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Operator: Good morning, and welcome to the Ocean Power Technologies' Third Quarter Fiscal 2026 Earnings Conference Call. A webcast of this call is also available and can be accessed by a link on the company's website at www.oceanpowertechnologies.com. This conference call is being recorded and will be available for replay shortly after its completion. On the call today are Dr. Philipp Stratmann, President and Chief Executive Officer; and Bob Power, Senior Vice President and Chief Financial Officer. Following the prepared remarks, there will be a question-and-answer session. Now I am pleased to introduce Bob Powers. Robert Powers: Thank you, and good morning. Last evening, post market close, we issued our earnings press release for the third quarter of fiscal 2026 ended January 31, 2026, and filed our Form 10-Q with the SEC. Our public filings are available on the SEC website and within the Investor Relations section of the OPT website. During this call, we will make forward-looking statements that are within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections or other statements of the company's plans, objectives, expectations or intentions. These statements are based on assumptions made by management regarding future circumstances and involve risks and uncertainties that may cause actual results to differ materially. Additional information about these risks can be found in the company's SEC filings. The company disclaims any obligation to update the forward-looking statements made on this call. Finally, we've posted an updated investor presentation on our IR website. With that, I'll turn the call over to our CEO, Dr. Philipp Stratmann. Philipp Stratmann: Good morning. and thank you for joining us. OPT continues to see increasing traction across our core markets. Backlog reached a record $19.9 million, and our pipeline expanded to almost $164 million, reflecting growing engagement with government and commercial customers globally. Importantly, a significant portion of this pipeline is associated with defense and security programs. This quarter reflects more than contract wins. It highlights the role OPT is beginning to play in the evolving architecture of maritime security and autonomy. Our $6.5 million DHS award, together with our integration with Anduril positions our PowerBuoy systems within the next-generation defense sensing network. We believe this validates our role as a provider of persistent offshore infrastructure supporting U.S. national security missions. The first of these systems is being ready for shipment, and we expect to ship several more in the coming weeks. At the same time, we continue advancing what we believe represents a new category in the maritime domain, scalable autonomy infrastructure at sea. Our goal is to enable autonomous systems to power, recharge and operate persistently offshore, supporting long duration missions without the need for traditional logistics support. During the quarter, OPT expanded its global operational footprint. We shipped WAM-V autonomous service vehicle to Greece to support ongoing customer operations, further strengthening our presence in international defense and commercial markets. In parallel, we advanced development of our integrated autonomous docking and charging solution, transitioning the system from prototype into full scale build. We are targeting an early access commercial launch in calendar year 2026, designed to allow autonomous systems to dock, recharge and redeploy in support of persistent offshore missions. OPT also progressed system integration and open water validation activities through our collaboration with Mythos AI, enhancing autonomous navigation and control capabilities across our platforms. Taken together, these initiatives support our broader strategy of enabling persistent multi-domain offshore autonomy. We are seeing several opportunities within our pipeline progress into more advanced stages of customer engagement. As deployments increase, we expect a growing portion of our business to include services, data and system support associated with long duration offshore operations. Our capabilities align closely with expanding defense priorities around distributed sensing, autonomous systems and persistent maritime domain awareness. At the same time, our systems continue to accumulate operational hours in real-world maritime environment, generating valuable operational data that supports product improvements, enhances mission readiness for our customers and informs the continued scaling of our maritime autonomy infrastructure. More broadly, this progress reflects the business that is steadily building capability, operational experience and customer confidence. Our focus remains consistent, deliver reliable systems, support our customers' missions and execute against the opportunities we see developing across our core markets. From architecture refining projects, such as our DHS award, to expanding international WAM-V deployments to advancing autonomous docking and AI-enabled capabilities, we believe we are building the foundation for what could become a global maritime autonomy infrastructure layer. Over time, this strategy positions OPT not simply as a product provider, but as a platform supporting the future of offshore autonomy. With that, I'll turn it over to Bob to discuss backlog in more detail and review the quarter's financial results. Robert Powers: Thanks, Philipp. I'll begin with backlog, which provides the clearest view of our future revenue. As Philipp mentioned, backlog as of January 31 was approximately $19.9 million, an increase of $12.4 million and 165% from the same time last year. This reflects conversion of opportunities across defense, government security, offshore energy and commercial applications. Our pipeline for the quarter ended at $163.9 million, up $74.7 million and 84% year-over-year. The pipeline includes larger and more strategic opportunities, including multi-vehicle USB programs, integrated buoy and USV surveillance solutions in autonomy enabled missions. These indicators reinforce the momentum we are seeing in customer engagements. Production throughput remains stable, and we are prepared to meet scaling requirements as additional programs move forward. Revenue for the 3 and 9 months ended January 31, 2026, were $0.5 million and $2.1 million, respectively. Revenues for the 3 and 9 months ended January 31, 2025, were $0.8 million and $4.5 million, respectively. The year-over-year decline in revenue was largely driven by timing impacts associated with the U.S. federal government shutdown in October and November 2025. These disruptions shifted a number of OPT deliverables and development activities into subsequent quarters, which reduced our revenue. These timing effects are not indicative of underlying demand, and we expect a portion of the delayed work to convert later in the fiscal year. Gross profit for the 3 and 9 months ended January 31, 2026, was a loss of $0.8 million and $2.2 million, respectively, as compared to a gross profit of $0.2 million and $1.4 million for the corresponding period in the prior year. Gross margin for the quarter includes recognition of one-time losses associated with certain strategic contracts in accordance with U.S. GAAP. The expenses associated with these projects are now substantially complete, although that we continue to generate revenue over the next several months. Importantly, our core programs and commercial pipeline continue to demonstrate improving margin and operating leverage. Operating expenses increased primarily due to higher noncash stock-based compensation, which rose by $1.8 million for the 3-month period and $6.5 million for the 9-month period compared to the prior year. Increases in head count necessary to convert pipeline into backlog and strengthen the company's competitive position also contributed to the year-over-year increases. Including the noncash amounts, operating expenses were $8.4 million for the 3 months ended January 31, 2026, versus $6.1 million in the same period of 2025 and $24.2 million for the 9 months ended January 31, 2026, compared to $15.7 million in the prior year period. Excluding stock-based compensation, operating expenses increased approximately 9% for the 3-month period and 14% for the 9-month period, with employee-related expenses being the primary driver for both periods. Net losses for the 3 and 9 months ended January 31, 2026, were $11.4 million and $29.6 million, respectively. Net losses for the 3 and 9 months ended January 31, 2025, were $6.7 million and $15.1 million, respectively. Combined cash, unrestricted cash, cash equivalents and short-term investments as of January 31, 2026, was $7.2 million, which compares to $6.9 million at the beginning of the fiscal year. Net cash used in operating activities for the 9 months ended January 31, 2026, was approximately $19.9 million compared to $14.6 million for the same period in the prior year. With that, I'll turn the call back to Philipp for closing remarks before Q&A. Philipp Stratmann: Thanks, Bob. Stepping back, we are seeing continued positive momentum across our business. Demand signals across our core markets remain strong with backlog and pipeline levels significantly higher than a year ago. Government engagement is increasing, supported by new programs and initiatives across several agencies. And our international demonstrations are expanding market awareness while validating our