Hi. Thank you. What should we read into the financial services year-over-year decline as it relates to maybe the balance of the year? And have you seen any change in the first couple of weeks of the second quarter here? And then, just given that that is a segment with typically large spend on IT, any read-throughs to the other segments? Sadasivam Iyer: Maggie, as we mentioned in the remarks, what we are seeing is just continued tight management of expenditure in the largest piece of financial services for us, which is the big banks. They have stabilized, but there is really not an increase in spending that we are seeing at any measurable rate in that segment. That being said, we are seeing some green shoots in insurance and also some green shoots in diversified financials, which we expect will turn into revenue upticks for us in the second quarter. But the continued compression, or rather lack of uptick, we see in the big banks is why we see the continued decline, because they are the largest spender in the financial services industry. Theodore S. Hanson: And I think, Maggie, if you look at the sequential growth in supplemental for that industry, we always have a negative 3% to 5% from Q4 to Q1 for all the seasonal reasons that we talk about all the time. I would say Sadasivam is right on. There is a lot of caution there on behalf of those customers, but it is in line with what we would see seasonally. The real message is you are not seeing a surge or a pickup there; it is less about a sequential decline. Maggie Nolan: Okay. Great. Thank you. And then on the commercial IT book-to-bill of 1.1, I thought that was encouraging. Can you give a little bit more color on that—maybe the quality and duration of recent wins? Are you seeing shorter cycle projects versus what mix is longer-term solution-led work, and then just how that translates into your visibility for the remainder of the year? Sadasivam Iyer: If you think about the strength we are seeing from a bookings perspective, it is relatively broad-based across several areas. Other than some of the enterprise platform dynamic that Theodore alluded to, we are seeing a pretty big uptick in some of our cloud and infrastructure-type work in the technology verticals, especially around services we provide to our software companies. Those are generally longer-term bookings, so that is healthy from a mix perspective. We are also seeing longer-term bookings in cybersecurity and continued strength in our application modernization and engineering capabilities. I do not believe the durations have materially shifted, but overall durations are lengthening because of some of the cloud and infrastructure work and the volumes we see associated with that with our software providers. Operator: Thank you. Our next question is coming from the line of Kevin McVeigh with UBS. Please proceed with your question. Kevin McVeigh: Great. Thanks so much. I think you alluded to some unanticipated expenses in the quarter. Can you help us dimensionalize that a little bit? And coming out of Investor Day, I do not remember them being referenced. Is that something new, or did I miss it at Investor Day? Marie L. Perry: Hi, Kevin. The $12.8 million that we referenced are add-backs to EBITDA. When we talk about the $80 million of savings that we are going to achieve over the three-year period, those dollars that we provided for Q1 relate to the implementation of those. There is a component that is Quinox—costs associated with the Quinox transaction—and also our go-to-market, our back-office outsourcing, and then our ERP. In our guide for Q2, we gave a range of $8 million to $10 million, and those costs will come down throughout 2026. Theodore S. Hanson: Typically, Kevin, those strategic integration and acquisition expenses are immaterial. Since they are a little higher now for a few quarters and more known, Marie has been able to call them out and also give you a range for the next quarter. Kevin McVeigh: Okay. And then, Marie, can you remind us how much Quinox contributed to the Q2 guidance on revenue and EBITDA? Theodore S. Hanson: We only had them for a few weeks in Q1, so just a few million. Kevin McVeigh: No, for the next quarter. Theodore S. Hanson: For the next quarter—Marie? Marie L. Perry: Similar to how we treated TopLog, Kevin, we gave the full-year revenue contribution. For Quinox, it is $100 million, with growth of low to mid teens, and then EBITDA margin of low 20%. Theodore S. Hanson: So 2025 just at or just under $100 million, and we are expecting low double-digit growth rate in 2026. Kevin McVeigh: Right. Figure about $25 million in Q2. Is that fair? Theodore S. Hanson: That is about the math. Kevin McVeigh: Thank you. Marie L. Perry: Thank you. Operator: Thank you. Our next question comes from the line of Tobey O’Brien Sommer with Truist Securities. Please proceed with your question. Tobey O’Brien Sommer: Thanks. I was wondering if you could give us some color on the assignment business and get a sense for the trends there. And then on the government consulting side, with the presidential budget request, what are the implications for the business if you could—maybe think about it from a defense and intel and then also a civil perspective where there are some agencies with cuts? And then, last, on your transition towards consulting more broadly throughout the organization: you have had several executive hires announced recently. How is the sales force absorbing that? Are there any changes you are making internally to better align incentives and compensation to drive that change going forward? Theodore S. Hanson: On assignment, just Q4 to Q1, I would say sequentially it performed about like we expected. It was down low to mid single digits quarter to quarter. That is seasonally about what we see every year, so no surprises there. Pay-to-bill margins were pretty steady, and contribution of perm was pretty flat. So no surprises on the assignment side. On the government side, I think we are pretty well positioned with where the budget money is flowing. Obviously, there is a watch item for us with DHS, although all our contracts are being supported, but I do not think there is going to be a net increase there commensurate with what is going on in defense. On the defense side, there is a big new chunk coming. AI is going to be a big part of that. Data is going to be a big part of that. Cybersecurity is going to continue to be a big part of that. In those areas where we play, we are pretty well positioned. The money has been slow to roll out. In the first quarter—or at least the first two months—there was not a lot of activity because it really did not happen until the middle of the quarter. Not a lot happened in the second half of the quarter because there were plenty of other things the government was focused on. But now you are seeing a better release. We are seeing the cycle on new award activity pick up with volume, and we are expecting, at least in our projected pipeline of bookings, a better second quarter than first quarter in that area. As for incentives and sales force alignment, we have a normal amount of change going on. We are bringing more to bear for all these accounts, so the sales team is having to adapt—doing a lot more than just bringing IT staffing to these big clients. Our sales teams are getting used to bringing everything that is in the toolbox. Incentives change every year based on what we are trying to attack: how we allocate bonuses to certain objectives, what commission schemes may be, how we resource against account opportunities. If you have certain industries with really good growth prospects, then you are feeding resources into that. If you have other industries where you want to be for the long haul but it is not working as well right now, you may subtract resources. At the beginning of the year, that activity is always going on, so people see the normal ebb and flow of all of that. Sadasivam Iyer: As Theodore said, you are always looking to make tweaks and adjustments to incent the right behaviors aligned to your strategy, but a core tenet of that plan has not shifted. Operator: Thank you. Our next question comes from the line of Jason Daniel Haas with Wells Fargo. Please proceed with your question. Jason Daniel Haas: Great. Thanks for taking my question. We have seen the nonfarm payrolls index for temporary help bounce off the bottom a little bit in Q1. I am curious if you are seeing any green shoots in your business on the assignment side. And as a follow-up, you mentioned earlier that some of the sales of higher-margin solutions were slower and later in the quarter. Did any of that push into Q2? Theodore S. Hanson: Honestly, my experience is that IT really tracks IT spending. If our clients are spending on their tech stack, then that is a driver of our business. If they are more muted, then that is a tougher environment. Broadly in staffing, if you went down to the lower end like commercial, you would see that that has been resilient through all this. But on the white-collar piece and especially on the IT piece, it has about the same trend as IT spending. Sadasivam Iyer: Just to clarify the dynamic: we had record bookings in Q4, and our guide for Q1 assumed historical conversion. Two dynamics in Q1—ramp-up time for those projects was slower than anticipated, so how quickly those sales turned into revenue was not at the rate we expected. From a sales perspective in Q1, clients are deliberating longer before they pull the trigger on projects, so sales cycles are getting slightly longer. We are not seeing a material impact, and some of that has been factored into the Q2 guide. We see the recovery happening throughout the year. As Theodore said, it is not a rubber band because there is still a lot of uncertainty around macro topics, and that is what we are seeing in both buying cycles and conversion cycles. Operator: Thank you. Our next question comes from the line of Mark Marcon with Baird. Please proceed with your question. Mark Marcon: Good afternoon, and thanks for taking my question. Following up on the last point, you mentioned the gross margins are down. It seems like, on the consulting side, financial services clearly had a deceleration and was a weak spot. But coming off these high bookings, aside from mix, is there any way to disaggregate the gross margin compression and EBIT margin compression that we saw on the commercial side between pure mix versus any change with regards to bill rates or how profitable the actual contracts were? Are you seeing any pricing pressure? And how do you expect that to flow as these clients become more deliberative as the year unfolds? And then can you explain what is going on with the DSO, and how should we think about the free cash flow conversion relative to EBITDA over the course of this year? Sadasivam Iyer: We are not seeing a material compression in pricing. The most important thing that drove the gross margins down was really timing. As some of our higher-margin pieces of the business did not ramp up at the same rate, the solutions mix that drives our consulting revenue was different than what we thought it would be. We have higher-margin solutions and lower-margin solutions, and when the mix gets off kilter on some of the higher-margin pieces, it drives margins down. But unit pricing on GlideFast, Workday, and similar practices is not changing, which is why we said we will see the recovery in margin gradually throughout the year. It will not rubber band, but we are not seeing any deterioration in pricing. Marie L. Perry: On DSO and free cash flow conversion, a good rule of thumb is 60% of our adjusted EBITDA converting to free cash flow for the full year. There is seasonality around free cash flow and DSO. Last year, 2025, our free cash flow was actually slightly lower than what we are reporting this quarter in Q1. We ended the full year 2025 at 68% conversion. It is not 60% every quarter; it gradually gets there for the full year. Theodore S. Hanson: So the DSO is just a normal seasonal thing; we are not seeing any change in behavior with regards to how quickly clients are paying. Marie L. Perry: Correct. No change in behavior and no increase in bad debt. Mark Marcon: Okay. Great. Thank you. Operator: We have reached the end of the question-and-answer session. I would like to turn the floor back over to CEO Theodore S. Hanson for closing remarks. Theodore S. Hanson: Great. I want to thank everyone for being here with us today and for your questions, and we look forward to speaking to you next quarter at Everfor for our second quarter earnings release. Have a great evening. Operator: Thank you. This concludes today’s conference, and you may disconnect your lines at this time. We thank you for your participation.
Operator: Good day and thank you for standing by. Welcome to the Goosehead Insurance, Inc first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question-and-answer session. To ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. I would now like to hand the conference over to your speaker today, Maddie Middleton, Senior Director of Investor Relations. Maddie Middleton: Thank you, and good afternoon. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on expectations, estimates, and projections of management as of today. Forward-looking statements in our discussions are subject to various assumptions, risks, and uncertainties that are difficult to predict and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance and therefore, reliance should not be placed on them. We refer all of you to our recent SEC filings for a more detailed discussion of risks and uncertainties that could impact future operating results and financial condition of Goosehead Insurance, Inc. We disclaim any intention or obligation to update or revise any forward-looking statements except to the extent required by applicable law. I would also like to point out that during this call, we will discuss certain financial measures that are not prepared in accordance with GAAP. Management uses these non-GAAP financial measures when planning, monitoring, and evaluating our performance. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons period to period by including potential differences caused by variations in capital structure, tax position, depreciation, amortization, and certain other items that we believe are not representative of our core business. For more information regarding the use of non-GAAP financial measures, including reconciliations of these measures to the most recent comparable GAAP financial measures, we refer you to today's earnings release. In addition, this call is being webcast, and an archived version will be made available shortly after the call ends on the Investor Relations portion of the company's website at fusehead.com. Now I would like to turn the call over to our CEO, Mark Miller. Mark Miller: Thanks, Maddie, and good afternoon, everyone. Thank you for joining us today for our first quarter 2026 earnings call. I would like to begin by welcoming John Martin as our new Chief Financial Officer, succeeding Mark Jones Jr., who has been promoted to President and COO. John brings a strong combination of financial expertise, operational discipline, and a background rooted in technology and e-commerce, which aligns well with our focus on execution and our high-performance culture. The team is excited to welcome John and I know he looks forward to engaging with our investors and analysts in the quarters ahead. We are equally thrilled to see Mark expand his leadership responsibilities. John will report to Mark, and I will work closely with both of them, continuing my role as CEO. These leadership announcements are evidence of our commitment to a comprehensive succession plan and our focus on ensuring Goosehead Insurance, Inc has the right leaders for today and well into the future. Let me start by reinforcing something we have said consistently: Goosehead Insurance, Inc is a compounding business designed to drive long-term growth in policies in force, revenue, earnings, and ultimately, cash flow. We achieve that by operating a highly scalable distribution platform supported by world-class service. For the first quarter, we delivered strong and consistent financial results, with revenue growing 23% to $93 million, core revenue growing 15% to $79 million, and adjusted EBITDA of $24.4 million. Last quarter, we spent a significant amount of time discussing investments we are making in our digital agent platform and AI initiatives. We have been very intentional in prioritizing long-term value creation while managing to strong and sustainable margins in order to maximize shareholder returns. Today, I want to focus on the strong start to the year and how the investments we have been making are beginning to translate into tangible business results. Goosehead Insurance, Inc has always been a technology-forward distribution business, but over the past several years, technology has become even more deeply embedded in every part of how we operate. What is in front of us today is what I believe is the single largest opportunity our business and the broader personal lines industry has ever seen. In nearly every industry, customers have the ability to choose how they want to interact and transact. That has not existed in the independent personal lines insurance space—until now. Choice has always been part of Goosehead Insurance, Inc’s DNA. Historically, that choice has been centered around access to a broad set of carrier partners. We have proven that we are a market leader, providing clients coast to coast with access to over 200 underwriting partners. But today, we are expanding that definition of choice. We are now giving clients a choice in how they prefer to actually transact. For the first time in the United States, clients can shop, quote, and buy insurance through a true choice model—whether that is fully digital, partially digital, or entirely human-driven. During our last earnings call, we announced we went live with this capability with multiple auto carriers in Texas, including partners like Progressive, Liberty Mutual, Mercury, and Root. Today, we are excited to announce that clients can now digitally buy multiple homeowners products in Texas with carriers such as SageSure and Mercury. This is an important milestone in building a large-scale digital marketplace, which is now that much more achievable because of the real demand that now exists with our carrier partners. Carriers want this capability, and they want it specifically with Goosehead Insurance, Inc because of the trusted relationships we have built over decades, our access to large amounts of integrated data that drive better underwriting outcomes, and our differentiated go-to-market strategy executed through highly curated client acquisition channels. At the same time, the broader insurance shopping experience—particularly online—remains fragmented and often broken. You may see advertising across social media for AI insurance agencies that claim they can bind and service autonomously or headlines that declare instant best rates. Those false claims end up generating terrible experiences for the end user. Customers are frequently routed through lead aggregators and data resellers, creating the illusion of choice but ultimately leading to confusion, lack of transparency, and in many cases, poor coverage decisions. Goosehead Insurance, Inc’s digital agent platform is solving these pain points. We are delivering real choice, not just in product offering, but now in purchasing experience. And by implementing this platform with a targeted audience through our partnerships, we remain the trusted adviser our clients and carrier partners rely on. In the area of AI, we are now seeing tangible benefits as we roll out multiple use cases across our service organization. “Lily,” our AI-powered virtual phone assistant, is now fully resolving approximately 19% of all inbound calls without requiring transfer to a live agent. This improves speed to resolution for our clients and allows our service teams to focus on more complex and consultative interactions. In addition, we have deployed tools behind the scenes in areas such as intelligent case routing, which has allowed us to reinvest roughly 40 full-time service team members toward more complex and value-added interactions. These tools are driving real-time efficiency gains, while also adding scalability to what has historically been the most complex and labor-intensive part of our business. All of this progress is occurring alongside a rapidly improving product market. Our carrier partners are increasingly leaning into growth across both home and auto products nationwide. As pricing stabilizes and product availability expands, we are seeing consistent improvement in many of our key operating metrics. For example, our client retention continues to climb at a steady pace, and we expect to achieve 86% client retention during the year. Bind rates and package rates are increasing, supporting higher agent productivity. Given these strong market conditions, we believe the time is right to more aggressively expand our offensive capability with more agents and more geographies. When we spoke to you in February, I commented that we had fundamentally reset the corporate agent footprint. At that time, we had expanded into new geographies like Tempe, Arizona and Nashville, Tennessee. We are continuing to make excellent progress on this initiative. During the quarter, we opened three additional corporate offices in Seattle, the Washington, D.C. area, and Minneapolis, and we had a fourth opening in April in Indianapolis. As of the end of the first quarter, we now have more than half of our corporate agents outside of Texas. These three offices are outperforming our expectations, but even more importantly, these offices serve a strategic purpose that far exceeds the short-term production they generate. They are quickly diversifying our agent base, making Goosehead Insurance, Inc an even more attractive partner for our major national carriers. And these offices are talent incubators for future franchise ownership. Since the beginning of the year, we have launched 12 new franchises out of our corporate offices, all of which are outperforming the average franchises we have launched from outside of our ecosystem. In just their second month live, these 12 launches contributed new business production that was nearly 2.5 times the average franchise. Our existing franchise base also continues to lean into growth, with 133 franchises hiring at least one producer during the quarter, generating nearly 50% increase in gross producer adds year over year. As agencies continue to focus on hiring and driving productivity, they are reaching new highs with 208 franchises hitting monthly production records during the quarter. On top of that momentum, our enterprise sales and partnerships are rapidly gaining scale. What was a start-up inside the organization just two years ago is now meaningfully contributing to total revenue. When we step back, we are building more than an insurance agency. We are building a technology-enabled distribution platform that delivers real choice, frictionless experience, and better outcomes for clients and carrier partners. I want to recognize and thank our teammates. This quarter's performance is a direct result of their discipline, execution, and commitment to delivering a world-class client experience. I will now turn the call over to Mark Jones Jr., our President and COO. Mark Jones Jr.: And good afternoon to everyone joining us. I want to echo Mark's sentiment in welcoming John as our new CFO. I look forward to working closely with him in the future. What an exciting time it is here at Goosehead Insurance, Inc. We have now built the country's first choice online shopping experience in the history of personal lines insurance with our Digital Agent 2.0. As we enter into a new world for insurance distribution, it is important that we take a step back and fully understand what that means for clients, carrier partners, strategic partners, and agents alike. As Mark Miller discussed, for clients, you now have choice—not only in what underwriter you have access to, but how you engage and transact. Why did this never exist before? Because there has never been a personal lines agency like Goosehead Insurance, Inc. Selling and servicing multiple product lines across 50 states with over 200 carriers is a challenge no other company has been bold enough to tackle. A frictionless choice shopping model has many hurdles in development that cannot easily be solved by throwing money at the problem. It takes deep domain expertise across regulators, product knowledge, client behavior, and the inner workings of fragmented technology solutions across the industry. Each regulator has different requirements, each carrier has bespoke underwriting criteria and a differing technology stack with degrees of sophistication, and each client segment has unique needs and preferences. How are we able to solve this? We have been very intentional about our location in the value chain and distribution. We built strong and lasting relationships with our carrier partners to make sure our goals are aligned and we can deliver a differentiated experience to them. We have been thoughtful about geographic expansion so we understand the specific nuance of each critical state. We have spent 20 years and hundreds of millions of dollars in our history investing in technology to drive the industry forward. And we have always placed the client at the center of our universe, so we have a clear understanding of what matters not just at the initial sale, but throughout that client's entire life cycle. I am incredibly proud of our team for what we have delivered so far, but we are just getting started. In the coming quarters, we plan to continue to expand our offering with new carrier partners, roll out to additional states, and add features and functionality that improve the client experience and conversion rates to maximize the economic returns. As exciting as the rollout of our Digital Agent 2.0 is, I am equally excited about the direction of our corporate, franchise, and enterprise teams. As Mark Miller mentioned, we launched three new corporate offices in the quarter, including Seattle, the D.C. area, and Minneapolis, all of which are hitting the ground running. As we have discussed, we are highly intentional with where we grow our presence for the benefit of our teammates, our clients, and our carrier partners. Productivity in our corporate channel continues to improve, supported by increased lead flow and better conversion from a combination of the improving product market, expansion into untapped geographies, and investments in our management infrastructure. The enterprise sales team, which is fueled by our partnership efforts, continued its rapid growth in the first quarter, generating new business growth of over 70% and contributing approximately 20% of the production of new business commissions and agency fees. The partnerships that feed that team now include 2.3 million potential clients across mortgage origination and servicing, as well as 4 million potential clients from other home and financial services organizations. While there may be some overlap across our partner client base, that improves our likelihood of conversion as we increase the number of touch points we have with potential clients. The momentum we are seeing across our corporate and enterprise sales teams generated a new business commissions growth rate of 29%, the fastest pace of growth we have seen in nearly five years. The franchise business also saw strong acceleration in the first quarter, growing new business royalties by 14%. Our Agency Staffing Program, which we call ASP, continues to be a highly strategic asset, aiding our franchises in faster growth and expansion. Sourcing from the ASP program grew 53% over the prior-year quarter. Our average producers per franchise expanded to 2.3 from 1.9 a year ago. Total franchise producers at quarter end were 2,150, up 3% year over year. Turning to our financial results for the quarter, total revenues were $93.1 million, up 23% over the previous-year quarter, with core revenues growing 15% to $79.5 million. As we look towards the second quarter, we expect a similar growth rate in core revenues when adjusting for the $4 million of previously unpaid renewal commissions and royalty fees that we recovered from a carrier partner in 2025. Throughout 2026, we expect improvements in client retention from our strategic initiatives and the improving product market to begin to outpace the impact of slower year-over-year pricing in our book of business. We expect that to result in faster core revenue growth when combined with continued strong new business generation. Ancillary revenues, which are largely comprised of contingent commissions, were $11.9 million for the quarter, growing 141% year over year. Our outlook for contingent commissions on the year remains unchanged, at 60 to 85 basis points of total written premiums. We will provide more updates as underwriting performance advances throughout the year. Cost recovery revenue for the quarter was $1.7 million. During the quarter, we launched 20 new franchise locations across 10 different states. We also had 10 agencies exit the system and 63 agencies consolidate into another larger franchise. Total written premiums for the quarter were $1.1 billion, growing 13% over the previous-year quarter. Policies in force grew 14% for the quarter to 2 million. We expect the growth rate in policies in force to accelerate during the year as client retention continues to improve and we drive strong growth in new business production. Adjusted EBITDA for the quarter was $24.4 million, growing 57% and delivering an adjusted EBITDA margin of 26%. During the quarter, we demonstrated strong cash generation, with $22.9 million of cash flow from operations. Utilizing our excess cash, combined with drawing $26 million on our existing revolving credit facility, we repurchased and retired 985 thousand of our Class A shares, representing $49.8 million. We believe there is a significant market dislocation in our stock price, and retiring these shares will generate excess shareholder return. As of the end of the quarter, we now have fewer shares outstanding than we did at the time of our IPO. We plan to continue to be opportunistic with our remaining $148 million on our existing share repurchase authorization. We ended the quarter with $26 million of cash and cash equivalents and had total debt outstanding of $324 million. We remain committed to conservative balance sheet management and do not expect to add leverage outside of our historical precedent of 3 to 4 times trailing twelve-month adjusted EBITDA. We are reiterating our guidance for the full year 2026. Total revenues are expected to grow organically between 10% and 19%. Total written premiums are expected to grow organically between 12% and 20%. I am incredibly excited about the position our business is in. Our business is healthy and delivering strong growth, and because we have been prudent stewards of our capital, we are able to invest in new and exciting technology that we believe will change the industry to our advantage. Thank you to our teammates, partners, franchises, and shareholders for your continued trust. We are just getting started. We will now open the call for questions. Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment for questions. Our first question comes from Andrew Andersen with Jefferies. You may proceed. Andrew Andersen: Hey, good afternoon. How should we think about the 2026 PIF acceleration? Do you view this as more renewal retention-driven or new business-driven? And could you also help us think about seasonality in Q2 and Q3? Mark Jones Jr.: Yeah. Hey, Andrew. Thanks for the question. If you think about how big our book is, pretty clearly retention is what is going to aid in PIF acceleration more than what new business will, just given so much of the book is in the renewal base. We expect to see continued improvements in client retention. We mentioned in the prepared remarks that we expect to get to at least 86% during this year. That said, we are seeing really strong new business momentum, which is super fun to watch. You see the new business commissions line growing 29% in the first quarter. That is the fastest growth rate in the last five years. So it is a combination of both things, but the renewal side has a bigger impact on PIF. From a seasonality perspective, generation of new business will likely follow the normal seasonality trend, which would mean the second and third quarter typically contribute more than the first and the fourth quarter. I am not expecting that trend to change. Andrew Andersen: Thanks. In the past, you have addressed why AI is not a disintermediation risk at policy inception. But how do you ensure that increased digital convenience does not create a greater disintermediation risk at renewal over time? Mark Jones Jr.: I think the hurdles on the renewal side are even bigger than they are in new business generation—and that is not to downplay how challenging the new business generation aspect is. There is so much in terms of competitive moat that goes into our ability to actually put policies in force. But there is a lot of manual labor that cannot easily be automated on the back end to make sure policies continue to retain and that clients get all of their service needs met. I do not think people fully understand how much work goes into that. It would not be very easy to automate a lot of what we do. We have been able to take big chunks of work and automate it, but that is going to be a really long tail of stuff. And as you know, all of the economics in this business are in the renewal. So if you try to automate as much as you can, but you leave off some portion of it, you are not going to be able to actually generate profitability over the longer term. Operator: Our next question comes from Brian Meredith with UBS. You may proceed. Brian Meredith: A couple of quick questions here. First, just quickly on the Digital Agent, are the economics there the same as your other business from the perspective of commission rates that you are receiving from the carriers? Mark Miller: From the carriers? Yeah. Mark Jones Jr.: So it is a really interesting development, Brian. Because our go-to-market strategy with the Digital Agent is largely to integrate it into partners where we have good information about who the clients are, and we can make sure that we are providing carriers with really high-quality business. There has been increased demand to have outsized compensation in that partner and Digital Agent channel. That was not really something that we contemplated when we started this process, but it has been a positive development that carriers have indicated they may be willing to pay more for policies distributed that way. Brian Meredith: Interesting. And then what is the pipeline of potential new carriers on the platform, particularly for the auto insurance side? Mark Miller: Yeah, Brian. We have four auto carriers now already on the platform, which gives us really good coverage. As you know, auto is not as specific to region as home is. We have pretty good coverage and a couple more to be added in the next two months. It has been interesting to watch—initially there were a lot of hurdles for us to jump over to explain how this product will work, how we are able to safeguard underwriters and clients from making poor decisions through digital distribution. As we have had more and more conversations and explained why it will work so well with us, demand from new carriers wanting to get in line to get on the platform has been really fun to watch as well. There are people now saying, “How do we get involved because we feel like we missed the first wave?” We are focused on where our partners have client needs. We have been very focused on rolling it out in Texas and working on our conversion. It is kind of a new muscle for us—once you get them into the funnel, how do you get them to actually buy? So we are really focused on Texas, then we will roll out to the next biggest state and the carriers that we need to fill those states out. Brian Meredith: Great. Thanks. And then one quick numbers question. Commission rates that you are seeing across your book—are we starting to see them lift? Mark Jones Jr.: Yeah. The aggregate commission rate is now up year over year, which is great to see. The communication with carriers has all been around how we incentivize more growth, and if you want to incentivize more growth, compensation is a tool that you can use. In pockets of the country where there was maybe higher E&S usage in previous years, you can see that in the renewal commission rates, but I do not expect that to be a long-term thing. I am happy to see the aggregate commission rate now going up. Operator: Our next question comes from Thomas Patrick McJoynt-Griffith with KBW. Good evening. You may proceed. Thomas Patrick McJoynt-Griffith: A couple of questions around your Digital Agent. First off, is that experience really entirely targeted through your enterprise partnerships, or are you also advertising the Digital Agent as a full comparison and appearing in top-of-funnel search results? Mark Jones Jr.: We are not really trying to drive eyeballs to goosehead.com. What we want to do is put it in a place where it is going to drive the maximum value for everybody across the value chain, which we believe is through the partner channel. I think there is going to be stumble-upon business—we have stumble-upon business of people buying auto and home insurance directly through the website—but we have been really clear with our carrier partners about what the go-to-market strategy is, just so we can make sure everybody is having a good experience. So it is largely going to be with partners. Over time, that may evolve as the brand gets a little bit bigger, but we are not necessarily going to deploy a bunch of capital to try and draw eyeballs. It is not an efficient use of money. Thomas Patrick McJoynt-Griffith: Okay. Got it. And then my other question on Digital Agent. How do you balance the responsibility to the customer that is searching for insurance to the extent that they are using Digital Agent and there are only a couple carriers available for homeowners quotes, versus if they were to use a human Goosehead Insurance, Inc agent they might be able to see a lot more quotes with perhaps better coverage or better pricing? Mark Jones Jr.: What we have tried to do is make sure the areas we are bringing to the platform initially are the ones that do a disproportionate amount of the business in the geography that we roll it out in. We have got really strong coverage in both our home and auto carriers that are on the platform now. So it is not like you are getting a random one-off carrier that should not necessarily be writing a ton of business in your area. We also are able to build into the platform safeguards and kickouts that basically would say, you may be eligible for a certain carrier, but that is not probably the right spot for you to be. You should talk to an agent. That helps us prevent carriers from getting business that they should not get and from clients choosing options that they probably should not choose. Thomas Patrick McJoynt-Griffith: Got it. And last one if I could sneak it in. On the new business commissions, you said 20% of the new business is coming through—was that the partnership channel or was that through Digital Agent? Can you clarify what that number was? Mark Jones Jr.: That is coming from the enterprise sales team, which is largely the partnership channel. The Digital Agent is not today generating significant revenue, nor did we expect it to be generating significant revenue yet. We expect those contributions to start to begin really in the second half of the year as it gets more deeply integrated into our partnership base. But the enterprise sales team—which is the human fulfillment of our partner engine, which has only really existed now for about two and a half years—is growing really nicely and making meaningful contributions to the revenue growth rates. Operator: Our next question comes from Analyst with BMO Capital Markets. You may proceed. Analyst: Hi. Thanks. Maybe just on the new corporate state entries that you called out and the progress with Nashville and Arizona. Can you update us on how much of your premium was in Texas this quarter, and how you expect the evolving state mix to impact premium per policy as we move throughout the year? Mark Jones Jr.: For the first quarter, 37% of the premium was in Texas, down from 39% as of the end of the fourth quarter. So we are continuing to diversify the book, which is a really good thing. Each individual state has different puts and takes on the economics of their own policies. Where you usually see lower premium per policy, typically you get better bind rates and better package rates. So it all kind of comes out in the wash in terms of productivity. We were really strategic in the locations that we picked. They are areas that have good demand from our carrier partners—they want us to go sell new business there. They have got growing metropolitan areas. It is a good place to recruit from. It is the right kind of cost of living. I am really happy with where we have planted flags so far, and those offices are off to phenomenal starts. Analyst: Thanks. And then maybe just one on the guidance. The contingent commission number was really strong this quarter, but you did not bring up the lower end of your guidance for total revenue. Can you walk us through your thinking and how you are thinking about the cadence of revenue as we go through the year? Mark Jones Jr.: It was a strong contingency quarter, but like we have talked about in the past, the first quarter always includes some true-ups from the fourth quarter where we did not have enough information to record revenue or there was too much uncertainty on whether you would actually earn the commission. So we had an outsized number in the first quarter relative to history. That does not necessarily change our outlook on what contingency should be for the full year. It did not feel like there was a good rationale to update the guidance number given we still do not know if there is going to be big hail or hurricanes or fires. We will continue to keep an eye on that throughout the year. Analyst: Just as a follow-up, nothing has changed on your view on core revenue and the cadence there, correct? Mark Jones Jr.: Correct. We are still expecting acceleration in the second half of the year as the improvements in client retention begin to outpace the offset of the pricing impacts on year-over-year premium changes, as well as contribution from strong new business production across all three sales channels, really driven by agent productivity and adding a few more heads here and there. Operator: Our next question comes from Andrew Scott Kligerman with TD Cowen. You may proceed. Andrew Scott Kligerman: I am curious on the franchise producers. It looks like you were up quite a bit year over year on less-than-a-year producers, but those that have been with the company for more than a year declined to 1,525 from 1,577. Could you give a little color on why the more experienced producers came off? Mark Jones Jr.: Andrew, that is really the consolidation that has been going on in the franchise community, which as we have talked about in the past is really a good thing and done very intentionally in the business to create larger, more successful franchises. We continue to see that as super healthy. So that is largely going to be taken out of people that have been in the system for multiple years. What I like to see is that the agencies continue to reinvest that capital and hire more. We had really strong gross adds in the first quarter. I was really pleased with that. And we are seeing good productivity of those producers. It feels like the franchise community right now is probably healthier than it has been in many years. Andrew Scott Kligerman: And the producers per franchise— is that number up materially year over year? Mark Jones Jr.: Yeah. It is up something like 18% year over year. It is up to 2.2 to 2.3 versus 1.9 last year this time. It is moving exactly like we want it to. I still believe we can get to about five producers per franchise in a reasonable time frame. That is where you start to get a real scale business that operates a lot more efficiently than a sole proprietorship. Andrew Scott Kligerman: Got it, Mark. And then for those producers at the firms more than a year, the franchise productivity was up remarkably—from 30.6 to 37.4. Can you provide a little color on that sharp productivity increase? Mark Jones Jr.: That productivity number is on the per-franchise basis, not at the producer level. As more tenured agencies keep hiring, that is going to help drive total productivity per location. The individual producers underneath them are also getting more productive. That is a function of those producers ending up in franchises that are more in the top half of the community—the ones that have scaled infrastructure, good management practices, and demand high levels of productivity. We are continuing to push agencies to join that club: invest in your business, invest in your management infrastructure, and hold people accountable. That message is being well received. Andrew Scott Kligerman: One last one. The mortgage originators and other home and financial services operations where you are embedding your enterprise product—what is the moat that keeps Goosehead Insurance, Inc with these partners and keeps out the competition? Mark Jones Jr.: There are a lot of elements that generate a significant moat. We have the national scale and local expertise of our 2,500 agents across the entire country, which means we know how to handle your house in Miami, your house in L.A. on stilts, the one in the flats in Nebraska. We can handle everything that happens in your portfolio. We have the ability to route leads appropriately so you are getting to the best agent at the best time. We have the service function on the back end, which I believe is really differentiated in the industry and can deliver strong levels of retention, which is where all of the actual profitability in this business is. We have a better product offering than most other organizations with over 200 different underwriters. The technology to bind in the human world is, we think, much better than what other people have, and now we have the ability to bind fully digitally in a single location through a choice shopping model. To our knowledge, nobody else has that ability. That is a huge competitive moat. Operator: Our next question comes from Analyst with Cantor Fitzgerald. You may proceed. Analyst: Hi. Going back to retention, you mentioned expecting to get closer to 86% for 2026, and you are posting 85%. Can you provide some granularity around why it is taking longer for retention to improve than anticipated? Mark Jones Jr.: I would not say it is taking longer than anticipated. If you go back, we were at 84% for five straight quarters. We have now been at 85% for three. I am anticipating us to click up to 86% during this year. I am really pleased with the direction of the client retention number. It is continuing to grind upward. We have specific initiatives to try and accelerate the pace of that improvement, and the product market being in a really healthy spot now is super helpful for that. Analyst: Do you think the reason it is not as high as it once was is maybe agents are more focused on new business, while the servicing aspect does not have the training to deal with the big increases on the existing business? Can you give more detail there, at least on the programs you are trying to initiate? Mark Jones Jr.: Our agents’ job has always been to capture new business and deliver excellent service when they are talking to clients, but their main focus should be capturing new business. Our service function’s main focus should be retaining the existing business and delivering outstanding service. We have made a ton of structural and foundational improvements to our service function in the last couple of years. We feel like we are delivering an excellent value proposition to our clients. I think what is happening is people are frustrated that pricing got so expensive over the last several years. I do not know if that means consumer behavior has fundamentally changed and they feel like they need to shop more frequently. If they do, that actually benefits us because they will be shopping in an area where we provide the most options with the best service. If you are coming from a different agency, we should be able to provide differentiated value to you. Analyst: Thanks. And last question—looking sequentially at your Net Promoter Score, it has been declining since late 2024. Can you dig into what is going on there and if you have any further details? Mark Miller: This is Mark. I think we have said it before: the NPS score is more of an industry sentiment score, the way we use it. Steep price increases over the last three years, particularly in our biggest market in Texas, have been pretty steep. NPS is a 12-month rolling average, and we have talked about expecting it to come down over time, and that is what it is doing—it is behaving like we expected. We think we deliver an outstanding client experience, and NPS is kind of dislocated from retention rates at this point. Mark just talked about retention rates continuing to climb. We also do client surveys—those scores are extremely strong. So we think we are delivering a really good client experience. Operator: Our next question comes from Analyst with Truist. You may proceed. Analyst: Hi. Thank you. I am calling in for Mark Hughes. Your premium retention has been fairly steady lately, as you have mentioned, but doing a little math, the corporate retention has gotten substantially better over these last few quarters while franchise retention has dropped off just a bit. What is your experience in each channel that you think may be driving the difference here? And how many franchise locations were onboarded in the quarter? Mark Jones Jr.: One thing I would point to is the diversity of the franchise book versus the corporate book. The franchise book has more exposure to places like Florida and California where there was more commission rate pressure over the last several years. As you write more new business into the excess and surplus lines or even the state-run plans, as those become a larger portion of the book, it can drag down your revenue retention rates. I am not anticipating that continuing to be an issue. I am expecting client retention to outpace that in the second half of the year. The corporate team is much more in places like Texas and Illinois, where there is much more admitted product versus the excess and surplus lines. We onboarded 20 new franchise locations in the quarter—20 new agencies, 12 of which were launches from the corporate team. Those are performing at about 2.5 times the average external launch. That strategy continues to be really important and strategically hard to replicate. Operator: Our next question comes from Pablo Singzon with JPMorgan. You may proceed. Pablo Singzon: Hi. Good afternoon. I wanted to ask about the growth in enterprise. I think you had quoted 70% growth year over year. How much of that was headcount versus productivity? And how are you thinking about that channel as it scales up? Mark Jones Jr.: Enterprise right now—growth is coming from nice, stable, strong productivity, and we are adding more heads into the system. We have built out a strong partner base and have an awesome pipeline of potential new partners. We can meter the lead flow to make sure we do not get over our skis and cannot deliver on the service we are supposed to deliver. We are adding heads now to the point where we feel like we can continue to execute on 100% of the lead flow. We just want to load-balance that appropriately. Tenure on that team is still pretty low because it has only existed for a couple of years, but you are seeing at the top end of the tenure curve the people who have been with us for a while now perform equal, if not better, than the average corporate or franchise agent. Over time, it is still a three-pronged approach: we want the enterprise team to operate at speed and deliver for our partners; we want the corporate team to be the talent incubator for the entire organization, to demonstrate best practice and show how high productivity can be; and we want the franchise team to be the growth engine that can get to every place in the country without a massive infrastructure. Operator: Our next question comes from Analyst with RBC Capital Markets. You may proceed. Analyst: Hi. Good evening. Last quarter, you talked about EBITDA margins being flat to down a little this year, and I was wondering if this quarter changes that expectation. Mark Jones Jr.: If you look ex-item, the expense base was slightly lower than what we were initially planning for in the first quarter. That was really just a function of timing of hires. If you look at compensation expense in Q1, I think it only grew 5%. I would not expect that trend to continue throughout the rest of the year as we onboard more talent to deliver Digital Agent integration into partners, marketing conversion-type roles, additional sales headcount, and then some more service headcount to handle the additional workload that comes throughout the year as we continue to sell new policies. On the G&A side, it was a big G&A first quarter because we had our conference with the top end of our franchise community in Q1 this year, which was in Q2 last year. That was approximately about $1.5 million of expense in Q1 that was not in Q1 last year. If you round all that out, timing of compensation was a little bit delayed relative to initial Q1 expectations, so you should think of that as maybe high-teens to low-20% growth rates throughout the remainder of the year. G&A was higher in Q1 than it will likely be throughout the rest of the year, but that does not necessarily change our margin outlook for the full year. We still have some Digital Agent investments to make and we want to be leaning into growth right now. Operator: Our next question comes from Katie Sakys with Autonomous Research. You may proceed. Katie Sakys: Thanks. I just wanted to circle back on core revenue growth. I think you previously framed first half as coming in closer to low double digits when we heard from you in February. Clearly, 1Q outperformed that. Do you expect 2Q to also trend higher than those initial low double-digit expectations before it further accelerates into the back half of the year? And then on an annual basis, you previously suggested about 10% of corporate agents launch their own franchises. Is that still the right run-rate? Mark Jones Jr.: Katie, I would just make sure you are tracking the $4 million from the second quarter of last year—that is a year-over-year comparison challenge. We talked about low double-digit first half, not necessarily in each individual quarter. In our prepared remarks, we said core revenue growth rate, when you adjust for that $4 million comparison challenge, will look similar to the first-quarter number. From that point, you should expect to see the renewal book begin to improve its performance, driving faster core revenue growth rates. On the corporate-to-franchise launch rate, that is certainly the right rate to be thinking about over time. In the last twelve months, we have launched 30 corporate agents into their own franchises, which is ballpark 10%, and, as a close adjacency, we have also seeded about 10 corporate agents into existing larger agencies or embedded partner franchises when it is a good fit. That is completely aligned with the strategy—we want the corporate team to be the talent incubator where we grow the best of the best. Operator: I am not showing any further questions at this time. I would now like to turn the call back over to Mark Miller for any closing remarks. Mark Miller: I just want to thank everybody for joining us today. It is an exciting time to be part of the Goosehead Insurance, Inc business, and we look forward to talking to everybody again in July for our second quarter call. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the CSX Corporation First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 a second time. Thank you. I would now like to turn the conference over to Matthew James Korn, Head of Investor Relations and Corporate Communications. You may begin. Thank you, Abby. Matthew James Korn: Good afternoon, everyone. We are very pleased to have you join our first quarter 2026 earnings call. Joining me from the CSX Corporation leadership team are Steve Angel, president, chief executive officer; Michael A. Cory, EVP and chief operating officer; Kevin S. Boone, EVP and chief financial officer; and Mary Claire Kenny, senior vice president and chief commercial officer. In the presentation that accompanies this call, which is available on our website, you will find slides with our forward-looking and our non-GAAP disclosures. We encourage you to review them. With that said, I am very happy to turn the call over to Mr. Steve Angel. Steve Angel: Good afternoon, and thank you for joining our call. I am pleased with the strong start to the year that our railroaders have delivered. We made great strides in safety, managed through weather challenges, and advanced our efforts to improve efficiency and streamline our cost structure. The progress we have made can be seen clearly in our quarterly results. Volume and revenue grew year over year, while operating expense moved substantially lower, which led to significant margin expansion and EPS growth. Solid earnings and continued capital discipline helped drive higher free cash flow. Altogether, this represents an encouraging first step toward our goal of best-in-class performance. At the same time, we recognize that we are still early in the process, and market conditions remain uncertain. As Mary Claire will discuss, conflict in the Middle East and rising energy prices are creating opportunities for some of our customers, but this has also added to broader concerns about inflationary pressure and potential effects on consumer sentiment. What remains constant is our focus on execution. Our team is responding to customer needs by expanding our service offerings, improving transit times, and converting freight from truck to rail. We are also moving forward on a wide range of cost initiatives as we push to develop the productivity muscle required to sustain performance over the long term. I will now turn the call over to Michael A. Cory to cover our safety and operational highlights. Michael A. Cory: Thank you, Steve. Slide five shows highlights for our safety and operational performance. Best-in-class performance starts with safety, and we made good progress in the first quarter. Our FRA injury rate improved by 13% compared to last year, that is with a 9% reduction in people hours. Our train accident rate improved by over 30%. Operating safely benefits our employees and our customers; it allows us to run a more fluid, efficient network. We remain committed to developing a culture at CSX Corporation where effective risk awareness and safe operating practices are consistent across our organization. Operationally, we successfully managed through the severe winter storms that covered most of the Midwestern and Northeastern United States through the quarter. Our key metrics compare favorably to last year, when closures due to the Blue Ridge reconstruction and the Howard Street Tunnel project impacted our resilience. Train speed, dwell, and cars online all improved on a year-over-year basis. We also delivered record first quarter fuel efficiency of 0.97 gallons per thousand gross ton miles and achieved 0.93 gallons per thousand GTMs in March, our best performance since 2021. Performance at our intermodal terminals has been very good, even as we have absorbed substantial new volume. For example, the team at Fairburn in Atlanta handled a 15% increase in intermodal lifts with our expanded domestic business in the Southeast while maintaining service our customers can count on. As well, the team has been very effective in finding and eliminating inefficiencies. Our engineering and network groups have been improving productivity substantially through more efficient use of work blocks and better overall coordination with our transportation groups. We have seen double-digit efficiency improvement in rail and tie installation to start the year through disciplined curfew execution. I am extremely proud of this team and what we have accomplished. There is so much more that we are working toward. We have great momentum, and our goal is to build on these successes as we progress through the rest of the year. With that, I will turn it over to Kevin for financial results for the quarter. Kevin S. Boone: Thank you, Mike, and good afternoon. As both Mike and Steve noted, 2026 is off to a strong start. Volume and revenue are up, while costs are lower across the company throughout CSX Corporation to drive efficiencies. These results reflect significant work and partnership in nearly every part of the business while maintaining our commitments to safety and customer service. Total revenue increased 2% on 3% volume growth, as pricing gains and higher fuel recovery were offset by business mix impacts. Total expenses fell by 6% from the steps taken to improve our cost structure and improve network fluidity. As a result, operating income increased 20%, with earnings per share up 26%. Turning to the next slide, total first quarter expense decreased by $153 million compared to the prior year. The variance includes over $100 million of year-over-year efficiency savings plus other benefits from real estate and the lapping of network disruption costs, partly offset by inflation and higher fuel prices. Labor costs were 1% lower, as a 5% reduction in headcount paired with a $10 million reduction in overtime expense offset inflation. PS&O savings were broad-based, benefiting from increased accountability for discretionary costs, eliminating wasteful spend, and improved asset utilization. As an example, CSX Corporation’s vehicle fleet is 7% smaller relative to 2024, including opportunities we found to turn in costly equipment rentals that will reduce both operating expense and capital spend. We will continue to press on these costs at the individual asset level, and new tools will support accountability and address unsafe and inefficient driving practices. We are bringing cost control to the front lines of the organization, educating our leaders on costs beyond their own budget. As Mike mentioned, our engineering group has found ways to drive efficiency, including less use of overtime labor, which will reduce capital spend this year. Along the same lines, we are improving visibility of freight car hire expense, so our field leaders can support the network center in managing the cost pool of over $1 million of spend per day. While fuel expense was a headwind in the quarter, given higher diesel prices, we delivered a record first quarter fuel efficiency and remain focused on reducing both locomotive and non-locomotive fuel spend. As we move into the second quarter, we do expect some non-seasonal expense from incentive compensation, timing of contractual locomotive costs, including overhauls, and advisory costs related to industry consolidation. As Steve noted, our focus is on creating a sustainable efficiency process that provides our leaders with tools and data visibility while empowering these same leaders to take action. We are not lacking opportunity to continue to improve as we look forward to the years ahead. With that, I will turn it over to Mary Claire to review revenue results. Mary Claire Kenny: Thank you, Kevin, and good afternoon, everyone. Our business performed well in the first quarter due to the great work of the commercial team and our strong partnership with the operations group. Early on, cold weather and storms weighed on shipments in certain markets, but our network was resilient. We stayed connected with our customers and finished March with momentum, supported by new business, reliable service, and favorable trends in select markets. We had a good start to the year, and we see several positive indicators entering spring. Looking forward, we remain nimble and customer-focused while executing on initiatives to expand our network reach, improve our customers’ experience, and drive profitable growth. Slide 10 covers first quarter volume and revenue performance. Overall, total volume was up 3% in the quarter, while revenue was up 2%. Business mix impacts led to a 1% decline in total revenue per unit. In merchandise, volume was flat year over year, while revenue and RPU grew 2%. Same-store pricing was in line with our expectations, so total merchandise revenue per unit was impacted by mix. Looking at some of the individual markets, minerals growth led merchandise, up 4% in volume, supported by cement and salt shipments. Chemicals was supported by higher frac sand shipments as data center demand drives natural gas production, and strength in plastics as domestic producers benefited from overseas supply chain disruptions. Fertilizers saw gains as phosphate exports out of the Bone Valley improved. On the other hand, forest products continued to drag with volume down 9%. We are facing difficult comps as we cycle closures that occurred in 2025, while demand remains impacted by weak housing. One emerging positive here is that shippers are looking more to rail conversion as they weigh the impacts of higher fuel and trucking costs. Intermodal was strong this quarter, with revenue up 5% on a 6% increase in volume. New business with key customers benefited us in both international and domestic markets. Mix was also a factor, with RPU down 1% as we saw substantial growth in our inland ports business, which tends to be shorter length of haul. Finally, revenue for our coal business declined 1% on 1% lower volume, with domestic tonnage slightly up and exports slightly down. Utility coal demand remains high, and strong operational performance in March supported customer restocking, but export shipments were impacted by cold weather that temporarily reduced loading. Sequentially, global met coal benchmarks remained largely flat, but coal RPU benefited from a favorable mix. Slide 11 covers highlights of our market expectations for the rest of 2026. Starting with merchandise, we see near-term opportunities in chemicals, as domestic plastic producers have a stable supply of feedstocks and look to capitalize on global supply imbalances. Commodities like aggregates, cement, and construction steel remain in high demand for infrastructure projects. Our metals business should also benefit from the ramp-up of new facilities we serve. Housing affordability remains a real headwind, particularly with our forest products business, where we have seen additional closures year to date. Automotive continues to be pressured by lower production and the extended retooling of a major plant on our network. Our intermodal business has good momentum, with tighter trucking supply and higher diesel prices creating tailwinds for freight conversions. Customers are also responding well to new, faster service options. We are completing the final infrastructure improvements on the former Meridian & Bigbee Railroad and we will soon be launching improved service with CPKC on our SMX product. SMX provides truck-competitive transit between major markets in the Southeast, with Dallas and Mexico, and recent investments will enhance both speed and efficiency. Additionally, the final infrastructure improvements around the Howard Street Tunnel clearances are nearing completion. When complete, we will shave a day off our East-West transit and will connect markets in the Southeast with markets in the Northeast more efficiently than ever before. Our international performance has been strong against challenging year-ago comps. Though energy cost inflation poses risk to consumer demand and imports, export coal should see the benefits of reopened mines. Power demand remains strong, supporting domestic utility volumes. We do have two facilities on our network now scheduled to shut down in the second quarter, but plant-life extensions present potential upside. Global met prices remain relatively stable, and we expect that to persist amid challenged global steel demand. On the next slide, I will provide an update on our industrial development program. Our team is positioning CSX Corporation rail as a compelling solution for new and expanding manufacturing facilities. Our pipeline of approximately 600 active projects remains strong. Twenty-one projects went into service over the first quarter alone, which should contribute an estimated 33 thousand annual carloads at full ramp. For the full year, we expect approximately 100 projects to enter service. This is a very strong year, with multiple facilities coming online that were approved three to four years ago. For context, these 100 projects are expected to contribute roughly 50% more volume at full ramp than last year’s 85 projects combined. The map on this slide gives detail on our Q1 projects in service, including highlights for three key projects. We worked with Keystone Terminals, a bulk commodity terminal in Jacksonville, Florida, to develop a new rail extension enabling synthetic gypsum shipments to move on our network. Martin Marietta expanded a rail-served aggregate loading facility in Green Cove Springs, Florida, with new rail infrastructure. With strong demand in this market, this facility is expected to reach full ramp by the end of Q2. We also supported Diamond Pet Foods with a multistate site search that settled in Indiana. Our team worked with the company to develop a complete track design that was incorporated into their site plan. I am proud of the depth of work across our sales, marketing, and industrial development teams as they continue to build the strong customer and community relationships that underpin our growth efforts. With that, I will pass it back to Steve. Steve Angel: Thank you, Mary Claire. Now we will review our updated guidance for— Kevin S. Boone: 2026 on slide 14. Our revenue performance was in line with our expectations and showed favorable trends as the quarter progressed. We remain encouraged by the opportunities ahead for the balance of the year. The change to our top-line outlook is largely driven by higher-than-expected energy prices, particularly diesel, which will begin to lift fuel-related revenue starting in the second quarter. Including fuel, and assuming diesel prices follow the forward curve as of this week, we now expect full-year revenue growth in the mid-single digits versus low single digits previously. As you know, higher fuel increases our revenue and our expenses, which can pressure reported margin. That said, we are pleased with our cost performance year to date, and as I described, we have a broad range of productivity efforts underway that position us well for next year and beyond. As a result, we anticipate year-over-year operating margin expansion of 200 to 300 basis points, but we now expect results to trend toward the high end of that range. We still expect total 2026 capital spending to be below $2.4 billion, and we now anticipate— Steve Angel: Free cash flow to grow by more than 60% compared to 2025. In closing, I want to thank everyone at CSX Corporation for their contributions to a successful quarter. We remain focused on our goals and are confident in our ability to continue this momentum through 2026 and beyond. And with that, Matthew, we will open it up for questions. Matthew James Korn: Thank you, Steve. We will now proceed with the question and answer session. In order to ensure that we maximize everyone’s opportunity, we ask that you please limit yourselves to one and only one question. Abby, with that, we are ready to begin. Thank you. Operator: Yes, if you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, it is 1 to join the queue. Our first question comes from the line of Christian F. Wetherbee with Wells Fargo. Your line is open. Christian F. Wetherbee: Yes, hey, thanks. Good afternoon, guys. I guess, just looking at the guidance here, maybe we will start where you guys wrapped up. In my math, higher fuel adds about 100 basis points to the operating ratio or takes away 100 basis points from the operating margin as we think out through the rest of the year. And so to maintain it and then, obviously, bias the high end is a good outcome. I was hoping maybe you could outline some of the productivity opportunities that you have uncovered—maybe could put some numbers around it, that would be great—but also what is left to come as the year progresses? How should we be thinking about that upper end of the 200 to 300 basis point range as we go through the next several quarters? Kevin S. Boone: Yes, Chris, thank you. Obviously very, very happy with the start to the year. When we convened in the fourth and came up with a plan, that plan consisted of over 100 different initiatives. That is a lot of work by a lot of different people throughout the organization coming together and driving progress. Quite frankly, a lot of the things that we knew were there, the team delivered maybe even more quickly than we thought they would, and you are seeing that in the first quarter results. I think your math around the fuel surcharges is relatively directionally correct. Obviously, a lot of uncertainty on where fuel will end up through the rest of the year, but when you look at the initiatives, clearly you saw a lot of progress on the PS&O line item, and that is a lot of work everywhere. I talked about vehicles. When you look at energy costs, that is one that we are really talking a lot about internally—not only locomotive fuel, but fuel related to vehicles and other areas, utilities. Utility spend is a big part of our spend as well. I would say energy over the next few months is going to be in the crosshairs of everything we are trying to do to drive efficiencies. Vehicle spend, as I mentioned, but the list goes on and on, and we continue to develop that. What our progress has done is given us the opportunity to now think about 2027 and start to build that pipeline. So I am excited about that progress. I cannot thank Mike and his team enough for all their work. It has been a group effort to go after it, and I expect us to continue down this path. We have to hold on to these initiatives, so that will be the big focus as we continue through the year—delivering on the plan that we set forth in the fourth quarter. Operator: Our next question comes from the line of Kenneth Scott Hoexter with Bank of America. Your line is open. Kenneth Scott Hoexter: Hey, great. Good afternoon, and really great to hear and great job on the cost side and the progress there. Exciting to watch the potential. If we think about, Mary Claire, the service, the Howard Street Tunnel, Port of Baltimore project, maybe just talk about timing and scalability of when the double-stacking is going to be fully launched and loaded? And then how quickly can we see it? Because you are already posting mid-single-digit growth now. What can the system handle, and how quickly can we see that volume ramp up? Thanks. Mary Claire Kenny: Yes. I would say on the Howard Street Tunnel, we have talked a little bit about it before, but we are really excited about this project. It has been a long time coming, and the operating team really did a phenomenal job last year getting the work on our end completed. The last bridge should be complete in the next week or so, and then we will have double-stack access. We have talked about it before. There are a couple of things this unlocks for us. One, it is additional capacity and efficiency on the East-West corridor. So you think about going from Western U.S. to Baltimore or vice versa, even Chicago to and from Baltimore. It essentially doubles our capacity there, and it is also going to take about a day out of our current transit. We are really excited about that. It also grants us efficiency on the I-95 corridor. We have really fast service, great service from Florida up into Jersey and Baltimore. Once again, we will have double the capacity there, and we are excited to unlock that. The third component is it allows us to efficiently serve markets that we really could not before. We are adding connection points when you think about places like Atlanta up into the Northeast—and when I say Northeast, New Jersey, Chambersburg, Philadelphia, places like that. That is newer service that we have not traditionally offered because we could not be efficient with that in the past. That will take some time to build. We have been talking to our channel partners and shippers for a while about this; they are very excited about it. We are coming to the tail end of this year’s bid season, but we are seeing some traction, and that will continue to build over the course of the next year or so. From my past experience, I would tell you new services typically take a couple of bid seasons to really get to full ramp. Operator: Our next question comes from the line of Stephanie Moore with Jefferies. Your line is open. Stephanie Moore: Great. Thank you for the question. I wanted to maybe touch on what you are seeing from an overall macro and freight environment. I believe your guidance—at least the prior guidance—did not assume any kind of macro recovery. I am assuming the current revenue guidance also does not assume any macro recovery. Just wanted to get your sense on what you are seeing in the market and the level of conservatism with that underlying assumption. Thanks. Mary Claire Kenny: Yes. I will do a little update on the markets. I talked about some in the prepared remarks. As we came into this year—what we talked about back in January—we saw opportunities in a few markets, but we also saw broader headwinds with industrial production. Baselining what we said in January, we talked about areas around infrastructure investment we still felt very positive about. Think about the aggregate side of the business; think about metals that go into construction—pipe, plate, rebar—those areas we felt good about. We also felt good about our domestic intermodal business with truck conversion opportunity and new services that we had launched. On the other side, a lot of our business is tied to housing and automotive, and those markets have been pretty bleak. As we sit here today, we have not really seen improvement in either of those areas. Auto production still right now is forecast to be down about 2% this year. We have mentioned a few times we have a large plant on our network that is down for the year for retooling, and that is another headwind for us. On the housing side, it is an affordability issue. Interest rates are still high, and they have bounced back up a little bit after everything that has happened in the Middle East. Those are still headwinds. Additionally, in our forest products business, we talked last year about paper and pulp mill closures that we have to overlap, and we will not really surpass those until later this year. Those elements from the beginning of this year have not changed. Where we have seen a bit of a difference is, one, with the conflict in the Middle East, we saw improvement at the tail end of last quarter and into the beginning of this quarter in the plastics business. Domestic producers have opportunity here given feedstocks. Not sure how long that will last, but that has been a more positive upside than we expected coming into this year, when we originally had seen global oversupply in that area. The second area is, with higher fuel prices, that increases the value proposition of rail. We are more optimistic today than we were in January in terms of truck conversion opportunities—primarily in our domestic intermodal business, but some other areas too, like our forest product segment. Operator: Our next question comes from the line of Scott H. Group with Wolfe Research. Your line is open. Scott H. Group: Hey, thanks, guys. So I do not know if Steve or Kevin— we have seen just such massive inflation in that PS&O line the last four years. You touched on it a bit earlier, but seeing some good progress in the first quarter on lowering that— is the $60 million a good run rate, or is there more opportunity to go on fixing this PS&O line? And then maybe if I can— there is just a lot of noise. We had a gain in Q1. We have got fuel moving around. Any thoughts on how to think about sequential margin improvement from Q1 to Q2? Thank you, guys. Kevin S. Boone: Yes. PS&O makes up a lot of different things. I would say Steve would say we are never done there. The procurement team continues to push our vendors for value, and that is going to continue in earnest. There are a lot of different components. It was an area where I and the team definitely saw a lot of opportunities for improvement. In terms of sustainability, we are going to continue to go after it, and, as I mentioned earlier, Mike and team along with the finance team are already pivoting to 2027 and looking at all the cost line items and seeing where there is opportunity. There is absolutely more to come. We are going to layer it in and be very thoughtful on how we think about those costs. Looking at second quarter, we will not have the real estate gain that occurred in the first quarter of $44 million. I did mention the overhauls on the engine side that will be a little bit higher than what we saw in the first quarter, and transaction-related costs that I mentioned. I would also say fuel at higher levels for the second quarter—which we anticipate being higher than on average for the first quarter—will by default have some pressure on the margin side just given where fuel prices are today. But that only motivates the team to go after those costs and drive more efficiency. The focus right now is to deliver the plan that we laid out in the fourth quarter and make sure that everybody is being held accountable to that, then start to build a pipeline for the years ahead to continue the cost efforts going forward. Operator: Our next question comes from the line of Brian Patrick Ossenbeck with JPMorgan. Your line is open. Brian Patrick Ossenbeck: Hey, good afternoon. Thanks for taking the question. Maybe just one quick follow-up for Kevin to start: the gain on sale—I know this can be lumpy. Is that what you expected coming into the year in terms of a run rate for the rest of the quarters? How should we be thinking about that in the back half of the year, since you said it is not going to occur into Q2? And a broader question for Mike: obviously a lot of productivity gains are starting to come through. Maybe the dwell time being a little bit elevated in some of these terminals that we are looking at does not have as much of an impact as we might think from the outside looking in, but I would like to get your perspective. While there are easier comps year over year and it is still improving out of tough weather, some of the areas are up quite a bit in terms of the dwell time. Is that a mix perspective? Is that reworking some of the yard and the systems? I would like to hear your thoughts more on that point in particular. Thank you. Kevin S. Boone: Alright. Let us take care of the real estate. We did anticipate this coming into the year—the $44 million. I would not expect anything of this size the remainder of the year. We always have some small things that come through, and Christina and her team do a great job of identifying those things, but nothing as material to this point. There are always things out there, and whether we are able to convert them and pull them forward, we will see—but not currently in the plan for this year. Michael A. Cory: Thanks for the question, Brian. As Kevin talked about before, our productivity initiatives are really broad-based and across all operations. The overall focus is on waste, cutting overhead, and especially improving our capital efficiency. We have been really disciplined with our engineering work teams’ start times and the full completion of their allotted time. As an example, this year we have been close to 100% on our curfews—the track outages—versus, I would say, 60% to 70% the last preceding years. In cases where we do not get the work done, that is a safety liability, and the overall cost is tremendous. In some cases, to get this work done this year, we have impacted our train and yard plans because we are instilling new methods of performing the work. Closing down a line or a portion of the yard for 24 hours and working continuously has caused some rerouting of trains and traffic, and it has caused delay. That is not our design, but more so a learning opportunity at this point to gain that efficiency to see if we can do it. The plan going forward is to build the right plan around the work that we are doing and the things we are learning from. The focus in the last 30 to 45 days on these efficiency opportunities is really starting to show us where not only we have to dig in and improve, but also places that we need to do some capital work. Some examples we are in progress on: in our yard in Cincinnati, we are completing power switches this year, and we have begun the work in Nashville the same way. We have identified work on sidings over some of our busy Southern corridors to increase fluid activity. Our focus is always on improving those operating metrics, and as much as we are deeply engaged on safety and service, we are driving equally as hard on the internal metrics. We are trying different things to create overall productivity. We are all very aware of the dwell and the train speed, and that is a huge focus for us, and we will bring that back in line, but we are not going to stop trying to get smarter and better in how we deploy all our costs. Operator: Our next question comes from the line of Brandon Oglenski with Barclays. Your line is open. Brandon Oglenski: Hi, good afternoon, and thanks for taking the question. Steve, you are another quarter into the job here, and I know you and the team have aspirations to drive higher return on invested capital. This question is a little open-ended, but I would like to get your input on it. As you look at it today, to drive a higher ROIC in the future, is it really asset productivity, improved business mix or pricing, cost efficiencies, or all of the above? Would love to get some direction on that. Thank you. Steve Angel: Sure. You have a numerator and a denominator in return on invested capital. I have had a lot of experience with this over the years. The best way to drive return on invested capital is to drive the numerator. That is improving our operating margin performance, growing operating income—that is the top line. You have seen our guidance for the year. You have heard both Kevin and Mike talk about the fact that we are working on 2027 productivity initiatives as well as executing during 2026. That is really the secret to driving that top line—to make sure we build that productivity muscle so that we can count on that contribution year in, year out. On the capital side—the denominator—it is being more prudent in terms of how we spend capital. Certainly that has an impact. Mike talked about how we are performing our engineering work in concert with transportation so that we are much more efficient and effective in terms of how we execute significant projects. I would say we were kind of in a mode where we had lots of projects going on simultaneously, not really making the progress we needed in bringing them to conclusion. By working more in a block mode, we are able to execute large projects more quickly, more efficiently, spend less dollars, and get the benefit of that investment. That is just one example on the capital side. Kevin is heavily involved managing the capital funding process. We look at every project now. Everyone has to stand on its own. We follow them individually. We are going to make sure we are executing the way we need to execute. Longer term, when you look at capital spend, I think predictive analytics can play a major role in focusing our capital spend, certainly on the infrastructure side. We can prioritize that spend based on what is needed—not necessarily what we think we need to do from a maintenance standpoint, but what the analytics and the data tell us we need to prioritize in terms of spend. As we move down that path and do a better job with that, I would expect our overall capital spend would be lower year over year because we are spending the money on the right things as opposed to what we believe based on experience we need to spend the money on. All that is a long answer to say that is how I think about return on invested capital. We said we want to be best in class in a lot of metrics. That is one of them. The way to do that is continue to drive that numerator north, grow our earnings year over year, and manage our capital spend very effectively. That is how we will do it. Operator: Our next question comes from the line of Thomas Richard Wadewitz with UBS. Your line is open. Thomas Richard Wadewitz: Yes, good afternoon. Wanted to ask a bit about the pricing side. There has been a pretty substantial and rapid tightening in the spot market, and I think contract rates going up quite a bit too. For Mary Claire or broader, how should we think about the time lag between that and what you could see in intermodal or merchandise pricing? Is there some of that that can benefit you in the second half, or is this really like, it is great to see, but we should expect more pricing in 2027? Then within the quarter, are you seeing any change in underlying pricing in merchandise? I know you talked about mix being a headwind, but is that kind of similar to what it has been or any change there? Thank you. Mary Claire Kenny: Yes, thanks for the question. We talked about pricing last quarter as well, and I would say it is an area I looked at as I came into this role. We have said before that on a same-store basis, pricing should be better this year than what we saw last year. We deliver an important service product for our customer, and it is important that we ensure we are pricing appropriately and getting the value for the service we deliver. In merchandise pricing over the course of this year, discretionary pricing—what we can touch—has been solid, and that will benefit us as we get later into this year and certainly into next year. We have mentioned before that of our total book, it is only about 50% that we can touch in any given year, so we cannot touch everything at the same time, and there is a lag effect. As you think about the intermodal side of the business, we continue to focus on price there just as we do in other markets, but it is different than other segments. For example, in international intermodal, it is pretty heavily concentrated, primarily contracted under long-term deals, and it is not highly correlated to changes in the truck market. So that is a little bit of a different area for us. Operator: Our next question comes from the line of Ariel Luis Rosa with Citigroup. Your line is open. Ariel Luis Rosa: Good afternoon. Congrats on some strong results here. Steve, I am curious for an update on the M&A situation. Last year, we heard a lot of concern that a transcon merger could leave CSX Corporation at a competitive disadvantage. Clearly, a lot of good progress is going on. As we step back and think about what the business looks like a year from now, two years from now, three years from now, to what extent is that a concern? What steps are you taking to position the business for that? Mary Claire talked about the build in the intermodal business opened up by the Howard Street Tunnel and some of the opportunities there. Just give us your updated thoughts on where vulnerabilities might lie and how CSX Corporation is positioned for that future if it does unfold. Steve Angel: Number one is doing what we are doing today and continuing to execute at a high level in the base business. Mary Claire talked about some of the growth opportunities that we have, of which there are quite a few. Obviously there are uncertainties out there in the market, but we feel pretty good about our growth opportunities. We feel good about how we are operating, our focus on capital, etc. A lot of things are going positively in that light. The way I think about the merger—and you have heard me say this before—it is a long process. One I was involved with took three years from beginning to end. A lot of time is going to lapse between now and some conclusion, whatever that is. I would look at any industry consolidation and say that if you are in that industry, there will be some challenges you have to manage, and there will be some opportunities to capitalize on. I suspect if this merger goes through, we will see both. But it is going to take a good bit of time. We do not know what the end result will be. In the interim, we are going to focus on execution and make sure that whatever happens down the road, we will be going into that situation from a position of strength. That has always been my view, and that is where we will be. Operator: Our next question comes from the line of Richa Harnain with Deutsche Bank. Your line is open. Richa Harnain: Hi, thanks for the time, everyone. I wanted to ask about the 21 projects that are expected to contribute—Mary Claire, you said 33,000 in annual carloads at full ramp. When do you expect to get to full ramp? And you have a total of 100 projects expected for the year; do the incremental 80 or so have the same impact as the 21? At that contribution level, we could get to very strong carload growth implied on an annual basis. I just wanted to make sure I was not missing anything or understanding the cadence of that. If we can drill into that, that would be great. Thanks. Mary Claire Kenny: Yes, thanks for the question. Every project is a little bit different, and the 21 projects are across multiple different business units. When I think about our industrial development efforts—what we saw last year, this year, and in the future pipeline—they vary. There are some larger projects. Last year, we talked about an auto plant that came online that, over time, once it gets up to full ramp, will be pretty sizable. It started out with one vehicle, and it will take time for that to ramp. We also have other projects in areas where it is a few thousand carloads. It is smaller in scale and revenue. The good thing is it is a diverse pipeline, and we are excited about that. It is not heavily concentrated in one particular area. As we think about changes in the market, that gives us a benefit as we think about the future. We are excited about it. That is probably all we are going to give from a guidance perspective at this point on ID, but we are certainly excited about the pipeline that we see, and it is an area that we will continue to develop as we go forward. Operator: Our next question comes from the line of Jonathan B. Chappell with Evercore ISI. Your line is open. Jonathan B. Chappell: Thank you. Good afternoon. Mary Claire, the one segment we probably have not touched on from a pricing or yield perspective is coal—up about 3% sequentially, the first time in several years—basically flat year over year, also the first time since 2022. Is this a function of some of the index headwinds finally easing? Is it a mix benefit? Did some of the commodity price volatility help coal maybe vis-à-vis oil? Long way of getting to: is this the start of a recovery, or when you think about coal RPU for the rest of this year, should we extrapolate 1Q? Mary Claire Kenny: Yes, thank you. On the export coal side, last year we saw the benchmarks come down throughout the course of the year. By the time we got to the fourth quarter, they were substantially lower than where they started in January. Into the first quarter of this year, the primary benchmark that we are tied to on the high-vol side has been relatively stable. So we had probably the biggest year-over-year impact in the first quarter, and as we saw those benchmark prices come down last year, that gap will close some if benchmarks stay where they are today, which is our current expectation and what is in our forward thoughts. On the domestic side of the business, we see good demand. There is strong demand for power—data centers and continued investment in that infrastructure are going to continue to pull on power. We feel good about domestic demand. We have mentioned before there are a couple of utilities on our network that are planned to close this quarter, but with the power demand that is out there right now, we expect there could be some extensions associated with those. So we see the domestic overall market as strong, but in terms of impact for us, part of it will be determined by whether we see these closures come about or we see extensions on those facilities. Operator: Our next question comes from the line of Jason H. Seidl with TD Cowen. Your line is open. Jason H. Seidl: Hey, thank you, operator. Question for Mike. Mike, we have the bridges opening up here to enable you guys to run double-stack, and you have made some changes on freight flows around Chicago. What else is on track for the remainder of the year that will help productivity and push margins? Thanks. Michael A. Cory: Jason, in Chicago, just to clarify, we are streamlining our service by running direct from origin points on CSX Corporation to our connecting carriers and belt lines for processing to other carriers. We have always used belt carriers to forward traffic, and now we are combining all the traffic that comes from outside of Chicago through Chicago with a belt carrier. It reduces the handlings, reduces time on all the traffic, and on the reverse, it works the same way. Across the rest of the network, we are looking at a cross-section of productivity initiatives, and we have some really good teamwork going on. Our engineering group is delivering quite a bit of efficiency that we see extrapolating out through the year, and they are working extremely well with our network group. So Casey Albright and Deborah Horchuck are really driving, and we learn more efficiencies every day, Jason. The things that we do not know are what we are going after. On the intermodal side, to Mary Claire’s earlier points about offering faster service lanes and getting that new business, we are putting expansion into our Atlanta terminal in Fairburn. Carrie Crozier and the team are driving some good results there. We are looking for as much productivity in terms of reducing handling, speeding up traffic, and getting rid of inefficiencies that have been inside all of operations—not just through dwell and train speed. There is a lot more out there within the entire group that we are going after. Operator: Our next question comes from the line of Walter Noel Spracklin with RBC Capital. Your line is open. Walter Noel Spracklin: Yes, thanks so much. Good afternoon. Mary Claire, this question is for you. You touched on the pipeline of projects that you have in the works. I am trying to separate what you would get in terms of growth from company-specific projects in total versus what you are seeing in terms of pressure in the macro. Obviously, the net is that you are guiding for flat. Just curious if that is plus two on projects, minus two on macro—something less or more than that? Again, just trying to isolate your company-specific growth so that hopefully, when the market improves and we see some macro improvement, we can layer company-specific opportunities on top of that. Mary Claire Kenny: Thank you. We told you about the projects that we have in the pipeline. We have added strong business over the course of the last several years through ID, and we expect that to continue. We have received questions over time around what broader macro forces have impacted industrial development. On our side, our pipeline has continued to remain strong. We have seen in a few areas where projects have ramped a little slower than what we originally expected due to the macro economy. We also had closures that impacted our network last year, primarily concentrated in the pulp and paper mill side of the business, and some of our customers were driving efficiency within their own business. Still, net of that, we see incremental opportunity with ID. I cannot project the full future in terms of whether we will see something else happen this year in the matter of a closure, but for right now, we think this is certainly a net positive for us. Operator: As a reminder, it is star 1 if you would like to ask a question. Our next question comes from the line of Ravi Shanker with Morgan Stanley. Your line is open. Ravi Shanker: Great, thanks. Good afternoon, everyone. Just a two-parter for Kevin. I think you highlighted some cost headwinds in your commentary—incentive comp and a couple of other things. Can you give us a little more color on quantity and timing of those items? Also, you said a couple of times that you are pivoting to 2027 in the productivity actions. Can you unpack that a little bit more? Is that because 2026 gets pretty much baked and any incremental gains are going to come in 2027? Or is it because the nature of those actions is more long term? Kevin S. Boone: Yes. First, unpacking the second quarter commentary: the things I would point out again are the engine overhauls, some additional costs with transaction costs, and then on the fuel side, with higher fuel price you will see some of that flow through, from the margin profile. Outside of that, I am probably not going to be more specific, but from a PS&O perspective on a sequential basis, it will not be the normal seasonality you would see based on some of those items I discussed. On why we are talking about 2027: yes, we do have a plan in place for 2026. Are we going to hopefully find things, as Mike said—he is finding things all the time? Yes. We want to create a muscle, as Steve said, in the cadence of continuous improvement. The things we want to do in 2027, we have to start now and have a plan together by the middle of the year so we can execute and build momentum. We talk about exit rates in any given year, and we want to build an exit rate in 2026 and in 2027 to make sure we are delivering on year-over-year improvement consistently. That is what the team is focused on for the remainder of this quarter and going into next year. The 100-plus initiatives that we have for this year—we have to make sure we stay on track and continue to add to those as well. Operator: Our next question comes from the line of David Scott Vernon with Bernstein. Your line is open. David Scott Vernon: If we think about the framework for the guidance—the 5% top line, obviously including fuel—I am wondering if you are also getting a little bit more optimistic or less optimistic on the volume side, and if there is any disaggregation between price and quantity in the updated guidance. And then, Mike, when you look at the headcount and the staffing level you are at right now, are you at a level where you are comfortable being able to handle low single-digit growth, or are we going to need to refill the talent pool a little bit? How are you thinking about headcount underlying the guidance you gave us today? Kevin S. Boone: On the revenue side, Mary Claire and Steve highlighted that the majority of the upward pressure on our guidance in terms of revenue is largely around the fuel side of things and energy costs, but those are impacting positively some markets. There are a lot of moving parts in the economy right now. We are watching that. Mary Claire did touch on that we exited the first quarter positively, and we will see if that continues. We are hopeful that continues, and a small amount of that has been embedded in our forward guidance. I will throw it over to Mike. Michael A. Cory: Yes, David. We feel comfortable right now with our current headcount levels. We may see an uptick in T&E labor in Q2 to Q3 where we generally see a little bit higher volume and some peak vacation time. But we are going to continue to carefully manage our attrition levels and always look for ways to be effective and productive with our workforce. We are staying very close with Mary Claire and her team to ensure we are hiring for volume where we need it. We are comfortable right now. Operator: Ladies and gentlemen, that concludes our question and answer session, as well as today’s call. We thank you for your participation, and you may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the Las Vegas Sands Corp. First Quarter 2026 Earnings Call. At this time, all participants have been placed on a listen-only mode. We will open the floor for your questions and comments following the presentation. It is now my pleasure to turn the floor over to Daniel Briggs, Senior Vice President of Investor Relations at Las Vegas Sands Corp. Sir, the floor is yours. Daniel Briggs: Thank you. Joining the call today are Patrick Dumont, our Chairman and Chief Executive Officer, Dr. Wilford Wong, Executive Vice Chairman of Sands China, and Grant Chum, CEO and President of Sands China and EVP of Asia Operations. Today’s conference call will contain forward-looking statements. We will be making those statements under the safe harbor provisions of federal securities laws; the language on forward-looking statements included in our press release also applies to our comments made on the call today. The company’s actual results may differ materially from the results reflected in those forward-looking statements. In addition, we will discuss non-GAAP measures. Reconciliations to the most comparable GAAP financial measures are included in our press release. We have posted an earnings presentation on our website; we will refer to that presentation during the call. Finally, for the Q&A session, we ask those with interest to please pose one question and one follow-up so we might allow everyone with interest the opportunity to participate. This presentation is being recorded. I will now turn the call over to Patrick. Patrick Dumont: Thanks, Daniel. Good afternoon. Thank you for joining the call. As we look to the future, we could not be more enthusiastic about the opportunities for our company. Our strategic priorities remain clear and consistent with the goals of investing with discipline and creating meaningful shareholder returns. Turning to our current quarter results, we once again delivered outstanding financial results at Marina Bay Sands in Singapore, with EBITDA increasing over 30% to reach $788 million. Singapore is an ideal market for high-value tourism spending; our focus on creating unique and memorable entertainment and hospitality experiences for our guests has been a tremendous success. The company’s fundamental operating strategy relies on three critical pillars: our people, our product, our service. When we get these three pillars optimized, we can create outstanding financial and operating performance. We are seeing that at Marina Bay Sands today, and we could not be more enthusiastic about our additional opportunities for growth in Singapore as we continue to enhance the customer experience for our guests in the years ahead. Turning to Macau, we delivered $633 million in EBITDA for the quarter, an increase of over 18%. Mass market revenue share reached 25.7% for this quarter, our strongest performance since 2024. As in Singapore, the operating pillars of people, product, and service underpin our strategy to deliver growth in Macau. We believe we will deliver growth over time in Macau as we implement specific strategies to improve both our products and our service levels. We have a goal of reaching $700 million in quarterly EBITDA, and beyond over time, as we fully implement our investment and operating strategies and as the Macau market continues to grow. Today, the growth in the Macau market is primarily driven by the premium segments. The competition in that segment remains intense, and luxurious suite product coupled with outstanding service levels are critical to success. We have the suite product to effectively compete in the premium segment at both The Londoner and Grand Suites at Four Seasons. We are singularly focused today on matching that suite and room product with the service levels that the most discerning and valuable customers in Macau increasingly demand. We are making progress. We have meaningfully increased our gaming revenues, gaming volumes, and premium customer patronage since implementing the recent changes to our reinvestment programs. Implementing meaningful improvements in the service pillar of our strategy in Macau will be critical to realizing additional growth and securing our long-term success. We believe we have outstanding opportunities for growth in every segment as we implement our strategies. Accordingly, we will be making targeted investments in training and hiring of additional customer-focused team members throughout the portfolio. Creating and delivering unique and memorable hospitality experiences is the centerpiece of our strategy, and improving service levels in Macau is critical to the achievement of our long-term financial and operating objectives. In addition, we plan to introduce refreshed and luxurious room and suite products throughout the portfolio, as we further execute the product pillar of our strategy. We are focused on the highest-return projects to increase cash flow over the next three years. We will begin with The Venetian, where work is already in progress, with refreshed room product beginning to come into service in 2026. Additional luxurious suite products and the total product refresh are targeted to be completed by 2027. Meaningful patron growth we have seen in The Londoner and Grand Suites at Four Seasons provides support for these investments. It is important to note that the work we envision will not create significant disruption throughout the portfolio. The scale of our portfolio will allow us to serve customers in other properties and elsewhere in each resort while work is in progress. Nothing we are doing as we invest in the portfolio over the next several years will hinder our ability to use our scale advantages to outperform the non-premium segment should spending in that segment accelerate in the future. We are confident in our strategy in Macau, and we look forward to updating you on our progress as we execute our plans. Let us move forward to provide some additional detail on our current quarter financial performance. Macau EBITDA was $633 million. If we had held as expected in our rolling program, our EBITDA would have been lower by $15 million. When adjusted for higher-than-expected hold in the rolling segment, our EBITDA margin for the Macau portfolio of properties would have been 29.6%, down 200 basis points compared to 2025. Our principal focus in 2026 is to deliver revenue and cash flow growth across the portfolio. Our investments in improving service offerings will naturally increase expenses and will continue to negatively impact margins as we implement our strategy. We do expect margins to improve over time as we grow revenue in the lower end of the premium segment and in the non-premium segment, where the scale of our hotel inventory gives us natural advantages as we improve our service levels and further refine our reinvestment strategies. Margin for the quarter at The Venetian was 33.5%, while margin at The Londoner was 29.6%. We expect growth in EBITDA as revenues grow. We will use our scale and product advantages together with service level improvements and targeted incentives to effectively compete in every market segment. In Singapore, Marina Bay Sands EBITDA for the quarter was $788 million at a margin of 53%. If we had held as expected in our rolling program, our EBITDA would have been higher by $6 million. The outstanding financial and operating results at MBS reflect the impact of high-quality investment in market-leading product, world-class service, and the growth in high-value tourism. Turning to our program to return capital to shareholders, we repurchased $740 million of Las Vegas Sands Corp. stock during the quarter. We also paid our recurring quarterly dividend of $0.30 per share. We have now purchased 14.3% of the company’s outstanding shares over the last ten quarters, and we believe additional repurchases of Las Vegas Sands Corp. equity through our share repurchase program will be meaningfully accretive to the company and its shareholders over the long term. While we did not purchase any shares of SCL during the quarter, we do continue to see value in both the Las Vegas Sands Corp. and SCL names. The company’s ownership of SCL remained at 74.8% as of March 31, 2026. We look forward to continuing to utilize the company’s share repurchase program to increase returns to shareholders. Thanks again for joining the call today and for your interest in Las Vegas Sands Corp. We will now open the call for questions. Operator: Thank you. Ladies and gentlemen, the floor is now open for questions. If listening on speakerphone today, please pick up your handset to provide optimum sound quality. Also, we ask that each participant limit themselves to one question and one follow-up. Please hold a moment while we poll for questions. The first question today is coming from Daniel Politzer from JPMorgan. Daniel, your line is live. Daniel Politzer: Hey, good afternoon, everyone, and thanks for taking my questions. Singapore, it has gone from strength to strength to strength. I think you had $18 billion of rolling chips in the quarter. I mean, I guess, how do you think about what is driving this? I mean, it is just kind of the levels here. And to what extent are you seeing any benefit from some of the things kind of evolving in the geopolitical landscape that may be hitting other regions and possibly benefiting Singapore? Patrick Dumont: Thanks. So there are a couple of things about the Marina Bay Sands growth story, which is really a story about investment. The more we invest in high-quality assets, the better service levels we have, the more we are going to differentiate the product that we have, and the more high-value visitation we are going to get. Look, I think the VIP segment is just a very competitive segment across Asia. The fact that we are able to see success here with these very high-value patrons is really just an example of the execution there at the property. I will tell you that our main driver of profitability at Marina Bay Sands is mass win and slots. VIP is a very volatile segment, and it can be concentrated at times. It is high-value customers, and they can vary from quarter to quarter. What I will tell you is that with the introduction of IR2, we will have more product to address this market and scale with it. But the one thing to note is that we had an outstanding quarter. The team did a phenomenal job. These quarters can be highly concentrated and can vary. And then just turning to Macau, you mentioned the goal to get back to that $700 million in quarterly EBITDA level. Obviously, it is going to require a little bit more investment. But, I mean, in terms of the market growth that you have to get there, how—at what level do you have to see the overall market or mass grow? Is that something you can kind of get to or achieve independent of the market really accelerating here? Look, I think we are heading in the right direction in Macau. I think you see the growth this quarter, and you see that our focus on service and improving our product—we have some work to do there across the portfolio, as we mentioned—is starting to show some progress. And so, in our mind, that is a milestone that is achievable. Obviously, it is going to require some growth in the overall market. But more importantly, it is going to require us to continue on the execution of hospitality and service that we are showing. Grant, do you have anything else to add? Grant Chum: First of all, the market continues to grow. We had 14% growth year-over-year this quarter, and it is notable that we achieved significant revenue outperformance against each segment. So we gained share in every single segment both on a year-over-year basis as well as sequentially. So we achieved the EBITDA growth as well as sequential margin improvement at the same time as we optimized our reinvestment levels. Daniel Politzer: Got it. Thanks so much. Operator: The next question will be from Brandt Montour from Barclays. Brandt, your line is live. Brandt Montour: Hi, everybody. Thanks for taking my questions. So over in Singapore, you have a slide that you show us on theoretical rolling hold. And I know that that is just a pure statistical output from betting mix, but you do show it kind of curling over and reverting back lower. I just want to make sure: are you guys seeing a change in betting behavior or any type of reversion away from side bets, or the sort of long-odds bets that you talked about? Patrick Dumont: Yeah, I appreciate the question. You know, the VIP business is very volatile, and there is an interesting occurrence in the way patrons play now, which is some customers who are high-end VIP customers on rolling programs play traditional bets and they bet in a much more traditional, conservative way. And then we have other patrons who really enjoy the volatility and the side bets that we present. And so, if you look at 2025, where we hit the peak of 4.2% with $9.1 billion in rolling volume, we had patrons in the building who really loved those side bets, and so it drove the theoretical higher. In the case of this quarter, with $18 billion of rolling volume, it was a barbell. We had people in the building who were betting the traditional bets in a very conservative manner and rolling a lot of volume, and then on the other side, we had some people who were really playing the side bets. And so the way we got to 3.6% was a more traditional VIP hold mixed with people who were taking advantage of the side bets and having a more, let us call it, modern approach to the game. So what you ended up with was this 3.6%, but it was not like an average play. It really was a barbell. Brandt Montour: Okay. That is really helpful. Thanks for that. And then a second question would be on Macau. You know, the base mass is not where most of the growth appears to be coming in the broader industry right now. And I am just curious if you guys are starting to see any green shoots in that customer, given we have seen a little bit of better stock market and maybe some other green shoots in the macro. But just anything that you check or are watching from your KPIs on the macro level that gives you any sort of confidence or incremental confidence in that segment? Grant Chum: Thanks for the question. The market growth is driven by premium segments, both in rolling and non-rolling segments. But we can point to a couple of indicators to show that the base mass and the mass growth is actually solid. If you look at not so much the base mass tables, but the slot and ETG segment, we are seeing strong growth as a whole in the market, and Sands China outperformed the market in that segment by a significant margin this quarter. So our slot and ETG segment grew by 31% year-over-year and 10% sequentially, especially driven by our more mass-orientated properties in Parisian and Sands, where you can see the slot and ETG number has grown tremendously. The second indicator is our retail business. We actually hit a quarterly all-time high in tenant sales in this first quarter, which is an exceptional performance. Tenant sales grew by 37%. Yes, it was driven by the jewelry and watch sector, but the spending was very broad across all of our malls, and we also saw significant growth in the fashion segment as well. So from the slot segment and from the retail mall, you can see that consumption is solid, but clearly for the GGR, the premium segments are still driving the majority of the growth. Operator: Excellent. Thanks, everyone. The next question will be from Robin Farley from UBS. Robin, your line is live. Robin Farley: Great, thanks. Just circling back, Patrick, you were making comments about Singapore and you talked about both VIP and mass, and then you said something like IR2 will give us more product to address that. Were you suggesting that IR2 would be focusing on one or the other of those markets, or did you just mean broadly product to address the Singapore market? So I just want clarification on that. And then I do have a follow-up. Patrick Dumont: Yeah, no problem. Thanks for asking a follow-up on IR2. In our mind, this will be the most luxurious and most highly amenitized hotel in the world. And our intention is to set a new standard for luxury hospitality, which will naturally attract very high-end patrons, some of whom are gaming patrons on rolling programs. And so my comment around the volatility and concentrated nature of the VIP/CIP play that we see in Marina Bay Sands, in our mind, can be smoothed a little bit by having more inventory to bring in more of these very high-value patrons. And so while IR2 will not be focused solely on VIP patrons, it is really going to be for all the high-value tourists that we have coming into our building. But it is really going to set a new standard, and those types of customers tend to gravitate to those types of hospitality and amenities environments. It will also have an unbelievable entertainment component, which we believe will also appeal to the highest-value tourists that we have—highest-value patrons we have coming into the building. So we hope that that gives us additional inventory and strength at the highest levels of patron rating. Robin Farley: Great. Helpful. Thank you. And just a follow-up on Singapore in general. I do not know if you have any thoughts about how we should think about the two properties and what combined EBITDA might look like or incremental EBITDA from IR2—any sort of, I know it is early, but big picture. Thanks. Patrick Dumont: I think for us, we are really looking to get our targeted return on invested capital across the total investment. We have always said that we kind of target a 20% return. So that is kind of where we are trying to get to. And if you look at the productivity that we are seeing out of our highest-end products within Marina Bay Sands, we believe that this is achievable, and that is why we are investing in the project. The market is very unique. The tourists that are coming into the market, the structural tailwinds that are supporting growth in Singapore, the value that Singapore has demonstrated as a tourism destination, the fact that we are going to have an arena now that we control that will have some of the best presentation technology in the world—we are very excited about the opportunity there, so we think it will enhance not only the experience you would have at IR2, but the type of guests we have coming across the portfolio, because of what it will bring in terms of additional amenities. So, for us, we are looking at a total project return in excess of the 20% we talked about. Robin Farley: Great. Thank you. Operator: Thank you. The next question will be from Stephen Grambling from Morgan Stanley. Stephen, your line is live. Stephen Grambling: Hi. Thank you. This is maybe digging into one of the questions on Marina Bay Sands. Can you maybe just talk about how the customer concentration may have evolved over time? Are you actually getting more customers, and is the comment about having the highest-end customer meaning that your IR2 being able to attract—you are hitting some kind of threshold where you just do not have enough space for some of these customers, or is it just that you are getting more play out of each individual and you have not seen any kind of upper bound on that? Thank you. Patrick Dumont: We went from 132 suites to 770, and we need more capacity. We wish we could have IR2 tomorrow. I think for us, there was a sea change in the way that we presented our products there. You hear us talk about the quality of the design—our design excellence initiatives—and our design team has done outstanding work. The service levels there are