capabilities in the field. At the same time, we have aligned our organization to support this growth. Our focus remains on execution reliability and delivering solutions that performed consistently in mission-critical environments. Operator: [Operator Instructions] Our first questions come from the line of Sameer Joshi with H.C. Wainright. Unknown Analyst: Philipp and Bob, starting off with the backlog, the $19.9 million is a solid backlog, do we have a visibility in terms of the cadence of delivering this backlog? And also, can you -- are you able to categorize this in by geography or type of customer? Philipp Stratmann: Yes. Sameer, absolutely. So of that $19.9 million in the contracted backlog, some of that is due for immediate delivery. As we stated in the past, we are working on shipping out the systems for the Department of Security, which we announced in January with the follow-up contract for the installation a couple of weeks ago. We're talking days and weeks here for those to leave our facility here and get ready for in-store. And if you talk in terms of cadence, that is, as we announced, that is a contractor-owned, contractor-operated contract for a 15-month period of performance. So once these are installed over the course of the next couple of weeks, that's when we're going to start recognizing revenue from them, essentially as if it was a lease contract over that 15-month period of performance. The other part of that backlog have slightly longer conversion cycles. And if you were to categorize them geographically, I'd say about roughly half of it is North America and the rest is sort of split between Latin America and parts of the Middle East with a couple of outliers in various other parts of the world. Unknown Analyst: Got it. And this next question could be sensitive, but you do have some activity in UAE waters. Is there any prospect of getting more contracts from there? Like are you in talks? If you cannot answer this, that is fine. Philipp Stratmann: I think what we can say on that is we have assets in country. We have several vehicles and a buoy in the country. We also do have local-based staff who are working -- first and foremost, they're all safe. And secondly, they're working tirelessly on efforts to help support shipping and safe port operations. Unknown Analyst: Got it. And just going back to sort of the backlog. I just want to make sure it includes revenues expected from the Merrows, which is likely to be a recurring revenues. What portion -- like what level of revenues do you expect? And what is the contracted period for the -- specifically Merrows orders? Philipp Stratmann: That's a great question. It's not like there is specific Merrows contracts in there, but there are contracts like the home and security efforts that utilize the Merrows platform. Take the Homeland Security contract, again, as a great example. It utilizes all of our systems, which then go via Merrows into other data-enabling platforms. That utilizing Merrows on the systems that we're providing enables us to do 2 things. One is to stream data to Coast Guard directly. The other one is to stream data to Anduril who is another party on a separate portion of these contracting mechanisms and integrate our data with their system, fortress lattice in order to kind of provide a unified operating picture. The fact that we have Merrows enables us to have multiple streaming efforts from 1 platform into a multiple kind of common operating pictures. Unknown Analyst: Got it. Understood. And then, on the gross margin front, should we -- these onetime or rather -- yes, onetime effects have been taken care of, going forward, should we expect to see positive gross margins? Philipp Stratmann: Yes. I think, as Bob stated in his remarks, several of the contracts are recently completed, had a lot of their costs already recognized due to GAAP impact with future revenues still to be reflected. So I think particularly on lease contracts or cocoa type contracts, if we're talking U.S. government, we're going to start seeing and working toward -- we're certainly working towards them. We should start seeing an improvement in the gross margin again as we move to larger scale deployments. . Unknown Analyst: Understood. And last question. The pipeline is also pretty strong and it has grown year-over-year, of course, but also quarter-over-quarter. Who are the kind of -- rather, what is the kind of competition that you are seeing for these potential sort of orders? And what confidence or probability do you assign to conversion of this $164 million pipeline into backlog? Philipp Stratmann: Yes. We recently stated -- we sort of largely completed the retooling of several parts of our team. That has included the commercial team, which now consists of many veterans of the U.S. armed forces. So that has enabled us to truly position the OPT suite of products, be that the underlying fixed assets or be that Merrows into the appropriate parts of the defense and security industry. And the same holds true, obviously, for private customers in the commercial industry. So it's -- we're seeing lots of collaboration in certain aspects of the industry. But competitively, I think OPT is positioned in a good place because we are going after a section of the market that isn't us heavily competed over as the big Navy fast interceptor, far-reaching, kinetic-type USVs. And that is enabling us to have, a, grow the pipeline, but also, b, gaining greater confidence in the conversion of that pipeline to backlog. Operator: Our next question has come from the line of Peter Gastreich with Water Tower Research. Peter Gastreich: Great. Thank you very much. Philipp and Bob, also congratulations on the great momentum in your pipeline and backlog. It's very encouraging. Just a few questions. A follow-up on the international defense engagements. Can you update us on the status of your defense engagements in Latin America? And are there any multi-asset opportunities there that are comparable and scaled to the DHS contract? Philipp Stratmann: Yes. Peter, absolutely. We recently completed several exercises in Latin America. One was in Brazil, and that was around Aramis, which was demonstrating the capabilities of our USV platforms as a broader tool in part -- for mine countermeasures over there. We also completed a submarine surgeon rescue exercise using 1 of our 8-foot WAM-V in Chile, where we demonstrated the ability to be launched from a manned asset from the Navy in order to locate in a simulated bottomed submarine. And we've got several discussions ongoing around buoys to be deployed for either underwater or surface surveillance operations. Can't comment on the specific countries or use cases where we have detailed dialogues ongoing. But it is fair to say that we continue at pace operating in Latin America and working on converting the backlog to meaningful revenues in the near future. Peter Gastreich: Okay. Just my next question is just about inventories. So you mentioned before about prebuilding buoys ahead of the contract awards to accelerate delivery. How should we think about your inventory strategy going forward? And does the balance sheet reflect additional prebuild activity for anticipated orders? Robert Powers: Peter, yes, absolutely. So you can see a little bit of a growth on our balance sheet versus where we were at the end of our fiscal 2025 and that absolutely reflects some buildup, particularly on the buoy side with regard to both current deliveries for what we have in our backlog as well as anticipated builds for what we see coming through in our pipeline. So, yes, you can expect to see more of that going forward. That is certainly part of our plan and strategy to build out that inventory in order to react quickly to our orders as they come in. Peter Gastreich: Okay. Just 1 more a question about your team. So can you discuss how your facility clearance and government-focused team are positioning you to expand beyond coast cards, potentially into other DHS components like CVP? And how is that pipeline developing? Philipp Stratmann: Yes. Absolutely, obviously with our SVP for commercial sales, Jason Weed, obviously, retired navy captain. And below him, we have a team of mainly Navy and other parts of the defense and security apparatus veterans. Given our clearance, that is enabling us to participate in conversations where there is real needs and real today use cases being discussed, which is positioning us to deliver for the hemispheric defense of our nation and to support our allies in other parts of the world. Operator: We have reached the end of our question-and-answer session. I would now like to hand the call back over to Philipp Stratmann for any closing comments. Philipp Stratmann: Thank you. Before concluding, I'd like to thank our shareholders for their continued support. Our team remains focused on executing our strategy, advancing our technology and delivering reliable solutions that meet the evolving operational needs of our customers. We believe our continued progress in strengthening the company's position in the market and building a solid foundation for long-term growth. We appreciate your support and look forward to updating you on our progress in the quarters ahead. Operator: Ladies and gentlemen, thank you so much. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