extraordinary. Our hospitality team has really stepped up. Our culinary efforts have really improved over time. Our nightlife is really accelerating. And with the strength in our retail business there, we really have so many amenities that just drive the highest-value tourist from the region to Singapore and to our property. And we are able to use a lot more capacity when it becomes available. So we are looking at IR2 as a way to really increase the high-end suites that we have, add amenities across the portfolio that we do not have today in terms of entertainment, additional ballrooms, additional culinary, additional sights to be seen. For us, this is something that we hope will have a multiplier effect on what we have on offer there. But we need more capacity. Yes, we made the change; we started bringing in much higher-value tourists into Singapore and to our building. But there are more of them. And so we are looking forward to the opportunity to grow and to take advantage of what we see as the market opportunity. Stephen Grambling: That is helpful. And maybe one follow-up, but just on Macau. I think you mentioned some of the investments going on there. Can you just remind us of some of the timing of some of the renovations and work that you are doing and how you are thinking about where to invest based on what you are seeing in the market now? Patrick Dumont: So a couple of things I will highlight, and then I will turn it over to Grant. I think for us, we have a very strong fundamental view for the long-term success of Macau, and our company has been built from Sheldon’s original vision that investment and scale create a competitive advantage. What you see in Macau today is—even though the market is hypercompetitive in certain segments—we continue to perform in those segments with high-quality product, the right service levels, and the right marketing. So for us, we are going to look to invest in our portfolio. We do have scale, we do have rooms, we do have amenities, we do have retail, we do have entertainment—to invest in a way that will give us the maximum opportunity to take advantage of what we see as growth in segments that we are getting the benefit of today. I think the next couple of years, you will see us invest in certain areas that we think we have underinvested in over the last five years, in an attempt to reposition some of our assets to better address the market today and make us more competitive. Grant, would you like to add anything? Grant Chum: Sure. We can see exceptional results from our new product throughout the last three to four quarters. So part of our market share gain is a function not just of our reinvestment strategies, but also the ramp-up of The Londoner and Grand Suites. You can see that very clearly in our results. And, of course, Four Seasons with the Grand Suites product is also very competitive. Looking forward, we have said, I think in Patrick’s opening remarks, we are starting the renovation of The Venetian. This is our flagship property, and we are very excited by the upcoming transformation of The Venetian. This will deliver new inventory progressively starting in 2026 and then the entire project should finish by late 2027 or early 2028. Stephen Grambling: Very helpful. Thank you. Operator: The next question will be from Elizabeth Dove from Goldman Sachs. Elizabeth Dove: Hi. Thanks for taking the question. So it looks like the buyback stepped up a little bit this quarter. I am just curious, especially as you see this continued Singapore EBITDA going from strength to strength, is this an appropriate kind of quarterly run rate? Or how do you think about capital returns more broadly longer term? Patrick Dumont: I think we have said for a long time, we see significant value in both Las Vegas Sands Corp. and SCL equity. We are going to continue repurchasing shares. We thought this quarter represented a significant opportunity where levels were, so we were a little more aggressive than maybe you have seen in prior quarters. But our goal is to continue to repurchase shares in a meaningful way. We think it is an important part of our return of capital strategy, and it is something that really creates long-term value for our shareholders over time. You see the share count reduction over the last couple of years. It is very meaningful, and we are going to continue to look in that direction as we think about return of capital. Elizabeth Dove: Got it. Thanks. And then, as we think about Macau for the rest of the year, we are only a couple of months away from comps starting to get a little bit tougher. Obviously, you are making progress on the margin side with that sequential uptick, but how do you think about your ability to keep improving on that, especially as the comps get a little tougher going forward? Grant Chum: Thanks for the question. First of all, revenue growth is an important factor. Over time, we expect higher revenues will drive margin improvement. Outside of that, we are investing heavily, as Patrick referenced, in improving our service offerings across our operating capacity, across our salesforce and distribution, and also importantly, into our hospitality and gaming service levels. Those initiatives are having an impact on the cost structure and will continue to impact the margin in the near term. At the same time, we are driving revenue growth. We are achieving revenue share gains, and over time, we intend to grow margin as the revenue levels continue to increase. In terms of the reinvestment levels, we have been able to spend less on reinvestment relative to revenue on a sequential basis. We see, at least in our strategy and our ability to optimize, stabilization in the reinvestment levels. The market continues to be very competitive; we have to continue to monitor the dynamics very carefully. But for this quarter, we were able to achieve both revenue growth and sequential stabilization and improvement in our reinvestment strategy. Operator: Thank you. The next question will be from Chad Beynon from Macquarie. Chad, your line is live. Chad Beynon: Hi, good afternoon. Thanks for taking my question. Two questions on Macau. One, just wanted to ask about how the entertainment calendar looks maybe through the rest of the year at Cotai Arena and then at the smaller venues. And then my second question is more around just the sentiment with the base mass customer—really good growth in the first quarter, as we have talked about a couple of times—and particular growth in the Chinese stock market and just overall what we are able to see in consumer sentiment indicators. But are you getting any different sense from your customers since the tensions in the Middle East have started, or do you think most of the base mass customers— Patrick Dumont: Hey, Chad. You have a lot going on there. Sorry. We will answer all these questions so you do not have to ask nine questions at once. Let us just break them into little segments. We will get through them all, I promise. Alright, first on the entertainment calendar, and I will stop there. First on the entertainment: one of the things about the entertainment calendar, you know, we have been investing in entertainment assets for years in Macau. We feel that entertainment is a great way to drive inbound tourism into Macau from both China and actually from the surrounding region. We are very happy to have some uptick in tourism from outside of Macau coming in, and we think over time entertainment is an important component of that. We also feel like entertainment is a great way to show off the quality of our assets and the quality of the experiences that you can have at our portfolio of properties. So we have been really focused on not only investing in our entertainment assets—you saw the renovation of the arena that allowed us to have the NBA games—but also other things that we are doing around the portfolio to enhance the customer experience with our entertainment assets, including programming. I did want to address that just in terms of the physical asset side, and I would ask Grant to comment on the calendar. Grant Chum: The calendar was strong in the first quarter for us, which helped our performance. We did 11 to 12 shows during the quarter. If you look at the pacing of the calendar, like Patrick said, we will continue to use entertainment content as a driver for resort visitation, and it helps us across every segment of the patron value chain. We do see that the big tours have slowed down in the Asian tour stops this year versus the prior immediate two years. However, we have the ability to bring content of different size and different spectatorship because we have access to both the Venetian Arena, which is the bigger arena, as well as the mid-sized Londoner Arena. So we are able to bring a more diverse range of acts and content because we do have the scale on the performance venues, which is an attraction for different artists and promoters, because being able to access high-quality venues at different times of the year is not always easy. We do have an advantage with a number of acts and artists in the region where we can offer them best-in-class and a different range of performance venues all the way from the Venetian Arena to Londoner Arena and then also to our performance theaters. Patrick Dumont: In regards to the mass gaming, I think you have seen 30% growth year-over-year in the overall market. For us, that just speaks to the attractiveness of the assets in the market, liquidity, accessibility, and just the overall growth in demand, which I think has been super helpful for us. Grant, I do not know if there is anything else you want to bring up as far as mass. Grant Chum: I think that is it. Patrick Dumont: And then you were going to ask us about Middle East disruption. Was that your next one? Chad Beynon: Yeah. Just if you think that the Chinese customer can power through in the same way that we are seeing a U.S. customer, given where oil prices are and how that all factors into sentiment? Grant Chum: The way to think about this is the number of options available to the outbound Chinese visitor. If you look at the options available today versus three months ago, six months ago, the reality is destinations that are closer to home are going to gain share in general as a result of the current environment, for all sorts of reasons that you are familiar with. So the net effect from a demand standpoint is, I think, a positive one for both Macau and Singapore because these destinations are going to be more desirable and more preferred during the current geopolitical environment and also given the cost of air travel. All of those factors put together in this environment right now mean the short-haul destinations, especially ones of this appeal in Macau and Singapore, are going to be more popular with the Chinese market. Chad Beynon: Thank you both. Very helpful. Thanks. Operator: Thank you. The next question will be from George Choi from Citigroup. George, your line is live. George Choi: Thank you very much for taking my question. Just a quick one from me. Based on the numbers that you are seeing right now, how do you see the popularity of side bets amongst your Macau players versus Singapore? And do you guys introduce more new side options in Macau? Thank you very much. Grant Chum: You are normally the first one to notice on the side bets. We have introduced some new side wager options in Macau over the past week. In terms of your question about popularity, it remains true that the take-up of side bets, especially as a percentage of total wagers, is much higher still in Marina Bay Sands than in Macau. That said, the take-up of side wagers in Macau is increasing. The propensity to wager on these side wagers—we do see a progressive trend upwards, and I think the introduction of these new side wagers that we will be implementing now and in the next few months will further enhance that propensity. Thank you very much for calling. Operator: The next question will be from Joseph Stauff from SIG. Joseph, your line is live. Joseph Stauff: Thank you. On MBS, I wanted to follow up on the rolling chip volume—just an absolutely huge number in the quarter. I am wondering about the volatility associated with this. Is it visitations and what those visitations will do in terms of volume? What is easier for you to program, I guess, between the two? And was there a particular reason maybe in the first quarter that drove higher visitation from this clientele versus, say, other quarters? Patrick Dumont: The VIP segment is volatile. It can be concentrated, and it depends on who shows up when. So it is about visitation, and it is about bringing the highest-value patrons we have who want to be on a rolling program into the building. The great news is, we have longstanding relationships with historical customers, and we have new customers coming into the building. They love our service, they love the hotel suites they get, they love the food, entertainment, and retail. So it is really a total experience proposition. Then they show up and they play. For us, it is about having the right amenities to satisfy these very high-value customers and just getting them into the building. Joseph Stauff: Got it. Thank you. Operator: The next question will be from Analyst from Wells Fargo. Your line is live. Analyst: Hey, guys. Thanks for the question. I guess just one on CapEx. The maintenance CapEx and the SCL-level CapEx in the slide deck moved up the next couple of years. Is that maybe just, one, you guys are doing so well, so why not reinvest a little more aggressively? And then two, is it a pull-forward concession—just curious on those two numbers. Also, some of the things you guys referenced around the Venetian rehab? Thanks. Patrick Dumont: One of the industry greats a long time ago said that depreciation is real in our business, and we have to spend money to maintain our positioning and to grow. We are doing a full portfolio review to make sure that we are deploying capital in the most efficient way and that the highest-return projects generate cash flow growth. This increase in CapEx is based on our expectations that if we invest more, we will grow more. Analyst: Perfect. Thank you. And one other question. The promotional activity in Macau looks like it ticked down a little bit sequentially. Could we kind of assume that it is higher year-over-year again in Q1, but it is getting better as we look forward—is it just you guys really ramped it in Q4, kind of stickiness you are seeing from early promotional activity, demanding less of it as we go forward? And should that be one of the factors helping out this drive towards that $700 million number? Thanks a lot, guys. Grant Chum: We have been able to optimize some of our programs having started to change our reinvestment programming and approach since 2025. This is a natural progression as we change our programs. We assess what worked or was less effective, and great credit to the team—we were able to achieve good optimization in this quarter whilst continuing to gain market share and grow revenue. We are also able to optimize the reinvestment level because we have been more successful in leveraging our product advantage. We have been able to ramp up The Londoner and Grand Suites especially, and that has helped us tremendously, especially in the core premium mass mid-tier segments, growing the customer base there. That speaks to the CapEx and the upgrading of product referenced by Patrick. As we review the portfolio, there are going to be other significant opportunities for us to invest for growth, and at the same time as it is growing, it also allows us to be more targeted and disciplined in reinvestment as these products come online. Analyst: Great. Thanks for the time, guys. Operator: The next question will be from Steven Moyer Wieczynski from Stifel. Steven, your line is live. Steven Moyer Wieczynski: So, Patrick, I am going to ask another question about getting to the $700 million a quarter in Macau. Obviously, there is a lot of promotional activity taking place right now in the market. To get to $700 million eventually in EBITDA, does that assume your competitors pull back so-called aggressive promotions, or, said differently, does that assume more of a normalized promotional environment from not only yourselves but also your competitors as well? Patrick Dumont: No. Actually, we are thinking about that in the context of current conditions. It is a very competitive market. Look at the growth that we experienced in Q1, but I think the market is growing, and I think we are also helping to grow the market with the high-quality assets that we have. For us, when we think about $700 million, it is about continuing to invest, having the right marketing programs, utilizing our assets more efficiently. It would be helpful if the market grows a little bit; additional growth in the market and expansion of GGR market-wide is helpful. But we think that it is in the context of the current conditions. Steven Moyer Wieczynski: Gotcha. And then, sticking with that, Patrick, I know you do not give guidance, but based on what you just said there, is it fair to think that this sort of run rate of, let us call it, $600 million a quarter in Macau is probably the right way to think about the market for the foreseeable future until that base mass business really does return? Patrick Dumont: I think the one thing I want to be careful about is, there is seasonality in our business. I know you know that. The second quarter is typically our softest, and sequential comparisons between Q1 and Q2—given we have Chinese New Year in Q1—are always tough and sometimes not that helpful. But just directionally, we would like to believe that we are in a really solid place as we continue to grow our business and make the right moves in terms of marketing and utilizing our assets. That is kind of how we think about it. Steven Moyer Wieczynski: Thanks so much. Appreciate it. Operator: Next question will be from David Katz from Jefferies. David, your line is live. David Katz: Hi, afternoon. Thanks for taking my question. I appreciate it. Can we just talk about The Venetian a little bit and the degree to which we should be factoring in some disruption as you go through that room renovation? Any qualitative perspective would be helpful. Thank you. Grant Chum: Thank you for the question. No, we do not expect meaningful disruption impact. We will be balancing the out-of-inventory with the business needs, and we are able to redistribute the demand throughout the rest of the portfolio. At the same time, new rooms will continuously be coming back to the active inventory starting from the third quarter of 2026. So even as total number of keys will be reduced modestly during this period, we are going to be benefiting from brand-new suites coming online over the coming quarters, especially when the multi-bay suites come back online towards the back end of 2027. David Katz: Understood. And as my follow-up, I know we have touched on this just a bit, but maintenance CapEx we usually think about in the context of non-discretionary versus projects that can be decided upon and moved around. I understand every company’s perspective on it is different, but just noticing in the deck—should we think about that $500 million number as something that is non-discretionary? And how did that come about? Patrick Dumont: First off, we believe that it is necessary to maintain our business. It is split between Marina Bay Sands and Sands China. We just want to be realistic about what we believe we need to spend going forward to ensure our buildings are kept in the best possible condition to maximize our cash flow. We do not view this as optional. We view this as something that is a responsible move to take care of our buildings into the future. David Katz: Thank you. Operator: And the next question will be from John DeCree from CBRE. John, your line is live. John DeCree: Hi, everyone. Thanks for taking the question. I know we have covered the topic of OpEx in Macau a little bit, but maybe just to round it out, if you could provide a little color, maybe coming at it from a modeling angle. Are we expecting the investment in service you have talked about to grow in line with revenue? Are these going to be fixed-cost people coming online—more staff—and will that happen regardless of which way revenue goes? Or is it something that you will time throughout the year as revenue increases at different paces, you will add service levels? Just trying to get a sense of how much fixed cost is coming in this year versus variable depending on revenue. Patrick Dumont: These are hires that are designed to increase and enhance the service levels of our buildings. Ideally, as we grow revenue—because we are bringing in higher-value patrons—we get some scale or some operating leverage across these fixed costs, but they are primarily payroll. We are adding people in certain areas to service certain patron tiers, to enhance their experience, and make sure that we are at the highest standards for service. So this hiring, in our mind, is actually beneficial because while we have to hire and train these people and add them to our team so that we can accomplish our goals in providing leading hospitality in the market, combined with the investments and the renovations that we are doing, this will put us in a better position to grow. You need the people and you need the physical product in order to provide the patron experience that allows you to differentiate and draw the highest-value customers into your buildings. This is an investment in the future. John DeCree: Got it. Thanks, Patrick. Maybe just a quick follow-up on that. For the new hires—apologies for being granular—are they coming on a rolling basis going forward, or have they already been hired? When should we think about the lion’s share of the additional staff coming online? Patrick Dumont: A significant number are actually in the OpEx now. We have people joining our staff, and some of that is actually in the margin today—some of the additional payroll associated with the service enhancement. It will continue to be added over the next couple of quarters. Operator: That concludes today’s Q&A session, and it also concludes today’s conference call. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation.
Mike Beckman: Welcome to the Texas Instruments Incorporated First Quarter 2026 Earnings Conference Call. I am Mike Beckman, Head of Investor Relations, and I am joined by our Chief Executive Officer, Haviv Ilan, and our Chief Financial Officer, Rafael R. Lizardi. For any of you who missed the release, you can find it on our website at ti.com/ir. This call is being broadcast live over the web and can be accessed through our website. In addition, today's call is being recorded and will be available via replay on our website. This call will include forward-looking statements that involve risks and uncertainties that could cause Texas Instruments Incorporated's results to differ materially from management's current expectations. We encourage you to review the notice regarding forward-looking statements contained in the earnings release published today as well as Texas Instruments Incorporated's most recent SEC filings for a more complete description. Today, we will provide the following updates. First, Haviv will start with a quick overview of the quarter. Next, he will provide insight into first quarter revenue results, with some details on what we are seeing with respect to our end markets. Lastly, Rafael will cover the financial results, give an update on capital management, as well as share the guidance for second quarter 2026. With that, let me turn it over to Haviv. Haviv Ilan: Thanks, Mike. Before I go into the results, I want to highlight that in the first quarter, we announced an agreement for Texas Instruments Incorporated to acquire Silicon Labs. This transaction enhances our global leadership in embedded wireless connectivity, expands Texas Instruments Incorporated's portfolio, and leverages Texas Instruments Incorporated's internally owned technology and manufacturing and reach of market channels. We expect the transaction to close in 2027 subject to necessary approval. Now let me provide a quick overview of the first quarter. Revenue was $4.8 billion, an increase of 9% sequentially and an increase of 19% year over year. Analog and Embedded both grew sequentially and year over year. Analog revenue grew 22% year over year and Embedded Processing grew 12%. Our Other segment declined 16% from the year-ago quarter. Let me provide a few comments about the current market environment. In the first quarter, revenue came in above the top of the range as we saw continued acceleration in Industrial and Data Center. The overall semiconductor market recovery is continuing, and we remain well positioned with inventory and capacity that allows us to support our customers with competitive lead times through the cycle. Now I will share some additional insights into first quarter revenue by end market. First, Industrial increased more than 30% year over year and was up more than 20% sequentially, growing broadly across all sectors and regions. Automotive increased mid-single digits year over year and was about flat sequentially. Data Center grew about 90% year over year and grew more than 25% sequentially. Personal Electronics was flat year over year and grew low single digits sequentially. And lastly, Communications Equipment grew about 25% year over year and grew more than 30% sequentially. With that, let me turn it over to Rafael to review profitability and capital management. Rafael R. Lizardi: Thanks, Haviv, and good afternoon, everyone. As Haviv mentioned, first quarter revenue was $4.8 billion. Gross profit in the quarter was $2.8 billion, or 58% of revenue. Sequentially, gross profit margin increased 210 basis points. Operating expenses in the quarter were $974 million, about as expected. On a trailing twelve-month basis, operating expenses were $3.9 billion, or 21% of revenue. Operating profit was $1.8 billion in the quarter, or 37% of revenue, and was up 37% from the year-ago quarter. Net income in the quarter was $1.5 billion, or $1.68 per share. Earnings per share included a $0.05 benefit for items not in our original guidance, primarily due to discrete tax benefits. Let me now comment on our capital management results. Starting with our cash generation, cash flow from operations was $1.5 billion in the quarter, and $7.8 billion on a trailing twelve-month basis. Capital expenditures were $676 million in the quarter and $4.1 billion over the last twelve months. Free cash flow on a trailing twelve-month basis was $4.4 billion, up from $1.7 billion in 2025, trending up as growth returns and CapEx begins to moderate. Free cash flow in the trailing twelve months includes $965 million of CHIPS Act incentives. This includes a $555 million payment received in the first quarter as part of our direct funding agreement related to the start of production at our newest 300-millimeter wafer fab in Sherman, Texas. In the quarter, we paid $1.3 billion in dividends and repurchased $158 million of our stock. In total, we returned $6 billion to our owners in the past twelve months. Our balance sheet remains strong with $5.1 billion of cash and short-term investments at the end of the first quarter. Total debt outstanding is $14 billion with a weighted average coupon of 4%. Inventory at the end of the quarter was $4.7 billion, down $109 million from the prior quarter, and days were 209, down thirteen days sequentially. Turning to our outlook for the second quarter, we expect Texas Instruments Incorporated's revenue in the range of $5.0 billion to $5.4 billion and earnings per share to be in the range of $1.77 to $2.05. We expect our effective tax rate to be about 13% in the second quarter. In closing, we will stay focused in the areas that add value in the long term. We continue to invest in our competitive advantages, which are manufacturing and technology, a broad product portfolio, reach of our channels, and diverse and long-lived positions. We will continue to strengthen these advantages through disciplined capital allocation and by focusing on the best opportunities, which we believe will enable us to continue to deliver free cash flow per share growth over the long term. With that, let me turn it back to Mike. Mike Beckman: Operator, you can now open the line for questions. In order to provide as many of you as possible an opportunity to ask your questions, please limit yourself to a single question. After our response, we will provide you an opportunity for an additional follow-up. Operator? Operator: Thank you. We will now be conducting a question-and-answer session. You may press 2 to remove your question from the queue. For participants using speaker equipment, please pick up your handset before pressing the keys. Please hold for a moment while we poll for questions. Our first question is from Timothy Arcuri with UBS. Timothy Arcuri: Thanks a lot. Haviv, I wonder if you can comment on the behavior of customers. I know you are guiding up a little better than seasonal off of a number in March that was very strong. So it sounds like it is mostly Industrial, but can you comment on whether there are rush orders? We are seeing signs of price increases and things like that. So is this impacting the customers' behavior? Thanks. Haviv Ilan: Yeah, thanks, Tim. In general, I think Q1 was a continuation of what we saw in Q4, similar behavior, meaning growth coming from two main areas, led by Industrial, as you mentioned, and also supported by the Data Center market that we have seen secular growth in for the last couple of years. This was the eighth quarter of sequential growth, just off of a higher number, so that also helps the overall growth of the company. I will say that the Industrial signal was a little bit broader this time, so I would say all sectors, all geographies grew sequentially, and it continued to accelerate through the quarter. If you think about January, February, and then you always want to see how the exit from the Lunar or the Chinese New Year break is going to look, but it continued in March. So just a continuation. I would say it is our five or six months of continued growth in Industrial. We want to keep watching it, but I would say that is what guides our forecast into the second quarter. Mike, anything to add on that? Mike Beckman: I think on behavior, just want to be mindful of the overall macro backdrop and want to see how sustainable the growth is, and that was factored into the guide. Tim, do you have a follow-up? Timothy Arcuri: I do. Mike, maybe you can comment on, I know typically you do not break the guidance down by segment, but just given how different it was in March, and given that we are hearing some choppiness in Autos, particularly in China, I would think that most of the sequential growth will be Industrial, but can you give any comments for what is being thought of in the June guidance for those two? Mike Beckman: Thanks. Haviv Ilan: Let me take that, Tim. I think I can help you a little bit on the Automotive side. First, I think as you said, we are not seeing a change from the previous quarter, so I expect growth to be led by Industrial and Data Center. I will not break it out between the two, but we see strength in both. Regarding Automotive, you are right that Q1 was, you know, it is always the same in Q1 in China. The overall quarter was flat sequentially, but China was down. The rest of the world was up. I want to see Automotive and see how it develops in Q2. It is too soon to call it. I will remind that during the COVID cycle, even Automotive was the last to join in, also the last to peak. So I am not surprised by the behavior of this market. I will say that secular growth in Automotive continues for the foreseeable future, and that is what gives me encouragement. We are seeing cars adding features. We are seeing more content added to vehicles across the powertrain, whether it is BEV, ICE, or hybrid. Anything to add on that, Mike, in terms of the guide? Mike Beckman: No, I think you have characterized it well. And as you know, Auto has been steady at an elevated level for some time. It did not really have that steep correction that we saw in the other end market. So as we have called out, these markets in the past have been transitioning out of phase. I do not think it is unrealistic to assume that could happen again. So we will have to see how it plays out. Haviv Ilan: I think it is an important point. As Mike said, Q1 was a flat quarter, but very close to peak levels, maybe a point or two below its peak. So it is holding very nicely at a high level. Mike Beckman: Alright. We will move on to our next caller. Operator: Thank you. Our next question is from Vivek Arya with Bank of America. Vivek Arya: Thanks for taking my question. On this Industrial growth, up 30% year over year, this is obviously well above the long-term trend line. Could you help us dissect which applications, which end markets are driving this? Is this still inventory replenishment? Is this pricing? Is it share gains? What checks and balances do you have in place that this is not any kind of double ordering or hoarding of your product? Haviv Ilan: No, I do not see it that way, at least I do not have the evidence to show that, Vivek. But remember, for one quarter, that is a lot of growth. If you look at the long-term trend line, we are still below the trend line. I just did the math in Q1: our Industrial had a very good quarter growing at the rate that you mentioned, but still 15% lower than the peak that was back in 2022. And as I say many times, there is secular growth continuing in Industrial, so we deserve a higher peak four years later. I think there is a lot of room to grow. The encouragement I would have this time is that I see it at a broader application level. Not only the data-center-related energy infrastructure or power delivery, not only Aerospace and Defense—given the geopolitical tensions the market is establishing new peaks every quarter—I saw it across all sectors in Industrial and also across all customers in terms of regions, and also the size of customers. It is the first quarter where we saw the broad market, typically the tail, starting to wake up again after a long hibernation period, I would call it. So I am encouraged about the fact that we are seeing growth there, but I think there is room to go. I would like to see secular growth in Industrial continuing and then higher peaks establishing in 2026 or later versus the 2022 peak. So in that sense, trend lines are suggesting we still have room to go. Hopefully, that helps. Do you have a follow-up with that? Vivek Arya: Thank you, Mike. So last year, we saw the overall Analog industry do very well in the first half, and then there was some level of deceleration in the second half. I realize every year is different. I know you are not guiding to the second half. But from what you see today, what are the puts and takes as you look at the second half versus the first half? Is there anything that could be different just given all the macro trends, memory price inflation, and whatnot? And as part of that, if Rafael could also help chime in with how you are managing fab loadings as you look towards the rest of the year. Haviv Ilan: Yeah, let me start and Rafael will follow. So first, Vivek, you are spot on. We had a similar strong beginning of the year last year. Maybe the year-over-year growth last year was a little lower, but it was still in the teens, and it looked like it was getting stronger. But it was, whatever you want to call it, a head fake, a false start, or whatever. We had a good year in Analog, but it did not accelerate in the second half. It actually slowed down a little bit. So I think we need to be, as Mike mentioned, mindful. There is geopolitics. There is the macro that we are watching. On the other hand, there is secular growth in our markets. So in the long term, I am still very optimistic. We want to play it quarter by quarter. That is part of the way we have guided to $5.2 billion at the midpoint. Let the second quarter play out, and we will call it as we see it. I remind you that the way we support our customers and the way we go to market, we serve our customers direct. We have very friendly customer terms. So we see the build-up of demand as we go almost real time. I want to see the second quarter play out and see if this growth is sustainable. That is the biggest question I have for myself for the second half. But at least the fact that Industrial is still trending below previous peaks and the secular growth in Data Center and, of course, the content growth in Automotive, makes me feel optimistic about the long term. Rafael, can you comment about loading? Rafael R. Lizardi: Yeah. I will just add that we have the capacity and the inventory, and we are well positioned on both of those to handle a wide range of scenarios in the upturn. Mike Beckman: Alright. Vivek, thank you so much for the questions. I will move on to our next caller. Operator: Our next question is from Joe Moore with Morgan Stanley. Joe Moore: Great, thank you. Yes, on the topic of fab loading, can you talk about what is going to happen with inventory over the course of Q2? And are you seeing incremental gross margins off of Q1 that are better than normal, worse than normal, or just normal? What are the dynamics around that transition? Rafael R. Lizardi: Yeah. Again, we are well positioned on inventory. The objective of inventory is to maintain high levels of customer service, keep lead times short and stable, and we are accomplishing that. So we feel very good as to where those are, and we will continue to determine what makes sense from a loadings and inventory standpoint throughout the quarter to handle any scenarios. Haviv Ilan: And Joe, just to add on that, you and I talked a month ago, we saw rapid growth in Q1 and inventory served us well. We depleted some of it. We filled our customers in real time according to their demand. And we just want to see how sustainable that would be. But as Rafael said, if indeed the market wants to have very rapid growth and maybe catch up to the trend line even quicker, we are well positioned. Of course, we are in this phase three on the fab, and we can modulate wafer starts there. We have the capacity. We may make some incremental investments on the ATs because we are seeing, on the assembly and test side, a little bit of a tighter environment, at least externally. So as you know, we have brought most of our supply internally, and we have that knob as well. We are very excited about the fact that we are prepared. If the market wants to grow at the same rate as Q1, we mentioned 19% year over year, we are ready. If it wants to accelerate, we are ready as well. Mike Beckman: Joe, do you have a follow-up? Joe, do you have a follow-up? Joe Moore: Well, just on my follow-up, on the gross margin aspect of that. Is the incremental gross margin going to look normal, or is there some part of inventory management that makes it lesser or more? Rafael R. Lizardi: Yeah, no. The fall-through that you should expect is in the 75% to 85% that we have guided. That is excluding depreciation over a long term. But on a year-on-year basis, if you look at our midpoint on EPS and revenue, and make the right assumptions on OpEx and other lines, you should get to a reasonable assumption on gross margins, and it will be in that fall-through that we have guided. Operator: Okay. Thank you. Thanks for these questions. Moving on to our next caller. Our next question is from Stacy Rasgon with Bernstein Research. Stacy Rasgon: Hi, guys. Thanks for taking my question. Maybe just to dig into that gross margin point, if I typically think of your OpEx up, what, a couple of points in Q2, I come out with a gross margin implicit in the guidance maybe low to mid 59%, up from 58%. And it is up, I do not know, 100 or 150 bps year over year on a pretty material revenue growth. Part of me would almost expect the incremental gross margin to be higher given the revenue. But maybe it is differential, like the increase in depreciation. How should I be thinking about the different drivers of gross margin into Q2? Qualitatively, if not quantitatively, if you do not want to give us a quantitative? Rafael R. Lizardi: Yeah. So, Stacy, to help you out a little bit, your OpEx assumption was not a bad one. So you should expect some growth in OpEx first to second. Maybe what you are missing is the acquisition charges line. You should expect to continue to have charges there every quarter at the tune of what we just reported in first quarter. We will continue having those there every quarter until we close, at which time it will be a lot higher at close, and then they will be steady after that for a number of years. But for now, for second quarter, just assume somewhere in the range of what we just reported on the acquisition line. When you do that, you will get a gross margin assumption that should make sense. Operator: Alright. Do you have a follow-up, Stacy? Stacy Rasgon: Thanks. Maybe to ask about the acquisition itself. Again, not the deal specifics, but I know you have talked about it being accretive. You are one of the few, if not the only company in my coverage that still does pure GAAP earnings. And I even remember when you bought Nat Semi, you did pro forma for a little while and then said this is stupid, we are going back to GAAP, and told us to make whatever adjustments we want to make. What are your intentions for how you are going to report once you do close Silicon Labs? Because I have a hard time getting it accretive on a GAAP basis. Are you going to be going to a pro forma, or how should we be thinking about that? Rafael R. Lizardi: Our thinking right now is we will do GAAP, and we will give you all the pieces that you need to do your own non-GAAP in whichever way you want to do that. So we will have the acquisition charges line, for example. You can take that out if you like and not count it. Once we are on a run-rate basis, all those will be noncash. But initially, some of those are cash charges. They are charges to advisors: bankers, lawyers, regulatory fees, etc. There will be other things. For example, the first quarter will have some transition impacts in gross margins and inventory as we write off the inventory that we are buying. We will give you all those pieces. That way, you can do the non-GAAP analysis yourself. Operator: Thanks for the question. Thank you. Moving on to our next caller, please. Our next question is from Ross Seymore with Deutsche Bank. Ross Seymore: Hi, guys. Thanks. Let me ask a couple of questions. I guess the first one is the strength that you saw—what was the biggest surprise versus the midpoint of your guide in the first quarter? And was pricing part of the strength in either the quarter or the guide? Haviv Ilan: Yeah. Let me start with pricing and then we can chat a little bit more about what happened in the quarter. I think we answered it, but I will repeat the same messages. In terms of pricing, I think we said in the last quarter, we do not expect pricing to help the growth, at least not sequentially or year over year, and that was the case. But it was better than our model. Usually, Q1 pricing is a couple of points down—call it low single-digit down year over year and also sequentially—because price agreements typically kick in at the beginning of the year. So the quarter behaved a little better. We had pricing that was stable, flat if you will, like-for-like, both sequentially, Q4 to Q1, and also year over year, Q1 2026 versus Q1 2025. So that helped a little bit. And I expect Q2 to be very similar, Ross. Just the way we work with our customers, these are discussions that are not happening immediately. We serve them direct, and I will mention that as I look at the year, if demand—and right now, the demand signals are strong—continues to be strong, and we are monitoring the market price and there is definitely at least an average price increase in the last several months across the Analog market, I think it is likely that prices may go up in the second half of the year. Again, this is going to be a case-by-case discussion in our case, but that is the pricing environment as I see it right now. And, again, it is always a function of supply and demand, and the unknown for me right now is the sustainability of demand. So I want to see it play out one more quarter, and then we will figure out for the second half. So high level, not immediate support on growth sequentially and year over year on pricing. Now what we have seen is just breadth of demand—multiple sectors, all sectors, all regions, all types of customers, small and large—and supported by a Data Center market where we do pretty well. I think our portfolio is growing. I believe we are fulfilling customer demands at the highest level. We have no shortages, and it allows us, I believe over time, to take market share there. That is what drove Q1. I expect a similar behavior in Q2, and the second half of the year is still unknown. We are seeing, as I mentioned before, a higher tension on the Analog side. I think we see strength there. And I think we are unique in the setup in the sense that we have the capacity, we have the inventory, and we are well positioned to support customers at the highest level. Mike Beckman: Do you have a follow-up, Ross? Ross Seymore: Yeah, I do. One of the concerns people have, and it does not sound in the strong report and guide that you are seeing it, but one of the concerns people had was more consumer-oriented end markets seeing demand destruction with higher memory costs, memory availability, those sorts of things. Are you seeing any evidence of that? Your Personal Electronics segment seemed like it was well better than normal seasonal in the first quarter. I suspect that is where it would arise if it were to arise. So I just wondered if you have seen any evidence of that across your business. Haviv Ilan: High level, we have not, although customers are very aware of it, but I think they are doing well preparing themselves. And I will let Mike comment about the Personal Electronics market. Mike Beckman: Yeah. I think it is also important to remember that fourth quarter last year was a pretty easy compare for the sequential transition for PE. And on a year-on-year basis, it is about flat. So, again, if that was happening, I do not know if you could point to those results as evidence of that. But, again, you cannot rule that out. We will move on to our next caller. Thank you, Ross. Operator: Our next question is from Tore Svanberg with Stifel. Tore Svanberg: Yes, thank you and congrats on the strong results. Haviv, I was hoping to zoom in on Data Center and specifically Power. It is a great market and great opportunity. It is also very competitive. I am wondering if you could talk a little more about some of the moats here as we go into the next few years that Texas Instruments Incorporated has. I assume your manufacturing footprint will be an important element of that, but any other color you could add on Texas Instruments Incorporated's positioning in power semis, especially with Data Center over the next few years? Haviv Ilan: Yeah, Tore. Power in general is very important to Data Centers, and specifically power density. Think about the amount of power or energy you have to drive into these systems—you need a lot of silicon to withstand it. So that implies the importance of power electronics, and Texas Instruments Incorporated is well positioned there. What I like about our position is the combination—true for every market—but in Data Center there is a lot of attention to what I call application-specific sockets. You can call it stage one, stage two, the VRM, the last VCORE that these GPUs need for power delivery at the highest level—very complex parts, multiphase power delivery, etc. And there is also a lot of general-purpose parts in a rack. I would say tens of thousands of them, lots of different SKUs, and this is where our general-purpose portfolio is amazing. We can fulfill almost every Analog socket on these racks. I think we are very unique in that point, not only because of the breadth of the portfolio, but also because of our ability to supply. We have seen cases where our customers needed help because they had supply shortages from their other suppliers, and we come in and solve the problem. I think that is part of the reason our growth has been so high. I mentioned 90% year over year, and I am very excited about the future there. So that combination of a broad portfolio and the ability to support customers with capacity and inventory is unique. The second point, which I have touched upon in many calls or conferences, we are also investing more and more R&D in Data Center, and we are going to be one of the competitors on the application-specific sockets, whether it is VRM stage two, or high-voltage conversion—800 to 12 or 6 at stage one—and we are well positioned there as well, both with the GaN technologies that we have invested in for the past fifteen years and also now very advanced BCD nodes that not only have the capability needed, but are also built in North America, here in Texas, and customers care a lot about it. So I think that combination of broad portfolio, both on general purpose and ASSPs; ability to support the rack, not only the board; and ability to supply at scale with the volume that this market demands is very unique, not to mention that it comes from a geopolitically dependable location. All of that is a unique combination, and that is part of what we like to talk about as our competitive advantages. Maybe one of them is easy to replicate, but trying to replicate all—in this case, all three—is not easy. This is why I am very encouraged about our opportunity to continue to grow in this market. I will just add that our application-specific sockets are seeing momentum as well on the design-in phase right now, and I do expect that they will kick in more in the second half of the year and into 2027. So my bar for the team and my expectations are high here. Mike Beckman: Thanks. Tore, do you have a follow-up? Tore Svanberg: Yeah, that is great color. Thank you, Haviv, for that. And then as my follow-up, thinking about another new upcycle in Analog and comparing this to the last one. In the last one, capacity got tight pretty quickly. Lead times started extending pretty quickly. I know it is a different cycle, but now that you have made all the CapEx investments and you have the big manufacturing footprint, are you starting to see share gains pop up in your design wins since you are much better positioned with capacity now versus back then? Haviv Ilan: I believe we are, yes. We gained share in Analog in 2025, but I think we have a lot of room to go. We are still below previous peaks. The question, Tore, is can we do it quickly—meaning, does strong demand continue, or is it going to take more time? From our perspective, we hope demand continues. We have the answer for customers, and in many cases, we are unique. I gave the Data Center example a minute ago, but we are starting to see other areas where our availability is allowing us to win back market share. I mentioned pricing before. Our pricing is very competitive. I think we have an opportunity there as well for the second half of the year. So it all depends on the sustainability of demand. Vivek mentioned before, we had a very unique 2025 where it started strong and then took a breather. I want to see it play out in 2026. Obviously, if it continues, our opportunity just grows. Mike Beckman: I will just add that we spent the last several years preparing with capacity and inventory, as you know, and our lead times have been stable over the last several years, especially the last several months. We are really happy with the delivery performance. If we look at what the future holds, we want to make sure we can service our customers' needs, but also their growth as well across a broad customer base. We are really happy with the systems we have in place to allow that. Alright. I will move on to our next caller. Thanks. Operator: Our next question is from Analyst with Cantor Fitzgerald. Analyst: Guys, thanks for taking the question. You previously talked about spending about $2 billion to $3 billion CapEx in 2026. First, is that still the right number? And then as we think about the modular buildouts within this ongoing recovery, can you help walk us through when you would need to start to add the incremental equipment and how you are thinking strategically about your capacity today, as we are starting to see some foundry capacity at custom mature nodes and now tier-two foundry pricing increases? Rafael R. Lizardi: Yes. I will start. First, the answer to your question is yes. We are looking at $2 billion to $3 billion of CapEx for this year. In that number, there is capacity for what we call phase three, which is incremental capacity that you are alluding to. That is both on the fab side and also on the assembly test side. That is where a growing proportion of our CapEx is going, to the assembly test side, to address growth. Beyond that, what I would tell you for CapEx beyond 2026 is to think of the 1.2 times rate that we have talked about before for the long-term CapEx intensity. So, for example, if you take 5% growth, that would translate into 6% CapEx as a percent of revenue, and that is how you would want to model it. Haviv Ilan: Matthew, just one more point. I think Rafael touched upon it. So again, $2 billion to $3 billion is very valid. Remember, we gave a framework that is still very valid—I think it was a couple of years back during Capital Management—on revenue scenarios and CapEx. I think those are also very valid. I will say that, as Rafael alluded to, we are seeing right now, even at the midpoint of the second quarter—and again, I want to see how it plays out—we are looking at 17% to 18% growth year over year for the first half of the year. That is stronger than last year. So, of course, we want to be prepared in case it continues. No one tells us what the future will be; we just have to support a range of scenarios. In that sense, we are taking the opportunity to divert some of the focus because we have enough wafer capacity. I think we are well positioned with our 300-millimeter wafer fabs. We have the brick and mortar. We have the installed equipment. But on the AT side, I think there is an opportunity, and we are very happy that we have internalized our supply because we are seeing more and more bottlenecks in the market that are popping up. The fact that we control our destiny here and we can move more stuff internally is a benefit. So some of the $2 billion to $3 billion of CapEx that you are seeing this year is going to support a faster internalization of our back end into our own assembly and test, and that allows us to support customers at a higher level. Mike Beckman: Do you have a follow-up, Matt? Analyst: Yeah, that is helpful. Thanks. I guess as a follow-up, is there any update to your messaging around depreciation expectations versus three months ago? Then maybe how to think about timing of when Texas Instruments Incorporated will receive the remaining CHIPS Act direct funding? Thanks. Rafael R. Lizardi: Yes. I will take that. No change to depreciation. The expectation for this year is $2.2 billion to $2.4 billion. And then for 2027, continued upward pressure, but likely at a slower rate. On the CHIPS Act, first, I will tell you the more interesting one is ITC. We have been talking about that one. That is the one that is going to give us more money over the long term, and that is 35% of qualified manufacturing investment. We have been getting that ITC and will continue to get ITC. On the direct funding, we have just received over $500 million. In total, what we received in fourth quarter and first quarter is $630 million out of the up to $1.6 billion of direct funding. The remaining should come over the coming years as we continue fulfilling the various milestones stipulated in the contract. Mike Beckman: Thanks, Matt. Move on to our next caller, please. Operator: Our next question is from Analyst with Wells Fargo. Analyst: Yes, thanks for taking the question. I was curious if you could help us understand, given the resegmentation of revenue especially on the Industrial side, what is normal seasonality now for June? Mike Beckman: You could look back and model out what our revenue has done over history. I do not have a by-end-market specific percentage, but overall, what you will typically see is the second and third quarter are stronger quarters, and fourth and first are typically lower compared to second and third. A follow-up? Haviv Ilan: I will just add on that, just on seasonality. Our guide is, I would describe it as, a little bit above seasonal. I think we have guided at about 8% sequential. That is a little bit above. The combination of the market is changing—Data Center, as we know, is now a bigger part of our revenue. But overall, my view on Q2 is it is a slightly above seasonal guide. Hopefully, that helps. Mike Beckman: Do you have a follow-up? Analyst: Yeah. As a follow-up, you had a really strong quarter in the first quarter out of the gate for free cash flow and cash flow from operations. Any update on how to think about free cash flow per share for this year? Any change there? Haviv Ilan: Yeah. I think I mentioned during the Capital Management call that as long as revenue is growing mid- to high-single digits, that $8 free cash flow per share is very probable, highly probable. Now, as I said before, first half of the year at the midpoint is somewhere between 15% to 20% growth. So there is definitely an upside. I am not going to say what the number is, but go back to our framework that we provided in the Capital Management call. You will see, I think at $20 billion we had $8 to $9, and at $22 billion we had $9 to $10. So it gives you how every extra billion dollars of revenue helps free cash flow per share. It gives you a very high-level framework. But right now, assuming we do not have another false start, I think it is very likely we will easily be at $8 free cash flow per share for 2026. Again, we need to see how the year continues, but I would say the probability is high. Mike Beckman: Thank you. Move on to our last caller. Operator: Our last question is from Chris Caso with Wolfe Research. Chris Caso: Yes, thank you. First question will be about fab loading. Given what appears to be a strong start to the year, what are your plans for fab loadings, and what do you expect to do with inventory as we go through the year? I know you have been building inventory in order to be responsive to customers. Do you expect to keep inventories at these levels, or let that dip a bit? Rafael R. Lizardi: Yeah. We feel very comfortable with our position with both capacity and inventory. Inventory is there to support customer satisfaction and keep lead times short and stable. So we will continue to do that, and we will adjust loadings throughout the quarter to handle whatever comes at us in a number of scenarios in this upturn. Haviv Ilan: I would just add on that, Chris. We talked about all these phases of our investment—phase one, phase two, phase three. Right now, the surge of demand is in Analog, and in Analog we are at phase three. So we are modulating starts. We have the capacity. We are moderating starts in real time. We are looking at daily consumption, and this is where Rafael guides the team on how to start wafers. Of course, we have the opportunity. Now in terms of inventory, it all depends on the rate of consumption. If demand continues to be very strong, we will continue to deplete inventory. Obviously, it takes time to build these parts. Some of the parts get built in three months, but some can take six to nine months. That is why we have inventory. Inventory allows us a quick surge of customer support if they have strong demand. That is what happened in Q1. We have a strong guide for Q2; at the midpoint it is 8% sequentially, above seasonal, as I mentioned. So I think inventory will play a role there. Then the machine catches up. To me, all these questions are related to what the second half of the year of demand will do. Based on the macro environment and based on what happened last year, when the market was jittery, I want to see it play out. The good news is that we are prepared for every scenario that will be presented to us. Rafael R. Lizardi: Taking a longer view than just the next quarter, when you think of our range of inventory days—150 to 250—during an upturn, we should be draining that number. Right now, we are at 209. It should drift towards the lower end. And then during the downturn, that is when we build inventory and it moves upward. So high level, in an ideal scenario, that is what you would see in terms of days of inventory. Chris, do you have a follow-up? Chris Caso: I do. For my follow-up, I want to return to some of your comments about pricing. We have heard from others in the space who were a little more explicit on what they were doing with pricing. Is Texas Instruments Incorporated simply following the market right now with your comments of potentially some better pricing in the second half? And then as a follow-on to that, to what extent are your customers—what percentage of your customers—on annual price contracts such that if there was a reset in pricing, that would more likely happen toward the end of the year into next year? Haviv Ilan: I think it is a good question, and I think we touched most of it. Just to clarify, Texas Instruments Incorporated follows because we want to see sustainability. We do not want to be changing prices every quarter. Of course, prices go up and down every quarter. It depends on the portfolio and where customers need more demand and what supply is. But let us look at 2025. In 2025, our pricing behaved as we expected. It was down, this low single-digit number. That was the actual number in 2025. In 2026, it was stable. It was a good start of the year. If demand continues to behave like that and we see stronger and stronger requests from our customers, that opens up a discussion, and that is what we are going through right now. We are definitely seeing that the price agreements we did last year—agreed upon in Q4 when the demand environment was very different—are being revisited. We are seeing higher numbers in terms of demand. We will have to invest in our capacity. I mentioned back-end capacity investment to support all of that. There is a tightness on the outsourced world. So, of course, there is a discussion. I think customers are very thoughtful, and most important for them is not to have a $0.30 part stopping their production. They need to have a high level of customer support, and that is what we are offering. Not only in supporting the parts we promised them, but also sometimes solving problems they have with other suppliers. That is the opportunity we have in 2026. But it all depends on the sustainability of the demand signal. So we will continue to watch it. We are discussing with our customers as we speak. And we will report back during the July call. Mike Beckman: Thanks, Chris. Haviv, do you want to close us out? Haviv Ilan: Yes. Let me wrap up what we have said previously. At our core, we are engineers, and technology is the foundation of our company. But ultimately, our objective and the best metric to measure progress and generate value to owners is the long-term growth of free cash flow per share. Thank you all, and have a good evening. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.
Travis Axelrod: Good afternoon, everyone, and welcome to Tesla's First Quarter 2026 Q&A Webcast. My name is Travis Axelrod, Head of Investor Relations, and I'm joined today by Elon Musk, Vaibhav Taneja and a number of other executives. Our Q1 results were announced at about 3:00 p.m. Central Time in the update deck we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the question-and-answer portion of today's call, please limit yourself to 1 question and 1 follow-up. [Operator Instructions] Before we jump into Q&A, Elon has some opening remarks. Elon? Elon Musk: Thank you. So I think we've got a very exciting year ahead of us with 2026. We're going to be substantially increasing our investments in the future so we should expect to see significant -- a very significant increase in capital expenditures, but I think well justified for a substantially increased future revenue stream. And obviously, Tesla is not alone in this. I think you've seen most, if not all, certainly the major technology companies substantially increasing their capital investments. And we're going to be doing the same. I think it's going to pay off in a very big way. So we're investing in and improving our core technologies, battery powertrain, AI software, AI training, chip design, manufacturing -- laying the groundwork for significantly increased manufacturing production. We are also strengthening our supply chain across the board, batteries, energy, AI, silicon, everything, and laying the groundwork, like I said, for what we expect to be a significant increase in vehicle production in the future and, of course, a very significant increase -- well, actually releasing Optimus. But increasing our internal production for testing and then probably being able to have Optimus be useful outside of Tesla sometime next year. As you've heard me say a few times, I think Optimus will be our biggest product -- not just Tesla's biggest product ever, but probably the biggest product ever. And I remain convinced of that conclusion. So on our vehicle side, it's always, I think, worth noting that a Tesla car is incredibly -- incredible value for money, and they're all autonomy-ready depending on what part of the world you're in. The supervised full self-driving is getting extremely good. We have just started production of Cybercab, and we'll begin production about SemiTruck soon. And I should say, whenever you have a new product with a completely new supply chain, new everything, it's always a stretched out S-curve. So you should expect that initial production of Cybercab and Semi will be very slow, but then ramping up and going kind of exponential towards the end of the year and certainly next year. And in fact, we'll be ramping up production of all vehicles and all factories to the best of our ability through the balance of this year. On the energy front, the United States and the whole world will need a lot of energy storage to meet growing electricity demand. Demand for our Megapack is very strong, and we're excited to begin production of Megapack 3 later this year in our new world-class factory outside Houston. For full self-driving and Robotaxi, version 14.3 was a major architectural update. And we have a whole pipeline of major improvements to full self-driving that, we believe, will lead to unsupervised full self-driving being available anywhere in the world that it is legal to do so. And then there's a version 15, hopefully later this -- hopefully by the end of this year, but certainly by early next year. And that will be a complete overhaul of the software architecture, and will run on AI4. That's -- and at that point, we're really just increasing the safety level of FSD above human safety level, even more. Meaning I think even within version 14, we're significantly safer than human, but v13 will take that to another level. We've expanded Robotaxi to Dallas in Houston using the same software source in the Bay Area. And the limiting factor for expansion is really rigorous validation, making sure things are completely safe. We don't want to have a single accidental injury with the expansion of Robotaxi. And we have, to the credit of the team, not had a single one to date. And Optimus, we're preparing Fremont for starter production later this year with Optimus. Again, totally new supply chain, totally new technology. So therefore, the production S-curve is always very slow in the beginning, but we'll ramp up to significant numbers next year. And we're constructing a second Optimus factory in -- at our Giga Texas location. And that will probably start production around summer next year. The V3 Optimus design is almost ready to demonstrate. I think we want to just make sure it's like polished. Like it works functionally, but there's some aesthetic elements that need to be finalized. And I think probably middle of this year, we should be able to show it off. We're also a little hesitant to show V3 off because we find our competitors do a frame-by-frame analysis whenever we release something and copy everything they possibly can. So I think there's some value to not showing new technology until it's close to production. The -- congratulations to -- again to the Tesla AI chip team for taping out AI5. That's going to be a great chip. I think probably the best AI inference chip for edge compute that exists. And certainly, I think the best value for money. The team did a great job. And we already have a lot of momentum for designing AI6, and we've begun to discuss ideas for Dojo 3. So this is all very exciting. We've also finalized plans for the chip fab -- the research chip fab on the Giga Texas campus, and we'll start construction of that this year. In conclusion, Tesla is working on a lot of large, ambitious projects. They're all very challenging, but I think they're going to be revolutionary. And that's what the team does best, solve the hardest problems and build amazing products. And I'd like to thank the Tesla team for all the hard work and thank you to all of our supporters. Travis Axelrod: Great. Thank you very much, Elon. And Vaibhav also has some opening remarks. Vaibhav Taneja: Thanks, Travis. So 2026 has had an interesting start not just for us, but I think the world in general. On the autos business, we have seen a resurgence in demand in EMEA, in certain countries like France and Germany showing over 150% quarter-over-quarter growth in deliveries. In APAC, we witnessed growth in South Korea and Japan, again, in terms of deliveries. Even out here in the U.S., we have seen a slight growth in terms of [ quarter-quarter ] deliveries. On the order backlog front, we ended the quarter with the highest Q1 order backlog in over 2 years. Whilst the recent increase in gas prices has had a positive impact on the order rate, this improvement started before the uptrend in gas prices. This is due to the work done by the Tesla team in bringing more compelling and affordable vehicles to market. 10 years back, when we launched Model 3 in the U.S. with a promise of $35,000 starting price, which if you adjust today for inflation, translates to about $48,000 in today's dollar terms, the starting price of Model 3 today is way less than that when the product is way more compelling from where it started. Given this setup, we're focused on increasing our overall production volume, something that we already started in Q1. This volume increase is evidenced by the Giga Berlin reaching a record output of over 61,000 units in Q1. We plan to keep growing volumes further, not just in Berlin, but across all our factories. Our biggest limiter continues to be our battery pack capacity, and we are actively working on resolving that. Auto margins, excluding credits, improved sequentially from 17.9% to 19.2%. Note that we have had certain onetime benefits from warranty true-downs around $230 million and some relief on tariffs. We have not realized any benefit from the recent Supreme Court ruling on IEEPA tariffs as there is still a lot of uncertainty around the final outcome. Both tariffs and sustained high interest rates continue to add to our automotive cost. Interest rate subvention costs are recognized upfront. If interest rates continue to rise, our cost of subvention will continue to impact auto margins. On the FSD adoption front, we continue to see improvement, reaching nearly 1.3 million paid customers globally. The bulk of the growth came from subscriptions, while upfront purchases only increased 7% as we remove the purchase option in some markets in Q1. We recently received approvals for our FSD in Netherlands. This sets up us well for an EU-wide approval later in Q2, and we're just gated by how the regulators go about it. Additionally, we've also received approvals in China. The broader approval is still not there, but we're working with the regulators in the country, and we're hoping that we can get approval by Q3. With these approvals coming through, we expect the broader adoption of the software in the existing fleet and incremental demand for our vehicles. With all this in mind, we have evolved our vehicle sales strategy, where we now emphasize FSD as a product and vehicle as only the delivery mechanism. As we have noted previously, the energy storage business is inherently lumpy tied to customer deployment time lines. In Q1, we deployed 6 -- 8.8 gigawatt hour of energy storage, a 38% sequential decline. However, we still expect 2026 deployments to be higher than 2025. We set yet another record with gross margins in this business over 39.5% due to some onetime benefits from certain tariff recognitions of more than $250 million from certain tariffs which we had paid in prior quarters. On a normalized basis, we continue to expect energy compression from here with increasing competition and tariff impacts. As previously discussed, tariffs in this business can have outsized impacts as most of the battery cells are procured from China. Our order backlog for this business is robust, and we're doing our best to build not based on -- not just based on existing demand but also unexpected demand. Services and Others improved sequentially from 8.8% to 9.2%. This includes a collection of efforts meant to support our customers like service centers, used cars, spare supercharging, part sales, insurance and even our Robotaxi business. We're making deliberate investments in the infrastructure to help the Robotaxi in the future. We grew the Robotaxi fleet quarter-over-quarter, and we expect to keep ramping the fleet as we accelerate and get into other geographies. On operating expenses side, we did increase sequentially from a full quarter stock-based compensation expense for the 2025 CEO compensation plan for which one milestone is still deemed probable. Additionally, our spend on AI-related initiatives, including expense on development of our own AI5 chip and new products like Cybercab, Semi, Optimus and Megablock, et cetera, continue to be at elevated levels, and we expect this trend to continue for the full year 2026. Net income was impacted from mark-to-market charges on our Bitcoin holdings, which depreciated 22% as compared to the last quarter and the unfavorable impact of FX, primarily from our large intercompany ForEx. On free cash flow, we ended the quarter with just over $1.4 billion. As Elon mentioned, we are in a very big capital investment phase, which is going to start now and would last a couple of years. So based on that, our current expectation for 2025 -- 2026 is over $25 billion of CapEx. And just to remind you, we are paying for 6 factories which we're going to go into operation. Some have already started, some would go into operation later part of this year. We're further increasing our investment in AI-related initiatives, including the AI infrastructure to support Robotaxi and the launch of Optimus. We've already started placing orders for the research semiconductor fab in Austin and for solar manufacturing equipment. While this may seem a lot and will have the impact of negative free cash flow for the rest of the year, we believe this is the right strategy to position the company for the next era. We'll make such investments in a very capital-efficient manner. We are actively working on our mission of building a future of amazing abundance. However, that requires not just a lot of investment, but an immense amount of execution. The future is going to be great, and the whole Tesla team is rising to the occasion to make this a reality. I would like to end by thanking the Tesla team, our customers, investors and vendors for having confidence in us on this journey. Thanks. Travis Axelrod: Thank you very much, Vaibhav. Now we're going to go to investor questions, starting with questions from say.com. The first question is, when will we have the Optimus 3 reveal, which we already touched on. But the rest of the question is, when will Optimus production start since we ended the Model X and S production earlier this -- the midyear? And then what's the expected Optimus production rate exiting this year? And what are the initial targeted skills? Elon Musk: Well, as I was saying, what we found is that when we've unveiled various Optimus versions, we found out our competitors literally do a frame-by-frame analysis and copy everything we're doing. So I think we want to push the Optimus 3 unveil maybe closer to production. Start of production is -- we're assuming is somewhere around the late July, August time frame. And I mean just to inject some reality into these questions since these questions are not -- if I were to describe those questions, it does not fully understand what happens with the production line. The last S and X production will be in early May. But you have to look at the entire upstream portion of the production line. So you start with sales, battery packs, motor production, all the parts production. And so we've been dismantling the S, X production line from the more base-level parts -- more basic level parts to -- as you get to more larger subassemblies, you start dismantling the line from the small parts first, not from the final assembly first. So the final assembly line will -- that will be dismantled next month and after the last of the S X vehicle is done. You can't dismantle some gigantic production line like overnight. It takes at least a few months to do so. And then you've got to install a new production line, and you've got to provide all of the wiring and communication, test out the machines of the new production line for Optimus. So that also takes several months. So frankly, if we're able to go from [ suffering ] production on one line, dismantling that entire line, reinstalling a whole new line and turning that on in a matter of 4 months, that is an insanely fast speed. I don't think any other company on earth has ever done that before, just to put things into perspective and inject some reality into the situation here. I don't know what the production rate of Optimus will be this year. It is impossible to predict these things. The -- when you have a brand-new product in an entirely new production line and you have 10,000 unique items, all of which have to go right into ramp production, it will move as fast as the least luckiest, lowest, dumbest part in the entire 10,000. And this is a Optimus -- it's a completely new product with completely new production line. So it's just literally impossible to predict, except that I think it will be quite slow for us as we iron out the 10,000-plus unique items that have to be sold for Optimus to reach volume production. Initial skills will be -- obviously, we're going to start with simple skills in the factory and then build up from there. Travis Axelrod: Great. Thank you, Elon. The next question is, what milestones are you targeting for unsupervised FSD and Robotaxi expansion beyond Austin this year? And how will that drive recurring revenue? Elon Musk: Well, we certainly hope to be -- have unsupervised FSD or Robotaxi operating in, I don't know -- it does [indiscernible] states by the end of this year. Initially, we're taking it very -- we're taking a very cautious approach to the rollout here. Like we haven't had any injuries and certainly no fatalities to date with the unsupervised FSD and Robotaxi expansion. We want to keep it that way. And so I don't -- I think probably unsupervised FSD or Robotaxi revenue would not be super material this year. But I do think it will be material -- it will be material probably in a significant way next year. Travis Axelrod: Great. Thank you very much. The next question is, when do you expect FSD unsupervised to reach customer cars? Elon Musk: I'm just guessing here, but probably in the fourth quarter. It's difficult to release this like to everyone everywhere all at once because we do want to make sure that they're not unique situations in a city that particularly complex intersection or actually, they tend to be places where people get into accidents a lot because they're just -- perhaps there's -- and like I said, an unsafe intersection or bad road markings or a lot of weather challenges. So I think we would release unsupervised gradually to the customer fleet as we feel like a particular geography is confirmed to be safe. Travis Axelrod: Great. And the next question is, how will hardware 3 cars reach unsupervised FSD? Elon Musk: Unfortunately, hardware 3 -- I wish it were otherwise, but hardware 3 simply does not have the capability to achieve unsupervised FSD. We did think at one point, it would have that, but relative to hardware 4, it has only 1/8 of the memory bandwidth of hardware 4. And memory bandwidth is one of the key elements needed for unsupervised FSD. And it's just generally a thing that's needed for AI. If you're doing order aggressive transformer memory bandwidth, it's the [indiscernible] point. So for customers that have bought FSD, what we're offering is essentially trade in -- like a discounted trade-in for cars that have AI4 hardware. And then we'll also be offering the ability to upgrade the car to replace the computer, and you also need to replace the cameras, unfortunately, to go to hardware 4. So to do this efficiently, we're going to have to set up like kind of micro factories or small factories in major metropolitan areas in order to do it efficiently. It's -- because if it's done just at the service center, it is extremely slow to do so and inefficient. So we basically need like many production lines to make the change. And I do think, over time, it's going to make sense for us to convert all hardware 3 cars to hardware 4 because that's what enables them to enter the Robotaxi fleet and have unsupervised FSD. Vaibhav Taneja: And for what it's worth, in the meantime, we are going to also release a V14 version for Hardware 3. This will be a distilled version of the same V14 software that we released for Hardware 4, and people should be able to start the drive from park state and basically have all the features that V14 for Hardware 4 has. And that's expected to come end of June. Travis Axelrod: Great. The next question is what enabled you to finish the AI5 tape out early? And were there any changes to the original vision? Last week, Elon said AI5 will go into Optimus and the supercomputer, but 1 month ago said it would go into the robotaxi. Has AI5 been dropped from the vehicle road map? Elon Musk: Well, the reason AI5 tape-out finished early was because the team worked incredibly hard to make it happen. And just over time, we gathered a lot of momentum. But we did have to work every weekend for 6 months straight, including every holiday. So it was a lot of sacrifice by our team, and I was there, of course, myself, every weekend. And fortunately, we didn't encounter any major -- we didn't make any major mistakes, at least that we're aware of that required pushing out the tape-out. So the team just did a great job and worked incredibly hard is the reason. Yes, I do expect that AI5 will go into Optimus and into the data center because it's looking like we'll be able to achieve unsupervised self-driving with AI4 that is far greater than human safety levels. So -- which means it's not -- certainly not immediately needed in the car. At some point, I think it will make sense for us to switch to AI5 in the car, but that's -- but there's not a pricing issue to do so. So -- but at some point, the AI4 hardware is going to get like so old that it's like, okay, the only reason they're keeping the factory open is for AI4. We are planning an AI4 upgrade to use newer generation RAM. So it will go from 16 gigabytes to, I think, 32 gigabytes per SoC. It's a total of 64 gigabytes, and probably a 10% increase in compute in sort of into [ trillions ] of operations per second and in memory bandwidth. So that's AI4.1 or AI4+ probably goes into production middle of next year, I think, depends. It depends on -- Samsung is doing the modifications for us. So it sort of depends on when they're able to finish that -- finish those modifications and bring it to production. Travis Axelrod: Great. The next question is now that FSD has been approved in the Netherlands and is expected to launch across Europe this summer, can you discuss your Robotaxi strategy for the region? Elon Musk: Well, we're probably jumping a gun here on Robotaxi in Europe since it is -- it took us an immense amount of time just to get supervised self-driving approved in Europe. And these -- we don't control the regulators. It's -- we push as hard as we can, but that's -- it's ultimately up to the governments in Europe and the EU to decide what to do. So yes, as it is, we've only been approved in Netherlands, we expect to be approved in a lot of other countries. And I think the supervised FSD goes to Brussels for EU review in May, yes. So -- and obviously, the next thing beyond that is to aim for unsupervised self-driving or Robotaxi in Europe. I actually don't know what the time frame for that is and would be somewhat at the most of the regulators as to when that approval would take place. Ashok Elluswamy: And from a technology standpoint, what we deployed in Netherlands and Europe is the same exact architecture and the training procedure and so on, except we had more Europe data. And I suspect that same thing will be true for unsupervised FSD as well. Whatever we use to solve in the U.S. will work in other places and the rest of the world, too, probably that we were able to add the data from the local regions. Travis Axelrod: Great. The next question is, given the recent NHTSA incident filings, can you update us on the Robotaxi safety data? If safety validation remains the primary bottleneck, why not deploy thousands of vehicles to accelerate removal of the safety driver? Elon Musk: Ashok, do you want to take that? Ashok Elluswamy: Yes. We are increasing the amount of our QA fleet, but we also want to use the customer fleet to give us the useful metrics back so that we can scale it safely. Like Elon mentioned, we are absolutely focused on safety. And so far, we have 0 incidents, and that's why the NHTSA filing also shows. In addition to safety, we are also solving some of these so-called scaling issues. For example, you do not want the Robotaxi to be stuck, blocking intersections or don't want to be dropping people off at slightly incorrect locations and so on. So we are simultaneously solving the long tail of safety by monitoring the metrics across the entire Tesla customer vehicle fleet, which is close to driving 10 billion miles on FSD in the next few weeks and also scaling up the amount of QA fleet that we have across the entire U.S. to accelerate our safety validation while also scaling the rest of the factors that can throttle the increase of unsupervised vehicles. Travis Axelrod: All right. The next question is, is v14.3 still the last piece of the puzzle to enable large-scale unsupervised FSD and Robotaxi? Or do we have to wait until V15? Elon Musk: Well, I think 14.3 is last piece of the puzzle for unsupervised FSD. Now the question is like degrees of safety. Like how -- safety and convenience, I suppose. We have a lot of known improvements like major architectural improvements that we know would improve the probability of safety significantly. So I think it's not going to make sense for us to deploy unsupervised FSD Robotaxi large scale when we know that there are major architectural improvements to the software that can improve safety. So I think we're going to want to finish writing that software, validate it and release it before going to large-scale unsupervised FSD. Depending on what large scale means. I mean we are, of course, as I mentioned earlier, doing unsupervised FSD in 3 studies, and we'll expand to, like I said, probably a dozen states or more later this year. So it kind of depends on what your definition of large scale is. But I do think it wouldn't be right for us to go to like very large scale unsupervised FSD when we know that there are software improvements in the pipeline that would improve safety. Ashok Elluswamy: Yes. And I'd like to note that the version of Robotaxi that's running in Austin and Dallas, Houston, et cetera, those are essentially 14.3 variants, and it's obviously safe that, that's why we're able to launch in those cities, and we continue to expand based on the v13 -- v14 base for a while until v15 lands. And v15 is going to be a major upgrade. Elon Musk: Yes. Travis Axelrod: Great. Thank you. The next 2 questions, we've already answered about Robotaxi rollout and the data that we're observing. So we will end on the last question, which is what is Tesla doing to scale the energy generation business with solar? Residential roof deployments have stalled. Will Tesla move to regional solar and battery farms, perhaps coupled to superchargers? Will we deploy solar through utilities? Micheal Snyder: Yes. The overall U.S. residential solar market is going through a bit of a correction after the loss of the homeowner tax credit last year, but we still see strong demand shaping up for the second half of the year. Tesla introduced a lease product this year that allows us to capture the tax credit ourselves and offer competitive pricing for homeowners. We have also debuted our own solar panel with superior performance in aesthetics as well as our own best-in-class mounting system that gives us a fully integrated home energy ecosystem. We believe -- we strongly believe that solar and storage markets globally will continue to grow at both residential and utility scale, and we will continue to invest in that growth. Travis Axelrod: Great. Thank you, Mike. So now we're going to move on to analyst questions. The first question is going to come from Will Stein at Truist. Will, please feel free to unmute yourself when you're ready. William Stein: Can you hear me? Travis Axelrod: Yes. Yes, we can. William Stein: Considering the various parties involved in the Terafab project, I'm hoping you can provide some details for investors about which party is going to take responsibility for each aspect of that project, funding it, designing it, building it, operating, taking production and the like. I would love to hear some more details. Elon Musk: Yes. So we're still working out the details of the Terafab deployment. In the near term, Tesla will be building the research fab on our Giga Texas campus. This is something we expect to be probably a $3 billion-ish initiative and capable of maybe a few thousand wafers per month, but it's really intended to try out ideas. The research fab, it was in terms of maybe -- we have some ideas for improving the fundamental technology of how chips are made and some of some new physics we'd like to test out, but we also want to test out the ability to -- to see if something is working in production. So you need kind of like a few thousand wafer starts a month to make sure that a production process is sound. And then SpaceX is going to take care of like the initial phase of the scaled up Terafab. And that's what we figured out thus far. Any kind of intercompany thing has to be approved by both the SpaceX and Tesla Board of Directors. It has got to go through a conflict resolution. It's going to have a lot of, unfortunately, a lot of complexity because we've got to make sure Tesla shareholders are served and SpaceX shareholders have served and strike the right balance there. So it takes a while to work through the kind of independent director reviews on this. So that's basically what we figured out thus far is Tesla doing the research fab, SpaceX doing the initial part of the large-scale Terafab. And then we got to figure out the rest. William Stein: Yes. And what about Intel's involvement? Elon Musk: Yes. So Intel is excited to partner with us on some of the core manufacturing technologies. So we plan to use Intel's 14A process, which is state-of-the-art and in fact, not yet totally complete. So -- but given that by the time Terafab scales up, 14A will be probably fairly mature or ready for prime time. 14A seems like the right move. And we have a great relationship with Intel. A lot of respect for the CEO, the CTO and the new team there. So we think it's going to be a great partnership. Ashok Elluswamy: Yes. And the other thing on the research fab, I think we've said it before, we plan to do memory logic, everything in the same place, including mask because we want to have a quick iteration loop so that we can see and basically scale the technologies, which we are trying to bring up. Elon Musk: Yes. I think this will be unique in the world, or at least I'm not aware of any a place where you have the lithography mask creation, the -- and then logic, memory and packaging in under one roof in one building. That's about the fastest I could possibly imagine doing [ recourse ] of research and development and being able to try out some pretty radical ideas, some of which have -- it's kind of long-shot stuff, but if some of these long shots pan out, it would be radical improvements in the way [indiscernible] work. Travis Axelrod: Great. The next question is going to come from Pierre at New Street. Pierre Ferragu: A quick one first on FSD adoption. So you have 180,000 new users, paying users this quarter. And I compare that to your overall installed base, it might be 15%. But then if I shrink that to the U.S. or to North America, where most of them are, it's probably more like 30%, 35%. And I'm trying to -- and I compare that you probably sold about 100,000 cars in North America in the quarter. So you're winning twice more FSD users and you're selling cars. And then if I add to that picture the fact that, I guess, it's mostly Hardware 4 owners who subscribe to FSD, it sounds like most drivers in North America who have Hardware 4 would already be using FSD. Is that the right way to think about it and the kind of like success FSD is meeting today? Is that the right way to think about it? Ashok Elluswamy: Yes. I think you're thinking about it the right way, Pierre. And the other thing which I'll share is that you can't just look at 1 quarter versus the other quarter in terms of churn, but we are actually seeing churn of subscribers also coming down, which again is a reflection of the product is getting better. And obviously, if subscriptions are going up, that is a good metric. The other thing also to note is that we are seeing customers actually drive longer which, again, you could correlate it. That's why you have lesser churn because people are liking the product. And if -- I mean, I've said this before, if I just use my own personal behavior, right, I literally get in the car, I press a button and it just goes. Earlier, I used to park. Now I don't even have to park. And that is the experience which we want everybody to [ grade, ] and that's why you're starting seeing it in the numbers come through. Pierre Ferragu: Excellent. And if I maybe a quick follow-up, completely difference, it's more on the Optimus architecture. And you talked about the partnership with xAI and Grok, and I was wondering if you can share with us anything about how the system to intelligence is going to be implemented? Is that going to be onboard on chips inside Optimus? Or if we should think that like your fleet of like 1 million Optimus being produced a year actually driving very significant inference demand in data centers as well for system to thinking. Elon Musk: Well, we think we can put a lot of intelligence locally in the robot. And it certainly needs enough intelligence that if a robot gets disconnected like if it's a bad cellular signal or there isn't WiFi, Optimus can't just get stuck. It needs to have enough local intelligence that it can still do useful things even if it loses connection kind of like the car. Like the car does not need any cellular or WiFi connection to be able to drive safely. Now I guess you can think of like Optimus needs kind of a manager to be told what to do, broadly speaking, like if otherwise going to keep doing the same thing it did before. So I think you need kind of an orchestration AI, which Grok would be good for orchestration. And then for Optimus' voice, having a low-latency intelligent voice AI, Grok is actually very good for that. So if you want to talk to Optimus and have kind of a Grok-level conversation, you kind of need to connect to a Grok-level AI for that. But I would expect the amount of interaction, apart from like the voice stuff and asking complicated questions of the robot that necessarily needs a large AI model to answer, the -- Grok will probably have about as much interaction with Optimus as a manager would have with the people on their team. So meaning Optimus could probably work for several hours without any management oversight. Travis Axelrod: Great. The next question is going to come from Dan at Barclays. Dan Levy: Great. Elon, your chip suppliers generally generate pretty good economics on the chip they sell. Your approach has historically been on vertical integration, part of that has been to get better economics. So I know the longer-term goal of Terafab is to get the supply you need, but how much of Terafab is also motivated to get better economics on your midterm chip purchases? And how long is it going to take to ramp to get to a yield that achieves that type of economic parity? Elon Musk: No. I mean Terafab is not some sort of mechanism to generate leverage over our chip suppliers. It's just literally, we don't see a path to having enough efficient quantity of AI chips down the road. As we scale production to high levels, just the rate at which the industry is growing in logic, but even more so in memory, it's just doesn't -- we just anticipate hitting a wall if we don't make chips ourselves. So that's the reason for the Terafab. I think that we do have some ideas for how to make maybe radically better AI chips. And these are kind of research ideas there -- which means like long shot, but if long shot pays off, it's maybe a giant improvement. And it's just easier to do that if we have our own research fab and are developing our own production technologies. So -- and if you look sort of long term at, say, having AI satellites, making chips for those, they're just -- there's just no way in how the existing industry can keep up with that. It's impossible. Travis Axelrod: All right. And our next question is going to come from Mark at Goldman Sachs. Mark Delaney: Yes. I recognize the importance of FSD and that FSD can help to drive vehicle sales and see some of the improvements in the FSD technology more recently with version 14. However, I'm also hoping to understand if the companies you on new vehicle models has evolved. And I ask given that you, Elon, posted on X recently that Tesla could develop a family vehicle, and there's also been some past discussion about a compact vehicle. Elon Musk: Well, I mean, Cybercab is compact. It's actually -- I mean, it's very roomy, but it's a 2-person vehicle. And we do think probably most of our production long term will be Cybercab because 90% of miles driven are with 1 or 2 people. So it would mean that you'd want to the vast majority of your production to be Cybercab. Then over time, it's going to make sense for our whole lineup to be autonomous vehicles of different sizes. And I did talk a bit about this when we did the kind of AI Day in L.A. at Warner Bros. and showed like -- this is our current lineup, and this is what some idea of what our future lineup will be, which is that it's going to be almost entirely autonomous. In fact, long term, the only manually driven car will be the new Tesla Roadster. Speaking of which, we may be able to debut that in a month or so. It requires a lot of testing and validation before we can actually have a demo and not have something go wrong with the demo. But I think it will be one of the most exciting product unveils ever. I'm not sure -- I don't think it moves the needle massively from a revenue standpoint. So -- but it is very cool. I think it might be one of the most spectacular demos ever. Travis Axelrod: All right. Mark, did you have a follow-up question? Mark Delaney: Yes. My other question was on batteries, and the company mentioned battery is a constraint on its growth. Can you speak more to how Tesla expects to resolve this? And to what extent that might come from ramping up your own LFP and 4680 battery cell manufacturing? Or is this something that you would expect to resolve primarily with increased sourcing from suppliers? Vaibhav Taneja: Yes. So at the moment, I think the limiter is not the cells itself. It's the battery pack capacity. And we're -- like I said in my opening remarks, we're actively working on resolving this. There's more capacity being added as we speak, and I'll let Lars add a few more -- thanks -- to it. Lars Moravy: Yes. Thanks, Vaibhav. As you guys may have seen in Berlin, we started launching model battery pack with our in-house 4680 cells a few months ago, and that is ramping up nicely, adding to Berlin's output and helping with the demand surge that we've seen in Europe as well. We're adding additional capacity in our Reno facility, sort of retooling it as it's been building packs now for almost 10 years. And in order to put in some more efficient lines and get additional output out there. And then we continue to have growth in China as well, ramping in-house LFP module production and battery packs associated with that. So all of those things are happening now in the next months and that's really plans we laid out a few months back to increase that output with the growing demand. Travis Axelrod: All right. Thank you guys. And our next analyst is going to be Colin from Wells Fargo. Colin Langan: Great. You moved the safety driver in Austin, and you're now expanding into Allison, Houston. What are the key safety metrics that you're tracking that gives you confidence that Robotaxi is safe enough to expand? Is it sort of miles per intervention, miles per accident, per fatality? And where do you stand on that now? Elon Musk: [ Ashok? ] Ashok Elluswamy: Yes. We track basically all the metrics that you mentioned. We have a pretty large QA fleet spread across all of the United States, and then we look at any intervention that could happen and then sort of simulate both in practice and also in our simulators that are very, very good nowadays using neural networks as what would have happened. And then based on all these analysis, we then make the call to expand. And so far, all of the expansions have gone according to our expectations. Elon Musk: Yes, a lot of the limiting -- a lot of what limits wider deployment of Robotaxi are actually not safety issues, but convenience issues or the car basically gets paranoid and get stuck, like sometimes it gets -- because it's programmed for maximum safety. So the problem is that then it sometimes just gets scared to do things. So like get scared across railroads, for example, or it will get stuck at a light where there's -- the light number changes from red or I mean there was one kind of amusing situation where a whole bunch of Robotaxi got stuck in the Lifton land in Austin because, I kid you not, a Waymo had crashed into a bus. And so they could not turn left because the Waymo crashed into the bus. And so you have this like long line of like, I don't know, a dozen or more hit Robotaxi that were waiting for the bus to move, but the bus was never going to move because the Waymo just crashes the bus. So that obviously drives people crazy if there's a whole bunch of Robotaxi is blocking the whole road. So it's a ton of things like that. That's the single biggest thing is just the car being scared to move or getting kind of stuck in situations like that. We've also had literal infinite loops where the car might want to make a turn into a road, but there's construction and then it goes around the block, tries to turn into the road to construction, goes around the block, tries to turn on the road. And so you have to stop the infinite looping, literal infinite looping. So those actually -- those are, by far, the issues that we have to resolve as opposed to direct safety issues. Colin Langan: Got it. Great. Elon Musk: And then your follow-up. Colin Langan: Yes. Just last year, I asked about FSD and camera and the issues with sun glare, and you noted that there was a breakthrough with direct photon counting that address this issue. But a month ago, there was a NHTSA filing saying that they haven't received an update when the solution was deployed in the number of vehicles. Is this -- did it require a retrofit of the camera? Is this fully deployed? And I guess I was just curious since the filing mentioned it. Lars Moravy: Yes. First, I want to say, we did change the cameras some months ago, and those are out. And the NHTSA is referring to like older vehicles. We always work directly with NHTSA on all of the issues that they raised with us, and they're asking for quite a bit of information, and we're complying with that in as timely manner as possible. And so we expect to resolve that in any of the other investigations in short order. Unknown Executive: Yes. And we have also implemented stricter measures for the visibility of the camera. So in recent software, if the camera is not able to see things clearly because of residual buildup or what have you, then the FSD won't be available for those cars. Elon Musk: It just means you have to clean the inside of the windscreen. Travis Axelrod: Great. That, unfortunately, is all the time we have today. We appreciate everyone's questions, and we look forward to talking to you next quarter. Thank you very much, and goodbye.
Operator: Good day, and welcome to the Crown Castle First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kris Hinson, Vice President of Corporate Finance and Treasurer. Please go ahead. Kris Hinson: Thank you, Chloe, and good afternoon, everyone. Thank you for joining us today as we discuss our first quarter 2026 results. With me on the call this afternoon are Chris Hillabrant, Crown Castle's President and Chief Executive Officer; and Sunit Patel, Crown Castle's Chief Financial Officer. To aid the discussion, we have posted supplemental materials in the Investors section of our website at crowncastle.com that will be referenced throughout the call. This conference call will contain forward-looking statements, which are subject to certain risks, uncertainties and assumptions, and actual results may vary materially from those expected. Information about potential factors which could affect our results is available in the press release and the Risk Factors sections of the company's SEC filings. Our statements are made as of today, April 22, 2026, and we assume no obligation to update any forward-looking statements. In addition, today's call includes discussions of certain non-GAAP financial measures. Tables reconciling these non-GAAP financial measures are available in the supplemental information package in the Investors section of the company's website at crowncastle.com. I would like to remind everyone that having an agreement to sell our fiber segment means that the fiber segment results are required to be reported within Crown Castle's financial statements as discontinued operations. Consistent with last quarter, the company's full year 2026 outlook and first quarter results do not include contributions from what we previously reported under the Fiber segment, except as otherwise noted. With that, let me turn the call over to Chris. Christian Hillabrant: Thank you, Kris, and good afternoon, everyone. We delivered solid first quarter results and are reiterating our guidance for full year 2026. This is a transformative year for Crown Castle, and we believe we have an opportunity to generate attractive shareholder returns as we transition to a stand-alone tower business and pursue our goal of becoming a best-in-class U.S. tower operator. To maximize shareholder value and to reach our goal of becoming best-in-class, we are focused on 3 business priorities. Our first priority is to conclude the sale of our small cell and fiber businesses, which we believe remains on track to close in the first half of 2026. We have received almost all required approvals and have largely completed the separation of our small cell and fiber businesses. Second, we are working diligently to preserve the value captured in our original DISH agreement from 2020. Along with the Wireless Industry Association, we have taken an active role in engaging with the relevant government authorities to ensure that DISH honors its commitments. We have also taken appropriate legal action. After DISH defaulted on its payment obligations in January, we exercised our right to terminate the agreement, and we are seeking to recover the remaining payments DISH showed for the terms of the contract. We believe we have a strong legal case against DISH and continue to vigorously pursue a legal remedy in the federal courts. During the first quarter, we amended our pending litigation against DISH to include a claim for breach of contract alongside our request for declaratory judgment. The amendment also asserts a claim against EchoStar for their role in helping DISH evade its contractual commitments. And finally, to become a best-in-class U.S. tower operator, we are performing a thorough review of our business, looking for ways to drive improvement in our operational efficiency and effectiveness. In the first quarter, we successfully executed a restructuring of our tower and corporate organizations, resulting in an anticipated $65 million reduction to annualized run rate cost. We have benchmarked our performance against competitors to both drive efficiency and excellence in operations. I would like to thank our Crown Castle teammates for working hard to ensure that we continue delivering for our customers during this transition period. I remain impressed by the resilience and determination along this journey. Our 2026 guidance also includes a year-over-year increase in capital expenditures as we seek to acquire more land under our towers and invest in systems and processes, which we believe will drive operational efficiency and effectiveness in the following ways. First, we believe that acquiring land under our towers improves our margin and increases operational control of our assets, allowing us to deliver more value to the customer by meeting their needs more rapidly. Second, we believe the investments we are making to enhance, streamline and automate our systems and processes will improve the quality and accessibility of our asset information and empower the Crown Castle team to make better business decisions in a more timely manner. As I look to the future, I am excited by the opportunities in our sector, including the persistent growth in mobile data demand, the upcoming spectrum deployments by Crown Castle's customers and over 800 megahertz of new spectrum auctions beginning in 2027. I believe our focus on becoming a best-in-class U.S. tower operator will position us to capitalize on these trends and maximize cash flow by unlocking additional organic growth and improving profitability. In summary, we believe we will generate attractive shareholder returns by focusing on the following priorities: including the sale of the small cell fiber businesses, preserving the value captured in our DISH agreement and improving our operational efficiency and effectiveness. We believe these priorities, combined with our disciplined capital allocation framework and investment-grade balance sheet will maximize shareholder value. With that, I'll turn it over to Sunit to walk us through the details of the quarter. Sunit Patel: Thanks, Chris, and good afternoon, everyone. We had a solid start to the year in the first quarter as we executed the previously announced restructuring. First quarter organic growth, excluding the impact of Sprint cancellations and DISH terminations was 3.1% or $30 million and included 0.3% or $3 million decrease in other billings. First quarter organic growth increases to 3.3% if DISH revenues are excluded from prior year site rental billings. Excluding the decrease in other billings, organic growth was 3.6%, this growth was more than offset at site rental revenues by $5 million of Sprint cancellations, $49 million of DISH terminations and a $26 million decrease in noncash straight-line revenues and amortization of prepaid rent. Adjusted EBITDA and AFFO in the first quarter benefited from lower repair and maintenance costs, sustaining capital expenditures and other nonlabor costs. These lower costs were largely due to timing and seasonality, so we expect them to occur later in the year. We also experienced a modest decrease in quarterly interest expense due to lower-than-anticipated short-term borrowing rates. Turning to Page 4. Our full year outlook remains unchanged. When excluding DISH revenues from prior year site rental billing, our full year outlook includes 3.5% organic growth, excluding the impact of Sprint cancellations and DISH terminations, which we expect to mark the low point. At the midpoint of the range for full year 2026, we expect site rental revenues of approximately $3.9 billion, adjusted EBITDA of approximately $2.7 billion and AFFO of approximately $1.9 billion. As a reminder, for the purposes of building our full year 2026 outlook, we'll assume the sale of the small cell and fiber businesses closes on June 30. Following the close of the transaction, we plan to allocate approximately $1 billion to share repurchases and approximately $7 billion to repay debt, allowing us to remain at our target leverage range between 6 and 6.5x. Our full year 2026 outlook positions us well to meet our unchanged range for AFFO for the 12 months following the anticipated close of the transaction of $2.1 billion at the midpoint. Turning to the balance sheet. We ended the quarter with significant liquidity and flexibility, positioning us to efficiently maintain our investment-grade rating after the sale of the small cell and fiber businesses based on our previously announced target capital structure and capital allocation framework. Lastly, our outlook for discretionary CapEx remains unchanged at $200 million or $160 million, net of $40 million of prepaid rent received. To wrap up, we believe we have an opportunity to generate attractive shareholder returns as we transition to a stand-alone tower business and pursue our goal of becoming a best-in-class U.S. tower operator. With that, operator, I'd like to open the line for questions. Operator: [Operator Instructions] The first question comes from Rick Prentiss with Raymond James. Ric Prentiss: Two questions for me. One, we had noticed at the FCC website that there's an application maybe to split the fiber small cell transaction into domestic and international to maybe try and get a May 1 closing. Can you update us as far as is that hopeful? What would be the process? And it seems to make sense. But if you could just comment on that FCC letter that's saying maybe you could split it into -- and the vast majority of the value seems to be in domestic. Christian Hillabrant: Yes, Rick, maybe I'll just start by saying we continue to work towards our stated goal of closing the transaction by the end of first half. We have received the vast majority of approvals, as I mentioned in my statement, and continue to feel very positive about the direction that things are headed. While not getting into the specifics of some machinations that might be going on behind the scenes, we remain extremely confident that we will close by the end of first half or as soon as possible. Ric Prentiss: Okay. Makes sense. And so just trying to work the Washington levers given the government shutdown maybe had affected things. Okay. Second question that we get a lot is when you think about Crown's portfolio of U.S. towers and the peer group of both public and private companies out there, is there any reason systemically or fundamentally on why over a medium or long term, your growth rates should vary from the peer group, maybe it's something as simple as where we are in the 5G cycle and then heading into a 6G cycle. Is there anything systemically or fundamentally different in your towers that is leading to the kind of lower new lease activity where we're seeing in this year's guidance? Christian Hillabrant: Rick, you almost answered the question for me. So thanks for the context there. Yes, I think if you look at the full course of the 5G cycle to date, our organic growth has been roughly in line with at least one of the peers and slightly lagged the other. When you include DISH, organic growth was in line with peer and exceeded the other. So nothing systemically more a cycle of what you have if you go back in time to the beginning of the 5G cycle is the timing of when that growth occurred. Ric Prentiss: Okay. And then so you think of the 6G, you guys might exceed or be similar depending on those cycles as we look at 6G coming around someday. Christian Hillabrant: I mean one of the benefits of having a portfolio that tends to skew towards urban and suburban where the PoP coverage is, is it actually drives for us earlier in the cycle. So yes, I think we're looking forward to the 800 megahertz of spectrum being released starting in 2027 in the auctions and what it might be for both Crown and the industry as a whole. Operator: The next question comes from Matt McNaum with [indiscernible] Unknown Analyst: I will have 2 questions as well. Just first, on the 5G cycle, I'm just curious, are we at the point now where carriers are coming back to initial 5G coverage layers to add more densification? And is this any different from prior 3G, 4G cycles? And then secondly, maybe a bigger picture question. Is the dynamic of your carrier customers partnering with satellite players for connectivity in remote areas affected at all how they're approaching network and site planning in conversations with yourself? Christian Hillabrant: Let's start off with the first question, which is around what the carrier behavior has been in terms of densification with 5G. You get a combination of 2 things. You have both the additional capacity where spectrum is available to add additional radios and tower loading on individual towers in which they're installed today. And then you have a continued densification where maybe they don't have the amount of spectrum that they need and/or they're looking to drive better in-building coverage in either residential or workplaces and therefore, go on incremental towers in the form of colocations. And not really any change from past deployments and very specific to the individual customer and their spectrum portfolio. In terms of answering your second question on the satellites, again, this has been something that I think we've said repeatedly, we see as something that is ultimately a plus up for operators to go into very, very rural locations where maybe coverage is a little more sparse. There's a number of limitations around satellite in terms of in-building coverage, line of sight that doesn't make it a perfect surrogate for really rural sites, but rather something that is an additional plus up for the satellite companies and the operators to squeeze some incremental revenue opportunities in those very, very rural areas. And in terms of its impact on us as a business, it's really de minimis or inconsequential at this point. Unknown Analyst: Just if I can follow up quickly, Chris. the mix of applications you're seeing between amendments and new colos, has that evolved at all in recent periods? Christian Hillabrant: Nothing specific, no. Operator: The next question comes from Aryeh Klein with BMO Capital Markets. Aryeh Klein: I think you mentioned in the prepared remarks how you're looking at benchmarking yourself versus peers. And curious where you think kind of the biggest incremental opportunity remains on that front. Christian Hillabrant: Yes. Thanks, Aryeh. I think best-in-class for us is something that we've defined across several pillars of our business. Think of it in terms of broad-based what do we do to become best-in-class towards the customer, towards our teammates here within the company, our shareholders and partners, which are to us landlords and vendors. And as just an example of the types of benchmarking we're doing, we're looking at for customer as an example, customer satisfaction and how can we dramatically improve our customer satisfaction over time. We benchmark against our other competitors and find ways to take actions to meet the unmet needs of the customers. It might be in the form of increased cycle time and delivery of an application. It could be in terms of the products that we develop to meet that unmet demand. We look at this holistically of what we can do to drive a superior customer experience such that when there's choice of a customer between 2 tower companies that we win 100% of the jump balls. That's the way I think about it. In terms of teammates, another example might be is looking at employee engagement across the organization post the split. It's about training and developing our employees. It's about process improvement and tools and pay for performance. So in each one of these, we've worked with outside consultants to help us to both define those goals and then to put in goals for 2026 specific to our company performance, but then also over the '27 and '28 so that we have a long-range transformation that allows us to make that claim that we're a best-in-class tower company. This is how we're approaching it and how we're implementing it in the company today. Aryeh Klein: And then if I could just follow up on the last question in relation to satellite risks. I guess if you think about your portfolio and maybe what's in a little bit more remote markets, is there an element that over the long run, whether that's 5 or 10 years, where you think maybe that piece is at risk? Are you able to quantify that if that's the case? Christian Hillabrant: I mean we've got no indication from customers. In fact, if you look at most of the public related statements, both of the carriers themselves and even the satellite companies and the satellite industry association, all of them see this as a complementary technology. Now are there specific use cases in a very rural area for fixed wireless, which we think is, obviously, we see that they've had some success, providing emergency coverage, absolutely. But if I have to walk up the hill to the top of the hill in order to get a satellite signal to place a call, if I want to do anything in the form of mobility and broadband type experience in mobility, this is probably not the substitute that's going to eventually displace towers anytime soon based on all those data sources. Operator: The next question comes from Michael Funk with Bank of America. Michael Funk: I have 2, if I could. So we've heard us here from a couple of the carriers that they intend to do more densification on their own fiber with small cells in 2026. And just wondering if you're hearing similar comments from your carrier customers and look to densify with 5G? And then I have one for a follow-up after. Christian Hillabrant: If I understand the question correctly, Michael, it's around densification, specifically in the small cell business that we're listing as discontinued operations? Michael Funk: All the carriers utilizing their own fiber and then using small cell to add capacity rather than contracting with the tower companies for densification in some of the urban and suburban areas that you mentioned earlier? Christian Hillabrant: I don't have any specific knowledge of that. I do know this is that we've seen continued demand of operators starting to ask us if we're interested in going back in the business of building macro cell towers for them. So I would assume that there's some need. As you know, the cost has gone up considerably in the last 6 or 7 years post pandemic in order to be able to build new sites and