Operator: Welcome to the Williams-Sonoma, Inc. Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. A question and answer session will follow the conclusion of the prepared remarks. I would now like to turn the call over to Jeremy Brooks, Chief Accounting Officer and Head of Investor Relations. Please go ahead. Jeremy Brooks: Good morning, and thank you for joining our fourth quarter earnings call. Before we get started, I would like to remind you that during this call, we will make forward-looking statements with respect to future events and financial performance, including our annual guidance for fiscal 2026 and our long-term outlook. We believe these statements reflect our best estimates. However, we cannot make any assurances that these statements will materialize. Actual results may differ significantly from our expectations. The company undertakes no obligation to publicly update or revise any of these statements to reflect events or circumstances that may arise after today's call. Additionally, we will refer to certain non-GAAP financial measures. These measures should not be considered replacements for and should be read together with our GAAP results. This call should also be considered in conjunction with our filings with the SEC. Finally, a replay of this call will be available on our Investor Relations website. I will now turn the call over to Laura Alber, our President and Chief Executive Officer. Laura Alber: Thank you, Jeremy. Good morning, everyone, and thank you for joining the call. I am excited to talk to you today about our fourth quarter and our full-year 2025 results. In 2025, we delivered sustainable, profitable growth in a dynamic environment. This performance is a testament to strong consumer demand for our distinctive products and brands and our world-class team. In Q4, our comp came in at 3.2%. We drove an operating margin of 20.3%, with earnings per share of $3.04. We delivered these results despite no material changes in the macro environment and continued unpredictability around logistics and tariffs. Normalizing for the fifty-third week last year and the tariff impact this year, we delivered substantial operating margin improvements versus last year. As we look forward to 2026 and beyond, we are confident in our competitive advantages that have allowed us to take market share, and our focus is on widening that advantage. Just a few things on Q4 before we spend more time on the year and our outlook for 2026. In Q4 2025, we saw strength and momentum across our strong portfolio of brands and in our channels. Our retail teams drove a 4.3% comp in the quarter, and there was a continued acceleration in our gift-giving brands. Both Williams Sonoma and our Pottery Barn Children’s business outperformed, with Williams Sonoma driving a 7.2% comp and our children’s business driving a 4% comp. And West Elm continued to pick up the pace with a 4.8% comp. Finally, our DTC channel was strong due to an improved customer experience, continued personalization, and incredible service. Thank you to our team. They continue to find leadership in our industry across product, service, and disciplined execution. Turning to the full year, we outperformed the industry with a comp of 3.5%. We delivered an operating margin of 18.1%, and full-year earnings per share increased 1% to a record $8.84, with the internal and external expectations on both the top and bottom lines. And in fact, we raised our guidance twice during the year. Before we get into the year, let us talk about tariffs. The tariff landscape was uncertain and unpredictable in 2025. We expect it will remain that way in 2026. As we all know, policy can shift quickly. But as you saw in 2025, we have proven that we are resilient and capable of mitigation. As we look to 2026, we will continue to execute our mitigation strategies, which include vendor negotiations, resourcing where it makes sense, supply chain efficiencies, cost improvements, and select pricing actions. We will stay flexible and continue to adjust quickly as the tariff environment evolves. We entered 2025 with a focus on three key priorities: returning to growth, elevating our world-class customer service, and driving earnings. Let me highlight the progress we made on each of these priorities in 2025. Starting with growth, we have been focused on building growth strategies across our portfolio of brands. In 2025, we drove positive top-line comps in all of our brands, and even as full-price selling increased, we gained market share. We focused on newness and innovation in product and brand development. We are not just competing on price. We are really competing on, and winning on, authority, aspiration, quality, design, exclusivity, and service. Collaborations were also an important part of our growth strategy in 2025. These partnerships drove relevance and excitement. They continue to bring in new customers while increasing engagement with our existing customers. B2B was another standout for the year. In 2025, B2B grew 10%. We continue to win because we have paired design expertise with commercial-grade products and end-to-end service. That combination is a clear market differentiator in the B2B space. Our emerging brands also delivered strong performance in 2025, with double-digit comps all year. We have invested in the growth of our emerging brands with expansion in categories and new product development. Our ability to incubate and develop brands in a portfolio approach is one of our long-term advantages. Our second priority for 2025 is customer service, and we are very proud of our progress. Our goal stayed simple: to deliver the perfect order, on time and damage-free, every time. Our supply chain team focused on operational excellence every day. They made industry-leading progress again on supply chain delivery and customer service metrics. Also, we are pleased with our improved customer handling by both our teams and our AI capabilities. That brings me to our third priority, driving earnings. Our profitability in 2025 reflected strong execution across the company. We have maintained tight control on SG&A. We also stayed lean on employment with a focus on productivity. The implementation of AI helps by automating work and allowing our teams to do more with the same resources. We also extended AI more deeply across our e-commerce and operations platforms. For example, we extended personalization, deepened product discovery and ranking, and increased the influence of data-driven recommendations. These enhancements are improving relevance, engagement, and monetization efficiency across our brands. AI is also embedded in friction reduction, from smarter product discovery to accelerated checkout experiences, supporting stronger conversion and a more intuitive shopping journey. Beyond digital e-commerce, AI and advanced analytics continue to improve forecasting, routing logic, and customer service workflows, driving operational efficiency across our supply chain and care operations. What differentiates Williams-Sonoma, Inc. is how AI amplifies our proprietary data, vertical integration, and deep brand expertise. Because we control the full ecosystem, we can apply AI in tightly integrated and scalable ways. In summary, AI is delivering measurable impact today and strengthening our long-term competitive advantages. Looking ahead, we are confident in our competitive advantages. And as I said earlier, we plan to further widen our moat. We have a powerful portfolio of brands, an in-house design team that drives exclusive product and newness, a vertically integrated sourcing and supply chain model, and leading omnichannel capability. And underpinning all of this is our experienced leadership team, who knows how to execute. In 2026, our plan is centered on the same three priorities we laid out last year. We just changed the words “returning to growth” to “accelerating growth.” We are going to accelerate growth, deliver world-class customer service, and drive earnings. These priorities all relate to one another. Growth creates leverage in our operating model, and improved customer service drives loyal and satisfied customers. When the customer is happy, our costs go down, driving earnings. Let us start with growth. We are focused on four areas: brand growth, product pipeline, brand heat, and channel experience. First, brand growth. In 2026, we are focused on comp growth throughout the company, specifically accelerating the Pottery Barn comp and building on the momentum of the West Elm comp. We expect Williams Sonoma to continue performing well, supported by premium quality, authority in the kitchen, and strong seasonal storytelling. We are planning for growth in the children’s business, with baby and dorm as highlights. And our emerging brands will contribute meaningfully, led by Rejuvenation. Finally, B2B remains a major opportunity for growth. Second, product pipeline. In 2026, our product pipeline will include an increased level of product newness. We will increase newness by offering new collections, finishes, and design details that are timely, on-trend, and unique. Also, we will expand into proven collections that are built around newness that performed well last year, adding SKUs to add sales. We will also lean into advantaged growth categories that expand our reach and create new reasons for customers to shop with us. A great example is West Elm Office, our new collection of modern and flexible office furniture made with high-quality materials with endless configuration. We see other outsized opportunities for growth in dorm, baby, and certain Pottery Barn categories. And at Williams Sonoma, we will continue to expand our successful branded and exclusive assortment. This strategy increases differentiation and supports value and margin. Third, brand heat. We will continue to create excitement and buzz for our brands. First, collaborations will be a key driver, with all brands delivering double-digit sales growth in collabs. Second, we will increase our social and influencer partnerships, and we will improve our storytelling across our websites, emails, and catalogs. Our fourth growth initiative is channel experience. We will continue to improve how customers discover and shop our brands, and we will build on the momentum we have seen in both DTC and retail. In DTC, our plan is to accelerate growth with elevated discovery, both on-site and externally. We will also drive DTC-advantaged categories, and we will continue to use AI to create more personalized shopping journeys that improve engagement and conversion. In retail, we will build on momentum by expanding Take It Home Today, scaling Design Services 3.0, and investing in new stores, repositions, and relocations where the returns are compelling. Now turning to delivering world-class customer service. We have always been a leader here and will continue to raise the bar as we keep pursuing the perfect order, on time and damage-free, every time. We believe we have continued opportunity from supply chain efficiencies across distribution centers, shipping costs, returns, replacements, and damages. AI is a key enabler here. Our AI service initiatives are expected to further reduce call center escalations and accommodations while also improving inventory in-stocks and accuracy for customers. And we are expanding AI tools to enhance supply chain intelligence, including better visibility into inventory and shipping. Finally, driving earnings. In addition to regular price testing, we will continue emphasizing full-price selling and improving product margin by reducing markdown depth. We will also continue to drive sourcing efficiencies through vendor cost reductions, resourcing, and organizational productivity. We will stay disciplined in controlling variable costs, including employment and ad spend, and we will drive AI-enabled efficiencies, including savings in engineering costs, care center payroll, and creative costs. Turning to our outlook for 2026, our assumptions reflect what we know today. We are not building into our assumptions a meaningful housing recovery, and allowing for all the uncertainties we know are out there and that we have discussed, we are guiding comp brand revenue growth of 2% to 6%, with a midpoint of 4%, and operating margin in the range of 17.5% to 18.1%, with a midpoint of 17.8%. This outlook reflects our current initiatives and the tariff environment in place today. Now let us review our brands. Pottery Barn ran a negative 2.3% comp in Q4 after delivering positive comp in each of the first three quarters. While Q4 was disappointing, Pottery Barn ran a positive 0.4% comp on the year, and Pottery Barn’s two-year comp improved over the year. Different than other quarters, the percentage of our decorating assortment is larger in the fourth quarter, and that assortment relied heavily on last year’s program, and sales did not meet our expectations. While furniture was better, it was not enough to offset the softness in non-furniture. A highlight was our retail performance, which was strong in Pottery Barn, with customers responding to our inspirational stores and the in-person shopping experience. But DTC lagged. Retail tends to lower comp. As we look at 2026, we are focused on driving stronger growth in Pottery Barn, and we are working as a team on quarter-by-quarter strategy and execution. Pottery Barn is refocusing on its heritage aesthetic and strengthening its product pipeline. We are also optimizing the core assortment. We are building proprietary collections and creating more brand heat through collaborations, influencers, storytelling, and store events. And we are investing in both digital and retail, with a focus on conversion and personalization. The good news is that we are seeing better comp performance quarter to date. Now I would like to talk about part of our children’s business, which delivered a strong fourth quarter, running a positive 4% comp. For the full year, Kids and Teens delivered a positive 4.4% comp, with strength across both furniture and non-furniture. Collaborations and licensing remain key drivers, led by fashion favorite LoveShackFancy, and the launch of the NHL collection. Innovation was strong, and holiday gifting outperformed, driven by high-quality personalized gifts across life stages. As the largest specialty retailer of home furnishings for children, we see significant growth ahead. Our pipeline of new product introductions and continued collaboration growth is strong, and we are excited to launch Dormify in late April, which expands our reach in the college and dorm market and strengthens our position with the next generation of customers. Now let us talk about West Elm. West Elm had a positive 4.8% comp in Q4, accelerating from Q3, and delivered a positive 2.9% comp for the full year. I am proud to say that West Elm is officially on a roll. West Elm made improvements across products, brand, and channel excellence. New introductions in both furniture and non-furniture drove results, and the brand’s mix shifted meaningfully towards new products. In Q4, the brand delivered positive comps across the board. Retail also performed well in West Elm. When customers walked into the stores, they saw more newness and better availability, and that showed up in the results. The strength in the brand and at retail gives us confidence to return to store count growth, with five openings planned in 2026. Finally, collaborations have been a big part of the strategy at West Elm, and we could not be more excited than right now when we are launching our collaboration with Emma Chamberlain, a leading Gen Z voice known for authenticity and unique style. With over 14,000,000 Instagram followers, her collaboration with West Elm marks her first venture into the home space. If you have not seen it, be sure to check out the exciting personality-driven assortment which launched yesterday. Now let us review the Williams Sonoma brand. Williams Sonoma finished 2025 strong with a positive 7.2% comp in Q4 and a positive 6.9% comp for the year. The Williams Sonoma brand continued to outperform across the board. 2026 marks our seventieth anniversary. And at seventy years, this brand is not mature; it is gaining momentum. The core of our kitchen business is accelerating, and our pipeline of proprietary in-house design products and market exclusives continue to separate us from the competition. In Q4, customers came to us for holiday gifting, cooking, and entertaining. Also, Williams Sonoma has benefited from a strong gift assortment with products that perform, design that is distinctive, and assortments that reflect both who our customer is and who they aspire to be. 2025 was our biggest year ever for in-store events at Williams Sonoma. We held Skill Series classes on Sundays, and we hosted 120 celebrity chef and influencer book signings. Highlights from the events in Q4 included signings of Martha Stewart, Trisha Yearwood, and Wishbone Kitchen. We look forward to welcoming customers into our stores throughout 2026 with even more opportunities to learn, engage, and be inspired. Now I would like to update you on B2B. B2B had another record-breaking quarter at 13.7%, anchored by our largest contract quarter in our history. Both contract and trade delivered double-digit growth, and corporate gifting had its best quarter ever. We saw strength in our core hospitality and residential designer businesses, and we gained momentum in emerging verticals like higher education, sports, and entertainment. We also delivered several marquee projects, including the Waldorf Astoria Beverly Hills, Hilton Canopy in New York City, the Opryland Hotel in Nashville, multiple locations for WeWork, and corporate gifting for several premier clients, including the New York Yankees. For the full year, B2B grew 10%, and we exited the year with a strong pipeline heading into 2026. We remain excited about B2B as a growth engine. Now I would like to update you on our emerging brands, which continue to deliver strong growth and profitability. Rejuvenation had another quarter of double-digit comp growth, exceeding both our top-line and bottom-line expectations. Performance is driven by momentum in cabinet hardware, bath, and lighting, as customers remain highly engaged in project-driven purchases. Product innovation continued to build with high-quality, design-driven products, distinctive details, and customizable options. With only 13 stores and great online growth, we are thrilled for the progress in Rejuvenation, and we continue to believe in the potential for Rejuvenation to be our next billion-dollar brand. Mark & Graham finished 2025 also with solid momentum, driven by a record-breaking holiday season and positive comps. We entered 2026 well positioned with a focused pipeline of launches across key gifting occasions, reinforcing the brand’s growth opportunity ahead. And I cannot forget our newest brand, GreenRow. We are thrilled that on March 6, GreenRow opened the brand’s first store in Soho, New York. If you are in New York, I would encourage you to stop by and see it in person. The store truly captures the entrepreneurial spirit that exists in our company that allows us to bring new concepts to life and