therefore, the business cases that we or any other builder of those types of facilities would apply, have to have an appropriate return. Based on those investments. And so that they might be going off and doing a spot small cell here or there, I wouldn't doubt it. But it certainly isn't something that we've seen a widespread impact into the business or the industry as a whole. Michael Funk: Okay. And any early conversations with AT&T about deploying some of the spectrum or requiring from deals office expected to close relatively soon first half of the year? Christian Hillabrant: We have continuous conversations with AT&T and all of our customers. I mean I think we're very eager for that spectrum that DISH had to be put to work. It's a good thing for Crown and for the industry as a whole. And so I'll just leave it at that. We have ongoing commercial conversations with nothing to share at this time. Operator: The next question comes from Richard Choe with JPMorgan. Richard Choe: I wanted to ask, Chris, a few alloy talked about looking at growth opportunities. And I was wondering, when should we expect, I guess, to see maybe the outcome of looking at those growth opportunities? Would it be after the close of the transaction and then kind of going forward? Or is that something that is happening now and something that you can implement sooner? Christian Hillabrant: A couple of comments. One is you see from our guide that it is a second half loaded growth guide that we've given. And therefore, we're in the process of developing and starting to build that. In terms of like specific things I'd leave you with what I've said historically, which is the great news is when we talk to our customers, they're looking to do additional business with us and looking for ways that we can partner with them. Some of that is related to, obviously, new colocations or amendments. Some of it's related to an expanded service offering. Many folks are asking for turnkey based services versus the service model that we currently have. We are starting to talk to folks about new tower builds again, which is exciting as a tower company to build new towers. And then other things like Power as a Service or shared generators, things that we believe will help us to ultimately build the revenue per tower and the profitability of Crown are all on the -- all being considered now. And then most recently, if you would have seen, I think, a press release, 1 of our partners recently released, which is around the exciting opportunity potentially here of edge compute and making our 40,000 odd sites available for colocation with data centers, given that many of our sites we have existing shelters that can be reutilized or repurpose for this usage. So there's a bunch of stuff in the pipeline, and I'd just say, look, as our guide has shown for this to be more of a second half or series of opportunities. Richard Choe: And I have to follow up with the edge data center comment, like how meaningful could that be this year and going into next year? And actually kind of follow up on that a little bit. Will you need to add more backhaul at your tower sites? Or is the current backhaul situation and most of your tower is pretty robust. Christian Hillabrant: Yes. Let's start with as an opportunity. I would characterize this in the trial phase, right? So we've signed an additional partnership to test the waters here I think I mentioned in the last earnings call were in Mobile World Congress in Barcelona, we saw a lot of very interesting edge use cases, starting to develop there. So I think we're excited potentially where this could take us. But these are early days still. And our key is to utilize our existing assets and to find ways to drive new revenue streams. So we're looking at this as a very opportunistic thing for us to pursue, with very little capital required, but yet as a real estate company, fully utilizing our assets. So this is how we're thinking about it. I'd say let's stay tuned to this, and maybe this is something that we can continue to update you on through the course of the year as we start to see some of the initial results of the efforts underway. In terms of the fiber, sorry, second part of that question, the question of the question, fiber, most of our sites do have fiber backhaul into them. So there's ample ability to scale those sites. One of the attractive things about tower companies as edge data centers is that you have ample fiber, you have ample power and you have space, which we have all the and, therefore, fairly easy in terms of speed to market for interested parties. Operator: Next question comes from Eric Luebchow with Wells Fargo. Eric Luebchow: Great. Appreciate it. Just to follow up on Richard's question. I think you mentioned that there might be some opportunity for new tower builds. I think that's something we haven't seen a lot of among the public tower REITs in the last few years. Just curious like what form that could take, how significant it could be? And what kind of returns do you think you could get on that? I think, generally speaking, single tenant towers are not generally pretty low return business, but maybe you could elaborate a little bit on that comment. Christian Hillabrant: Yes. And I certainly don't want to raise expectations that we're going into a mass power bill here. It's more a demand profile from our customers looking for partners to help them build towers. I think some of the other smaller companies have started to slow down and as the cost of capital, to your point, has become more expensive. It requires making sure that you really have potentially multiple tenants lined up in order to build these towers and to make the business cases work. So we have a very disciplined approach in place on how we look at this. It's initially going to be small volumes here. But I think our hope is to eventually find a way to provide this as a service to our customers. as I think we're in a unique position given our size and scale to deliver this at a price that's effective and attractive in the marketplace, but allows for the returns that Sunit and his team require in order for us to put a cement in the ground. Eric Luebchow: Great. And just one follow-up. I think you've talked the last couple of quarters about kind of cost efficiencies through SG&A and gross margins and getting your margins up 300 or 400 basis points over some period of time. So I just wanted to confirm that and potentially anything you can reveal on kind of some of the cost initiatives that we'll see after the fiber and small cell deal closes that could kind of close some of the margin gap you have versus your 2 tower peers. Sunit Patel: Yes, let me take that. It's Sunit. So we've already done a fair bit of that with that 20% reduction in staffing this last quarter. Having said that, I do think there are 2 big areas. One is what Chris talked about in his remarks, which is us buying ground leases at returns that take our cost of capital. We think that is a long-term opportunity for us, where structurally, our costs are higher than our peers because they own more of the towers underneath their -- more of their land and they need their towers than we do. So that is a good long-term opportunity for us that we're executing harder on. And then the second is what we talked about, which is investments in platforms and systems and automation which we think will continue to drive efficiencies over the next few years. So yes, I mean, as I look at where we are in '26, let's say all the way after 2030 definitely things that we can do another, meaning in addition to the reduction we made probably another well over 200 basis points in margin improvements. Operator: Next question comes from Nick Del Deo with MoffettNathanson. Nicholas Del Deo: Maybe Sunit, to continue on the land topic, you currently own land at about 30% of your towers. How high do you think that can go over some reasonable time horizon? And how would you characterize the level of competition to acquire land and like the number of opportunities that you're seeing? Philip Cusick: Yes, it's a great question, Nick, because some of it is like how we engage with our landlords and make sure that they if they want to do something, they will prefer us. Some of it is financial returns. You're right. We might be competing against other people. We do believe our cost of capital is lower than many of those operators just focus on land purchases. So I mean, I think that you're beginning to -- you saw some benefit in the first quarter, you saw our CapEx is a little higher. But we do think this is a long-term opportunity. And where can we get to? I mean our goal is over the next handful of years get to a point where we own from 30% to as much as 40% of the land underneath our towers. So it's a long-term opportunity for us that we think we just stay focused on and turn up the dial on that and continue to execute well. Nicholas Del Deo: Okay. Should we think of the level of CapEx over the last couple of quarters as being reasonable prospectively? Or do you think that might even go a little higher to the extent that you can get the machine operating efficiently? Sunit Patel: I think the guide we provided for this year, I think, is fine. And then we'll see kind of where we get to towards the end of the year from a run rate production perspective. And then see what guide we'll provide next year. But Yes, I think this year's guide should be adequate in terms of the range to get done what we think we need to get done. Operator: Next question comes from Brendan Lynch with Barclays. Brendan Lynch: To start with the satellite deployments and Chris, I agree with your assessment that there isn't too much of a risk from direct to device to the tower business. Maybe you could comment on the fixed wireless access demand that you've had over the years and how that might be at some risk of increased competition from satellite -- from broadband satellite? Christian Hillabrant: Well, let's start with the premise of the start of fixed wireless for the operators, and I spent half micron on the operator side, so a little bit of insights here was really about excess capacity being soaked up and monetized by the operators. Since that time, if you look at the current growth rate of data being on a CAGR of like 30% plus, it's now clear this is a new line of business and that is driving incremental activity in terms of densification and capacity in the 5G networks as these operators really go and push this as an opportunity to grow their topline business. Again, our portfolio tends to skew more towards suburban and urban. The hypothesis that you're going to replicate the capacity that a terrestrial network has to service that customer from a broadband perspective seems highly problematic to me, comparative to that very rural customer where you may have excess capacity. The coverage areas of the individual satellites are much larger in terms of the service areas that they provide to than, say, a terrestrial network in general. And therefore, I think we feel pretty confident that, that won't be something anytime soon where the satellite guys are going to be going after the urban customer, but rather the rural customer rather than the guy who's out on his boat somewhere and wants to have broadband available or the farmer out in their farmland. This is how I think we're looking at it and as the industry looks at it today. Brendan Lynch: Okay. That's helpful. And maybe a related question because we've also seen a lot of fiber being rolled out fiber to the home. How should we think about that as competition that might be a little bit more urban, suburban focused than the satellite capacity that might be available? Christian Hillabrant: Well, if you're thinking about like voice over WiFi as an example, using VOIP. Obviously, it's been great for the operators to find a way to offload their networks, to provide that capacity using WiFi and broadband, but again, as they -- this is the same experience and that somebody is utilizing going on to WiFi outside of the home as a way of offloading. If there's a new business model there, I'm not aware of it. So in terms of threats that we look at is what could conceivably reduce the capacity requirements of our network across our portfolio, we don't see Wi-Fi beyond what is already being used as a huge disruptor in the marketplace and suddenly shifting a huge amounts of capacity off the operator networks. I think they would have done it already if they could. Brendan Lynch: Okay. And maybe just one other on the satellite front. To the extent that the satellite networks are going to need to connect to terrestrial networks, is there any upside potential from the satellite operators deploying at some terrestrial sites? . Christian Hillabrant: I mean the good news is Crown Castle is open for business. So to the extent that one of the satellite operators decides to build a terrestrial network and going into the type of competition that you described previously. I think we're open for business and eager to offer our towers and rooftops to those operators. I haven't seen anything that says that they're going to do this in any publications. Maybe you know something that I don't. But again, it's an opportunity that exists if somebody would step into the breach the DISH has left in the market. Operator: The next question comes from Madison Rezaei with Bernstein. Madison Rezaei: I appreciate the extra color on the DISH litigation guys. I know it's a little bit of a black box, and we're also sort of waiting to see, in the theoretical scenario where outcomes move in your favor, I guess, how should we think about sort of recoveries? Are we thinking this is potentially a primary like onetime cash proceeds? Do we think there could be something more structural how do we think that could ultimately flow through if we have any sort of context? Christian Hillabrant: Well, let me start by reiterating what I always do, which is that we are aggressively taking every action to compel DISH to fulfill its obligations, right, both from a legal perspective from a lobbying and public interest perspective, I've certainly been getting the frequent flyer miles back and forth to D.C. meeting with members of the administration, members of Congress, the FCC and the like kind of telling the story, and I think hats off to the WIA or Wireless Industry Association. I think they've done a very good job may not compellingly why this is not in the public interest to allow DISH to walk away from their obligations without paying their bills. And so I'm hopeful that there'll be some action taken, although we don't have any specific knowledge of how this will unfold exactly. In terms of the legal process, we feel really good about our lawsuits. I think we feel like we're in a good position, disputing the force majeure and the various suits that we filed. But I think I've always cautioned the folks on these calls that legal outcome is going to take at least a year. And so there is some time that it will take to get to a resolution there. And then any type of government intervention on our negotiated settlement would be on an ad hoc basis, and that would also take time. So there's no -- I don't have a crystal ball in front of me right now, but I would say if -- at the end of the day, I will feel very good having left it all out on the pitch that we've done everything we possibly can to try to drive to a favorable outcome for our shareholders. And I think legally, we're in a good position. But the timing of that, how it might manifest itself is still very much an unknown. Operator: The next question comes from David Barden with New Street Research. David Barden: So I guess, I got 2 questions. So I guess, Chris, with respect to the upper C-band auction, which is going to come in 2027, it's kind of the biggest event that's going to really happen next year. Could you lay out what you believe based on your conversations with the community of carriers, the base case deployment expectation is. Because there's been a lot of reporting about the FAA altimeter interference with the 4.2 to 4.4 gigahertz. And I think it would be great to just get a sense as to whether when we get this auction done, is this going to be something that drives growth in '27 or '28 or '29 or somewhere beyond. And the second question, if I could, please, is, there were a couple of questions earlier about the edge data center stuff, and we've been talking about this for a really long time, largely in part because of Crown Castle. And the question is, how does that business model look? Who owns the shed? What zoning do you require? How political could it be to get a data center plugged into a local community that uses X amount of power who owns the servers, who deploys -- how does it work? If you guys have had thoughts about that, it really interesting to hear like the evolved business model would be great. Christian Hillabrant: Yes. I'll start out with the first half, and then I'll let Sunit opine on the second half. So in terms of the upper sea band and the spectrum that's made available. It is really hard to give you an estimate of when we think that will be put into service. I think the good news is as we have agreements in place with our customers, that drive the capacity loading ability of each of the sites is it's not going to require a lot of work for us to be able to partner with our customers in enabling that rollout and as rapid as they're willing to deploy it. I do know this, there is a huge again, back to my more recent experience in D.C. There is a growing excitement amongst members -- senior members of Congress and the administration around emerging 6G and the spectrum that's being put into play here starting in '27 that will enable the U.S. to have a strong leadership position in 6G. Now how that manifests itself? What are the use cases? I can't tell you. I'm not sitting in the boardrooms of those companies. But there's going to be a lot of push from the government to enable this to provide funding for it, to provide spectrum for it. And so I'm excited about what that means for the industry as a whole, as I think about long term. And potentially, that we'll find a way to have a long-term guidance that you guys will actually be happy with in our guide. But all I can say is we're very hopeful for where we're headed in that perspective. I think in terms of the second part of the question on the edge data center, you want to talk about that Sunit? Sunit Patel: Yes. I mean the business model there is, look, we're a real estate company. So we sell a lot of vertical space. We also have horizontal space. So in this case, it's conditions charter space that people would rent that could have power. So we required power. In some cases, they might on power backup, they look at that. And then like Chris said earlier, all our dollars have fiber backhaul coming into the towers. So I think the advantage about what we have is you have a fiber connection, you have power and you can have a sort of secure conditions outer space. And we have a fair bit of that already because of prior initiatives. And in some cases, we'd look to either improve or put in new charter space. But essentially, all we are doing is renting our real estate, which is what to do what we do as a business, mostly vertical real estate and in this case, horizontals. So we're not taking any depreciation of technology risk by deploying our own servers or anything like that. Christian Hillabrant: David, the other thing just from my experience in actually building networks and sites and data centers is that there's this not in my backyard around data centers, too, about the requirement the power requirements and the cooling requirements. One of the advantages of the edge beyond the fact that you have really low latency is typically, these are much smaller installations. So you don't have the community uproar about a very, very large facility being put into place. And it provides some level of redundancy in that you have the the edge compute put out in multiple locations, and therefore, you have additional physical redundancy built into the network. So a couple of things of why, if anything, maybe it's even a smaller impediment to getting these out into place than the very large data centers that are getting some pushback in communities now. Operator: The next question comes from Batya Levi with UBS. Batya Levi: Great. Looking at your renewal cycle, it looks like you have a big one coming up with one of your tenants in '28. Can you provide some guidance on when those discussions would typically begin and how you would approach such a renewal with potential competition from private companies or carrier own deployments, maybe even satellite coverage I think that would be helpful to understand what elements of a new contract would be of utmost importance for you, maybe the contract length or escalator. Some guidance around that would be helpful. Sunit Patel: Yes. Thank you, Batya. Good Question. We typically don't get into specific customer discussions. But I would say over any 5- or 10-year period, we do have several at least to the 3 big ones, 1 or 2 of them where we are renegotiating either because it's a new agreement, which all our agreements are long term, 10 to 15 years. Or in some other cases, they want to occupy more space on our tower than they might have had given the deploying new spectrum band. So see it depends what those negotiations look like based on what they're needs are at the time. But I would just say that we have agreements with all our clients, and we generally try to work on them on a timely basis with all our clients. So that's all I can probably say at this point. Batya Levi: Maybe would you have a preference to do renewals in parts? Or does it typically have a sort of home in renewals? Philip Cusick: It sort of depends on the situation and what the client or the carrier wants to do given what -- where they are. Sometimes you do the whole thing, sometimes you might do some interim arrangements while you're working on the whole thing. So it just depends. Operator: The next question comes from Brandon Nispel with KeyBanc Capital Markets. Brandon Nispel: Yes. I was wondering if you could talk about your capital allocation and specifically your dividend framework. The payout ratio is going to be extremely high at 90%. And I think pre deal, we were probably expecting the payout ratio to be much lower and work its way up. And with where the stock is at, it seems to make a lot more sense and be more accretive if you were to actually cut your dividend and buy back stock, especially as we sort of forecast out AFFO growth next year, assuming you delever. So I was hoping you could talk about that and sort of your decision to keep the dividend at current levels. Sunit Patel: Sure. Thank you. Yes, I mean, this question saw a lot of discussion and deliberation, both with the team and also the board and the finance committee of the Board and even back when we first announced this capital allocation framework. If you recall back then, people worried about DISH make it, for example. So some of this was talked through. And I think that where we came out is to basically reiterate that the dividend would stay where it is now. We do think that as we said previously, that we can grow our pretty well. And so we will, over the next couple of years or so get to the point where the dividend payout is within the ratio of the range. that we've talked about. And then in the short term, we are paying down a lot of debt because one of the key things for us is to remain investment grade, and we are going to be buying out $1 billion of shares, which should also help both return capital to our shareholders and also drive FFO per share growth. So yes, we did contemplate or think through that more than a year ago. And as I said at the time, people worried about if this would be around. So that was part of our thinking. Operator: Our final question comes from Michael Rollins with Citi. Michael Rollins: A couple of topics, if I could. So the first one is if you were a private company, what could Crown Castle do differently, that's difficult or you wouldn't do whether it's operationally or strategically as a public company? And just curious if there's other considerations as you think about where is best for Crown to operate in public versus private markets? And the second question I had was going back to the terms of contracts. And I know it's -- you can't talk about individual customers. But when you look at the cohorts of towers that you manage and the vintages and where they came from. Is there -- and you mentioned earlier that you're a real estate company. So I think of mark-to-market. In your portfolio, is there a significant number of towers that could either at some point have a significantly positive mark-to-market or negative mark-to-market that investors should be mindful of? Sunit Patel: Yes. Great questions. On the private versus public, I think that the goals and objectives that Chris articulated, I don't think it changed like making sure we are customer experience, customer satisfaction, improving our cycle times, operating efficiently, driving productivity. I think those will remain in place. I think where we see opportunities to put money to work, like we talked about buying ground leases. I don't think that would change making investments in platforms and systems to drive more efficiency, productivity automation. I don't think that would change. The only real change in a private company is, I believe, how much leverage you might take and what would you do with your cash because you're not paying dividends out, whether you pay debt down or pay to your shareholders. But from an operational perspective, I don't know that we would do anything, but I'll let Chris to jump... Christian Hillabrant: I was just going to say, I just came from leading the private tower company in Europe, and there's not a lot of differences. And in fact, you still pay dividends even as a private company. So I don't know that there's any real advantages or disadvantages. I think in the end, we should always be guided by what's in the best interest of shareholders that would guide a decision like that. I think it would be very expensive possibility. But it -- look, we would do whatever is in the best interest of shareholders always. But I can assure you, in terms of running a private tower company versus a public tower company. We all face the same series of pressures to drive efficiency, a highest return on invested capital. And it's about servicing the customer. And I don't really see any advantages one way or the other only in terms of the valuation of of how they're looked at in the public and private markets that would differentiate them. No real advantages that I would see, but that's one man's opinion. Sunit Patel: Yes. And then on your question with respect to repricing tower asset value, in terms of contracts, we have quite a few levers with clients. One is, to the extent they want more space on an existing tower beyond what they have contracted for, how would you charge for that. To the extent they want to add new dollars, what's the pricing for that? And in some cases, you might either have average cost over tower. In some cases, you might have market specific pricing. So just depending on escalators is another one. So depending on the client, the history where you are, what kind of money we might or might not be leaving on the table, competition, et cetera. what kind of commitments the clients is making the new tower or needing more space on an existing tower. We -- all of that gets factored into our commercial models to try and figure out what -- how we can craft win-win outcomes for both sides. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon. My name is Sarah, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Knight-Swift Transportation First Quarter 2026 Earnings Call. [Operator Instructions] Speakers from today's call will be Adam Miller, Chief Executive Officer; Andrew Hess, Chief Financial Officer; Brad Stewart, Treasurer and Senior VP of Investor Relations. Mr. Stewart, the meeting is now yours. Brad Stewart: Thank you, Sarah. Good afternoon, everyone, and thank you for joining our first quarter 2026 earnings call. Today, we plan to discuss topics related to the results of the quarter, current market conditions and our earnings guidance. We have slides to accompany this call, which are posted on our investor website. Our call is scheduled to last 1 hour. Following our commentary, we will answer questions related to these topics. In order to get to as many participants as possible, we limit the questions to one per participant. If you have a second question, please feel free to get back in the queue. We will answer as many questions as time allows. If we are not able to get to your question due to time restrictions, you may call (602) 606-6349. To begin, I will first refer you to the disclosures on Slide 2 of the presentation and note the following: this conference call and presentation contain forward-looking statements made by the company that involve risks, assumptions and uncertainties that are difficult to predict. Investors are directed to the information contained in Item 1A Risk Factors or Part 1 of the company's annual report on Form 10-K filed with the United States SEC for a discussion of the risks that may affect the company's future operating results. Actual results may differ. Now I will hand the call over to Adam for some opening remarks. Adam Miller: Thank you, Brad, and good afternoon, everyone. So these are certainly interesting times, and there are now more reasons to be optimistic about our industry than we have seen in over 4 years now. We operate one of the largest fleets in the truckload industry, and roughly 70% of our fleet is deployed in one way or over-the-road service. It is true the one-way market has been the most difficult place to be over the past 3 years plus as this market has felt the brunt of the influx of capacity over the last several years. Much of that capacity may not have been playing by the rules that we play by and therefore, operating with a different cost structure with distorted pricing behaviors and cyclical patterns. The ongoing efforts of the FMCSA and the DOT to prevent and revoke in validly issued CDLs, shut down noncompliant CDL schools and address our service abuses are in the early stages and are already having an impact on the market. This cleanup effort should, in our view, have an outsized impact on not just the one-way truckload market, but on the lowest price capacity in this market. The market that was the hardest hit over the past few years is now benefiting the most from the removal of capacity, a dynamic which we expect will continue. As we mentioned last quarter, the market has progressed to a point where even small changes can cause disruption. And we saw evidence of that during the first quarter as the severe weather in January led to acute tightness in an elevated spot market almost overnight. We were able to leverage our one-way over-the-road capacity at scale to provide solutions across multiple brands to help our customers recover from the storm when others in our space were not able. Following the recovery from the storm, the tightness in the truckload market has continued to build, largely due to declining capacity though some indications of improving demand are beginning to emerge. Broad truckload market indicators show improving trends for low tenders, tender rejections and spot pricing. Our business is experiencing even stronger levels on these metrics as our leading presence in the one-way market grows increasingly valuable to shippers. So late in the first quarter, we began to see the outcomes from early first quarter bids, which showed our volumes generally holding steady or growing while achieving mid-single-digit percentage rate increases. For reference, that is better than last year at this time when targeting slightly lower price increases often led to lower volumes. Price activity is very busy now. In addition to bid season being in full swing, many bid activity has increased, indicating incumbent carriers are unable to or perhaps unwilling to service right at existing rates. In addition, turn back bids are happening more frequently as bid awards are being at least partially rejected by the awarded carriers as networks have shifted or the market has moved well past rates that were proposed even 1 or 2 months ago. Unlike the past few years, shippers are generally not issuing off-cycle they're not issuing off-cycle bids opportunistically to improve service or drive prices lower, these actions are driven by a need to secure capacity. At the same time, previously deep discounts in the spot market have evaporated. Further encouraging shippers to align with quality asset capacity. This is on top of a trend of shippers favoring asset-based relationships that have formed late last year in response to the regulatory enforcement efforts. Whether for these reasons or because of expectations of improving demand, we have already had a number of shippers initiate discussions about peak season demand support, which is not typical this early in the year. As we navigate a busy and rapidly evolving bid environment, we have shifted our bid targets to a range of high single to low double-digit percentage increases on current pricing activity as compared to our low to mid-single-digit target 1 quarter ago. Across our truck blue brands, we are reviewing business that is not subject to current or near-term bids and addressing rates that are below market. Aside from the market developments and our position in one-way service, we believe our work over the past 2 years structurally cutting cost out of our business with ongoing opportunities for further progress sets us up for greater incremental margin as business conditions improve. As the market improves, recruiting and retaining quality drivers have and will become more challenging. We believe we have an advantage with our terminal network and academies to source and develop drivers. However, we expect this to be a challenge for the industry in the back half of the year. While the LTL sector is not seeing the same sharp tightening as truckload, we are seeing our freight mix improve and rate renewals continue at a mid-single-digit pace. Shipment volume trends have been directionally in line with normal seasonal patterns, though somewhat understated until late in the first quarter. However, we saw a notable improvement in weight per shipment for the first time in years with this measure progressively growing throughout the quarter. This is a result of bringing on more industrial customers who can leverage our expanded network footprint to move heavier and longer length of haul shipments. We believe we are in the early stages of our network transition from regional to national. We expect that over time, growing into our network investments on maturing freight mix, improvement in network density and continuously refining our operational execution will allow us to drive sustained methodical improvement in operating margin. We remain committed to thoughtfully deploying capital intentionally leveraging our strengths and creatively unlocking synergy opportunities across our businesses. And with that, I will turn the call over to Andrew and Brad to review the results and our guidance. Andrew Hess: Thanks, Adam. The charts on Slide 3 compare our consolidated first quarter revenue and earnings results on a year-over-year basis. Consolidated revenue, excluding Truckload fuel surcharge was essentially flat and operating income declined by $38 million year-over-year largely due to the $18 million of expense for claim development in our LTL segment, primarily related to an adverse arbitration ruling on the 2022 claim. $4 million of expense in our Truckload segment for an adverse decision on VAT reimbursement in Mexico for prior tax years. Warehousing project business deferred to future quarters and an estimated $12 million to $14 million net negative impact for volume and cost headwinds from severe winter weather disruptions and sharply rising fuel prices during the quarter. Adjusted operating income declined $37 million year-over-year, primarily driven by the same items. GAAP earnings per diluted share for the first quarter of 2026 were a loss of $0.01 and primarily due to the items noted above. GAAP earnings per diluted share in the prior year quarter were $0.19. Adjusted EPS was $0.09 for the first quarter of 2026 and compared to $0.28 for the first quarter of 2025. Our consolidated adjusted operating ratio was 97%, up 230 basis points year-over-year. The effective tax rate on our GAAP results was 7%, and our non-GAAP effective tax rate was 28%. Slide 4 illustrates the revenue and adjusted operating income for each of our segments for the quarter. Overall, the relative shares of our various services -- service offerings remains largely consistent quarter-over-quarter, with LTL gains slightly over the fourth quarter as it exits its seasonally weakest period of the year. Now we will discuss each of our segments, starting with our Truckload segment on Slide 5. Aside from the negative impacts to volume and cost from severe winter weather and fuel challenges in the quarter, most operational metrics were improving throughout the quarter. Revenue per loaded mile, excluding fuel surcharge and intersegment transactions, turned out stronger than we anticipated and even improved sequentially over our end of year peak season result. Largely driven by spot opportunities that developed within the quarter. However, volumes and cost per mile for the quarter were both unfavorable as a result of the weather and fuel challenges. On the whole, our truckload adjusted operating ratio of 96.3% only degraded 70 basis points year-over-year as a reduction in empty miles and the strengthening rate environment largely offset the headwinds to volume and cost. Q1 marks the seventh consecutive quarter of year-over-year improvement in miles per tractor. Importantly, the strengthening rate backdrop and improving network efficiency have ongoing implications for our business, while the weather issues are not expected to reoccur. On a year-over-year basis, revenue excluding fuel surcharge was essentially flat as a 1.4% improvement in revenue per loaded mile, excluding fuel surcharge and intersegment transactions, largely offset a 1.8% decrease in loaded miles. Adjusted operating income declined $7.6 million year-over-year, largely as a result of the adverse decision in VAT reimbursement, as noted earlier as well as the cost headwind from severe winter weather and fuel escalation in the quarter. U.S. Express made further progress on operating efficiency and trailed the legacy brands and adjusted operating ratio by approximately 300 basis points for the quarter. The ongoing progress that U.S. Express is encouraging, and we expect this business will continue closing the gap in margin performance with our legacy brands as the market. Moving on to Slide 6. Our LTL business grew revenue, excluding fuel surcharge, 2.6% year-over-year, driven by a 5.2% increase in weight per shipment, with an 8.5% increase in the length of haul. Tonnage trends showed momentum as the quarter progressed, ending with March average daily tonnage up 7% year-over-year. Our expanded service coverage and presence in new markets is helping us win business with new customers, gradually increase our industrial exposure and transition our network and freight mix from regional to national. Shipments per day were down 1% year-over-year for the quarter, largely as a result of winter weather disruption in January and the shift in freight mix to a higher weight per shipment. Revenue per hundred weight excluding fuel surcharge, fell slightly by 70 basis points year-over-year, driven by the increase in weight per shipment, while renewal rates continued their trend of mid-single-digit increases. We continue to make progress normalizing operational and cost fundamentals following a period of significant change to our network and freight. Purchased transportation as a percentage of revenue, equipment rent and variable labor per shipment all showed improvement year-over-year in the first quarter, and we anticipate further improvements in efficiency as we refine our network and freight flows. As mentioned earlier, adjusted operating income and adjusted operating ratio were negatively impacted year-over-year by the adverse claims development. We are encouraged by emerging seasonal freight patterns steady progress on rate renewals, accelerating volume trends late in the quarter and an improvement in weight per shipment for the first time in years as freight mix continues to develop into our expanded terminal network. Now I'll turn it over to Brad for a discussion of our Logistics segment on Slide 7. Brad Stewart: Thanks, Andrew. Logistics revenue for the first quarter declined 9.9% year-over-year as volumes were down 18.9%, while revenue per load grew 10.4%. Third-party carrier capacity grew more difficult to source during the fourth quarter, and this trend continued through the first quarter. Gross margin of 16.6% for the first quarter declined 150 basis points year-over-year but improved 110 basis points from fourth quarter levels as strengthening spot opportunities helped to offset pressure on contractually priced business. Despite the year-over-year decline in volumes and gross margin, our Logistics segment produced an adjusted operating ratio of 96.2%, only a 70 basis point degradation year. In addition to the increase in third-party carrier costs brought on by the regulatory pressures on capacity, our Logistics business experienced increased pressure on gross margin as we further enhanced our already rigorous carrier qualification standards in response to a sharp increase in cargo theft in the industry and the troubling carrier practices exposed by recent regulatory efforts. This affects not only new applicants seeking to join our carrier base, but also resulted in a reduction in the number of existing carriers we are tendering loads to. While such efforts were a headwind to capacity costs and caused us to eject more loads as unprofitable, as we reset contractual pricing through the bid season, we expect that load count will improve and pressure on gross margin should lessen. Given the complementary relationship between our Logistics and asset-based Truckload segments, we believe the improving market dynamics will ultimately benefit both our asset and logistics businesses over time. Our Logistics business has demonstrated its agility in navigating a volatile market in the past few years by maintaining its operating margin close to target levels through disciplined pricing and cost management. This team is now further leveraging technology take cost efficiencies to a new level as well as to improve our responsiveness and our ability to capture opportunities in the marketplace, which we expect will contribute to our earnings in 2026. Now on to Slide 8 for a discussion of our Intermodal business. The Intermodal segment grew revenue 2.7% and improved its operating ratio of 50 basis points year-over-year as a 1.6% increase in revenue per load and a 1.2% increase in load count offset headwinds from winter weather in the quarter. Load count and revenue per load improved progressively throughout the quarter, with March load count up 8.4% year-over-year. While the intermodal pricing environment is more competitive than truckload, at this point. We are encouraged by ongoing opportunities to leverage our strong service performance and our truckload relationships to continue growing our volumes at improving rates. We remain focused on delivering excellent service and driving appropriate turns through growing our load count with disciplined pricing, cost control, network balance and equipment utilization. Slide 9 illustrates our all other segments category. This category includes warehousing activities and support services provided to our customers, independent contractors and third-party carriers such as equipment sales and rentals, equipment leasing, owner-operator insurance and maintenance. Additionally, beginning January 1, 2026, all other segments also includes the cost of our accounts receivable securitization program that was formerly reported below the line in interest expense in prior quarters. For the first quarter, revenue increased 13.5%, operating results declined to an operating loss, partially due to the inclusion of $5 million of costs for the accounts receivable securitization program as well as start-up costs on new contract awards in our Warehousing business, for which revenue is expected to ramp in the coming months. On Slide 10, we have outlined our guidance and the key assumptions, which are also stated in the earnings release. Actual results may differ from our expectations. Based on our assumptions, we project our adjusted EPS for the second quarter of 2026 will be in the range of $0.45 to $0.49. This range represents a larger-than-normal sequential increase in quarterly results. As the first quarter was negatively affected by events that we do not expect to recur and because freight market fundamentals are improving, exiting the first quarter. Our projections reflect recent trends in volumes, spot rates and bid activity as well as expectations for a continued seasonal build in freight demand for both truckload and LTL services. The key assumptions underpinning this guidance are listed on this slide. I won't take time to read through all of our assumptions here but I do want to highlight the point that the recent strengthening of the truckload pricing environment will generally impact our contractual rates beginning late in the second quarter and into. This concludes our prepared remarks. And before I turn it over for questions, and everyone to keep it to 1 question, perfect discipline. Thank you. Sarah we will now open the line for questions. Operator: [Operator Instructions] Your first question comes from Chris Wetherbee with Wells Fargo. Christian Wetherbee: I guess, obviously, the pricing environment in the truckload market is improving, probably materially versus what we talked about last time. So Adam, I was kind of curious as you think about the margin opportunities or maybe the earnings opportunity for the truckload business as we go through, I guess, this year, but maybe bigger picture. Do you think this cycle has the potential to be what you kind of hoped it could be in terms of the cycle earnings of the Truckload business or the midscale margins of the truckload business? Any color around that and maybe timing towards getting there would be helpful. Adam Miller: Yes. So I mean, a great question, Chris. And it's early in the inflection here. So it's hard to know exactly the strength, the duration and the timing of how that will play out. But just leaning in on our experience in previous cycles, I don't think we've ever really seen the pressure on capacity and that, I mean, from regulatory forces versus just normal economics. And so I think we could see more capacity coming out of the network than we typically would see in a cycle. And I feel like that could be a catalyst to really drive a strong bid season this year but also into next year. So the question is going to be, can we capture rates, but can we also improve the utilization on our equipment, which we've done that now for 7 consecutive quarters on a year-over-year basis. And then can we grow our seated trucks, not necessarily investing in more trucks. Now hey, if we get to that point, obviously, we'd have the ability to do that. But to be able to see more of the trucks that we have on our fleet, while running them productively. If we're able to do all 3 of those, then I do believe this sets up to be able to get back to a more normalized earnings or margin profile that we're accustomed to seeing in our businesses, and that includes even U.S. Express getting to the legacy performance that we've seen at Knight and Swift. It's early in the cycle, and we're just getting some feedback on bids, and we're seeing how those awards are coming in. And then how -- some of our customers are tendering those awards and what mini bid activity looks like, what turndown business is looking like. So still a lot to read through into the market. But it certainly feels like the setup is there for those in the industry to get back to kind of sustainable rates that puts our industry in a position where the good quality compliant carriers have the ability to make enough margin to invest in their businesses, invest in drivers, invest in safety and invest in good quality equipment. Operator: The next question comes from Richa Harnain with Deutsche Bank. Richa Talwar: So just following up from that previous question, just Adam, when you say normalized margins, maybe you can highlight kind of what that is mid-cycle, -- is it sort of low teens that we're talking about here? And then just I think, Brad, when you ended the segment, you said the impact of this high single-digit, low double-digit rate improvement will really be seen towards the end of Q2 into the back half of the year. But if you can just kind of like give us a sense of the level of magnitude of margin expansion as we move through the year, you're already calling for 100 to 200 basis points of year-over-year improvement in Q2 before we really start to see the evidence of this type of rate environment, I think in 2Q, you just caught a low single-digit improvement, right? So I'm just trying to get a sense of how we should flow through this in the model near term and maybe more longer term, if you could help things. Adam Miller: Okay. Well, I'll hit on maybe the first portion. I'll try the second and Brad, you can dovetail on that. I think we probably got this question on normalized margins for the last like 5 earnings calls in a row. So I'll try to be consistent on how I answer this. We look at our business in a normalized market, the truckload business typically operates in the mid-80s, right? So that's kind of a mid-teens margin when the market is really good, we've operated sub-80s and then typically, in a difficult market, you're upper 80s, obviously, this cycle played out differently has been far more challenging across the industry and for us, included in that. But that's what I'm referencing getting back to that mid-80s normalized earnings. I feel like there's the setup here in this bid season and going into next to be able to achieve that. And then when you look at where we're at, we have our LTL business that's been growing, and that doesn't have the same cycles as truckload and we look at just methodically improving the margins in that business. Obviously, we had the anomaly with the claim development in the first quarter, but we expect that to be put behind us and continue down the path of improving margins as we grow in to that network and start to march down into the 80s, which I still feel this year, we can achieve a sub-90 operating ratio during the year and just continue to build upon that. And then typically, when our truckload business is healthy, the logistics business can grow exponentially. Now early on as the cycle changes, logistics feels pain because the rates haven't adjusted yet to what the third-party capacity rates are. And so you probably see a low-count degradation which we've seen because you just can't take freight that you can't make a margin on. As rates reset, contractual rates, but also backup rates which we do a lot of with our customers. And so when the routing guy falls apart, they tend to slow to the backup rates that hopefully put us in a position where we can do it with our own trucks, we could do it with quality third-party capacity through our logistics business, 1 that we were able to take a lot more of the loads that we're turning down today. So in normal earnings, I would expect logistics to be growing. And then Intermodal, we believe is on a path to profitability. I think we laid out the improvement sequentially that we expect to achieve in intermodal, which would mean we're profitable. And volumes are really starting to build in that business. Last year, this time, we took a big step back when you had the tariffs announced that we were kind of pushing for improving our revenue per load, and that led to us losing some volume. But this year, it's very different. We're getting improvement, some improvement in rate, not near where you're going on the truckload side, but some improvement, and it's resulting in better volume as well. So we're starting to see things build and we'd expect intermodal to get it to profitability and to see that improve as the cycle strengthens. So that's how we're viewing kind of this, say, normalized, you're never really at normal. It's kind of you're always flowing in the cycle. But that's how I'd frame it up, be sure for that question. And then in terms of the high, low double-digit request, right now, we've probably got about 70% of our business in bid -- but a lot of that starts to be implemented kind of mid- to late second quarter and then it starts to flow into the third quarter. We have some pretty big customers that hit in the third quarter. So we may be seeing the activity really build in terms of approving a healthy rate improvement or rate increases, but it may not flow through to the P&L immediately. but we expect that margin to really start to flow through kind of fully based more in the third quarter and then build into the fourth quarter. Brad, I don't know if you had anything else you want to elaborate on. Brad Stewart: And just one thing I would add is in terms of our contract versus spot mix, we came into the first quarter in the 10% to 12% kind of range low double digits, where we had been for really the last couple of years in terms of spot exposure. We exit the first quarter, just a couple of points higher than that, kind of low to mid-teens perhaps. And look, as we navigate the pricing environment and navigate trying to manage our business and extract yield from our network, jumping into spot exposure is step one in trying to manage yield. And so our first priority is our contractual recurring relationship business, and we have expectations for what -- where the market is on price at this point. And that's what we're trying to address first and foremost. And -- if we can't come to agreement on price the same way in terms of the market, -- we may end up with less contractual exposure on certain accounts, and that will create more spot exposure. And so that's something that can evolve over the next several months as we continue to work through bid season. And so that's just another lever that can contribute to our realized rate per mile this is the contract and the backup rates as that 1 spoke to. So that's something that we're going to be managing and watching week by week as we work through this, but a lot of different avenues to generate. Operator: Your next question comes from Ken Hoexter with Bank of America. Ken Hoexter: And I guess, Brad, just to extrapolate on that a bit, right? It sounds like in the prepared remarks, Adam, I think you might have mentioned you're revisiting contracts that are longer in nature. Are you already starting to give those notices to to get out of the contracts and start to renew? Is that how tight the market has got. And I just want to understand kind of the comments around that. And to clarify on the LTL, did you say the delay but the weights are ramping, the delay in getting pricing, but you're seeing weights ramping given the industrial move. How long does that delay get until you get that pricing? Adam Miller: Well, let me clarify that. We're not saying we're getting delayed pricing on LTL. I think we're saying we're getting mid-single digit on the renewals, but we're seeing a freight mix change where we're getting longer length of haul, heavier shipments that we believe will improve the yield of the business. And so the revenue per hundredweight make it a little bit skewed in terms of the year-over-year comparison because of the freight mix change, but we're not seeing delay in LTL pricing. And then in terms of the rate review is what we would call them is we're going through our network and looking at any rate that may just be stale. If it's beyond a year, it's something we're going to look at. We're reviewing those that are called the bottom 20% performing and looking at what we need to do to get those rates to where they're closer to market. And so if we don't have an active bid to address those, we're being proactive of making that going through that review and then having discussions with customers around that. So that is something that is active. I think early stages right now because there are a customer a lot of customers that do RFPs and like I said, we're probably in the heart of about 70% of that business, but there is the 30% that we need to make sure we're addressing as the market moves quickly. Ken Hoexter: And same for the LTL, does that gap closed, do you get if you're already at high single, low double in truckload. Can you see that transfer to the LTL market? Adam Miller: I don't know that they align that right now in LTL on renewals, we're getting mid-single digits right now. Ken Hoexter: Okay. Operator: Your next question comes from Ravi Shanker with Morgan Stanley. Ravi Shanker: Adam, last quarter, you very helpfully walked through what you saw were upcoming catalysts on the supply side. Obviously, lots of moving parts here, but everything from derailers law, the Montgomery case and the brokerage side, you proposal for a $5 million minimum insurance as well as all of the rules that we saw last year. How do you see this evolving over the next few months and potentially the market tightening up more? Adam Miller: Yes. I mean I think you hit them, Ravi. I mean these are all pressures that we think are going to deter bad actors from coming into our space. I think it's going to push capacity out of the market that aren't at sustainable rates and are acting in a compliant manner. I think clearly, when our industry saw spot rates jumped dramatically in 2021 and then we had this push for immigration, this industry was targeted. And we had a lot of people enter our space and didn't have much experience in trucking, probably didn't have a great safety background, didn't have proper training and also we're probably exploded by some of the Camelian carriers that are out there and ultimately paid them rates well below what someone who's a citizen in the U.S. would view as livable wages. And so I think that population is getting pushed out with the pressure on eliminating the improperly issued nondomicile CDLs. And I think Delia's law will help codify that into law, among other things. I think we've got an administration who is really pushing on what some of these Camelian carriers, how they've exploited the system and the self-certification of training, the self-certification of logs and putting more regulation behind that. And I just think there's going to be a lot more oversight from the FMCSA that's needed. Now hey, if we get minimum insurance, that's another big thing. I mean you got English language proficiency, that's pushing capacity out of the market. And hey, I think drug testing is another big one where we already have set a much higher standard for ourselves. We've been doing hair follicle drug testing for over a decade. And we see that you're probably 10x to 15x more likely to pick up a positive drug testing you would with urine. Yet we don't accept that as a valid way to test drivers, and you can't even submit those positive results to the clearinghouse. And so those drivers can just go on to another company and get a job and be behind the wheel. And we don't think that's right. And so I think that's another thing that I think this industry needs to help clean it up and really be focused on putting the safest drivers on the road. But Ravi, what I'd say is we've never seen this type of push to clean up some of the capacity and the unsafe drivers out on the road. And when you pull that one of them, I think moves the needle enough, but when you aggregate them, I think we're already starting to see that influence the market. And really, the improvement we're seeing and the ability for us to get rate is driven largely by capacity reduction versus demand. And if we start to see demand pick up in conjunction with some of these other efforts that are just in the early innings, I think we could find ourselves in a much more favorable position from a carrier standpoint. Andrew Hess: Ravi, I would say that I think it's clear to us through our conversations, the administration is committed to the cleanup that needs to happen in our industry. We think if we can get legislative support through -- law and the like. But obviously, that makes that more durable through future administrations, but we don't think it's dependent on that. We think whether that happens or not, that the actions of the administration are going to be effective over the next few years as we continue to kind of get things right with our industry. Operator: Your next question comes from Scott Group with Wolfe Research. Scott Group: So Adam, what are you seeing with seated tractor counts and drivers generally? And then just big picture, if you think back last cycle, just massive growth in your and everyone's brokerage business, but all the things that you talked about and that last question with nondomicile and Camilion and Montgomery, all these sorts of things. I'm wondering, as you're having these big conversations, is there a sense from shippers that they're less willing to do a brokerage offering right now and maybe are they willing to pay more for asset-based this time versus maybe prior cycles? Adam Miller: Yes. Okay. Well, let me hit on those, Scott. So on the ceded truck side, that -- certainly, finding drivers hiring driver has always been a challenge in our space. I've always said, in our industry, you either have drivers or you have loads. Really do you have them at the same time, right? So we're starting to see the loads come through. And so we're making investments