scale them profitably. We look forward to building the business of GreenRow in 2026 and beyond. Finally, I would like to talk about our global business. We continue to see strong performance across our strategic global markets, including Canada, Mexico, and the UK, through differentiated products, omnichannel enhancements, and growth in our design and trade businesses. We are particularly encouraged by the customer response to the launch of Pottery Barn in the UK. As we reflect on the year, oh, what a year it was. We had many highlights, and we had a lot of things coming our way that we did not expect. However, at Williams-Sonoma, Inc., we delivered. We delivered a strong operating margin and record EPS. Our powerful portfolio of brands, strong channel execution, and growth strategies drove our results in 2025. As we look to 2026, we are focused on accelerating this growth. We are focused on delivering world-class customer service, and we are focused on driving earnings. We are confident in our future growth strategy and our profit profile. Our company is competitively distinct with advantages that set us apart, with a team that delivers. And with that, I want to thank our teams again for their hard work and their commitment, and I also want to thank our vendors and our shareholders for their partnership and support. And with that, I will turn it over to Jeff to walk you through the numbers and our outlook in more detail. Jeff Howie: Thank you, Laura, and good morning, everyone. We are proud to have delivered another quarter of growth with strong earnings, despite the headwinds from tariffs and anemic housing turnover. In fact, we have generated consistently strong earnings for several years, and now, top-line growth for five consecutive quarters. That execution and momentum gives us confidence as we transition into fiscal year 2026. Our ability to perform quarter after quarter reflects Williams-Sonoma, Inc.’s competitive advantages in the home furnishings industry, including a powerful multi-brand portfolio spanning categories, aesthetics, and price points to meet customers where they are; meaningful size and scale enabling us to capture market share and capitalize on attractive white space opportunities; a differentiated multichannel platform that serves customers seamlessly across e-commerce, stores, and business-to-business; our relentless focus on customer service, which drives efficiency and cost savings across our supply chain; and finally, a proven operating model that consistently delivers highly profitable earnings. Now let us turn to the numbers and see how our competitive advantages and strong execution produce results. I will begin with our fourth quarter performance, then review our full-year fiscal 2025 results, and finish with our outlook for fiscal 2026. As a reminder, fiscal 2024 was a fifty-three-week year for Williams-Sonoma, Inc. For Q4 fiscal 2025, we are reporting comps on a comparable thirteen-week versus thirteen-week basis. All other quarter-over-quarter comparisons are thirteen weeks versus fourteen weeks. We estimate the additional week in Q4 fiscal 2024 contributed 510 basis points to revenue growth and 60 basis points to operating margin. Q4 net revenues finished at $2.36 billion for a positive 3.2% comp. Positive comps in both our furniture and non-furniture categories drove our results, with our furniture trends accelerating from Q3. With the industry declining in the quarter, we gained market share even as we increased our penetration of full-price selling. From a channel perspective, both retail and e-commerce posted positive comps, with retail up 4.3% and e-commerce up 2.6%. Moving down the income statement, Q4 gross margin was 46.9%, down 40 basis points versus last year. The main driver of our lower gross margin was a 170 basis point decline in merchandise margins as the impact of higher tariffs flowed through our weighted average cost of goods sold. Occupancy costs contributed another 80 basis points to the deleverage, largely related to the fifty-third week. Partially offsetting these headwinds were shrink and supply chain efficiencies. Shrink added 160 basis points due to favorable year-end physical inventory results, and supply chain efficiencies added an additional 50 basis points. Our relentless focus on customer service continued to produce margin benefits from reduced returns, accommodations, damages, replacements, and shipping expense. Continuing down the income statement, Q4 SG&A was 26.6% of revenues, up 80 basis points versus last year. The main driver of the 80 basis points deleverage was general expense, which was up 120 basis points from last year. This increase was due to our lapping of an indirect tax resolution and a favorable insurance settlement in last year’s results. Employment and advertising expense leverage partially offset the impact from general expense. Employment expense leveraged 30 basis points, primarily due to lower variable labor costs across our distribution and customer care centers. Advertising expense was 10 basis points lower. Our in-house marketing team optimized spend while driving a quarter-over-quarter acceleration in e-commerce comps. On the bottom line, Q4 operating margin was 20.3%, down 120 basis points versus last year. Diluted earnings per share were $3.04 per share. Turning now to our full-year fiscal 2025 results, there are two items in fiscal 2024 that I want to remind you about. First, in 2024, we recorded a $49 million out-of-period adjustment related to freight accruals from prior years. This benefited fiscal 2024 operating margin by approximately 70 basis points. Second, the fifty-third week in fiscal 2024. For the full year, we are reporting comps on a comparable fifty-two-week versus fifty-two-week basis. All other year-over-year comparisons are fifty-two weeks versus fifty-three weeks. We estimate the additional week in fiscal 2024 contributed approximately 150 basis points to revenue growth and 20 basis points to operating margin on full-year results. Full-year 2025 net revenues were $7.8 billion at a positive 3.5% comp. All brands posted positive comps for the full year, driven by growth across both our furniture and non-furniture categories. From a channel perspective, both channels contributed to the strength, with retail up 6.4% and e-commerce up 2.2%. E-commerce was more than 65% of total revenues for the year. Full-year gross margin was 46.2%, a 30 basis point decline versus the prior year. The decrease was primarily driven by the 70 basis point impact from the prior-year out-of-period freight adjustment, a 40 basis point reduction in merchandise margins related to tariffs, and 20 basis points of occupancy deleverage. These pressures were partially offset by 50 basis points of supply chain efficiencies and 50 basis points of benefit from favorable shrink results. Full-year SG&A expense increased 10 basis points to 28%. Advertising expense leveraged by 30 basis points, partially offset by deleverage in employment and general expense. Employment deleveraged by 20 basis points due to higher performance-based incentive compensation, while general expense deleveraged by 20 basis points as we lapped the prior-year indirect tax resolution and the favorable insurance settlement mentioned previously. On the bottom line, full-year operating margin finished at 18.1%, 50 basis points lower year over year. Diluted earnings per share achieved a record $8.84, up 1% year over year. Turning to the balance sheet, we ended the quarter with over $1 billion in cash and no outstanding debt. Merchandise inventories were $1.5 billion, up 9.8% year over year. Included in year-end inventory is approximately $80 million of embedded incremental tariff costs. Excluding these tariff-related costs, inventories would have been in line with sales growth. Overall, we believe our ending inventory levels and composition are well positioned to support our fiscal 2026 guidance. Turning to cash flow and capital expenditures, we generated over $1.3 billion in operating cash flow in fiscal 2025. We reinvested $259 million in capital expenditures to support our long-term growth and delivered an industry-leading 51.6% return on invested capital on that spend. This resulted in $1.1 billion of free cash flow, and we returned nearly $1.2 billion to shareholders in fiscal 2025. That return included share repurchases of $854 million, or 4% of shares outstanding, at an average price of $174.70. Additionally, we delivered $316 million in dividends to our shareholders, reflecting a 13% year-over-year increase. Wrapping up my fiscal 2025 remarks, we are proud to have delivered growth and strong earnings for our shareholders despite the headwinds from tariff policy and anemic housing turnover. These results are a direct reflection of the exceptional talent and dedication of our team at Williams-Sonoma, Inc. I want to thank our team for their hard work and for delivering such strong performance. Now let us turn to fiscal 2026. The macroeconomic, geopolitical, and tariff environment remains uncertain. As we have demonstrated, we know how to navigate uncertainty and deliver consistently strong earnings. As we look ahead to fiscal 2026, we see significant opportunity to not only deliver strong earnings but, more importantly, accelerate top-line growth. Our guidance assumes no meaningful changes in the macroeconomic environment or housing turnover and does not include any benefit from the OB3 tax legislation. Our focus remains on what we can control: accelerating