to ensure that we can have an advantage in sourcing drivers. And so we're making investments in our marketing spend and the number of recruiters we have. We're leveraging AI to ensure that we're very quick to react to leads as they come in. And we're really leveraging the Academy network that we have to train and develop drivers. And we're -- as we've made those investments as we saw the market change, we're starting to see that build some momentum really across all of our different brands. And so I'm feeling more bullish on our ability to not only improve rates, but to improve our utilization and grow seated truck which I know was the biggest challenge during the last up cycle in the pan I think everyone went backwards to truck with how difficult labor was. I think the challenge that we'll have is that we've only gone after the high-quality drivers in some of our space have been able to hire those that don't meet the criteria that we had. Now as some of those drivers are kind of pushed out of the market because of some of the things we just talked about, the quality drivers that we look at are going to be more attractive. But we believe we bring far more to the table with terminal network we have, the equipment we have and the ability to give high-quality training. And so we feel like we'll have an advantage to maintain and even grow our seated truck count as drivers become more challenging. And to your point about logistics, I agree with you that I think we saw this proliferation in logistics because you had customers that just had to move goods at all cost because demand was so high and you had this lot of capacity coming in. I think when talking to shippers, I think they're going to have a bias towards towards asset-based carriers. I mean we're already starting to see that. We're starting to see that they're limiting even some bids, many bids only to asset-based carriers are living the percentage that they will allow in terms of brokers to participate in a bid. And I think that's going to continue. Now I think we get viewed a little bit differently because we do bring some assets to the equation with the power only that we offer. But we've also talked about what we're doing to vet the carriers that we work with. We have taken a great number of steps to really ensure that we have high-quality safe carriers. Now you're not always going to be perfect that, but we have cut down the number of carriers that we work with dramatically. Just since the beginning of this year, were down 30%, and we had made a large cut even earlier last year. And so we had, how long you've been in business. We're looking at evidence that you have logs that we could see where your tractors are at we actually -- because I think 1 of the challenges in our space is the broker has no idea in most cases, who is actually driving the truck. And I think that's been a real challenge. -- for the broker and the shippers really know that. And so we are taking steps to ensure we know we have a copy of the license, we know who's in the truck, especially if they're going to operate and leverage 1 of our trailers. So we're taking a lot of steps to put ourselves in a position that when customers kind of demand that as part of the logistics solution. We have that to offer. So I don't think you're going to see the same expensive growth that we saw during the pandemic. But I do think those that are good quality logistics providers do it the right way and have an asset solution to complement what they're offering. -- will have the ability to grow in a strengthening market. Operator: Your next question comes from Jonathan Chappell with Evercore ISI. Jonathan Chappell: Adam, I know you don't go into the monthly detail on LTL as some of the pure plays do. But is there any way to help give a cadence on kind of how the first quarter maybe April transpired as we think about like weight's been good, that's you're finally getting the turn there. But are we going to start to see more consistent kind of shipment tonnage growth? And then importantly, are you -- do you feel if you do get that demand tailwind or tonnage tailwind shipment tailwind behind you. I know cost alignment was kind of pretty difficult. Have you been building out the national network? Do you feel like your costs are now appropriately aligned that if there were to be a demand pickup that would kind of go right to margin improvement as opposed to still kind of chasing that with resources? Adam Miller: Okay. That was a long question, John. I'll try to hit every component of it. That's the shortest one so far. Yes. Okay. So on the LTL front, I think we talked about in our commentary that we were a little bit slower on volume to begin the quarter but a good build with March being the strongest and then those trends continuing into April. We only got a couple of weeks into April, but we're not seeing that slow down at all. And then typically, second quarter is our one of our strongest quarters in LTL. We do believe we have a tremendous amount of operating leverage in the business. There's just a few pinch points that we have, where we may have a few locations to open up this year, but it's not going to be near the investment we had to make in the prior years. And so it's allowed us to focus on the fundamentals with ensuring that we're efficient with our labor, managing the purchase trends. I think some of the things that Andrew touched on the LTL discussion, and so yes, as we see the tonnage improve, and it may not -- because of the freight mix, it may not even have to be a huge lift in shipment count if you're getting more tonnage that typically yields better. As we look at our kind of our weekly performance and we have an estimated OR in that weekly performance as we see that building, yes, I think we're seeing the operating leverage in the business and a lot of that flowing to improved margins. And so that's where, if you feel like if this continues, it could be back half of this year, we start to see that operating ratio began with an 8 versus the 9 and then just continue to build from there. I mean, hey, we're still working on freight flows and again, adjusting to the different -- the changing network but we feel very confident about our LTL team and what we're doing there and just making kind of consistent improvement in both the freight mix and the cost structure. I don't know, Andrew, you may have something you want to add to that? Andrew Hess: Well, let me just say a couple of things. Just to give you a sense for the momentum within the quarter. So obviously, the Southeast was pretty heavily impacted by weather, and that's kind of our highest density volume is in our business. But if you look at tonnage in January, it was up 1.6%, February 2.6% and March 6.9%. So we really ended up at 4.1% up or so on tonnage year-over-year. So we really did see that build as we kind of moved out of the weather and some of the new contract wins took effect. So I think that's going to be a positive momentum as we build into for us. In Q2 was our strongest seasonal quarter of our business. But when it comes to cost, I think below the surface, obviously, the claim or the arbitration liability cost impacted the core low, but we're seeing steady progress in our cost efficiency. So we saw our variable wage per ship improved from the fourth quarter to the first quarter, we expect that's going to continue. We have seen, I guess, I would say, just to give you a little feel for it. We're seeing the most improvement in our dock wages per shipment. And I think line haul is the next area where we're going to start to see the most improvement. So the costs that came out of the business as we brought our different businesses together last year, in terms of vehicle-oriented travel costs, right-sizing our equipment, all of those are showing positive trends. The one thing I would probably mention to you is we've mentioned that we're slowing down, building new locations. And that is right. That's kind of where we're at. But we're going to -- we have locations where there are pinch points that in our -- the security of our flow need to be addressed, and we are increasing door counts in those locations. That's going to allow our freight to flow in a more natural way, in a more cost-efficient way. So you're going to see a fab locations where we need to, to help with that flow. Those are going to create some growth, but primarily, they're going to help with our costs. So we're still aligning our evolving network with our footprint but we're in a place now where it's just -- we're positioned well. We're just going to see improvement in terms of that efficiency we expect going forward. Operator: Your next question comes from Dan Moore with Baird. Daniel Moore: A lot of questions have been asked and answered, but one that was not addressed yet that I think is definitely worth a little bit of time is leverage around U.S. Express. So I can't imagine about a rate environment to begin to realize momentum in that business. I think we've argued for a while now that, that's really what was needed. I know you guys have done a lot of cost repair and management repair. In terms of the business, but just the ability to move to a rate cycle, much less a rate cycle like this one. really presents a lot of opportunity. Can you talk to us about the size of the business today, generally? And maybe talk to the potential earnings leverage of U.S. Express as we move forward. Adam Miller: Yes. Well, so Dan, I think you're right. I mean when we purchased U.S. Express a few years ago, I mean, we felt like we were going to be in a more favorable environment sooner than we have found ourselves. So that's put some pressure on the margin and how quickly we are able to drive accretion through that acquisition. But I agree, we're finally in a place now where we can work on improving their freight network and improving their rates to a more sustainable level. And we've got a great team there, the gentleman who leads that business that was led sales at Swift following the merger and was an integral part of the improvement at Swift and the margin profile at Swift. And so we feel him and his team are well positioned to understand what it takes to make some of the changes. And hey, some of those rates are going to need to go up in a very meaningful way. And they're very equipped with understanding of the market, leveraging the network information we see across all of our brands. And closing the gap on where we're at from a legacy standpoint, I think this last quarter, they're about 300 basis point difference from an OR standpoint. Some of that is still a cost delta but I think a lot can be made up through getting the rates closer to where we are from a legacy standpoint, I think we've got the right team there. We've made a lot of changes there, but feel well positioned in the discussions with our customers and getting, I think, good feedback in the early parts of the bid and expect to see rate continue to grow and develop. Andrew Hess: And from a cost perspective, let me just make a couple of points. I'll point to Adam Miller: What are we going to say, Dan? Daniel Moore: Yes, I'm sorry. I just wanted to -- 1 thing that would be helpful to understand is just the size of the business today and if you want to bracket it, that's fine or any manner in which you'd like to answer the question. I know it's -- I know, obviously, it's a consolidated business at this point, but we don't know how how -- we don't know what the revenues are. So if you can maybe add some context around that today, if at all possible, that would be really appreciated. Adam Miller: Yes. I think between the trucking and the logistics business, I mean, you're just under $2 billion between those 2. Close to that. And now, Andrew, you want to... Andrew Hess: Yes. So just I think 4 areas that I think are opportunities ahead of us on cost. First, the cost of insurance and safety. So that -- we've had to go through something of a culture change there in regards to how we manage safety and insurance. And the CSA crash basic, I think, is a good number for us to look at. That's over 60% better from where we were we at the acquisition. So we are seeing, especially, we're starting to see that impact the business. And those legacy costs of insurance and claims have weighed on the business. We think that the -- the safety performance that's improved dramatically is going to start to impact the business. The equipment costs, we're still working through some of our high-cost equipment leasing and so we think as we roll through that equipment, that's going to provide some opportunity -- we've -- in terms of hiring costs and advertising, we think there's opportunity there as we get better at that to bring that cost down. Obviously, the biggest opportunity is rate that Adam talked about, where we think we have more than a normal amount of progress to make on rate. So a lot of the work we've done on cost has been on the fixed cost side. On our overhead costs, which has been pretty significant in the last year. We think that, that's going to be structural and sustainable through volume growing in the business. Daniel Moore: A lot of tailwinds emerging, a good look for the remainder of the year, guys. Operator: Your next question comes from Brian Ossenbeck with JPMorgan Chase. Brian Ossenbeck: Maybe just to come back to some of the more topical ones here will be discussing here for a while. Just in terms of the -- I guess, the work you did with carriers in the logistics business, down 30% I think it was for accepted Carrier. That's a pretty significant number. So is that something you feel like the rest of the industry has to go through as well. Maybe they have an even higher number of carriers they're going to have to squeeze out of their networks. And Adam, we've heard for a long time about hair follicle testing and things of that nature. It sounds like I think you said there's some momentum. But like what are the steps we would have to see for that to get a bit more progress? And when should we expect maybe we could see that start to begin. Adam Miller: Well, look, I don't want to speak to what other logistics companies should do or have to do, I think about what we felt like was required of us to ensure that we're putting quality carriers hauling our shipments, hauling our trailers when they're doing power only. We're anticipating that our customers are going to start being more concerned about this. as this becomes more of a relevant issue. And I think we're already seeing that in mainstream media. We've already had some discussions with some of these shippers about how we're really monitoring who's hauling their freight who's actually driving the truck. And so we felt it was prudent for us to take the steps to eliminate capacity that we didn't feel comfortable with. And do I think others will do that. I think some will. I think some will still take the cheapest carrier when they're available, and that may just be based on survival. So I don't know how that will play out. But I do think some of this capacity is just going to have to exit regardless because of some of the regulatory changes that are being enforced. And we feel very -- we were very supportive of this administration and the actions that they're taking. So some logistics company may not have a choice because the capacity of the leverage today won't exist. But we're not waiting for that. Where we want to be proactive and to do the right thing. On the hair follicle, Brad, do you want to maybe touch on that, Brad, you've been engaged in that? Brad Stewart: Yes, it was just maybe get a share in terms of what we've seen in our own experience over the last decade or so, as Adam mentioned, we do both, right? We do the year analysis because that's what's recognized by the feds. And we do the hair follicle test because that's what works. So we pay incremental cost to do that in addition to that because that is an important part of our hiring process. And what we found over doing this thousands, if not tens of thousands of times a year, is that the hair follicle test identifies roughly 14x the drug users that the urinalysis test does. So that prevents us from hiring them, it does not prevent them from driving in our industry because not all carriers do that. And so there is an openness it seems in Washington to at least engage in this conversation. Congress past this years ago, and just health and human services has not gotten around to writing the rules to actually put this into practice. So it does seem like there's maybe an openness to engaging in that conversation. We would ask just to allow us to report but those of us who are paying for the test, what we are finding. Maybe we don't require it of everyone, but if we're going to pay for it, let us report that to the registry because we do think that is important for safety for the motoring public. Operator: Your next question comes from Ari Rosa with Citigroup. Ariel Rosa: So Adam, I wanted to ask a bit of a strategic question. You've said a few thousand tractors since the USX acquisition. It makes sense to us, of course, why that decision would have been desirable in the downturn when obviously it was difficult to find loads. But now as we think about the up cycle, is there any dimension in which that holds back the ability to get the same level of upside that you might have seen if you kind of retain those tractors. I'm just hoping you can kind of discuss that decision or maybe defend that decision a bit, give us a little bit of color on like why that was the right decision to shed those tractors and also put it in the context of, on an absolute basis, obviously, we're looking at a larger tractor count now than what you had in kind of the prior cycle. So kind of how do those dynamics play out against each other as we think about what the upside could look like? Adam Miller: Well, what I'd say, Ari, is we don't go into an acquisition with intentionally trying to shrink the capacity. I think as we go in and review the freight network and U.S. Express, 40% of their loads were coming from brokers which obviously you're not going to be successful if that's where -- who you're relying on for your freight. So we had to go in and adjust their network to find direct relationships, loads that can support their network. And so in doing so, you had to turn some of the business they were very dependent on. At the same time, we're ensuring that we have good quality, safe drivers. And so we did change the standards at the hiring standards that U.S. expressed very early on in the acquisition to ensure that we had good quality drivers to drive down the craft basics to improve the safety, to improve productivity. Some of the things that Andrew has mentioned, -- and so when you do that, you kind of -- you're limiting the class sizes that you're going to have and then you're changing your freight network. When you have that kind of churn, you'll naturally end up or you have the risk of ending up with more open trucks than you feel comfortable carrying as overhead. And so as you went through that to get the business on a better foundation and position them to be far more healthy long term, you end up with some capacity that you just need to sell and exit and remove from your brand. And so that was the process that we went through at Express. Now we feel stable today -- and we're making the same investments there on the recruiting front and now leveraging that we have at Swift and said some at night to be able to train like our other brands do. And obviously, as you have a better freight market, they'll be able to make some progress on repairing their network and putting themselves in a position to have sustainable rates to grow the business back. And hey, we'd love to be able to seat more trucks and grow trucks. But today, we have -- we still have some empty trucks that we want to fill before we invest in additional capital but hey, we're in a much better spot today than if we would have just tried to hang on to all the trucks from the original acquisition and keep the porphyry and not adjust the standards that we hire in terms of drivers. So I still feel it was the right move. We feel good about how we're positioned and expect to make some real progress on margin and to the business. Brad Stewart: And I'm just going to add a little bit of context, this is Brad. I know the op income right now coming out of the long and Argos down cycle doesn't show it, but we are running more miles than we were prior to the last up cycle. So we've got more of a basis there to work with going to this new cycle. Adam Miller: So appreciate the question, Ari. I think that now concludes our call. I think we're beyond the time here. So appreciate all the questions and interest from everyone. And again, if we weren't able to get to your question, you can call (602) 606-6349, and we'll try to return your call as quick as possible. Thank you, everyone. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Good day, and welcome to QuantumScape's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Sam Kamara, QuantumScape's Senior Director, Investor Relations. Please go ahead, sir. Sam Kamara: Thank you, operator. Good afternoon and thank you to everyone for joining QuantumScape's First Quarter 2026 Earnings Call. To supplement today's discussion, please go to our Investor Relations website at ir.quantumscape.com to view our shareholder letter. Before we ,I want to call your attention to the safe harbor provision for forward-looking statements that is posted on our website as part of our quarterly update. Forward-looking statements generally relate to future events, future technology progress or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize. Actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. There are risk factors that may cause actual results to differ materially from the content of our forward-looking statements for the reasons that we cite in our shareholder letter from 10-K and other SEC filings, including uncertainties posed by the difficulty in predicting future outcomes. Joining us today will be QuantumScape's CEO, Dr. Siva Sivaram; and our CFO, Kevin Hettrich. With that, I'd like to turn the call over to Siva. Siva Sivaram: Thank you, Sam. First, an update on our Eagle Line. This is our highly automated pilot production line to demonstrate scalable production of our solid-state lithium metal battery technology. In Q1, we completed the installation of the Eagle Line and commenced start-up operations. We are producing initial volumes of QSE-5 cells. We have been working to continuously improve all aspects of Eagle Line functionality, such as equipment uptime, line throughput control systems and process stability. We've been integrating advanced AI models into the Eagle Line, and we have seen substantive progress on cell quality and reliability. We believe that the increased production capacity at the Eagle Line will help drive a virtuous cycle of higher data volume, more rapid learning cycles and enhanced quality. In Q2, we plan to ramp QSE-5 cell production to support customer programs across automotive and other applications. Development work for EV applications remains our core focus and our largest source of customer billings. We continue to work closely with the Volkswagen Group's PowerCo as we advance through the phases of our automotive commercialization road map. The next phase is field testing. Sales from the Eagle Line will be put through a demanding set of real-world test conditions, and that some feedback will be used to learn and iterate. Beyond our work with Volkswagen. In Q1, we shipped cells to an automotive JDA partner for testing. We continue to work through our 2 JDAs with top 10 global automotive OEMs to bring our solid-state lithium-metal technology into their vehicle programs. In addition, this quarter, we successfully completed our technology evaluation with another top 10 global automotive OEM customer. Their engineers performed hands-on testing of our technology and ran competitive benchmark against other solid-state technology approaches. With the success of this effort, we are moving into the next phase of this engagement: joint development activities with the ultimate goal of deploying QS technology in their automotive and other applications. Next, an update on our QS ecosystem. This is the cornerstone of our capital-light business model. By teaming up with world-class companies across the value chain, we can bring our technology to global scale faster and more efficiently. These alliances are a force multiplier for our commercialization efforts as we distribute our technology know-how to trust it partners. We continue to work closely with both Murata Manufacturing and Corning on scaling up production of our solid ceramic separator using our groundbreaking Cobra process to build a global value chain necessary for our gigawatt tower scale production of QS technology. Our ecosystem partners are also investing in QS proprietary hardware and systems to produce our ceramic separator. We see this as a clear sign of their commitment to our ecosystem as well as a source of customer billings. In Q1, we recorded our first customer billings from our ecosystem. Next, a word on new markets. We believe our high-performance solid-state design has compelling attributes to address the evolving energy storage needs of AI data centers, where conventional lithium-ion technology faces safety and performance limitations. Driven by massive compute demand, data centers are transitioning to 800-volt DC designs, and adopting power systems architecture and technology from the electric vehicle industry. We see this as a natural fit for our no-compromise solid-state battery. In-rack energy storage and power delivery is a large and fast-growing market, and the higher energy density of our battery technology can enable increased compute density for AI factories. In addition, we have seen strong customer interest in our battery technology from global players in the military, aerospace and government sectors. Our battery technology unlocks step-change improvements in both energy density and power simultaneously. Combined with the superior safety of our solid-state design, this is a highly attractive combination for these advanced applications. Our anode-free architecture also has supply chain benefits for these customers. Conventional lithium-ion batteries require graphite that is almost exclusively sourced from China. In contrast, our battery design is graphite-free, eliminating a major pain point for defense applications. To conclude, I want to take a moment to look at the big picture. The world's energy system is experiencing rapid change. The way we produce, store and use energies are going a once-in-a-century transformation. From electric vehicles and AI data centers to grid storage, drones and aerospace, the future of the world economy is being built on electrification, electrotech. To give just one example, the speed of change and growth in the AI data center market is breathtaking. The technology of the past is struggling to keep up and innovations in energy storage are essential to this transformational change. Thanks to our years of careful planning, consistent execution and constancy of vision, QS is in the middle of this electrotech story. From geopolitical disruptions to the energy system and supply chain risks for critical materials to the explosive growth of electrification across the world economy, the tailwinds for our technology have never been stronger. We believe we have the differentiated technology, world-class team, ecosystem partners and customer relationships to capitalize on this revolution. Even as we tackle the challenges still ahead, our dedicated team is motivated by a market opportunity that is global in scale and growing every day. We look forward to updating you on our progress over the months to come. With that, I'll turn things over to Kevin for a word on our financial outlook. Kevin Hettrich: Thank you, Siva. GAAP operating expenses and GAAP net loss in Q1 were $109.2 million and $100.8 million, respectively. Adjusted EBITDA loss was $63.2 million in Q1, in line with expectations. For full year 2026, we reiterate our adjusted EBITDA loss guidance of between $250 million and $275 million. A table reconciling GAAP net loss and adjusted EBITDA is available in the financial statement at the end of the shareholder letter. Capital expenditures in the first quarter were $10 million. Q1 CapEx was primarily composed of final payments related to the Eagle Line. For full year 2026, we reiterate our capital guidance of between $40 million and $60 million. Customer billings for Q1 were $11 million, representing a mix of customer development activities and ecosystem partner payments. Customer billings as a metric represents the total value of all the invoices issued by QS to our customers and partners in the period regardless of in treatment. As a reminder, customer billings may vary from quarter-to-quarter due to fluctuations in activity as we progress through various phases of engagement. Customer billings is a key operational metric meant to give insight into customer activity and future cash inflows. The metric is not a substitute for revenue under U.S. GAAP. We ended Q1 with $904.7 million in liquidity and will remain prudent with our strong balance sheet going forward. As always, we encourage investors to read more on our financial information, business outlook and risk factors in our quarterly and annual SEC filings on our Investor Relations website. Sam Kamara: Thanks, Kevin. We'll begin today's Q&A portion with a few questions we have received from investors or that I believe would interest investors. Siva, you've outlined our strategic blueprint and laid out our 2026 goals. With the first quarter behind us, can you drive the progress on our core annual growth? Siva Sivaram: Thank you, Sam. The Eagle Line is central to us. We are using the Eagle Line to demonstrate scalable production so that our licensing customers can take our technology and scale it up. You can measure progress in 2 ways, the technical side and the commercial side. On the technical side, the Eagle Line is making the expected progress as we ramp up. The team has been doing great work together with PowerCo. The day-to-day is all about getting the detail right, equipment uptime, line throughput, control systems, process stability and so on. The improvements we have made in reliability are enabled by some of our new AI models that take data from our metrology make determinations of the quality faster, more accurately and more consistently than a human could possibly do. This enables an accelerated feedback and feed-forward loop which drives the continuous improvement cycle faster. We shipped samples in Q1. And in Q2, we'll be ramping to support more shipments. That's the technical side. On the overall commercial side, we have great customer traction across major geographies in the automotive business, Europe, North America and Japan. We are working closely with VW on field testing in the near term, leading to large-scale production transfer. We have shipped cells to an auto JDA partner, successfully completed the technology evaluation with an additional top 10 automaker. All told, that 4 of the top 10 that are well engaged in our auto [indiscernible]. We are seeing our ecosystem business model also gaining momentum. Our ecosystem partners are making investments in hardware and systems to make our technology, which shows their commitment to the opportunity. Not only that, but these investments are beginning to flow through into QS customer billings. Our work on automotive ecosystem engagements and the higher throughput of the Eagle Line comes together to give us the resources that we need to go after some new markets faster. Sam Kamara: Thanks, Siva. On the new markets you've described, what makes the opportunity in AI data centers and defense interesting? Siva Sivaram: Sam, we think the opportunity for our technology in AI data centers is obvious and compelling. It's early days, but right now, I would call it a great addition to our automotive portfolio. It ticks all the boxes. The size of spend in the market, the growth, the product market fit and our ability to create and capture value. The requirements for in-rack power solutions align well with our technology. You need better energy density to increase the compute density of the data center. You need the power performance, charge and discharge, to provide power smoothing for these AI workloads, which from the battery's point of view is almost like being on a racetrack. And safety really matters for a data center, where operating temperatures are higher and a fire in a GPU rack could easily cost millions in damage and downtime. Our differentiated technology allows us to do things traditional lithium-ion cannot do. Better performance with better safety lets you get closer to the system and provide power over the last meter. We are setting up for this opportunity as well as other markets like military, aviation and space. We have added Ross Niebergall to the Board and Dr. Mark Maybury as an adviser to help us with these opportunities, and their expertise and networks are extremely valuable. We are really excited about these new markets, and we'll be shipping samples from Eagle Line to meet the increasing inbound customer interest. Sam Kamara: Kevin, we report first customer billings from ecosystem partners this quarter. Can you explain why that milestone matters and what it demonstrates about the longer-term economics of our business model? Kevin Hettrich: Our first customer billings from ecosystem partners are an important milestone for 3 reasons. First, this is an indicator of ecosystem investment in our technology platform. We believe this accumulation of investment by partners is an amplifier that is a strength of our capital-light business model. Second, these billings are an additional source of cash flow to the company as we transfer equipment, processes and know-how that enable our partners to move faster while retaining QS ownership of the core technology. Third, similar to our business model with customers, we plan to earn longer-term ecosystem licensing payments and royalties. We believe these ecosystem payments will be an important driver of shareholder value creation. As a reminder, we define customer billings and total value of all the invoices issued by QS to our customers and ecosystem partners during the period regardless of accounting treatment. This is an operational indicator rather than a substitute for GAAP revenue. The amount and accounting treatment can vary by agreement by quarter. But taken together, we believe they demonstrate growing external validation of our technology and the flexibility of our business model as we scale. Sam Kamara: Okay. Thanks so much, Kevin. We are now ready to begin the line portion of today's call. Operator, please open up the line for questions. Operator: And our first question for today comes from the line of Winnie Dong from Deutsche Bank. Yan Dong: I was wondering if you can potentially qualitatively characterize the ramp of QSE-5 production in 2Q. It seems like there's going to be some steep, I guess, quarter-over-quarter improvement in terms of the output, but I was wondering if you can characterize it as perhaps like qualitatively or even directionally? Siva Sivaram: Winnie, yes, we are building the ramp of the Eagle Line in Q2. As you would expect with a highly automated lines such as the Eagle Line, once we have installed and started beginning the initial volume of cells, we need to continuously improve the uptime, the throughput, the control systems, the process stability, all of this to continuously improve. And then there is an ongoing demand for samples from our automotive customers and from these new markets that we are attempting to enter, and these demands pile up. So Q2, we'll begin ramping, and we'll continue to go up satisfying these demands through the rest of the year. That gives you a good feel for how fast we are ramping the Eagle Line, Winnie. Yan Dong: Okay. Got it. And then second question is on the expansion to new markets. It seems like you think the sales can really be used for energy storage and data center. Maybe can you talk about some of the potential investments that you may need to put into this, and then what kind of time frame we're looking at in terms of launching a potential product for that? Is it -- does it need like some substantial change in terms of the technology and products? Or is it an easy sort of like transfer into that market? Siva Sivaram: Yes. That's a very interesting question, Winnie. Most of the learning from automotive business transfers here. The data center market is going into the 800-volt architecture. And many of the requirements are very similar with respect to energy density and power density and cycling life, et cetera. However, the most important thing we have to offer in addition is the safety and the no-compromise nature of the product, meaning you don't have to sacrifice performance for safety. You can have the product as close to the compute as possible. This is what we mean by last-meter power. And in all of these AI data centers and the AI factories, what you need is to be able to maximize the compute density. And so the ability of ourselves to be close and deliver high-quality last mile last meter power is what makes us very attractive. And it is a natural transition from the automotive product to the data center product. Kevin Hettrich: And Winnie, I'm happy to take the capital allocation part of the question. As you know, our strategy is to develop technology platforms that serve multiple markets. The bulk of the investment goes into developing platform. It's more incremental to tailor our product and to engage customers and where we see incremental investment opportunities in the best interest of shareholders, of course, we're going to go after them. We're very excited about the new high-value markets that we mentioned in the letter in our remarks. And as a reminder, one of our goals, number three, is to expand into high-value markets. our annual operating plan and the financial guidance upon which base already contemplate that. And in today's call, we reiterated our adjusted EBITDA guidance, our CapEx guidance. And we also reiterate that we are tracking to our year-over-year increase in customer billings, all reiterated on today's call. Operator: And our next question comes from the line of Ben Kallo from Baird. Ben Kallo: Congrats on the first billings. Just maybe on the last question, if you could expand just would it be similar in a license model? Or is it something that you could do under [indiscernible] the expanded purview that you guys did a while back? Siva Sivaram: Ben, it's exactly correct. So we will be looking at both of those. Initially, the samples will come out of the Eagle Line. Additionally, PowerCo has 5 gigawatt hours of capacity tenor markets outside the automotive. And we will continue to find other opportunities for these markets as well. And so all of these are, as you said, right in our path of how we want to take it through. The ecosystem also plays a big role. Our ability to ramp the separated production from either Corning or Murata helps with this. And we expect to see the same phenomena to happen with our equipment and materials partner who all will help us with this ramp. Ben Kallo: And then just taking to that, just moving on to the other auto OEMs that you're working with, could you just talk about kind of what -- if there is kind of a view on the progression of turning those to the formal licensing partner with the JDA and the formal licensing partner like a time frame or any kind of like what they're looking for to solidify that relationship? Siva Sivaram: Yes. Ben, thank you. Thanks for the question. Yes, upfront, I want to say, 4 of the top 10 auto OEMs level are now actively involved with us across the major geographies North America, Japan and of course, Europe with Volkswagen. And in all cases, we are carefully going on the progress with evaluation to joint development working towards licensing. As you know, Volkswagen is the most advanced in that relationship. The others are well on their way for us to progress towards a license from that. And all of these, of course, run through the Eagle Line. The Eagle Line makes the difference in our ability to sample and move this process along towards licensing. Operator: And our next question comes from the line of Mark Shooter from William Blair. Mark Shooter: Congrats on all the progress this quarter in the Eagle Line and the new auto engagement. So regarding the OEMs and the field testing as the next step, my understanding is that you'll need to size up the cell from the QSE-5 to fit into VW's unified cell architecture. So do you still need to do that for field testing with them? Or are they now taking the QSE-5 to field test? Or is another customer that you're working with, leapfrogging VW and beating [indiscernible]? Siva Sivaram: Mark, big interesting question. Yes, we are field listing with the QSE-5. As we demonstrated with the Ducati bike last year and onwards, they will be field testing. But you are absolutely right, we have the unified self to work with, and they are working closely with us to design that still as well. And I expect that each one of our OEM customers will want their specific form factors as well. And we work with each of them. This is one of the biggest advantages of the licensing business model is that our separator can handle all these form factors, but they -- I will be working with us on how to ramp on their specific needs. Mark Shooter: Great. Siva, that's very helpful. Switching to some other markets here. it's very evident where you're trying to go by the people you've added to the Board with the former military defense contractors. So I'll ask about the potential drone market in aerospace and defense. Your auto sample cell, the QSE-5 has a significant performance advantage for autos, but I'm wondering if there's some juice left per se. And if you were to redesign that for a drone spec because drones they require a higher specific energy density, but also they don't need as much cycle life. So I'm wondering if there is an [indiscernible] term like separator thickness and cell packaging where that could give you some torque on some performance improvements. Siva Sivaram: You are 100% correct, Mark. One of our goals for this year is go beyond QSE-5. As we keep repeating, we are just at the start of this S-curve. There are many levers still left to move us up the performance curve. And please allow us to come and show you what we are developing sometime later this year. And they'll be applicable not just to the drone market but to all other markets as well. So we will continue to push the technology frontier for all of this. The separated technology, the ceramic separator is the key to our sales architecture and its performance, and we will continue to evolve in all fronts to make the self-adapted to different applications. Operator: [Operator Instructions] Our next question comes from the line of Mark Delaney from Goldman Sachs. Unknown Analyst: You've got Ayush Ghosh on for Mark Delaney. On billings, how should we think about the potential increases in billings going forward, considering you recorded the first billings from the Go system and also with the new JDA and other non-auto end markets? Kevin Hettrich: Ayush, thank you for the question. In fiscal year 2025, we recorded approximately $19.5 million in customer billings. In Q1 '26 on this call, we recorded $11 million in the quarter. If you recall, our guidance is to increase billings year-over-year 2026 compared to 2025. And we reiterate that guidance today. Unknown Analyst: Got it. And then separately, you also mentioned you transitioned from the technology evaluation to the JDA with the top 10 OEM and congrats on that. Can you sort of speak on some of the benchmarking tests what they were and how QS performed and also what some of the initial feedback was? Siva Sivaram: Yes. I would love to talk about it. These are hands-on in-lab evaluation by these customer engineers in our pilot facilities. They spend a lot of time working with us, making the cells and measuring them here. And they have a lot of experience in solid state in their own labs and of course, all OEMs [ kick ] the tires from around the world. And these are top 10 OEMs. They are not novices to this technology, and they get actively involved with this. And for us to feel good about moving to the next stage, that makes us feel good and sort of ratifies our own confidence in how far we have been in this differentiated technology. Operator: And our next question comes from the line of Laisha Zaack from HSBC. Laisha Zaack Carrillo: Can you hear your me? Kevin Hettrich: Yes. Laisha Zaack Carrillo: I just have one very quick on timing. I wanted to know how this is going into these new markets changed the time frame that you've set for your automotive goals? Are they like -- are these new possibilities on some of the human capital that you does on [indiscernible] and the teams that you have established for automotive? Or are you going to start to expand your workforce, your teams, your resources, like how does this work? How should we take on it? Siva Sivaram: Laisha, a great question. The automotive marketplace still remains an important focus for us. We are adding these additional markets to our automotive portfolio. We are adding customers in the automotive marketplace. 4 of the top 10 are joining us. So it is not like we are taking our eye away from the ball with respect marketplace to automotive. However, these new big growing marketplaces with respect to data center and different set of space are very good fits for our product. So as Kevin mentioned earlier, at the start of the year, we had looked at these markets and appropriately sized our resourcing for this as part of our annual operating plan. So we have well resources, and we'll continue to invest as needed. This is not an either or. We are looking at both of these opportunities with capturing and -- creating and capturing careful the value. Operator: Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Siva Sivaram for any further remarks. Siva Sivaram: Thank you, operator. Finally, today, I want to recognize the entire QS team for their execution and thank our shareholders for their continued support. We look forward to updating you on our progress in the months ahead. Thank you. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Thank you for standing by. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Neptune Insurance Holdings First Quarter Earnings Call. [Operator Instructions] I would now like to turn the call over to Mr. Jon Carlon, Director of Corporate Development. You may begin. Jonathan Carlon: Thank you, and good afternoon. With me here today is Trevor Burgess, Chairman and CEO; Matt Duffy, President and Chief Risk Officer; and Jim Steiner, CFO and COO. Before we begin, I'd like to remind everyone that today's discussion will include forward-looking statements, including, among others, statements about our expectations for our future financial performance growth opportunities, business strategy, market trends and capital allocation plans. These statements are based on our current views and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially. We direct you to our recent SEC filings for a full description of these risks. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. We will also reference certain non-GAAP financial measures. These measures should be considered only as supplements to their comparable GAAP measures. Additional information, including reconciliations of the non-GAAP measures to their most comparable GAAP measures can be found in our earnings release at investors.neptuneflood.com and in our current report on Form 8-K that was publicly filed with the SEC on April 22, 2026. And now I'd like to turn the call over to Trevor. Trevor Burgess: Good evening, and thank you for joining us for Neptune's first quarter earnings call. Before we review the quarter, I wanted to talk about how excited I am by this moment in the history of technology. I was an investment banker during the first dotcom boom. I built one of the first technology first banks and now I'm leading when first AI native public companies. What AI has enabled in the last few months has far surpassed anything I've seen before. This is the power of the exponential. The Neptune team has the horse by the rains and is building something very special. People often ask how we think about AI at Neptune. The answer goes back to the very beginning. In 2018, when we hired our first engineers, I put a sign on the wall that said, "No Humans," not because we don't value people, but because we wanted to build a system where technology could do what humans cannot faster, more consistently and at scale. What is now being described as AI native, we simply view it as the right way to build from day 1. That mindset continues to guide us today. We don't start with today's constraints and optimize around them. We start with where the world is going and build towards that future. And as the technology continues to evolve, the gap between Neptune and traditional insurance platforms is not narrowing it is widening. AI also creates a significant opportunity to expand the market. Tens of millions of properties in the United States remain uninsured for flood risk. By using AI to improve risk awareness, simplify the buying process and support agents with better tools, we believe we can meaningfully grow the insured base over time. That brings me to what we are seeing in the business today. Last quarter I spoke about turning agents into what we call super agents. We are now seeing that come to life. Following quarter end, we launched in a beta release, Atlas+, are a genetic assistant for insurance agents. Atlas+ can answer questions, generate sales materials and interact directly with quotes in real time. Early feedback has been extremely strong, including examples of policies being sold directly as a result of these interactions. Over time, we expect Atlas+ to become a core part of the sales workflow. Importantly, these capabilities are built on top of what we believe is one of our most important advantages, our proprietary data. Our platform has processed tens of millions of quotes and over 1 million policies, generating real-world underwriting, pricing and behavioral data that continuously improves our models. We believe that data advantage will continue to compound over time and create a structural barrier to entry in an AI-driven market. From a financial perspective, the implications are equally important. In 2025, we operated at a 60% adjusted EBITDA margin. As AI continues to reduce friction in distribution and automate workflows, we believe our current level is a floor and not a ceiling. Turning to the quarter. The first quarter of 2026 was a record first quarter for Neptune and reflected continued strength across the business. Highlights from Q1 include: revenue of $37.8 million, a 29% increase year-over-year; net income of $7.3 million with adjusted net income of $13.4 million; adjusted EBITDA was $21.6 million, that's growth of 26%; written premium was $86.7 million, driving 32% year-over-year premium in force growth, and we had record first quarter new business sales. As a reminder, the first quarter is typically our lowest margin quarter due to seasonality. And this year, that effect is more pronounced as public company audit and compliance costs are front-end loaded in Q1. As a result, adjusted EBITDA margin in the quarter was approximately 57.1%. Importantly, this is a timing dynamic, not a structural change in the business. and we continue to expect full year margins in the 60% to 61% range. Premium in force reached approximately $389 million at quarter end, and we look forward to celebrating our $400 million threshold shortly. As a reminder, Neptune operates as an asset-light MGA and takes no balance sheet risk. This allows us to scale efficiently while maintaining strong profitability. On a trailing 12-month basis, revenue per employee reached $2.8 million and adjusted EBITDA per employee reached $1.7 million, both record levels. To put our revenue per employee in context, do this calculation for other companies. This is how you can tell if a company is really AI native. In addition to our earnings results, today, we announced that our Board has approved a $100 million stock repurchase program. We expect to fund this program through free cash flow over the next 2 years. This is incremental to our previously announced plan to retire shares associated with RSU tax settlements. We view share repurchases as a high return use of capital given the strength of our cash generation and scalability of our model. Stepping back, we believe our competitive position is defined by 3 core advantages: proprietary data and AI-driven underwriting, deep and expanding capacity relationships and flexible technology-enabled distribution. Together, these create a durable and widening moat. I'll now turn things over to Matt to walk through the business in more detail. Matthew Duffy: Thank you, Trevor. Q1 was a very strong quarter for our system and our team of 62 exceptional employees. Across our 3 core pillars, we continue to adapt, innovate and perform with the results able to speak for themselves. Starting with technology. Trevor touched on the pace of change we're seeing in technology. Inside Neptune, that's showing up in a very tangible way. And I'll be honest, it's hard to capture in an earnings call, just how fast things are moving internally. Our team is building with tools that didn't exist a matter of months ago. and they're using them to rethink how we build, how we operate and how we serve our agents and customers. You can see that directly in the pace of product development coming out of the company, during and immediately following the first quarter, we rolled out 3 major technology advancements, all of which lay the groundwork for a continued redefinition of how our system is utilized, accessed and built. The first is Atlas+, which is the AI layer we're building across the Neptune platform and which we introduced in April through an initial beta experience for a small group of agents. This beta is a conversational interface embedded directly into the quoting workflow. Agents can ask questions, adjust coverage and move through the quote to bind process using natural language. In the first couple of weeks, we've seen thousands of agent interactions, which tells us this fits naturally into how agents already work. And this is just the starting point. Over the coming quarters, we expect Atlas+ to expand beyond this initial interface and become a core part of how users interact with Neptune across our platform. The second is our Neptune application inside ChatGPT, which gives property owners a new way to interact with our platform. Instead of navigating a traditional quoting flow, users can ask questions about flood risk in plain language and receive a real-time Neptune quote directly within the interface. What's important here is less the interface itself and more what it represents as conversational AI continues to evolve, we expect experiences like this to play an increasing role in how people access information and make decisions. And the third is Proteus, an internally developed AI software developer. The way we think about this is pretty simple. Our engineers are exceptionally talented and their highest value comes from problem solving system design and building new capabilities, not from spending time on execution that can be automated. So we've built Proteus as a set of agentic tools and skills that can take on the execution work. Proteus writes code reviews it, completes development tasks and monitors the system in real time. It allows our engineers to stay focused on the critical thinking and design work that actually moves the platform forward. In March alone, Proteus was responsible for over 30% of the engineering tickets completed. Put differently, that's nearly a 50% increase in the amount of work the team is shipping, and you can feel that inside the company, things that used to take weeks are getting done in hours and ideas we've had for years are now becoming feasible projects. Each of these changes I've discussed is powered by the data running through our system, tens of millions of quotes, over 1 million bound policies and constant interaction from tens of thousands of agents. And as they evolve, these changes will continue to represent a fundamental shift in how Neptune's platform is accessed, how it's used and how it's built. Turning to capacity. During the quarter, we renewed one of our 8 programs, increasing the size of that program for the '26, '27 treaty period and adding 2 new reinsurers, bringing our total panel to 42 capacity providers. Program renewals are important milestones for the business. They reflect long-term relationships and a track record of consistent underwriting performance. In this case, we saw the program grow and terms update in a way that reflect the results we've delivered. That's been a consistent pattern for us as the platform scales and the data continues to improve our capacity partners are growing alongside us. And finally, distribution. Our growth continues to be supported by the strength of our agent network, which remains an important part of how we reach and serve property owners across the country. During the first quarter, we delivered record first quarter new business production, driven by strong agent engagement and continued deepening of distribution relationships. One of the clearest indicators of that momentum is user-based activity. Since launching our new user-based log-in system in December, more than 45,000 individual agents have signed up for direct access to Neptune, and that number continues to grow daily. To be clear, this is not the total number of agents we work with, but rather the number of individual users who create direct accounts using their e-mail and phone number and verified that access by a multifactor authentication on the platform between December and March. And nearly 11,000 of those users have already bound new business policies in that same time frame. Those stats show the real scale of how the platform is being used and the associated data allows us to build better tools and experiences around how agents actually work. We continue to invest heavily in our agents through building tools and products that are driving adoption and helping us to help insurance agents become increasingly effective. I'll summarize with this. What you're seeing here is a system, an ecosystem that gets better in real time. faster to build, easier to use and more valuable to the agents, customers and capacity providers that are a part of it. And that's really how this business can continue to compound over time. As we head into hurricane season, which is typically our busiest period, that level of performance really matters. With that, I'll turn it over to Jim. James Steiner: Thanks, Matt. The first quarter reflects another strong period of execution with a continued growth in revenue, strong retention across the portfolio and sustained profitability. Revenue for the quarter increased 28.8% year-over-year to $37.8 million driven by record first quarter new business production and the continued expansion of our premium in force. Adjusted EBITDA increased 26% to $21.6 million, which demonstrates that revenue growth didn't come at the expense of operating discipline. We continue to see strong performance on renewals. Premium retention remains high, reflecting both the value of our product and the consistency of our pricing approach. The Q1 adjusted EBITDA margin was 57.1%, even though substantially, all of our public company accounting costs hit the P&L during the first quarter. Again, this is a timing dynamic, not a structural change in the business and we continue to expect full year adjusted EBITDA margins in the 60% to 61% range. Stepping back, the underlying economics of the model remain very strong. A reminder on the model: we don't carry any of the underwriting risk, the carriers do. What we carry is the technology that decides which risk to bind, who to bind them with and at what price. That means we grow by adding policies, not by adding capital. and we scale by writing more code, not by hiring underwriters. We track our employee metrics as key indicators of our performance. Revenue per employee was $2.8 million on a trailing 12-month basis. Adjusted EBITDA per employee was $1.7 million. Both metrics are up double digits year-over-year. These head count ratios hold the roof up on the whole margin story. If we had to add 1 employee for every few hundred thousand of revenue, we look like every other insurance company. These metrics highlight the efficiency and scalability of the platform as we grow. Turning to the balance sheet. During the quarter, we continued to strengthen our capital structure. Last year, we refinanced our existing term debt into a $260 million revolving credit facility, which lowered our cost of capital, removed to acquired amortization and has provided greater flexibility as we manage the business. We ended the quarter at $227 million of total debt outstanding on the revolver, which is 2.2x trailing adjusted EBITDA. Yesterday, we paid another $5 million down, bringing our current balance to $222 million. Neptune's earnings mean that leverage comes down on its own. And to date, we've repaid debt with excess cash. From a capital allocation perspective, our framework is pretty simple going forward. The first dollar goes into the platform because that's where the compounding happens. The second dollar shows up in the share buyback program Trevor just announced and the RSU net settlement program we announced last year. Both of these tools return capital to shareholders. Overall, the financial results of the quarter reinforced the strength of the model. We continue to deliver strong growth, high