growth, delivering world-class customer service, and driving earnings. We expect fiscal 2026 net revenue comps to be in the range of 2% to 6%, with total net revenue growth of 2.7% to 6.7%. We expect operating margin to be in the range of 17.5% to 18.1%. On the top line, our guidance reflects our confidence in our strategies. We remain focused on accelerating growth through our compelling product lineup, continued investment in collaborations, and disciplined execution across our growth initiatives, including dorm, Rejuvenation, and business-to-business. And if there are more favorable macro conditions, we see potential upside to that growth. On operating margin, our guidance reflects our best estimate of the tariff impact on fiscal 2026 results based on three key assumptions. First, it reflects our estimate of how tariffs already paid and those we expect to pay in fiscal 2026 will flow through our weighted average cost of goods sold. As higher tariff costs are embedded in our inventory, we expect the impact on operating margin to be front-half weighted and then moderate over the balance of the year. Second, our guidance assumes that all tariff rates currently in effect remain in place for the balance of fiscal 2026. This includes the Section 232 tariffs, the current Section 301 tariffs, and the Section 122 tariffs at the announced rate of 15%. While the Section 122 tariffs are currently set to expire in July, our guidance assumes they will be replaced with tariffs at a similar rate. Third, our guidance does not contemplate any refund of UFLPA tariffs, given the uncertainty around both timing and process. It is important to recognize that tariff policy has been volatile and subject to multiple revisions. Given the ongoing uncertainty, it is impossible to say where tariffs will ultimately land and difficult to determine what impact they will have on our business. Our guidance reflects our best estimates based on the tariffs in place as of this call. As tariff policy changes, we may need to update our guidance. Turning now to capital allocation, our fiscal 2026 plans prioritize funding our business operations while continuing to invest in long-term growth. We expect to spend approximately $275 million in capital expenditures in fiscal 2026. About 95% of that investment will be focused on strengthening our e-commerce capabilities, optimizing our retail fleet, and driving supply chain efficiency. A key shift in the plan is a near doubling of capital investment in retail, reflecting the meaningful opportunity we see to accelerate growth through retail stores. Our stores are a competitive advantage—powerful brand billboards—to drive profitable sales. Our free interior design services continue to differentiate us. More than half of retail sales involve a design appointment, helping drive the 6.4% retail comp we delivered in fiscal 2025. We will remain disciplined, continuing to close underperforming stores that do not meet our profitability thresholds. In fact, since 2019, we have closed about 18% of our fleet. Starting in fiscal 2026, we are investing to drive more retail growth in two ways. First, we will continue repositioning stores from older malls into more vibrant lifestyle centers. We expect to complete 19 repositions in fiscal 2026—more than we have done in any single prior year. Second, we expect to open 20 new stores in fiscal 2026, primarily across West Elm, Williams Sonoma, Pottery Barn Kids, Rejuvenation, and our first two GreenRow locations. These expected 20 store openings represent our most openings in a decade. Every project meets our strict profitability and return on investment criteria. We expect to end fiscal 2026 with approximately the same store count as we ended fiscal 2025 due to store closures. After fiscal 2026, we anticipate store count growth in the years that follow of approximately 1% to 3% per year. Embedded in our fiscal 2026 guidance is approximately 70 basis points of non-comp growth from this real estate activity. Turning now to our commitment to returning excess cash to shareholders through a combination of increased dividends and ongoing share repurchases, on dividends, today we announced that our Board of Directors authorized a 15% increase in our quarterly dividend to $0.76 per share. Fiscal 2026 will mark our seventeenth consecutive year of dividend increases, an achievement we are proud of and remain committed to sustaining. On share repurchases, we have $1.3 billion remaining under our current authorizations, and we will continue to repurchase shares opportunistically as part of our disciplined approach to delivering shareholder returns. Looking beyond fiscal 2026, we are reiterating our long-term outlook for mid- to high-single-digit revenue growth and operating margins in the mid- to high-teens. It is worth noting that the high end of our 2026 guidance falls within our long-term outlook. Wrapping up our comments, we are proud to deliver strong results for our shareholders. As we look ahead, we are focused on accelerating growth, delivering world-class customer service, and driving earnings. We are confident we will continue to outperform our peers and deliver shareholder returns for these five reasons that remain consistent: our ability to gain market share in the fragmented home furnishings industry; the strength of our in-house proprietary design; the competitive advantage of our digital-first but not digital-only channel strategy; the ongoing strength of our growth initiatives; and the resiliency of our fortress balance sheet. Before we open the line for questions, I would like to mention that our 2026 investor presentation has been released and is available on our Investor Relations website. I encourage everyone to have a look. With that, I will open the call for questions. Operator: We will now begin the question and answer session. To ask a question, press 1 on your telephone keypad. To withdraw your question, press 1 again. We ask that you please limit your questions to one and one follow-up. Our first question will come from the line of Chuck Grom with Gordon Haskett. Please go ahead. Chuck Grom: Hey, thanks. Good morning. Congrats on a great year. Laura, can you talk about the opportunities for store growth in 2026 and beyond, particularly as you incubate new concepts, especially Rejuvenation? Also, how are you thinking about expanding B2B over the next few years? And then, Jeff, any hand-holding on margins and phasing throughout the year in addition to the tariff commentary? Laura Alber: Thanks, Chuck. I probably jammed—yeah. Good morning. Good morning. It is that coffee, Laura. Yeah. I have had coffee. Thank you. I love this store question because it is a big pivot for us. We have been talking about our optimization strategy at retail and focusing on, you know, more profitable stores and, you know, all the moves we have made. And we have been reducing our fleet, and now as we look forward, we do not see that as what our future holds. We see—actually, this year is an inflection point, and we are going to be net neutral at the end of the year. So we have the most new store openings that we have had in many years—over a decade. Over a decade. Yeah. So even better than that. And so we are opening this year 20 new stores, 18 repositions, net flat. And, you know, we see growth in West Elm. We have growth in Pottery Barn Kids. We have, you know, embedded opportunity in Rejuvenation. We shall see about GreenRow. You know, we opened our first store like two weeks—we will see how that works. We have another one on the docket that we will open later this year. And, you know, there are more kids’ stores open now. So we are excited about that change in trend and how profitable our stores are and how good they look. It is a big deal for us in terms of our growth algorithm. Second question on B2B. As you look at the macro and think about all the different opportunities, it is one that is continuing to be the outsized opportunity. And we had great growth last year, as you saw and you heard in our prepared remarks. And I think it is going to be better this year, frankly. You know, I love seeing the contract outpace the trade because it is more repeat business. And, you know, the combination of all the things that we do together gives us a competitive advantage. And I just think we have the best sales team in retail selling our B2B. Then I will hand it back to Jeff on margin. If you want to make a comment on the other two, that is great too. Jeff Howie: Well, I think, Laura, they are both Rejuvenation, retail, as well as B2B. They are all good examples of how we are really focused on accelerating growth. And we see a meaningful opportunity to do so in fiscal 2026 as we have guided. And I think Laura touched on those high points. I will say, Chuck, I am impressed—you got three questions in one. Diving right into the operating margin guidance for next year, regarding operating margins to be in the range of 17.5% to 18.1%. And, really, tariffs are the big story here. I think everyone knows that. And there are three things to consider when we think about how tariffs are going to impact our operating margin in 2026. The first is the tariffs we have already paid that are embedded in our inventory costs. Those will take a little while to flow through into our weighted average cost. The second thing to consider is the tariffs we are going to pay at the newer rates that have been announced. And then finally, it is just the uncertainty of the environment. So there are really three key assumptions that we have shared about how all these tariffs are going to flow through our operating margin. The first and most important thing to understand is it is not about a blended tariff rate. It is about how the tariffs flow through our weighted average cost of goods. And that is, you know, really a function of the costs that we ended the year with that are embedded in our inventory. And as we said in our prepared remarks, we expect the impact on our operating margin will be front-half weighted—heavily front-half weighted—and then moderate over the balance of the year as we start to comp the impact of tariffs in last year. And second, our guidance assumes all tariff rates currently in effect remain in place for the balance of fiscal 2026. Just to be clear, this includes the Section 232 tariffs, the current Section 301 tariffs, and Section 122 at what the administration has announced is 15%. And while we know the Section 122 tariffs expire in July, our guidance assumes it will be replaced with tariffs at a similar rate when they expire. And the third piece, and I will just say this—I think it is a given—but our guidance reflects our best estimates of the tariff impact based upon the tariffs in place as of this call. As we all know, tariffs have been subject to multiple revisions, and it is impossible to say where tariffs will ultimately land and what impact it will have on our business. Taking a step back, I think what we would observe is, you know, in 2025, we demonstrated we could navigate the tariff uncertainty and deliver consistently strong earnings. And regarding that, we believe we can do so again in fiscal 2026. Operator: Our next question will come from the line of Peter Benedict with Baird. Please go ahead. Peter Benedict: Hey, guys. Thanks for taking the question. So I guess one question would just be around, with the pivot to retail growth, you mentioned design services—you mentioned Design Service 3.0. I was curious if you could maybe expand on that. What is changing? What is different there? That is my first question. Laura Alber: So, you know, we have been really building our services in the percent charge almost, and we have told you how big that has been in part of our—the other brands that continue to have opportunity at that percent total. And in addition to purchasing homes with the big pieces, like furniture, we have been adding the second layer of accessories. And that was really two out of for us and all the accessories that go with, and then all the holidays that go with. The biggest option that we see in the future for design services is how we are going to use AI, and how we are going to put it in the hands of our sales associates to better decorate their homes. There is so much that we are doing with content and design services and Outward, and the combination of all that together with our people. And I will let Sameer Hassan mention a few things about that. Sameer Hassan: Yeah, thanks, Laura. It is just really exciting, the progress that we are seeing on the AI front. You heard Laura talk earlier in the prepared remarks about our strategies, and we are only starting to see it accelerate. And what is really exciting about what we are seeing with the evolution of AI and how customers are using it, how they are engaging with it, is that it really starts to play to our strengths as a business. AI works well when you have category authority. AI works well when you have expertise. And as customers are using it to find where there is value, where there is quality, where there are designs that meet their goals, both off our sites within these LLM engines, but also now on our site, as we are building these AI tools to help guide them through product discovery, to guide them through interior design—you have probably seen what we have launched with Olive on the Williams Sonoma site as a culinary authority to help customers with real problems and connect the dots between inspiration, between guidance, and ultimately towards shopping. So we are really excited about the progress we have made on the AI front, and we are really excited about what is yet to come. Operator: Our next question will come from the line of Oliver Wintermantel with Evercore ISI. Please go ahead. Oliver Wintermantel: Yes, thanks, and good morning. Could you maybe talk a little about quarter-to-date trends—if you have seen any disruptions from the winter storms? We heard some other retailers said that there was a disruption. But, Laura, I think you said Pottery Barn is actually off to a good start quarter to date. So maybe some details on that, please. Laura Alber: Yes. Good morning, Oliver. So yes, of course, there have been some disruptions in the winter, but, you know, it did not really materially impact our results. And, you know, there is always some weather someplace—always impacts us in one way or another, particularly this time of year—but it is not a big factor. In terms of what we are seeing quarter to date, as you know, we do not provide a lot of quarter-to-date commentary. We are not seeing any big impacts from anything. You know, our consumer continues to be resilient, and it is hard to say exactly where we are going to be there. And, you know, Easter is ahead of us. There is another Easter shift this year. But everything that we know today is embedded in our guidance. Operator: Our next question comes from the line of Kate McShane with Goldman Sachs. Please go ahead. Kate McShane: We wanted to ask about the real estate strategy, just in terms of the two strategies of moving to more vibrant locations and the opening of 20 new doors. Just what it means for your occupancy costs in 2026, and will you be able to leverage a higher occupancy cost at that 4% comp at the midpoint? Jeff Howie: Good morning, Kate. Good question. I think as you know, we do not guide individual lines like occupancy or even gross margin or SG&A. I think the story on retail is one really about growth, and we are seeing a meaningful opportunity to drive growth through our retail stores. And look, we delivered a 6.4% comp in retail in fiscal 2025, and we did so very profitably. And that is really because of what we talked about. First, our design services are a competitive advantage, and our customers are telling us that they love it and responding with opening up their pocketbooks. The second thing is the product we are delivering. We have really added the newness that we have been talking about in the past several calls to those stores, and we have improved the inventory position in those stores. They are really performing very well. And the third part of why we are delivering such strong comps and why we are confident in investing in the future is just the performance. I mean, the performance they have delivered, and it is really a function of the retail repositioning strategy that we have been through. So although this is a pivot, we are still going to be very disciplined. We will continue to close underperforming stores that do not meet our profitability thresholds. But we do see a meaningful opportunity to expand from here. Stores that we have repositioned from tired, older indoor malls to these more vibrant, high-traffic lifestyle centers have all seen substantial top-line comp improvements over their prior locations, as well as bottom-line improvements from less occupancy at that individual location. And that is why we are looking to do the most repositions this year that we have ever done. And then new stores—we are seeing meaningful opportunity there as well to go into white spaces in markets we are not in for certain stores, and there is a big opportunity there for us to continue that in the years ahead. Overall, we do not think it will have a major impact on our operating margin. It is embedded in our guidance that we have given today. But it is really a story about growth. And as we mentioned, you know, we will be flat at the end of this year in terms of store count. But as we look beyond 2026, we are guiding that we will increase our store count by 1% to 3% per year each year. Operator: Our next question will come from the line of Cristina Fernández with Telsey Advisory Group. Please go ahead. Cristina Fernández: Hi. Good morning, and congratulations on a good quarter and finish to the year. I had two questions. The first one is on Pottery Barn. As you look at the fourth quarter performance, I guess, how much of the disappointment was perhaps a lack of newness or the need to expand prices, and what changed in the first quarter to turn that from negative to positive? And then the second question is a follow-up on the tariff impact for the first half. Should we think about the fourth quarter pressure, the 170 basis points on the merchandise margin, as a good guide point for the first half? Or could it be higher given the mix of sales in the first half versus the fourth quarter? Laura Alber: Great. Thank you. So Pottery Barn, as you know, is a very strong, profitable, loved brand. And as I said in my prepared remarks, we are really happy to see the tier comps improving, and, in particular, stabilization in the furniture trend. As you all know, Q4 has a higher percentage of décor in Pottery Barn—substantially—than other quarters. And let us remember that, you know, post-COVID and housing flow, we were focused on decorating as a growth vehicle instead of furniture because people were buying garage furniture. Probably over-rotated a bit, to be honest with you. It reached an all-time high and saw a little bit