margins and increasing operating efficiency while maintaining a disciplined approach to capital management. With that, I'll turn it back to Trevor. Trevor Burgess: Neptune remains focused on long-term shareholder value creation. Despite the inherent variability of government policy and weather-related activity, the strength of our performance in the first quarter has increased our confidence in the outlook for 2026. Based on that performance, we are increasing our full year expectations. For the full year 2026, we now expect revenue of $195 million and an adjusted EBITDA margin between 60% and 61%. These targets reflect our continued commitment to profitable growth, operational efficiency and disciplined capital allocation. Where appropriate, we intend to deploy capital to grow the business while returning excess capital to shareholders. To date, that has included a strong emphasis on debt reduction as a straightforward and efficient way to enhance equity value. As part of this approach, our newly authorized stock repurchase program, together with our ongoing RSU related stock retirement gives us multiple levers to return capital in a disciplined and opportunistic way. We view these actions as a natural extension of a strong cash generation and high margin profile of this business. As we move towards the 2026 hurricane season, there are always unknowns around storm activity and weather patterns. What our customers and agents can count on is that our team shows up when it matters most. We are constantly improving the systems that help people protect their homes and businesses, and we take that responsibility seriously. And for our investors, our focus remains the same. We'll continue to push the boundaries of what an AI-native insurance platform can do. Every quarter, we are doubling down on our technological lead, strengthening our distribution network and deepening our capacity relationships. We believe the combination of those 3 things will continue to have a power law effect around this business. We'll now turn things over for questions. Operator: [Operator Instructions] And your first question comes from the line of Rob Cox with Goldman Sachs. Robert Cox: Yes, just the Atlas -- Atlas sounds very interesting. I was just hoping you could give us some more color around what exactly Atlas is doing, how near-term impactful this is? Of the 3 items you mentioned, where you've been leveraging AI, do you expect to see this today and in 2026 or how near term is this? Trevor Burgess: Yes. Thanks, Rob. We are very excited about Atlas+. The original Atlas was launched about 1.5 years ago as we've looked for ways to use AI available at that time to help educate our independent insurance agents about things like incoming storm activity or how many claims have there been in a particular neighborhood to give them facts and figures to help them become better at selling flood insurance. What agentic AI has allowed us to do now is to turn every agent into a super agent, and that's what we've really been focused on building with Atlas+. What's currently available is a chat interface that allows an agent to ask things such as generate an e-mail script for me that I can send out to a consumer or help me explain why temporary living expense cover is a really important add-on, or tell me the 3 main reasons why this customer should buy flood insurance, or go ahead and show me the price at all the different deductibles that are available. And Atlas+ can interact with the quote. We really view this as the very beginning of a long line of upgrades that we will make to the agent experience. We've mentioned for the past or 9 years as we built this business that our biggest barrier to growth is how do we change agents behavior, how do we get agents to offer flood insurance every time they're selling a home or a business owner's policy, how do we get them educated to be amazingly knowledgeable about flood insurance, its risks and why people need to be protected. Agentic AI is allowing us to do that, and we're excited to roll this out. We are already seeing the impact of what is live today, and we're very excited by the things that we'll be shipping in the coming months. I would have said a year or 2 ago that everything that we're trying to build take us years to build, but it's now down to weeks or months. And so the other things, the other uses of AI, creating a Proteus system that allows our internal software developers, engineers and data scientists to move at least twice as fast if you're 3x as fast, really means that Atlas+ can be -- we're trying to follow in Anthropic's footprints is constantly putting out amazing, new functionality and product very, very quickly. Robert Cox: That's very helpful and exciting. If I could just follow up on the guidance. The revenue guidance is increasing. Just curious if that was due to this quarter or if you're feeling better about later on in the year? And on the margin guidance maintained, I realize the first quarter here, we have some timing-related items but should we be thinking about this as Neptune is trending towards the lower end of the margin range for the year? Or is that premature? Trevor Burgess: Well, first, let's talk about the revenue side. What we saw in the first quarter was just continued really good trends. We obviously have great revenue in the first quarter, record sales in the first quarter. And we got a really good sense because remember, our policies go into effect as a 10-day waiting period. So by the 22nd of the month like we are today, we've got a really good sense of what April looks like and the general momentum that we have so far this year. So we're quite bullish on the top line revenue trends, which is why we increased the guidance. This is not some hope and prayer that things get better later on. This is looking at the trajectory that's here and now. On the margin side, no, we certainly hope to do as well as possible on the margin for the full year. You can look at our first quarter margin every single year, it's the lowest, and that's because we have all 62 employees the whole year long, but it only makes up about 18% of our revenue, right, because of the seasonality in the business. So it's just inherently a lower margin quarter and then you build in 100% of the 2025 audit expense with PwC in the first quarter, well, that's going to impact that. But no, we're feeling quite good about the margin profile of the business and are excited about really 60% being a floor rather than a ceiling to what this business can become. Operator: Your next question comes from the line of Josh Shanker with Bank of America. Joshua Shanker: Yes. Thank you, everyone. Great quarter. we talked about fourth quarter and into first quarter about the [ Milton-Helene ] opportunity back over a year ago and why that was a headwind on comparisons this year. As we enter 2Q, is that done? Or are there people who 6 months after Milton and Helene were still nervous and brought in 2Q 25 were the comparisons there, not in the number of going forward? Trevor Burgess: Yes, Josh, I don't think that's an impact going forward. That's really a do people renew the next year. And the most extreme example of that is Utah had this amazing snow season a couple of years ago. And the next year, it didn't snow and so people didn't renew their policies. That's the really extreme side of it. But in hurricane prone zones such as Florida, we will see a little bit of lower renewal when people are buying after a really scary storm. But that's now passed us, that wouldn't impact the first or second quarter. Joshua Shanker: And then switching gears to opportunity. Obviously, your data flow continues to increase and get smarter. I don't know if you're any more about earthquakes to or other events happening in California per se, what is your data learning right now about how Neptune can possibly be a meaningful player in market other than flood? Trevor Burgess: Well, it's certainly -- I will tell you that flood remains our core focus. It is an amazing business with a tremendous opportunity. We have 20 million buildings in America that need flood insurance that don't have it today. We have the NFIP shrinking and 60% of the people within the NFIP who could save money by switching to Neptune. That's about 1.7 million policies. So give us a good housing market, let's turn those into Neptune policyholders. But at the same time, as we announced last quarter, we are running a beta test of earthquake. Earthquake data doesn't come because we haven't had a major earthquake in decades. And so we're obviously not gathering an earthquake experience data at this time. What we're doing with earthquake is working with our agents and making sure that we have good product market fit before we actually launch a product into the marketplace. I would expect that, that beta test would continue for the next 3 or 4 months, and we would then make a decision around what we're going to launch in California. Operator: Your next question comes from the line of Gregory Peters with Raymond James. Charles Peters: So one of the things that we've been watching is that we've noticed that other companies have announced flood start-up initiatives or expanded their existing food capabilities. I'm thinking about like another local company, I'm thinking about like nationwide, I think they announced something called Titan Flood. So maybe you could just for a moment, talk about how resilient your competitive position is and talk about what you're seeing from other flood alternatives for insurance alternatives that is in the marketplace and if you're seeing anything that's of a concern? Trevor Burgess: Yes. Thank you. I really think that this is a power law business where the more data and the more size you have, the better that business is going to do. If you think about investing in social media companies. There were lots of competitors to Facebook, but you didn't invest and in you didn't make any money. To get very specific about flood insurance competitors, we had a record first quarter sales. It was the best first quarter sales we've ever had. We are not seeing any meaningful impact from any competitor except for the NFIP who remains the dominant force in flood insurance with approximately 85% of the business that's out there. We, of course, pay attention to all potential competitors, and we have seen many, many competitors come and go over the years. It is a very difficult peril to underwrite. We had no landfall hurricanes last year that has giving people a lot of confidence that they can typically underwrite flood insurance. Neptune, you'll remember, has been through 21 landfall hurricanes some of these new startups when faced with a meaningful hurricane in the major metropolitan area where they've sold a lot of policies, at least historically, have not fared very well and has led to many of them going out of business as quickly as they can in the business. But it is important for us always to pay attention to potential competitors and to look at the marketplace. If we are Uber, we want to be paying attention to who could potentially be a Lyft. I just don't see that yet, but we continue to look very carefully. So I would say as of today, we don't believe it's impacting our business. Charles Peters: Fair enough. In your investor presentation, when in the revenue section, you highlight a couple of also the larger renewal portfolio, increased commission. And then in the negative or the headwinds section you cited the residual slowdown in sales due to the active storm season, which you just addressed in the previous question. But you also talked about the ongoing slow real estate market, -- and so I'm just interested in your perspective on how -- if there is a change in the real estate market outlook sometime down the road that, that might become a tailwind? Or how do you size up that headwind versus a tailwind? Matthew Duffy: Greg, thanks for the question. We've talked about this for a number of years now where we've been experiencing the slow housing market. And the most important number to remember there is the 1 that Trevor just mentioned the market as it exists today, has something like 4 million policies for the insurance market and about $3.5 million of those exist would be NFIP G. Today, about 1.7 million, 1.8 million of those policyholders with the NFIP would save money by switching to Neptune. They have not done so because there's been no turnover in the housing market. And so there's not been the ability to shock that policy into the private market to see what that price looks like. And so we believe a change in the housing market and uptick in sales there, whether it's hours and sales or whether it's refinancing activity, would be a huge, huge tailwind to the business. We saw this a little bit at the start of COVID when the housing market picked up now. And while there was a very small incremental impact to midterm cancels in our portfolio, there was a much, much larger impact on new business sales, which far outweighs our installations on the portfolio. So give us a better housing market and we're very, very bullish on what that means for sales and for portfolio growth in general. Operator: Your next question comes from the line of David Motemaden with Evercore ISI. David Motemaden: I had a question just on policy retention. If you could talk a little bit about how that trended in the quarter. I see on Slide 9 that revenue retention ticked down a little bit. still at a strong level, it's at 90% over the last 12 months, but it did tick down from 92% in 2025. So just hoping you can unpack some of the trends there, please. Trevor Burgess: So I think the first thing to mention, then I'll turn it over to Matt for some more details. But the first thing to mention is we're one of the only companies in the P&C space to still be taking positive rate. Last year, our average price increase on renewals was about 13%. And so far this year, it is still positive. It's just happened to be positive mid- to high single digits. And so that explains most of the difference in the revenue retention is just the change in the increase of pricing. I'm really happy that we have our business as opposed to ones that are down 30%, right, and still be up 7% is amazing. So we're very happy that we have picked the market that we're in. You just have to remember that the NFIP prices on a statutory basis, not based upon whether or not it's a hard soft reinsurance market. Matt, what would you add to that? Matthew Duffy: Yes, I think that's all right. The only thing I would add is the machine learning models that are operating on the renewal book that are optimizing for lifetime value of the customer as opposed to any single year retention rate. So the more units that we're able to keep around the higher the lifetime value is not enter and on the portfolio in general. And so we're able to take a long-term view because we have a very, very long-term view of this business. as owner operators. And we will always prioritize ensuring that we keep customers around for the long term and that we have a great product and a great pricing strategy that provides value to the customers over the long term as well. David Motemaden: Got it. Sounds like the policy retention is pretty stable there. I think it was 86. So that's helpful there. My follow-up is just on how you guys are thinking about the FEMA Advisory Council process. Any sort of updates you have in terms of the possibility of a citizen style depopulation and how you guys might react to something like that? Trevor Burgess: So the first thing I would say is that we have no added information. We have heard nothing. We've got no communication. And so other than what we've all read in the press about the time frame being extended, we are not aware of any additional details. What I can tell you though is from a capacity standpoint, we have taken very specific actions to make sure that we're ready in case something does happen. And so we are entirely prepared to flex and bring on as many customers as we need to, to help make sure that means are protected for this peril in case the U.S. government decides to reduce their exposure or get out of the business. Our job, we feel, is to increase the role of private flood insurance and make sure that we're a viable alternative. And we absolutely are prepared to do that and have the capacity back in to do that. Operator: Your next question comes from the line of Tommy McJoynt with KBW. Thomas Mcjoynt-Griffith: I don't think you gave the updated lifetime to date loss ratio for your capacity providers, but I suspect it is in the teens at this point. While some of that may be fortunate weather and some is surely your risk modeling expertise, at some point, does that translate into pressure to actually reduce pricing on an absolute basis? Trevor Burgess: So the first thing is, a, we'll let you know. We plan on announcing that once a year, so we will announce that at the end of the second quarter. The last time we announced that was the end of the second quarter of last year. And so we will update that annually so that just people have a very clear non-seasonally affected view of that. So expect that at a data point at the end of the second quarter. The second thing I would say is that it really just creates an opportunity for us and this is a discussion that we've had with all of our capacity providers. would they be interested in higher volume in exchange for a slightly higher modeled loss ratio. And given our track record and given the exacting specificity our underwriting platform we are able to make changes like that, driven by our data science team, and we have those models live in the system at this point. And we're excited by the revenue growth and the policy growth that we're seeing as a result of those models being deployed. So I think it does create a -- success creates an opportunity to lower prices and get more people insured is really the summary. But please know that this is being done with an incredible system led by an incredible team of engineers and data scientists who are focused on just that optimization of this flood insurance conundrum that United States faces. Thomas Mcjoynt-Griffith: And then switching over to the ChatGPT product that you've rolled out, is there any compensation owed to a counterparty when flood policies and Neptune are placed through that app? And if not, does that just imply the incremental margins on any of those policies are very strong, similar to your direct-to-consumer channel? Trevor Burgess: At this point, there are no money is owed to any counterparty. ChatGPT is not charging for that. To be clear, they don't allow buy ins to take place on their platform. So it's very similar to the way you think about Google, right? If you Google Neptune, you can find it. And even if we didn't pay for Google Search, right, we were the top rank, we would show up as we do, someone could come to us and we wouldn't owe anybody. Now we do some Google ad words just to make sure we're always at the top of the paid search also. But it's very similar to just a Google search engine at this point. Now that may change in the future. We're excited to have launched that product because it's a great showcase for the technology prowess that Neptune and its engineers have but it is something that we think will have limited utility until consumers make the decision that they want to buy via chatbots, which is not something that has happened yet. Consumers really like the advice of their insurance agent in America. And that's why we are really focused on building Atlas+ to help turn our agents into super agents. Operator: Your next question comes from the line of Andrew Kligerman with TD Cowen. Andrew Kligerman: Just to quickly follow up on the FEMA question. If I understand it right, a congressional vote would come in either September or sooner, but nothing is clear at this stage. Is that the right read? Trevor Burgess: I'm not sure about that. The leaked FEMA memo that was published by Bloomberg seem to suggest that the administration was looking at things that they could do without Congress's involvement. The Biden administration put forward 14 proposals during their administration, proposes to Congress. Congress did not act on any of those proposals. Those proposals all would in pro private flood insurance. So this is really a bipartisan issue, how do we get more Americans insured. But I have not heard anything about proposed legislation being given to Congress for them to consider in September or October time frame. There's been a variety of congressional led proposals that some of which are quite positive Senator Scott has one to allow people to deduct the cost from their taxes, their flood insurance costs in the taxes. So there are a number of very positive suggestions coming out of Congress, but I haven't heard of any specific legislation. Andrew Kligerman: Got it. That was very helpful. Yesterday, we saw the approval [indiscernible] for [ Valeron ], a Bulgaria based broker to distribute policies directly inside of ChatGPT Trevor. Could we see this happening in the U.S. as well? Or do you see AI as more of a funnel into traditional direct channels on Neptune's website? Trevor Burgess: Currently, ChatGPT does not allow direct binding within the app itself. If they change that, we will be able to meet that immediately. But I think this is more about consumer behavior than necessarily the technological availability of something. We've had direct-to-consumer available since the very beginning of Neptune, and it's always made up 2% of our business. And it was 2% of a very small amount 9 years ago, and it's 2% of a much larger amount now, but it's still 2%. So this is really about our consumers now going to utilize chatbots to buy home-related insurance. And I think that's a much larger question then is it possible. Operator: Your next question comes from the line of Pablo Singzon with JPMorgan. Pablo Singzon: First question is on new business. I think this might be the first quarter that you disclosed the growth rate, which I think came in at 4%. I was wondering if you could give a perspective on how the growth rate had trended, I guess, in '25, right, whether over the full year or maybe the past couple of quarters? Trevor Burgess: We felt very good about the growth rate in the first quarter. The number of agents that we're finding was up. We obviously have switched to the single sign-on, which is extremely helpful in that we now have 45,000 agents who have established single sign-on credentials with us. But we'll get back to you on comparable information for the last -- for the prior year. Pablo Singzon: All right. And then a follow-up, just -- so as more pertained insurers and agents pivot to growth, right, whether it's selling auto or homeowners, do you think that helps or the track or maybe even neutral to your efforts to sell flood, right? So how do you start thinking about that your position against that trend because it is clear at this point that everyone is trying to sell more? Does it help or maybe it doesn't really affect you guys? Trevor Burgess: It's extremely positive for us when agents want to add on ancillary products, right? And flood is the most obvious ancillary product to the home or to the business policy since it's excluded by carriers. And so we view that trend as a very positive trend for Neptune. There are amazing agents such as Goosehead and others who have done a great job at really thinking about policies per relationship and how do they always offer flood insurance every time they're selling a homeowners policy that increases stickiness and increases the quality of the advice being given to the consumer. Because, as we've talked about many times, the main problem that we have in the U.S. with flood insurance is that people don't have it. There's 20 million people who are at risk of flooding who don't have the coverage. And so it's an amazing advice to come from a insurance agent to their consumer. So it's a great trend. Operator: Your next question comes from the line of Yaron Kinar with Mizuho. Yaron Kinar: My first question relates to the $195 million revenue target for the year. I'm starting to see some early indications of the North Atlantic hurricane season potentially being a bit lower just because of El Nino. Is that contemplated in that number? Or are you still assuming a normal season and whatever that may mean? Trevor Burgess: Yes. Thank you. We're very aware and we track very closely the predictions around the storm season. There are a couple of dynamics happening. One is phenomenon that you've mentioned and the other equally impactful phenomenon as the C temperature in the Gulf. And the Gulf temperature is extremely, extremely high, which means that the Gulf systems being able to spin up very quickly and gain steam very quickly like Hurricane Michael did that hit Florida with amazing power remain quite possible during the season. I would say the $195 million assumes that there is some storm activity but does not assume a very active storm season. Yaron Kinar: And can you maybe give us a little bit of color as to how you're thinking about that? When you talk about a some storm activity, are we talking about 2, 3 name stores, making land falls and population centers? Trevor Burgess: Yes. We think about that as 1.8 landfall hurricanes, which happens being a long term average. Yaron Kinar: Right, right. Okay. And then switching to capital deployment. So you have $100 million new share authorization that, if I understood correctly, you expect to utilize over the next couple of years, by the end of '27. And then if I just look at the EBITDA margins and the tax rate, I think you get to roughly $150 million of cash flows plus minus for the next 2 years. Are you intending to deploy the remaining cash flows towards filing debt? Or are you going to keep a portion of that as a dry powder for other opportunities? Trevor Burgess: Yes. Remember that we had also announced the RSU net tax settlement, which at today's stock price would use something like million of cash or something. So the employees will surrender the shares, we'll rip those up and then we'll pay the taxes to the IRS with company cash. So if you think about that this September and next September has 2 chunks, plus the $100 million starts to give you a sense of where we would use the cash. And we can work with you on some of the -- as you model out the free cash flow, we have a little higher expectations than you've noted. Operator: Your next question comes from the line of Cave Montazeri with Deutsche Bank. Cave Montazeri: So you keep paying down debt. At the same time, you guys growing looks like it could be at 2x debt to EBITDA by the end of next quarter. I'm just trying to understand what's your metal framework when it comes to debt you want to keep -- do you have a target debt-to-EBITDA ratio in mind for the medium to long term? Trevor Burgess: Yes. We generally would like to stay below 2.5x. So there may be opportunistic times to utilize the stock repurchase as we saw in the last quarter, if there was an event like that again, we would obviously take advantage of that to buy back shares opportunistically and utilize the revolver availability to do so. But absent that, we have, to date, at least continue to pay down debt. As long as we're below 2.5 to 3x levered, we feel very comfortable that we can, given the certainty of how this business operates, that we can begin returning cash to shareholders, and we think stock buybacks are the best way to do that. Cave Montazeri: Okay. And in terms of your -- the technology that you -- like how much of it is built in house versus purchase from third-party vendors? And I guess, of the technology that you're using from third-party vendors, do you now have the ability to maybe build it in-house and make it more bespoke versus some of the more standardized software that you could buy externally? Trevor Burgess: This is a really interesting debate that we often have. And you have to think about Neptune is a rather unique company because we have 62 employees and our entire expense base is less than 10% of our revenue. So we're already about as lean a company as it can be, right? And so if I think about how do I deploy our engineers and data scientists, I wanted to deploy them on things that can generate more revenue. Saying we're no longer using a third-party piece of software like Microsoft Word, could we rebuild Microsoft Word now? Yes. Does it make sense to do that? And maintain the system, et cetera. No, it makes much more sense just to pay Microsoft the whatever it costs $5,000 a year to have it. And so we are very focused on how do we deploy our engineers to increase revenue growth rather than save the couple of hundred thousand dollars that shows up in our externally purchased software and most of the software that we're purchasing at this point is really commodity type of software. Matt, what would you add? Matthew Duffy: Yes, Cave, I'd just add that all of the core functionality that exists in our systems today and try inside an Atlas and Proteus and all of the systems that we've mentioned is built entirely in-house. Trevor's comments are 100% true for ancillary software that may be helpful from a customer service standpoint, Zoom, that type of functionality, but all of the core software is built entirely enhanced. Operator: That concludes our question-and-answer session. I will now turn the conference back over to Mr. Trevor Burgess for closing remarks. Trevor Burgess: I'll end the way I started by just talking about this moment in history, I've never been more excited about being an entrepreneur than I am right now. Our entire team is Get to be working at Neptune on this challenge on this problem using the tools that are now available to us. We are live watching the updates from Anthropic from ChatGPT, from Google, from X about what tools are available to us and how can that allow us to move more quickly to help get these 20 million Americans insured for this payroll that they're not protected for right now. So it's a great time to be an entrepreneur. It's a great time to be at Neptune. And thank you for joining us today. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good day, and welcome to the Lam Research Corporation's March 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ram Ganesh, Vice President of Investor Relations. Please go ahead. Ram Ganesh: Thank you, and good afternoon, everyone. Welcome to Lam Research Quarterly Earnings Conference Call. With me today are Tim Archer, President and Chief Executive Officer; and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we will share our overview on the business environment, and we'll review our financial results for the March 2026 quarter and our outlook for the June 2026 quarter. The press release detailing our financial results was distributed a little after 1:00 p.m. Pacific Time. The release and the accompanying presentation slides for today's call can also be found on the Investors section of the company's website. Today's presentation and Q&A include forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings. Actual results could materially -- differ materially from those expressed in such forward-looking statements. Please see the accompanying presentation slides for additional information. Today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying presentation slides. This call is scheduled to last until 3:00 p.m. Pacific Time. A replay of this call will be made available later this afternoon on our website. And with that, I'll hand the call over to Tim. Timothy Archer: Thank you, Ram, and good afternoon, everyone. Lam is off to a solid start in calendar year 2026, with revenues and profitability in the March quarter at the upper end of our guidance ranges and earnings per share exceeding the top end of our guided range. Revenues were at record levels, highlighted by the first $2 billion quarter from our Customer Support Business Group. Our guidance for the June quarter points to Lam's strong momentum in an accelerating AI-driven semiconductor demand environment. In January, we shared our outlook for 2026 WFE in the $135 billion range. Since then, spending projections from customers have moved higher across all device segments. We now expect WFE of $140 billion with a bias to the upside as the industry continues to work through various constraints. We believe this sets the stage for another year of compelling WFE growth in 2027. For Lam, the AI-driven demand environment is creating an ideal setup for continued outperformance. Semiconductor technology inflections required to meet escalating AI compute needs are driving higher deposition and etch intensity. In 2026, we see Lam's served available market or SAM, percent of WFE, expanding to slightly more than the mid-30s percent level, well on track towards our stated goal of high 30s percent over the next few years. Lam is prepared for this moment by transforming how we innovate, build and support. The semiconductor manufacturing equipment needed to address the industry's most critical challenges. Our commitment to R&D and the velocity with which we have scaled our development capabilities have enabled us to create the broadest, most competitive product and services portfolio in the company's history. This is fueling our current outperformance and puts us in an excellent position to deliver on our future growth ambitions. Across all device segments, we are seeing greater opportunity for Lam. In NAND, AI transformation is moving beyond compute and into the storage layer. [ Hoken ] economics are driving changes to the memory hierarchy used in AI data centers including rising adoption of higher layer count QLC-based NAND devices for SSDs. We expect total data center bits this year to be greater than both PC and mobile segments combined with growing -- continuing growth in data center mix into the future. The growing device performance requirements of AI data centers are driving an acceleration of NAND technology upgrades. As you may recall, we said in early 2025 that roughly $40 billion in conversion spending would be required over several years to enable existing NAND installed wafer capacity to produce devices with more than 200 layers. We now anticipate that this conversion will be pulled forward with the majority of spending occurring before the end of calendar year 2027. In parallel, we expect growth in bit demand will drive greenfield capacity investment, especially considering that overall industry installed wafer capacity is expected to decline more than 20% from prior highs by the end of this year. Looking further ahead, we see continued adoption of NAND in the AI memory stack, driving even higher layer count NAND devices. With the largest installed base of tools for 3D NAND, Lam is uniquely positioned to benefit from this trend. As manufacturing complexity scales with layer count, we see an expanding set of deposition and etch opportunities, all rooted in our established leadership in high aspect ratio cryo etch, dielectric stack deposition, [ Worldline ] metallization, backside stress management and gap fill technologies. In dielectric etch, our Vantex and [ Flex ] tool sets delivered the industry's highest power density and productivity for dielectric channel hole edge applications, where we have a market-leading position. In conductor etch, we are also seeing momentum for our [ Kio ] systems as customers collaborate with us to maximize device yield in a constrained capacity environment. In a recent win, a customer switched to [ Kio ] in the middle of their production ramp due to superior defect performance and better yield. In deposition, we are seeing the transition to higher layer count NAND, also driving greater demand for our Strata, [ Altus Halo ALD ] and [ Vector DT ] products. Altogether, we believe the production proven strength of our portfolio puts Lam in a great position to outperform overall NAND WFE growth as AI demand accelerates over the next few years. In DRAM, AI's power and efficiency requirements are driving an industry transition to 1C generation devices. As feature dimensions shrink, the industry is shifting from traditional silicon nitride base dielectric films deposited using furnace, the more advanced ALD silicon carbide [ loc ] layers to achieve bit line capacity in production. Studies have shown the re-architected device structures, combined with low [ KBitline ] spacers can reduce capacitance by over 60%. Lam's Stryker carbide solution with its unique plasma source enables capacitive scaling by depositing dense, conformal and tunable low dielectric films with high productivity. As a result, our Stryker based solutions are the tools of record at all leading memory makers for bitline spacer applications. As the industry moves to 1C nodes, we see our total dielectric deposition SAM and DRAM growing more than 20%. With innovations like Stryker ALD, we believe Lam is well positioned to gain share within this expanding opportunity. In foundry/logic, calendar 2025 was a record year for Lam. We are carrying that momentum into 2026 as we capture more opportunities from inflections at the leading edge. Most notably, this quarter, we achieved both dielectric etch wins at a key founder logic manufacturer. Our first dielectric edge wins at this customer. And finally, we see growing demand for our advanced packaging solutions where we bring unmatched experience in equipment design and process technology for copper plating and [ TSC Edge ]. Lam's advanced packaging revenue growth is expected to exceed 50% in calendar year 2026. Turning to our Customer Support Business Group. We delivered our first $2 billion plus revenue quarter. Demand was strong across spares, upgrades and services. As customers look to improve fab output in a space-constrained environment, more opportunities are being created for CSBG to deliver innovations that increase productivity and enhance yield for our customers. Our services business posted mid-teens growth over the December quarter. Highlights included a new agreement with a leading foundry/logic customer to deploy our equipment intelligence services for critical deposition applications. The top memory customers also set to utilize our Equipment Intelligence capabilities in R&D to enable faster ramps of new nodes for NAND and DRAM production. We are also gaining momentum with our Dextro cobots, which deliver an unprecedented level of automated tool maintenance precision and repeatability. Customers using Dextro and production are benefiting from higher output and in some cases, improved yield from existing capacity. In the March quarter, we expanded Dextro coverage to 8 Lam tool types up from 6 last quarter. We also introduced the next generation of Dextro, which packs 10x more compute power than the first generation into a smaller footprint. This quarter, we will ship our first Dextro cobot for a deposition product further increasing our ability to create value from our overall installed base more than 100,000 chambers. It's an exciting time for the semiconductor industry and for Lam. In an accelerating demand environment, we see rising deposition and etch intensity creating a multiyear outperformance setup for Lam. We have made strategic investments across the company to capitalize on this opportunity. increasing the velocity of both our technology development and our operational execution. Our progress can be seen in our strong March quarter results, our higher June quarter outlook, and our expectation that second half calendar year revenues will exceed the first half. In short, we are delivering on the tremendous opportunity in front of us with more to come. Thank you, and here's Doug. Douglas Bettinger: Excellent. Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today during what I know is a very busy earnings season. Lam is off to a solid start in 2026, building on the momentum we delivered across 2025. In the March quarter, revenue gross margin and operating margin came in above the midpoint of our guidance ranges, while earnings per share actually exceeded the high end of the range. We also achieved our third consecutive record revenue quarter. March quarter revenue came in at $5.84 billion, which was up 9% sequentially and up 24% from the same period in 2025. The deferred revenue balance at quarter end came in at $2.22 billion, which was flat sequentially. Within this balance, however, customer down payments came down by roughly [ $300 ] million, while the other line items increased with the growing business levels. I just mentioned that down payments are now at the lowest level we've seen in nearly 4 years. From a market segment perspective, foundry accounted for 54% of our systems revenue in the March quarter, which was down from 59% in the December quarter. Revenue in dollar terms was approximately flat sequentially, and it was up 35% year-over-year. Foundry saw strength in investments at the leading edge, as well as ongoing mature node spending. Advanced packaging within foundry continues to be an area of solid growth for us. Memory was 39% of systems revenue, up from 34% in the December quarter. Within memory, we delivered record DRAM revenue accounting for 27% of systems revenue which was up from 23% in the December quarter. High-bandwidth memory investments remained strong. The profile of spending is also gravitating towards the 1C node and beyond enabling the ramp of DDR5 and LPDDR5. Nonvolatile memory contributed 12% of our systems revenue, up slightly from 11% in the December quarter. As Tim outlined, AI workloads are accelerating demand for higher capacity NAND and Lam continues to benefit from strong leadership within this segment. We expect to see growth in NAND investments throughout the remainder of the year as the industry converts to 256 layer and above class devices. And finally, the Logic and Other segment came in at 7% of systems revenue in the March quarter, in line with the prior quarter. Let's turn to the regional breakdown of our total revenue. China came in at 34%, which was a slight decrease from the prior quarter level of 35%. We expect that China revenue in the June quarter will decline from these levels. Korea and Taiwan each came in at 23%, which was both up from 20% in the prior quarter. Both the Korea and Taiwan regions represent record revenue level in dollar terms in March. And I just mentioned that this regional mix was generally in line with our expectations from the beginning of the quarter. Customer Support Business Group generated a record $2.1 billion in revenue in the March quarter, which was up 6% sequentially and up 25% from the same period in 2025. Sequential growth was driven by a large and expanding installed base and the continued expansion across our spares, upgrades and services business, partly offset by Reliant. Growth in spares and service is benefiting from strong factory utilization across the industry. Let's take a look at profitability. Gross margin in the March quarter was 49.9%, which was at the high end of the guidance range, driven by multiple factors, including favorable customer product mix as well as improved factory efficiencies. Operating expenses in the March quarter came in at $866 million, up from the prior quarter's level of $827 million. The increase was driven by seasonal employee-related costs as well as higher headcount to support our growth. R&D accounted for 68% of total operating expenses. We will be growing R&D investments throughout the remainder of the year. March quarter operating margin was 35% at the high end of our guidance range due to the higher revenue and the improved gross margin. The non-GAAP tax rate for the quarter was 9.2%, which came in lower due to benefits from higher equity compensation vesting, which is deductible on the taxes during the quarter. We continue to see the tax rate below the mid-teens for calendar year 2026. Other income expense in the March quarter was $8 million in expense compared with $10 million in income in the December quarter. The variance in OI&E was primarily the result of small losses in our venture portfolio as well as lower interest income. Interest income decreased due to the lower cash balance in the quarter. And as we've talked about in the past, you should expect to see variability in OI&E quarter-to-quarter. For capital return in the March quarter, we allocated approximately $800 million to share buybacks through a combination of open share repurchases and a $200 million accelerated share repurchase transaction. Our average buyback price was approximately $211 per share. We also retired $750 million of unsecured notes that reach maturity using cash from the balance sheet. Additionally, we paid $326 million in dividends. In the March quarter, we returned 139% of our free cash flow. Our plans remain to return at least 85% of free cash flow to our shareholders over time. The March quarter diluted earnings per share came in at a record of $1.47 which was above the high end of our guidance range. The diluted share count was 1.26 billion shares, which was flattish with the December quarter and consistent with our guidance. And I just mentioned that we have $4.3 billion remaining on our board authorized share repurchase program. Let me pivot to the balance sheet. Cash and cash equivalents totaled approximately $4.8 billion at the end of the March quarter, which was a decrease from $6.2 billion at the end of the December quarter. The decrease was primarily driven by capital return activities that debt paydown as well as capital spending. Days sales outstanding was 64 days in the March quarter, an increase from 59 days in the December quarter. Inventory turns improved to 2.9x from 2.7x in the prior quarter. These were our highest level of inventory turns in over 4 years. As a company, we remain focused on our strong asset utilization and return on invested capital. We're pleased with the sustained performance we continue to deliver here. We will be managing our inventory and supply chain to align with the growing demand that we see in front of us. Noncash expenses in the March quarter included approximately $97 million in equity compensation, $103 million in depreciation and $13 million in amortization. Capital expenditures in the March quarter was $332 million, which was up $71 million from the December quarter. Spending was higher to support the strong demand environment that we're seeing. Investments are enabling a second manufacturing facility in Malaysia as well as lab-related investments in the United States and Taiwan. Looking forward, we continue to expect capital expenditure to be in the 4% to 5% of revenue range. We ended the March quarter with approximately 20,600 regular full-time employees which was an increase of approximately 900 people from the prior quarter. Headcount increases were primarily within the manufacturing and field organizations to support volume growth. as well as in R&D to support our long-term product road map. As we scale the organization, we also undertook a small workforce optimization focused on efficiency. You'll see this in our non-GAAP reconciliation. Let's turn to our non-GAAP guidance for the June 2026 quarter. We're expecting revenue of $6.6 billion, plus or minus $400 million. Gross margin of [ 50.5% ], plus or minus 1 percentage point. We're expecting this expanding gross margin despite slight headwinds that we're seeing from customer mix. Forecasting operating margins of 36.5% plus or minus 1 percentage point. And finally, we're forecasting record earnings per share of $1.65, plus or minus $0.15 based on a share count of approximately 1.255 billion shares. So let me wrap up. We're executing well against our financial objectives and driving operational efficiency while increasing R&D investments to extend our technology leadership. With our expanding installed base, the strength of our product portfolio and our disciplined approach to capital allocation, we remain confident in Lam's setup for continued outperformance. Operator, that concludes our prepared remarks. We would now like to open up the call for questions. Operator: [Operator Instructions] Our first question comes from Timothy Arcuri with UBS. Timothy Arcuri: Doug, I wanted to ask about gross margin. The guidance is great, it's [ 50.5% ]. It sounds like despite the mix being against you. So you're kind of already edge at your target model, right, because you were saying above 50. And I'm not asking you to update that model. But sort of can you like deconstruct how you got here so fast? And maybe also, I think people want to hear how much capacity you have? I know you mentioned that you're adding another site in Malaysia. So can you just speak about sort of what the puts and takes are going to be on margin going forward? Douglas Bettinger: Yes. No, Tim, it's a great question. Yes, I think we're pretty pleased with where we're at from a gross margin standpoint. And it's been a lot of real hard work from the company, honestly. I think you'll remember, I don't know, 4, 5 years ago, we talked about expanding our factory footprint to be closer to where our customers were. And that has delivered efficiencies from just a proximity standpoint, from shorter frame logistic lanes. From slightly lower cost from a labor standpoint, a better supply chain set up all of those things. Those were self-help activities that we undertook and frankly, we've delivered on it. So when I think about the global operations part of the company, they've really done a wonderful job. On top of that, we're working on everything we can do to get paid for the value we're delivering to customers. That's something we're always doing. And I think we're doing a reasonably good job with that, Tim. So anyway, when you put all of that together, I think we're pretty pleased with all of that, and I'll let Tim add a few things here. Timothy Archer: Yes. No, I was just going to add one other part that's pretty important in showing up is very important in this constrained period, which is the performance of our tools. We embarked -- Doug talked about some of our higher R&D spending. A lot of that was to ensure that all of these new tools that we have hitting the field enter the level of maturity that's beyond what we had probably delivered in the past. And that's very important for our customers in a period of fast ramp. That also yields benefits for us in terms of installation and warranty spending, which flows through to gross margin. And so you're seeing some of that as well. So that's something that, again, we're focused on going forward is reliability of systems, maturity of tools as they hit the fence. Douglas Bettinger: And let me just add one more thing. Yes, let me add one quick thing. I know there's going to be a question [indiscernible], how should our model gross margin for the rest of the year? I would encourage you to kind of keep it roughly in the levels that we just guided you to in June. This is going to kind of level out at where it's at, I think, for the rest of the year. So as you build your models, keep that in mind. Timothy Arcuri: Awesome Doug. And then I guess just as a follow-up. So there's been a big like massive new fab project. I mean you guys have obviously seen this news bigger than anything we've ever seen before. I mean I think that this customer would have to get in the queue given how booked out things are. Are you seeing -- I mean, I don't want to ask just about that one customer. But like are you seeing these signs of these huge new fab projects, sort of the customer base expanding? And if you did want to comment on that particular fab project if they're sort of coming to you was like a new opportunity, that would be great. Timothy Archer: Yes. Obviously, we can't comment on any specific customer, but clearly, the environment right now is such that there is -- there's just not enough to do. There's not enough memory in the world. And so -- and people are worried about supply. And so I don't think it's a surprise that more companies around the world will start to enter into the semiconductor space. And that's why when we talk about the longer-term outlook, it's a combination both of the increased demand, but really increased demand at some of the most compelling leading-edge opportunities that are presented to Lam. And so I think this is -- when we talk about WFE, there's so much -- only so much that can be executed in this year. But again, you see a lot of these projects starting to line up that I think represents opportunity in the future. Operator: Our next question comes from C.J. Muse with Cantor Fitzgerald. Christopher Muse: I just wanted to touch on your commentary around '27 visibility. And can you kind of speak to your discussions, conversations exceeding 18, 24 months, whether you're starting to see real slotting and desire to lock in time frames for delivery? And I guess as part of that, how are you kind of working your supply chain for readiness for that ramp? Timothy Archer: Yes. So clearly, we're about halfway through '26. And so given our lead times, of course, we're having conversations with customers about '27. And in some cases, for planning purposes, like getting resources ready engineers hired and trained in the right locations, those -- some of those conversations even extend beyond that. We have customers who clearly announced fabs with openings in 2028. There's no reason not to start having conversations with them about what the tooling is it's going to be required based on the node that we run, kind of the size, the resourcing requirements. So I'd say we're in various stages of those conversations, but the more visibility we have, the better we can get our supply chain and our own capabilities ready. I think it is a case where today, our view on WFE, as I said, for 2026 really has a lot to do with what we believe can be executed. We talked about this upward bias. We're working a lot with customers on near-term constraints, things they can do within their existing fabs. But at the same time, preparing for those new fab openings and true kind of greenfield shipments as they roll out later this year and through next year. Douglas Bettinger: Yes. [indiscernible], I'd just add, it feels like it's setting up to be a pretty good year in '27 right now based on what we can see. Christopher Muse: Excellent. And then maybe a question on CSBG. Obviously, tremendous focus on trying to get every bit out the door in this very tight environment. Curious if kind of the upgrade business that you're seeing is sustainable? And is there kind of [indiscernible] we should be thinking about for full calendar year '26 revenue growth in that bucket? Douglas Bettinger: Yes, [indiscernible] that's a great question. Look, I think we're feeling really good about CSBG, industry utilizations are high. So spares was quite strong in March. Service was quite strong in March. Tim talked about the new Equipment Intelligence and cobots that we're rolling out. We're excited about that. Our customers are excited about that. So when you see how strong it was in March, I think it popped up, I think it's going to kind of sustain roughly at these levels as we go through the remaining quarters in the calendar year, maybe up a little bit. But I think we're feeling pretty good about the strength that we're seeing here. And frankly, we're innovating here, too. So I think we feel pretty good. Operator: Our next question comes from Harlan Sur with JPMorgan. Harlan Sur: When you -- when I speak with the process development and integration engineers, obviously, of your customers, they're very focused on next-generation technologies and architectures and that's what we hear on these calls, right? How Lam is enabling 3D device architecture, cell structures, driving high aspect ratios, new materials, et cetera. But then when we speak with the manufacturing and operations teams, it's a very different focus, right? And the vocabulary set is very different. It's all about throughput, uptime, defectivity, overall fab cycle time. And then especially with the tight supply situation and constrained premium space environment that we're in today, any incremental improvement in high-volume productivity could unlock like literally millions of dollars of incremental wafer output. You've talked about things like the Dextro cobot, but any other enhancements that you're driving, Tim, to the installed base on productivity and manufacturability and more importantly, like, how are you guys monetizing this? I assume it's maybe primarily services and upgrades? Timothy Archer: Yes, it is a too-focused world, as you talked about. And the good news is we've got the company organized in a way that we can focus on both with significant intensity. So clearly, leading edge being in front of those inflections, a number of years, we said sometimes 5, 6, 7 years, you're working with the customer in advance of that node ever reaching production. But at the same time, especially in the environment we're in right now, I mean, production output, uptime yield, those things are really what are most critical to customers in the immediate term. Plus, I would say, really identifying the bottleneck tools within the customer that's limiting output and helping them with those workstations. Equipment Intelligence, if you think about what it does is it allows us to look at massive amounts of data coming from our tools on every single wafer, and that shortens troubleshooting time if there is a problem with the tool. It helps us with the time to ramp those tools either on new process or as they start up, helps us to match tools, better tool to tool chamber to chamber, all those things can yield -- lead to those tiny little improvements in yield that really do matter for the customer. On the Dextro cobot, we've talked about the fact that at some customers, the precision and repeatability of the maintenance has actually yielded improvements in both output and yield and does through -- that through better first time right. You do the maintenance, it comes back up and is back into production more quickly. And also just the improved repeatability of, like, let's say, the new part placement inside the chamber, actually has had positive effect on the yield need. So that's something we're really focused on. How do we monetize it. Yes, it's through services and obviously, in some cases, new tools. Harlan Sur: Yes. Okay. I appreciate that. And for Doug, your OpEx grew 5% sequentially in the March quarter, implied OpEx growth in June is 7% and given the leverage, it's allowing you to actually exceed your long-term operating margin target of 35%. So how should we think about the OpEx growth through the remainder of this year? And I guess when is the team going to update its long-term targets? Because as the year unfolds on more revenue growth, you're clearly going to drive margins above the 36.5% op margin range that you guided to for June, right? So when is the team contemplating like updating this long-term targets? Douglas Bettinger: Yes. Harlan, it's a great question. First, let me talk about the spending trajectory for the year. Listen, I think at the end of the day, this management team likes to see the top line growing faster than spending so that we can deliver leverage and that's absolutely how we're thinking about things this year. Having said that, we're going to grow spending this year because, frankly, we can afford to do so, and we have some things that I think are quite innovative that we've been thinking about that we've wanted to put a little more money towards. So we're going to do that. We've decided we're going to do that this year. And yes, we're talking internally about the fact that we're above the previous model that we gave. And yes, I know we need to give you an updated framework and we will do that later in the year. And we haven't bottomed out on exactly when or exactly how we're going to do it, but we know we need to and we will be doing that, Harlan. Operator: Our next question comes from Atif Malik with Citi. Atif Malik: My question is on the NAND market. It seems like near-term NAND is still low, like 12% sales, but something has changed versus 90 days ago, you guys are talking about NAND growing through the year and the pull forward in that the $40 billion number. So can you [indiscernible] has changed in the NAND market? Are you seeing signs of capacity additions? Or what has changed maybe with [ KB Cash ]? Timothy Archer: Yes, we didn't mention [ KB Cash], but I think it's a good example of exactly what I was referring to when I talked about it, it's increasingly important role in the AI memory hierarchy. And so clearly, there is increased demand for NAND coming from AI data centers, and that's helpful. But also, if you think of the -- on a relative basis, what under investment in that area, partly as customers make choices about clean room allocation and obviously some other devices like HBM were so hot during that period. Also, going back to what we said early last year, the installed base had gotten a little bit behind in terms of the state-of-the-art technology. And so most of the installed base at that time, early 2025, about 2/3 of it was still running in the [ 1xx ] 100-plus layer technologies really when you need to get those incremental bits out now, you need to be 200-layer plus. And so that's what's caused this acceleration is you need more bits. You need those bits to be more capable, you need QLC to meet AI data center demands and so you've started to see the push for accelerated conversions in the technology. And that is -- that's what caused a lot more activity in the NAND space. As people push forward, we didn't also said, look, the conversions are going to happen because that's very -- the quickest way to get to the high capability, but you'll also need greenfield because those technology improvements like in Lam's case, to go above 200-layer, we talked about the number of new tools you need to add to manage the complexity of higher layer count stacks that in itself reduces total wafer output capacity of the industry. And so eventually, you need to add greenfield back to continue to get the big growth we need. So that's the reason we started talking about it is it's materializing as a significant opportunity now on the revenue side for Lam and looks to be so for quite some time. Atif Malik: Doug, you talked about customer down payments at [indiscernible] level in 4 years. And you're also talking about WFE growing in next year. Can you reconcile those 2 comments? Douglas Bettinger: I guess what I would tell you, Atif, is the group of customers that generally provided on payments aren't the ones that are growing the quickest, and that's absolutely what we're seeing going on right now. Operator: The next question comes from Melissa Weathers with Deutsche Bank. Melissa Weathers: I had a more thematic question maybe for Tim or Doug, if you want to take a stab you can do. We've heard a lot of about reasons why this memory cycle is different with HBM and trade ratios and new applications like [ SOC ] and it does seem like AI is driving memory demand growth a lot faster than what we've seen historically. So I guess, do you ascribe to the view that this memory cycle is -- I won't say the D-word, but there's a change this time around? And then what kind of actions are you taking to derisk the cyclical side of things while still being able to capture the upside? Timothy Archer: Okay. Well, it's a great question. And maybe I won't use the D-word either, but I think it's -- or maybe I will. I think it's different for Lam in that -- and there was an earlier question that talked about how so many of these new devices have different architectures, 3D scaling. And so I think the most important thing about this memory cycle is it is a cycle in which you're seeing dramatic improvement and change in the etch and dep intensity. And so the complexity of 3D scaling has created a lot of new opportunities for Lam. And so that is driving both SAM expansion plus share gain for us through those new applications. So I feel like compared to prior upturns in memory, we are and we're doing even better just because of that extra layer of etch and dep intensity scaling. How do we prepare if there is ultimately that peak, which we're not -- we're certainly not calling right now given the tremendous demand that's out there. But it is we operate very flexibly. I mean, Doug talked about a lot of our operational investments we've made. And in many cases, some of the things we talked about, Dextro cobots, Equipment Intelligence. These are all kinds of capabilities that in many ways, allow us to support our customers without so much of the fixed cost scaling that we had to make in the past. And so we always have an eye on what's it going to look like if the business were to slow down. And I think if you look at our track record, in those periods, we've also outperformed. Douglas Bettinger: And Melissa, maybe I'd just add. I mean, the way I'm looking at this right now is memory is just so critical in all of these accelerated compute architectures to feed the parallel compute, you need just data coming in to keep the machine going. And so the criticality of it maybe is more than it's ever been from my point of view. And I observe -- maybe I'll use a different D-word disciplined investment, right? I mean, everybody likes profitability that they're generating right now. Everybody is just kind of lugging into where demand is. And I think that's a good thing for all of us in the industry. Operator: Our next question comes from Srini Pajjuri with RBC Capital Markets. Srinivas Pajjuri: My question is on China. Doug, I think your comment about prepayments being down. I'm guessing that's related to China. Can you talk about what you're seeing in terms of the demand environment in China? And as you go through the next few quarters, what are your expectations? Douglas Bettinger: Yes. I think, Srini, what we described a quarter ago is still the way I would describe it this year. I think WFE in China is flattish year-over-year from '25 to '26, maybe it's up a little bit. But you're just seeing so significant growth from the global multinational set of customers that China as a percent of the overall revenue is coming down. The other dynamic in China is you're starting to see some of the global multinationals in China spending a little bit more, too. So when you look at that overall geographic distribution in China, it's also broadening out in that regard. And yes, you're right about the fact that down payments are down -- down payments tend to come from smaller customers, and a lot of them are in the China region, and so those 2 things are correlated together. Srinivas Pajjuri: Okay. Great. And then my next question is on the CSBG. So obviously, I think it grew at a double-digit pace for the last several years. And I think last quarter, if I recall correctly, I think you were expecting high single digits because of the reliant slowdown here. But it does seem like the clean room issue is not going to get resolved. Demand is very strong. So my question is, should we -- I mean, are you seeing any acceleration in terms of your services and spares business? Is this something structural in your view going forward? Douglas Bettinger: Listen, Srini I'll let Tim comment after I give you a little bit of data. What drives a lot of spares and service, frankly, is utilization in the overall industry. Utilization right now and in the March quarter, is very, very high. And so a lot of the growth at least contributing to some of the sequential growth in CSBG was the uptick in spares and service from that utilization. I don't know that utilization can get any higher than it is. Frankly, it's pretty full out right now. And so when you think about growth sequentially over the next couple of quarters, those components of CSBG are probably kind of plus or minus where they are. Now Tim talked about advanced service and cobots and [ EI ], that layers on top of that to a certain extent. And then also, if you think about what's going on in mature node spending, a lot of that is what drives Reliant and that's flattish this year. The real growth is coming from stuff at the leading edge, which we're really benefiting from move to etch and dep intensity. So Anyway, that's just a few things to think about relative to CSBG. Anything you'd add, Tim? Timothy Archer: No, not really. I'd just point out that you're trying to work on constrained workstations within a fab. Again, this is where things like the Equipment Intelligence, how to get those tools up faster for production. There's a lot of focus on that. That's the short-term prove out. And I think that long term, that then has a real benefit because once the value has been seen in this kind of constrained environment, I think that it will be more likely that new fabs get built with all of those intelligent services and automated maintenance capabilities built in right from the start. Operator: Next question comes from Vivek Arya from Bank of America. Vivek Arya: To many of your memory customers are talking about long-term contracts, LTAs, pricing arrangements and whatnot. How is that translating into your visibility and pricing power? Should we expect customers to start putting down payments to secure your capacity also? And if not, why not? Timothy Archer: Well, it's a good question. I would say that it's translated into a longer visibility for us. As I mentioned in an answer earlier, clearly, we're having conversations with customers now at around the time that they're starting to construct these fabs, it means we have much longer visibility. And I think the most important thing there is to be ready with the resources that are needed and our own capacity to be needed to support those shipments. And so I would say, we're working with customers today short term in their existing fabs. We're working with them with these long-term fab plans and being ready. And in many ways, that's allowing us to be more efficient. As Doug talked about disciplined build out in our operational capabilities, our manufacturing, our supply chain. I would say that it is translating into financial benefit for Lam as well by having those longer visibility conversations. Douglas Bettinger: And Vivek, I mean, listen, we're having very long-term conversation with customers, but we don't need down payments. We generate ample free cash flow from the business we run the commitments we're going to get from customers are important and significant and they're happening, certainly, but it doesn't require down payments for us. Vivek Arya: Got it. I guess maybe the subtext of my question is the gross margins that you're seeing, right, the 50.5%, how durable are there? So let's say if memory pricing goes down next year for whatever reason, do you still think these gross margins are sustainable? And maybe you can even expand from these? Or do you think these gross margins are because the industry is so tight today. So I'm not asking for a gross margin forecast per se. I'm just trying to understand that if you're customers are getting assurance of their pricing? Is there anything Lam can do to help get assurance around your pricing and your -- the sustainability of your margins over the next 1, 2 years? Timothy Archer: You know what -- actually, we're not going to give you a gross margin forecast longer term. But I think that what you can see and what we've said is we have been building the gross margin improvement in our company around fundamental capabilities, either our own through our own operational efficiency or through the value that our equipment delivers. And that can be technically as the manufacturing becomes more complex, it can be the unique capabilities our tools provide from a technical or a productivity perspective. And so we have moved at a pace where we feel like the improvements we're making are sustainable because they're rooted in real value or real efficiency. And they're not a -- they're not leveraging sort of the opportunity, and they're not transactional in nature. They're really founded in fundamental value delivered to the customer. And when I talk about things like cobot, for instance, the value of a cobot is rooted directly in the value being delivered to the customer through better uptime, better yield, and we get paid for that. And I think those types of things are sustainable. When we deliver technology that enables the move to the next technology node. We think those are sustainable regardless of the cycle because it is delivering value to the customer. And that's -- we're in this for the long term with our customers, and that's why we look at, at all of this. Operator: Our next question comes from Jim Schneider with Goldman Sachs. James Schneider: I was wondering if you could maybe comment on in terms of the WFE uptick you expect which of the product areas do you expect the most kind of incremental leverage? Is it kind of split across all of them? You talked about advanced packaging, but which was driving the most upside to the overall spending envelope this year do you believe? And is that being driven mostly by early fab clean room pull-ins or something else? Douglas Bettinger: Yes, Jim, I'll comment and then if Tim wants to add I'll let him do that. I think the reality of it is everything is a little bit stronger. I think everybody in the industry is working on finding a little bit of clean room that they've been able to just accelerate to a certain extent. Demand has always been there. Demand is as strong as I can remember it. Frankly, it was strong 90 days ago. It continues to be maybe even a little bit stronger right now, and everybody found a little bit more clean room and so they were able to take a little bit more equipment. Operator: Our next question comes from Stacy Rasgon. Stacy Rasgon: For the first one, I wanted to push a little bit more on the services growth. So I understand the drivers around utilization topping and the Reliant weakness. But I mean, you also talked about the $40 billion in upgrade spending pretty much all happening by the end of '27. I don't get the feeling that we've had like tens of billions of that upgrade spending happening already. So it almost feels like we should have tens of billions of upgrade spending happening between now and the end of next year. And from what I understand, I thought that all goes into your services business. So why shouldn't that be a pretty big driver of services growth, I guess, between now and the [indiscernible]. Douglas Bettinger: Yes. Stacy, I would point out a couple of things to you. In that $40 billion number. Yes, there's upgrades for sure, but there's also new equipment purchases, right? There's some new things, right? When you upgrade the installed base, you need to buy new equipment to break bottlenecks and constraints. There's also some new equipment as the industry moves to moly. So it's not all just upgrades. And the other thing I would say relative to upgrades is upgrades were actually quite strong last year in '25 and are going to continue to be for the next year or 2. So that's part of the upgrade story. And then the other components, like I said, spares and service. It's already pretty darn strong in March and, frankly, Reliant with the mature node spending being a little bit softer than everything else, that's the puts and takes to get you to kind of quarter-by-quarter plus or minus flattish as you go through the rest of the year. Stacy Rasgon: Okay. That makes sense. If I could ask a follow-up. So you guys are seeing WFE growing this year on the order of, what, $30 billion, like you said, 110 last year to now 140 plus this year. And that's very strong, but it strong that it is, as you know, it is a constrained growth because of clean rooms. And those clean rooms start to come online into next year. Does that suggest to me that the sequential growth of WFE next year ought to be even stronger on a dollar basis than it is in '26 because you'll have some were to actually put the tools, whereas you don't really have that this year. Like what's wrong with that logic? How would you push back on that? Douglas Bettinger: [indiscernible] to decline to comment on the exact magnitude of WFE next year, but we do firmly as we sit here today, look at clean rooms are going to be more available next year and where we believe demand to be WFE is going to be nicely growing next year. And it's too soon for us to give you a number, but we feel pretty good about the growth trajectory into next year. Timothy Archer: Yes, I'd also point out that every year that goes by, as technology advances, etch and deposition intensity rises. And so as those new clean rooms come on and they're targeting more advanced technology nodes, that's better for -- certainly better for Lam's position within whatever the term I used compelling WFE growth is. Operator: Our next question comes from Krish Sankar with TD Cowen. Sreekrishnan Sankarnarayanan: I just want to follow up on an earlier question on the upgrade to the WFE numbers, the $135 billion going to $140 billion plus. Is there a way to segment was the bigger driver NAND? Was it CPU tightness? Or was it just AI strength? Douglas Bettinger: Krish, what I said is everything got a little bit stronger because everybody got the little bit of [indiscernible] clean room. So it's not any one component of the customer base. Everything is just a little bit better. Sreekrishnan Sankarnarayanan: Got it. Got it. And then as a quick follow-up. It looks like the third-party market share data came out and you folks gained share in PECVD quite a bit last year. I'm curious which vertical drove that PECVD share gain? Was it DRAM or foundry/logic or something else? Douglas Bettinger: Do you want to take that Tim? You want to [indiscernible]? Timothy Archer: Sure, go ahead, Doug. Douglas Bettinger: Listen, I think PECVD is such a broad pervasive tool. It shows up in every component of the customer base. One area I think that sometimes is underappreciated is the use of PECVD and underfill in advanced packaging, honestly. And that was a key contributor. Tim talked about we see packaging this year growing 50%. We talked about real strong growth last year. PECVD benefited from that, obviously. Timothy Archer: Yes. I think PECVD also shows up. It's challenging because you think about the old traditional PECVD applications. But even as I mentioned, as we move forward in NAND, for instance, even like our Vector [ DT ] backside stress management actually is a PECVD application. So in many ways, it's such a pervasive technology, and so we see that improvement in PECVD. Operator: Our next question comes from Joe Quatrochi with Wells Fargo. Joseph Quatrochi: I was wondering if you could talk a little bit just about where your lead times sit today? And then also, I think you talked about the second Malaysia factory opening. When is that ramp? And can you remind us like what is the size of that relative to, I think it was a pretty large first facility that you have like 700,000 square feet. Douglas Bettinger: Joe, first saying, we don't specifically put numbers around our lead times, but they are stretching out a little bit as demand is obviously quite strong. So [indiscernible] I'm going to give you a number though. Second, the second [indiscernible] facility, we'll come on the second half of the year. And yes, you're right. The first one was our largest factory in the network. This will be nearly the same size or maybe approximately the same size as the first one. So it will give us the opportunity to scale into the next year's demand, I think. Joseph Quatrochi: That's helpful. And then I was just curious, I was wondering if you could talk a little bit about just your position for high band with flash. And just any thoughts around that? What does the SAM potentially look like for you guys there? Douglas Bettinger: I'll let Tim should take that one. Timothy Archer: Well, I think in any of these cases where you are talking about device architectures that require 3D scaling. I mean, obviously, our SAM opportunity just grows. I think these devices in the exact process flows and [indiscernible] still being worked through. But the types of systems we have, whether it's high aspect ratio conductor etches, higher-spec dialectric etches, the depositions ALD, it will be a great opportunity for us if it -- when it comes to fruition. Douglas Bettinger: Operator, I think we have time for one more question. Operator: Our next question comes from Vijay Rakesh with Mizuho. Vijay Rakesh: Just a quick question on the DRAM side. It looks like it grew very nicely, up 45% year-on-year. On the -- when you look at HBM3E going to HBM4, with the higher layer count, I think, 50% higher. Is there a way to look at what your content uplift is per 100,000 wafers or something HBM3E goes to HBM4or 4E? And I have a quick follow-up. Douglas Bettinger: Vijay, maybe I'll comment and then maybe let Tim talk about the technology. Yes, clearly, it goes up. We haven't given specific numbers around it. But obviously, the higher stack required. I'm getting a little feed back. The higher stack requires more equipment, a little more challenging for the industry. So you clearly need more equipment. We haven't given a specific number on it in terms of dollar per 10-K. Vijay Rakesh: All right. And just on the follow-up on HBF. I mean are you seeing book SanDisk and Hynix talking about it, I guess, but outside of that, when you look at high bandwidth flash, are you seeing investments or CapEx picking up there? Is that something you're seeing into '27? How would you look at that ramp? Timothy Archer: Yes, I'd probably leave it to our customers to talk about their timing on these kinds of new technologies. But as I mentioned earlier, on any new technology, we're engaged with customers quite well ahead from a technology perspective of any production ramp. And then it's very much up to them ind. The one thing that's true, and we talked about it is that these are being driven by the growing importance of NAND as we see it within the AI memory hierarchy. And so again, we think it's something that in a matter of time, this kind of capability is likely needed and [indiscernible] technologies that will support it very well. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Doug Bettinger for any closing remarks. Douglas Bettinger: Listen, I think Tim and I, and Ram would just like to thank everybody for your time and attention during what I know it's a super busy earnings season. I know we're going to see lots of you as the quarter unfolds at different conferences and road shows. So we're looking forward to that. And again, thank you for your interest in the company. We appreciate it. Operator: This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Pathword Financial's Second Quarter Fiscal Year 2026 Investor Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Darby Schoenfeld, Senior Vice President, Chief of Staff and Investor Relations. Please go ahead. Darby Schoenfeld: Thank you, operator, and welcome. With me today are Paper Financial's CEO, Brett Pharr; and CFO, Greg Sigrist, who will discuss our operating and financial results for the second quarter of fiscal year 2026, after which we will take your questions. Additional information, including the earnings release, the investor presentation that accompanies our prepared remarks and supplemental slides may be found on our website at pashwordfinancial.com. As a reminder, our comments may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to update any forward-looking statements. Please refer to the cautionary language in the earnings release, investor presentation and in the company's filings with the Securities and Exchange Commission, including our most recent filings for additional information covering factors that could cause actual and anticipated results to differ materially from the forward-looking statements. Additionally, today, we will be discussing certain non-GAAP financial measures on this conference call. References to non-GAAP measures are only provided to assist you in understanding the company's results and performance trends, particularly in competitive analysis. In order to make our adjusted net interest margin as comparable as possible we have excluded the impact of the gross accounting methodology on our consumer loans included contractual rate-related processing expenses associated with deposits on the company's balance sheet. The historical numbers in the earnings presentation has also been updated to reflect this. Reconciliations for such non-GAAP measures are included in the earnings release and the appendix of investor presentation. Finally, all time periods referenced our fiscal quarters and fiscal years, and all comparisons are to the prior year period unless otherwise noted. Now let me turn the call over to Brett Pharr, our CEO. Brett Pharr: Thanks, Darby, and welcome, everyone, to our earnings conference call. At the midpoint of our fiscal year, we continue to make good progress on our goals and execute on our long-term strategy being the trusted platform that enables our partners to thrive. Our tax season is going very well with tax-related products leading the way in revenue growth for the quarter. Additionally, new and existing partnerships announced last year are developing nicely and the Partner Solutions pipeline remains robust. Net interest income from our commercial finance loans also increased significantly as well. All in all, our core businesses remain healthy, and we are pleased with the results achieved in the quarter. Continuing with some highlights. We reported net income of $72.9 million and earnings per diluted share of $3.35. Noninterest income in the quarter grew 9% and represented 55% of our total revenue. This was primarily accomplished through numerous successes within tax services and further supported by growth in our core card and deposit fees. Return metrics were also strong for the first 6 months of the year with return on average assets of 2.75% and return on average tangible equity of 40.69%. Just a reminder that these metrics generally hit their high point during this quarter due to the seasonality tax business. Finally, we are maintaining our guidance range of $8.55 to $9.05 earnings per diluted share. Our investments within tax services are paying off, and we are very proud of all that the team was able to accomplish not only this quarter, but also in the planning and preparation that was undertaken to achieve the results that you see today. This year, we operated with over 48,000 tax offices, which is another record for us and nearly double the number of offices from just 5 years ago. We are thanks to have cultivated such strong relationships with our existing tax partners and independent tax offices as well as new ones that have come on board. It is incredibly important to us especially given the competitive nature of the space that they trust our people and the level of service they receive. We hope to inspire financial confidence and empower more people to navigate the tax system with clarity. Tax season can be the most significant financial event of the year for many families. And through our products, we aim to help individuals make informed decisions about their finances. This focus on empowering taxpayers and delivering transparent solutions drove increased engagement and improved financial performance within tax services. For the 6 months ending March 31, 2026, we increased total tax product revenue by 13%, led by a 13% increase in noninterest income related to refund transfer products and Refund Advance products. Additionally, Refund Advance originations increased by over $200 million this year. This brought total tax services revenue to $96 million. Loss rates on refund advances were also favorable when compared to last year due to our continued work on our underwriting models and data analytics capabilities. This led us to preincome of $62 million for tax services, an increase of 30%. We believe these outcomes reflect our commitment to empowering people and partners through innovative solutions unlocking potential and fueling success for those we serve. We remain diligently focused on delivering on our strategy of being the trusted platform that enables our partners to thrive. As a reminder, this consists of 5 key focus areas in our fiscal 2026. First, we continue to favor asset rotation in areas where we believe we have a competitive advantage to deliver higher return on assets. With an asset limit of $10 billion to remain below the Durbin amendment exemption, we remain focused on creating balance sheet optionality. This should deliver increasing net interest income without growing the overall asset size and generate sustainable fee income in the form of secondary market revenue. Second, we invest regularly in technology and our run rate to help ensure that our platform undergoes the evolution and scalability needed to support our partners' growth as they expand their reach with new products and markets. Third, we believe people and culture are Pathword's most important assets, which is why I'm very proud to share with you that we once again earned the -- great Place to Work certification in 2026 for the fourth year in a row. Our culture is just as important as the outcome of our efforts. At Pather, we are guided by our core values, lead by example, find a better way, help others succeed and dare to be great. These core elements along with our talent anywhere approach is what we believe sets us apart. Fourth, the consultative governance approach we take when it comes to our risk and compliance framework helps our partners manage an area that is often complex and difficult to navigate. We also continue to invest in this area to not only evolve with the regulatory environment, but also allow for scalability with our partners. Finally, our focus on the client experience is about supporting our partners for greater successes and revenue enablement. Our pipeline remains full, and we are diligently working to bring more partners into the Pathward family and help those that we are already working with the door. We are also happy to announce that in April after the quarter closed, Path word executed a 3-year extension pay, a leading money movement platform. Now I'd like to turn it over to Greg, who will take you through the financials. Gregory Sigrist: Thank you, Brett. Overall, we are pleased with the financial performance in the quarter. As Brett mentioned, our tax season is off to a great start. This is the product of thoughtful planning and teamwork, and we're proud of what the team is accomplishing again this year. We're equally pleased to see growth in Partner Solutions, which I'll dive into a little deeper in a moment. First, let me start with revenue. As expected, the sale of the consumer finance portfolio back in October did impact net interest income given the elimination of the gross-up accounting for that portfolio. Having said that, our strategy of balance sheet optimization continues to deliver solid results with growth in our core commercial finance business. Other parts of our strategy have enabled to report solid results in noninterest income, particularly in our tax products as well as in core card and deposit fees. In our consolidated tax services which consist of both our independent tax offices and tax partnerships. We saw an 18% increase in noninterest income from Refund Advance and tax fees and a 7% growth in revenue from refund transfers during the quarter. This is the direct result of significant work to grow this business, increase market share and evolve the underwriting model. CoreCard and deposit fee income, which excludes the servicing fees we earn on custodial deposits grew 22%. We're seeing a lot of growth through existing partners as well as increasing contributions from new contracts signed last year. Due to the continued backlog from the first government shutdown, we fell short of our goal range for secondary market revenues but we believe this is primarily a timing impact, and we expect to make up the difference in subsequent quarters. Noninterest expense improved in the quarter, Outside of the impact from the sale of the consumer portfolio, the primary driver was lower card processing expense due to lower rates, partially offset by an increase in compensation and benefits. Given the value we place on our people, we remain committed to investing in them as well as processes and technology, and we were still able to manage expenses well when compared to the prior year quarter. This led to a net income of $72.9 million and earnings per diluted share of $3.35. Deposits sales on the company's balance sheet at March 31 were relatively flat versus a year ago. This is consistent with our balance sheet optimization strategy, lower-yielding assets such as securities declined and partner deposits were strong in the quarter. This allowed us to have over $250 million more in average custodial deposits than in the prior year quarter and also generated higher servicing fee income in the quarter. Loans and leases at March 31 grew 9%. Our focus on ensuring we have the right loans on the balance sheet was the primary driver of the increase with a $588 million increase in our core commercial finance business, particularly in renewable energy and structured finance. Additionally, Origination volumes were strong during the quarter with $367 million in commercial finance at yields higher than the March 31 portfolio yield and $945 million in consumer finance. This represents significant growth versus the same quarter last year, and we were pleased by the growth in consumer finance originations, which was driven by the new contract we announced last year. In Commercial Finance, our loan pipeline remains strong despite timing delays in certain cases stemming from the October 2025 government shutdown. Net interest margin was 6.3% in the quarter. Our adjusted net interest margin was 5.32%, a 23 basis point improvement over the same quarter last year. This was primarily driven by lower rate-related card expenses. Our nonperforming loans saw a modest increase to 2.39%, and our allowance for credit loss ratio on commercial finance increased versus last year. This was driven by a mix of specific reserves and our CECL model which takes into account a number of factors, including the macroeconomic environment as well as portfolio history over time. Our commercial finance portfolio metrics are being driven by a relatively small number of loans in comparison to our portfolio size and in different verticals. As we've mentioned before, we look at our credit metrics to a full year look back. And on March 31, our going 12-month net charge-off rate was at or below the same metric at the end of every quarter in fiscal 2025, and store remains at the low end of our historic range. Lastly, we continue to believe that we are still in a relatively stable credit environment, consistent with the past few quarters. Our liquidity remains strong with $2.7 billion available, and we are extremely pleased with our position at this point in the year. During the quarter, we repurchased approximately 855,000 shares at an average price of $84.15. This leaves 3.4 million shares still available for repurchase under the current stock repurchase program. This concludes our prepared remarks. Operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Tim Switzer with KBW. Timothy Switzer: So the first one I had, you guys took Ceska, but you upped to buy back quite a bit this quarter. Relative to what you've been doing recently. You still have a good amount of capital, obviously, a high ROE. Is what you did this quarter, is that kind of repeatable for the rest of the year? And what are your other priorities outside of organic growth and repurchases? Are there any other kind of M&A type businesses you're in discussions with? . Unknown Executive: Yes, Tim, let me start and Brett may jump in at the end. But I think what you typically see throughout the years, you're going to see seasonality in that buyback number of shares in the dollar amount. It typically is correlated to our higher earnings quarter. So second quarter is always our highest buyback quarter on a relative basis. I would say, though, that the algorithm for the number of shares we buy early in the quarter does get updated periodically. And I think this quarter in part of it was we took advantage of lower share prices as well. So if it optically looks like we got a little bit ahead, it probably had something to do with that. Obviously, very pleased with where we landed in the quarter on the buybacks, but I think more broadly on the question of capital and capital allocation, I mean I still continue to believe and we continue to believe that the share buybacks are still the highest use of capital at this point in time. We obviously continue to look at a lot of things, but -- and if that changes, we'll at some point, let you know, but I think it's still buybacks. Brett Pharr: Yes. And Tim, it's Brett. So just sort of on the strategic elements of M&A I mean we're always looking to see what's out there. But with our results, we've got a pretty high hurdle rate and obvious reasons, we wouldn't be involved in much of a bank kind of situation. We look for things that you might buy versus build. But we've just not seen anything over time to make any sense. So the kind of capital utilization we're doing is the highest and best use in our mind at this moment. . Timothy Switzer: And then the other -- another question I had, you guys -- I remember last quarter, 2 quarters ago, the new programs you guys announced in '25 would contribute mid- to high single digits to card fees year-over-year, not including some of the new living partnerships you guys have now that we're a few quarters then, are you guys still on track for that? What have been kind of the puts and takes over the last few months? And where do you think that can go as you head into '27. Brett Pharr: Yes. And Greg can talk about specifics as he wants to. But you look at our card fee income year-to-date, that's part of the increase in the noninterest income. And that's -- we had those deals. We've always talked about some of them take time to come on. We're now seeing the benefit of that come through the noninterest income line. . Unknown Executive: Yes. But as I said in my prepared remarks, year-over-year, the significant increase versus a year ago is largely organic. But as you would expect and as we talked about, we started to see some of the benefit of the new deals -- but it's all about the speed to revenue. It still takes some time after you've signed the deals to -- depending upon the product to get those programs live, and get the programs ramped and get them fully loaded. But the guide we gave previously about what that looked like on a fully loaded basis still applies. We still think it's going to be a measurable increase into next year as those programs fully ramp. . Timothy Switzer: And then the last one I had, and it might be a little too early to ask the question, and I don't know if we have enough details, but there's been a proposed executive order about banks being required to obtain citizenship inflow. And it seems like a tricky situation, I guess, with some of the [indiscernible] banks and like what's the risk needing to perform that for all the bank accounts you guys have and that comes out that cost? And then I know there's a lot on your like on the other side of it, is there an opportunity at all for like your prepaid card products, like do we know if those would be required to attain to obtain citizenship into as well? Brett Pharr: All right, Tim. So let's get in the weeds just a little bit. Obviously, we don't what the rules are, right? So that's part of it. You probably know that for any known owner of account, you have to collect something called CIP. So we already have documentary and nondocument pieces of information about our customers that we're required to get An exception to that is if it's unregistered like an unregistered gift card that would not apply, and I would suspect, in this case, it would not apply. But -- so we already have the processes in place with our partners to collect the necessary information like that. there's something else that has to be collected, then we, like everybody else would have to go and do that. But to we know what the rules are, we don't know what the implications are, but the highways already exist to get that kind of information. Timothy Switzer: Are you able to tell us maybe like what percent of your deposits or accounts would be part of that funded registered prepaid card business? Brett Pharr: Yes. So I'm getting the heads that say we don't disclose that here, right? But you can think about our business, right, in general, the kinds of things we have. And if you're in the gift card, it doesn't apply unless they specifically register it. payroll card, obviously, you know who it is. There's various kinds of things. So we would have it on some and we would not have it on others. . Unknown Executive: Yes. And I think as we say broadly on just the topic of deposits, it's a well-diversified deposit base -- so it's going to be different -- it's over time, it evolves and over time as we continue to bring on new partners, it continues to diversify. So hopefully, that helps you. Operator: Your next question comes from the line of Joe Yanchunis from Raymond James. Joseph Yanchunis: So I'd like to start with credit here. And I know you touched on in your prepared remarks, but NPAs ticked higher again this quarter. Can you provide some color on the underlying credits that drove this increase? And I know you often count your workout process, which can take time. So do you have a sense for how much of this bucket was resolved in the quarter? Brett Pharr: So let me go through a big picture. So you recall, we've got different asset classes. We always do collateral managed transactions. So there's no uncured and we stay out of certain kinds of verticals that we do not think have good collateral attributes over time. We measure these things through cycle, and Greg in his comments even talked about that. You always have some one-offs, right? So you have to go through a workout. Workouts can be short workouts can be long, and they're uneven as you go through them. So, I don't know that we could answer the question if there are any been resolved. They're all consistent with the way that we approach our collateral management program, and we've had consistent results with that literally for years that you can trace through -- so again, the great comments, I think in his remarks, we're not seeing anything changing in the credit environment. It's just one-off stories that happen in various asset classes. Gregory Sigrist: Yes. And Joe, just to walk you through a few of the is there just broadly on the credit side. You probably saw when you get into it that on the past due side, the 30- to 59-day bucket increase, it went up by about $40 million. That was due to a limited number of loans that frankly came after quarter end. So that kind of factors into this equation, too. So you kind of get back to a more normalized level of past dues in that bucket. And then when you take that into account, overall past dues are pretty moderate. And then when you get -- you mentioned the NPL ratio ticked up it did, but then you need to disaggregate that a little bit. When you look at the nonaccrual balances in the earnings release, those nonaccrual balances actually came down about $5 million. that's the bucket that had some of the larger loans in it that we've been talking about in terms of resolution over the last couple of quarters. What drove the NPL ratio in the quarter though is that greater than 90 days past due and still accruing bucket, which that's really the broad stuff in a normal course, collateral management and collection piece that Brett is talking about. So it's a number of just our normal process, a number of smaller loans kind of drove that. So in the quarter, what drove it up was that bucket. Not anything that's larger in part of the resolution. Joseph Yanchunis: And then just kind of moving over to the provision, and then we'll move on to a different topic. So the provision increased pretty materially in this quarter. How much of that increase was due to seasonal tax changes, organic growth versus underlying crises? Gregory Sigrist: I think the line I focus on the most. I mean I think we isolate the tax services provisioning in the document. I keep coming back to the commercial finance, which I addressed in my prepared remarks, right? Yes, it was a mix of -- there's certainly some specific reserving related to everything we talked about on the NPL side, but it's also just driven by our normal CECL process. many quarters is driven by increase in the loan book, but this quarter, it was more driven just by looking through and just taking a pragmatic view of where we're going to land on some of these credits. But with the benefit of looking forward, we still believe this is a very -- my word is benign, very stable credit environment. So we're not seeing anything special in that. . I think the other thing I pointed to in my prepared remarks, though, was -- you've heard us say this for quite a few quarters now. We always look at the trailing 12-month NPLs or net charge-offs because that's a better barometer for this business given how lumpy some of our workouts are and some of our recoveries are -- so when you kind of apply that backward-looking 12-quarter view to the net charges this quarter, and frankly, the things driving some of the credit metrics, it's benign. It's well within our historic averages. Brett Pharr: One of the things that's very important about our asset classes, Joe, is while in some industries, nonperforming loans are a leading indicator and the net charge-offs are a lagging indicator. If you look at the correlation in our book for the past literally decade, that's not what happens. And so while you have nonperforming loans, they generally tend to be more tightly secured. And even if you get a charge off, you get a recovery. So look at that history through the cycle, and you'll see our net charge-offs are disconnected from our nonperforming loans. Joseph Yanchunis: I appreciate that. And I'll ask one more before hopping back in the queue. So the -- you had mentioned, subsequent to quarter end, you reached a contract extension with a partner. And then sorry, I didn't catch the name during it. Speaking, how the economics change during the recontracting process. I understand that if the partner grows during the contract, you'll get more volume. But does the recontracting generally result in lower margins? Brett Pharr: Every contract is different. And there's a lot of contracts where you trade 1 thing for the other because that's what the partner wants to do. So the classic example is if there's deposits involved and somebody wants a higher percentage of what we call contractual card service payments on it, but then we just charge more transaction fees. So the net economics for us are the same. And a lot of it depends on whether they want to take interest rate risk or not. -- and we can manage interest rate risk or they can manage it. So there's always trade-offs. There's also trade-offs. So if you want a longer, that will probably be better economically if you want it shorter, probably not as good economically. So -- that's a general comment on them. So every contract negotiation is different, and there's not a standard sort of book approach to it. And no, we're not seeing things generally go south on the margin side because that's and we did this a few years ago. That's the reason we didn't do a lot of transactions at 1 point was as the pricing was silly. Now we're seeing the kind of pricing we want to have. Gregory Sigrist: And part of that, too, is we feather in the discipline to do risk-adjusted returns every time we do either a new partner or 1 of these renewals. So there's a pricing team that looks at it to make sure it makes sense, and it's sensical for us from an overall enterprise perspective. Operator: Your next question comes from the line of Manuel Novas from Piper Sandler. Unknown Analyst: Is there any more color you could add -- is there any more color you could add about the partner pipeline -- you said it robust? Just anything you could add there? Brett Pharr: Yes. Well, we've been through these last several years where there was a period of time I alluded to it a minute ago, where there were some things that were going on in the industry that we really didn't want to participate in A lot of that's gotten washed out. And we've started talking in the last year, 1.5 years that is really picking up and it's actually coming through with contracts. . And yes, our pipeline is very strong. Part of that has to do with our breadth of product approach with our partners, where we'll do multiple kinds of products with the same partner. And that's an advantage, I think, we have in the marketplace. We're continuing to have lots of new opportunities and new partners as well as existing partners bringing on new products and new programs. So pipeline is very strong and part of it is because we think the dynamics and economics have returned back in our favor. Gregory Sigrist: 22% increase in core card fee income from last year. That in part is new products with existing organic partners. No, I don't have the numbers to split it out for you. But again, that's just 1 outward sign that we're having success with our existing partners doing the multi-threaded approach on the product side, as Brett mentioned, in addition to, as he also mentioned, new partners, new products. So we're really pleased with where we are right now. . Unknown Analyst: That's helpful. Can you speak to there was some loan decline this quarter? I understand some of the seasonality there. How should we think about loan growth going forward? You talk about healthy pipelines in different of your loan lines -- can you speak to perhaps the mix of that growth as well going forward as you kind of reset the loan book to how you want it to end up? . Gregory Sigrist: Let me work backwards on that. I mean I think we like the verticals we're in. We've done some resetting over the last couple of years. We've exited a couple of verticals. But when we think about the asset classes that we're in, we've been very purposeful with them. We've obviously used a risk-adjusted return approach with looking at credit through the cycle. I think the variance you saw in the quarter, though, was more of a timing issue. On the USDA side, there's probably a bit of a slowdown in the quarter just related to the government shutdown, the first shutdown with the government, led to some slowdown on the USDA side, but I continue to believe that's just a timing issue. . When I think about the rest of the asset classes more broadly, I think it's just more of a timing issue. I would say our pipelines are very full across the verticals. So when I think about the balance of the year, I tend to focus more on the origination than I do the relative point estimate or average on the loan side. Why? And this goes back to our -- the treasury led model and the fact that we're focused on the balance sheet velocity, which really means we can be down quarter-on-quarter to just because old a lot of stuff purposefully as part of that process. This quarter, I didn't have anything to do with that, again, because the SDA was -- they're still a little bit groggy, -- they're still a little bit gummed up. But when I think about going forward, I would expect to see some modest continued uptick in the quarters going forward in the products we're in with an eye toward, again, risk-adjusted returns across the verticals we're in at this point in time. Unknown Analyst: I appreciate that. Any near-term guidance on the direction of the NIM, it stepped down on both the full version and then the adjusted level -- just kind of how should we think of it going forward on either metric? Gregory Sigrist: Yes. Adjusted NIM is the 1 I would recommend. It's the 1 I look to because I believe it's the more accurate representation of the interest rate risk on our balance sheet. -- because it kind of neutralizes for things that are not sitting in net interest expense, the contractual rate related fees we paid to partners on deposits. That one was down in the quarter. But if you kind of go back, I think we have a time sequence some place, it will show you that metric kind of back in time. you tend to always see seasonality in the March quarter because of tax season. The balance sheet grows. And as a result, we tend to do some borrowings, wholesale borrowings at the margin to fund that. We don't need to fund it 12 months of the year, but we do fund it for 45 to 60 days of the year. So that tends to cause a little bit of a downtick in the March quarter. Looking ahead though, I mean -- and I appreciate you weren't on last quarter's call and Emanuel say now, I really appreciate you joining the team here joining the party. I still continue to believe we're stable to up slightly trending up on the net -- adjusted net interest margin. Why? I think we've proven even look at the ether metric over the last year, rates are down approaching 100 basis points on last year. The adjusted yield back to the adjusted NIM a year ago were up. And that kind of -- I think it's proof that we're not sensitive to the short end of the curve. And as we've said consistently, we are more sensitive to the middle part of the curve, 3- to 5-year because that's where we price the fixed rate loans that we do have a price there. And as importantly, we still have roughly $200 million for the next 12 months in the securities portfolio that we will -- it will reprice and it will reprice likely into loans over the horizon. And there's still a bit of fixed rate loans that were put on before rates released went up in 2022 that are subject to repricing -- and that last 1 is becoming a smaller and smaller bucket, but it all leads down the path of, yes, I still believe there's a most tailwind there for us. I don't see with the current rate environment, current rate outlook and the mix we've got anything that would suggest otherwise. Unknown Analyst: One last question on the tax season. What's kind of I know there's about a month left in terms of what you haven't reported yet. But like what are some of the learnings that you're going to apply to next year? Anything on new tax laws, where you can gain market share? -- kind of any of the priorities that you think you might set up for the next tax season? Brett Pharr: Over the last several years, we have really done a good job of focusing on customer service with our -- and because of some disruption going on in the marketplace, it's given us a great opportunity to grab market share. And we would hope we would continue to do the same thing next year. Now this year got quite a boost from the new tax laws and interest in refunds and the size of it and a lot of those kinds of things, and that may not come next year, but we still continue to believe we're having a better experience for our EROs. And so therefore, we retain more and we'll be grabbing more in future years. . Operator: [Technical Difficulty] Your next question comes from the line of Tim Switzer from KBW. Tim your line is open. Please go ahead. Timothy Switzer: A quick 1 here. There's obviously been a lot of pullback from some competitors in the banking as a service space due to the regulatory environment. Now that we're a few years through that, can you quantify -- maybe not quantify, but discuss if you're starting to see more competition coming in? And are there different types of players or more players in the space than they were previously in terms of like this is coming from beyond banks now as you guys also expand your offerings? Brett Pharr: Yes. So let's talk about the elephant in the room, right? Which is everybody is going and getting a bank charter right now. I might as well just hit that head on. So generally, in our pipelines, we are not seeing the effect of that. There are those, including some of our partners that are getting charters, but in many cases, they're getting sort of limited purpose charters and acknowledging to us, they're going to continue to do things with us. So we think there will be certain cases where people get charters and do that. Those that are going for full national charters, some of those things. there's a long way between here and then actually getting a bank opened and getting something up and running. So my view is we're a couple of years out and they'll probably arrive just in time from what might be the next administration, which will be an interesting experience. So I think we've got a period of time here with runway on pipelines, and we're not seeing any impact yet from some of those kinds of things. I do believe there will be some that are successful in 2 or 3 years from now, we'll have some more competitors that are in this space. But we've been there before. And it's 1 of the reasons we're making sure we're serving partners well, giving them a wide breadth of product opportunities, which are not easy to duplicate, typically getting longer-term contracts where we can, switching costs are high. And we think that will help us even if we hit another competitive wave that may happen here in a few years. Timothy Switzer: Interesting. Yes, you did get ahead of my follow-up there on some of your partners going to get. So I got just 1 more here. And I think I asked this a couple of quarters ago, too, but there's so much movement happening in the space right now. And the current administration is very open to it. Any recent developments you guys can share or talk about your level of interest in partnering with a stable coin or some other digital asset company? Brett Pharr: Mean we're in the payments business, so we have to pay attention, right? So we have our own views [indiscernible], how we're going to deal with that, think about that, et cetera. But we are a partner-led model, and we're watching our partners. And as our partners come to us, we're engaging in various things, and that's not just stable coin. That's many other different kinds of payment mechanisms that are happening -- and so we'll continue to do that. But we're watching it and participating in the dialogue, but it's not the kind of thing we're announcing, and we'll watch how our partners lead us. . Operator: Your next question comes from the line of Joe Yanchunis from Raymond James. Joseph Yanchunis: So a few more questions for me here. So I understand your pipelines -- your partner pipeline is pretty full. Cross-selling remains a big opportunity. Over the next, call it, 12, 18 months, do you expect to have more success cross-selling products or signing up new partners. Brett Pharr: It's hard to answer that question and a lot of it depends on -- I mean we're going to be doing both, right? New ideas come in, et cetera. When you do a new partner and a new program, ramp-up is slow. There's no doubt about that. Greg alluded to it earlier, organic growth has been an awful lot of our growth recently, but we've got new things coming in. So I don't know that I could put a 50-50 on or something like that, but it's -- both of them are key parts of our overall strategy. . Gregory Sigrist: Yes. I'll answer just from a revenue growth perspective, not even numbers, what's signed up. And to Brett's point, I think you always get to even faster with existing partners in part because of just the third-party risk management you have to do once they're onboarded, it makes a little easier, there's less. But I think you also typically -- when I think about the next 18 months, I still think that you're going to have a fair amount of revenue growth that are going to come from existing partners, whether that's cross-selling to your words or multi-threaded to ours, I think when you get out past the 18 months is when you're still going to have the tailwind from new partners, new products. . Joseph Yanchunis: And so in that answer, you talked about onboarding partners and how it can be -- to take longer for new partners I guess how has the time to onboard a new partner changed over now versus, say, 3 years ago? And I understand you have different products, which might have different times. But just generally speaking, has that speed to market, has that changed at all? Brett Pharr: We've had a focus on speed to market, and that's part of what we're doing. Some of that is process improvement. Some of that is -- we're investing in technology and those kinds of things that will help with it. And sometimes, we're waiting on partners, right? So you've got both of those things are going on and you sort of took the words of my mouth, and it depends on the product. There's a few products you can turn on in a matter of weeks, right? and there's others that can take quite a while to do it. So it varies, but we have been focused on improving the speed of that. But we just got to remember, third-party delivery, in fact, third-party delivery, and there are frameworks that have to be put in place when you set that up, and that's an important part of our overall program. Gregory Sigrist: Yes. And speed to launching is different from speed to revenue because, again, we're not lifting and shifting programs that exist. These have not been transfers, right? So then you're then you hold into the partner to actually ramp their programs. And that, again, varies by product. But that's the other dimension that we work with partners on, but that's their -- the way they manage the program. Joseph Yanchunis: That's fair. And on the technology front, I mean, you're one of the major players in the Bang as a service space -- can you talk about value of building your own technology receiving a third-party vendor? Brett Pharr: Yes. We spend a lot of time talking about that. Part of the issue is that the requirements for this business are fairly unique. And the ability for, say, a service bureau to provide them, there's not sufficient scale for them to be interested in developing. So we have to do a lot of things ourselves. I have done a lot of things in the past and are rebuilding a lot of things now. The other thing is, and I'll just kind of go ahead and use the word everybody needs to use, which is AI is being used a lot in our engineering space to help speed up the time to develop various capabilities. . And that makes it even easier for us to build things ourselves internally, and I think that will be a key part of the future. I'm not saying that software service providers are going away. I just think that there will be different kinds of use cases for different things. And the things that are unique to our business, we will likely build ourselves. Joseph Yanchunis: Okay. And then one more for me here. Just kind of taking a step back and looking at the broader bath space. I mean, what do you view the biggest potential risk to the industry? We have -- JPM seems to be focused on small businesses are kind of doubling down on that segment. But I mean, how do you indicate the risk of stay one of the G-SIB starting to target lower end consumers? Brett Pharr: Yes. I mean one of the key things here for the big banks is there sufficient scale right? And I don't set that a and I worked for 1 of those at 1 point. So I kind of know the conversations that went on in that space. So I don't see that happening. I do think as we become less interchange product dependent oriented, which could happen over time, we'll face different kinds of competition. But again, being small, fast and nimble is something that I think is of great value and is particularly important in this third-party delivery environment. . And so we will have to adapt to change as product desires are coming in from our partners, which we're doing. It's why we like that wide breadth of products. But I don't see 1 of the big banks coming in and trying to take over the low to moderate income or the digital first, very young folks, it's just not enough scale in it. Operator: At this time, there are no further questions. I will now hand the call over to Brett Pharr, CEO, for closing remarks. Brett Pharr: Thank you, everyone, for joining the call today. Have a good evening. Operator: This concludes today's call. Thank you for attending. You may now disconnect.