of a giveback. But we also, you know, in retrospect, are self-critical. We are always looking for places to improve, and we probably had too much reliance on best sellers from last year, and we were not in it. And as we go into the first quarter and into the year, obviously the complexion of the categories changes back to be more balanced, and that is what is driving the improvement, we believe. Jeff Howie: All right. Now, transitioning to your second question on what we should think about in terms of operating margin in 2026. As you know, Cristina, we do not guide the individual quarters. But I will help you with the shape of the year. The big factor in the first half of the year is the embedded tariff cost we have already paid. We are on weighted average cost accounting, so it takes a little while for that to work through our operating margin. So as we have guided, the impact will be heavily weighted to the front half and then slowly moderate across the back half as the impact starts to wear off and we start to comp tariffs we paid last year. Operator: Our next question will come from the line of Jonathan Matuszewski with Jefferies. Please go ahead. Jonathan Matuszewski: Great. Good morning, and nice quarter. Laura, last quarter, you remarked that there were pockets of your assortment that remained underpriced. So how should we think about the magnitude of pricing that is embedded at the midpoint of 4% comps for the year? Thanks so much. Laura Alber: Well, I do not think about it like that. I mean, I think about the midpoint of range with the pricing. I would—I do not comment on the pricing, and then, Jeff, I do not know if you want to make a comment. But on the pricing, you know, whether it is, you know, because of tariffs or just all the time, we are constantly looking for the best price-value relationship and how to give our customers the winning combination that makes them buy from us. And the best thing we can ever do is give them a design they cannot resist at a fair price. Right? They can count on us for quality. They know that they are going to get great service. We have made such improvements with service, and we are also going to really help them because together with everything else in their house, which is a big deal because a lot of the other players, especially the online players, it is one-and-done, and you are not decorating. You are just buying an item—maybe for your garage. So in terms of pricing, there are pockets always where, gosh, we, because of something, blow it out, and we say, oh, it could have been a little higher, and, you know, think about that for next time and make adjustments. And there are some items and categories that are, we still think, undervalued. It is very competitive to open, so I do not really want to go through them all because I do not want to give that list of things to our competition to look at. But we do see some opportunity, and,you know, at the same time, look at the opposite too, which is, you know, where are we seeing an overpriced—as we get cost concessions, should we drive more units and take the price down slightly? So it is a pricing testing mindset in the company. We share it across brands and how pricing affects demand. Jeff Howie: Yes. I would just say, Laura talked about, when we think about pricing, it is category by category, SKU by SKU—really looking at each one of those categories, each SKU, and how is it compared to its competition. It is, for us, a little divorced from how we think about growth and how we think about our guidance. And that, you know, from that standpoint, what we are really thinking about when we look at guidance is we are looking at our trends. And last year, we delivered a 3.5% comp. And in fact, if you look at our Q4 results, our two-year comp accelerated, which we see as a positive indicator. And then we look at the confidence we have, the momentum we have with our growth strategies—you know, things like our white space opportunities that you have heard us talk a lot about, things like West Elm Office, which we launched in January; things like dorm; things like baby. We have white space opportunities that are going to be additive to our results. Then we have emerging brands. And we talked a lot about Rejuvenation. It is a brand that has been double-digit comps for over two years, and we just see continued opportunity to grow that. We think, over the long term, that can be a billion-dollar brand. We touched on B2B. It just delivered another double-digit quarter. It was up 14% comp. It had its largest quarter of contract volume to date. We exited the quarter with a very, very strong book of business and leads going into fiscal 2026. And then there is retail. We have talked a lot on the call about retail—it delivered a 6.4% comp in 2025, and we see meaningful opportunity to expand that. So when we think about our comp range and the midpoint of our comp guidance, which is a 4.0, it is really about our strategy and how we think that we have momentum behind our business. And the fact of the matter is we are taking market share in this industry, and we see an advantage to and ability to leverage our competitive advantages and take even more market share. Operator: Our next question will come from the line of Max Rakhlenko with TD Cowen. Please go ahead. Max Rakhlenko: Great. Thanks a lot. So first, Laura, can you speak to the health of the consumer and their willingness to stomach tariffs in the category? And just what is your take on the industry’s ability to maintain higher prices if tariff pressure does end up easing? Then, Jeff, just quickly, any more color on the shrink benefit that you saw in the quarter? Should that continue into next year, and just how to think about that? Laura Alber: Makes sense. In terms of the consumer, I can only comment about what we are seeing. You know, I am reading and hearing that other people are saying very different things, and you can see a lot of stepped-up promos in the competition. And so a lot of, like, flight-wise with “20 off” here and “20 off” there. And that is typically for a lot of the kind of smaller companies that are trying to be sold or that are—they are trying to, you know, establish themselves. They are playing that promo game. There is no sizable new entrant that we are seeing in the market. But I can comment that our customers are responding to our aesthetic, our newness, our collabs. They love them. Do not know if you got a chance now to look at what we are doing with Emma Chamberlain and West Elm. That is the kind of thing that they are delighted by. I mean, she has 14,000,000 followers—so fun. She is such a great marketer, and the product is really, really easy to buy. And that is how we are making the weather happen in our brand—is stuff like that. Furniture is single to us. I said that. B2B is growing. So, you know, we are seeing nice response from our consumers. But, you know, it is something you take for granted. Right? Every corner, every brand, we have strategies to improve the product line, to improve the mix, to improve our value equation, to improve our service, and to drive brand heat. And that is a big part of who we are and why we continue to deliver. Second part of your question on shrink. Jeff Howie: Simple. After completing physical inventory and reconciling all the inventory accounts, we had minimal shrink. And the thing is—and you have been doing retail for a long time—you simply never know until you take physical inventory and reconcile everything. And we attribute the favorable shrink results to ongoing supply chain improvements and fewer returns—fewer damages, fewer replacements, fewer last-mile shipping issues, better set-line inventory—and we think that is finally coming through in terms of physical inventory results. In terms of what it means for 2026, it is not a material driver, and any impact of shrink is embedded in our guidance. Operator: Our next question will come from the line of Brian Nagel with Oppenheimer. Please go ahead. Brian Nagel: Nice quarter. Congratulations. Nice year. Congratulations. I have two questions. I guess one is kind of short term and then maybe a longer-term one. So Jeff, on the short-term side, going back to prepared comments, there seemed like there were a lot of—if you look at gross margin—there were a lot of kind of one-off items here in the fourth quarter. I guess the question I want to ask is, how should we think about, as we look at fourth quarter gross margin—is there a way to frame if it was a normalized, I guess, year-over-year change? And then as we look into 2026, recognizing you do not give specific guidance, how should we think about kind of the puts and takes on the gross margin side? Jeff Howie: Yes, Brian, it goes back to what I have been saying in the call and the prepared remarks. When we think about the drivers of operating margin—and it flows a little bit through the gross margin—it really comes down to how the tariffs are going to impact us in 2026. And like I said, there are three pieces here. One are the higher tariff costs we have already paid that are sitting on our balance sheet that have to work their way through our weighted average cost. Then there are the tariffs that we are going to pay in 2026. And then, you know, we do comp somehow later in the year—as we head into Q3, Q4, we start to comp the tariffs. When you put all that together, our guidance is that the impact of tariffs on operating margin will be heavily front-half weighted and then moderate over the balance of the year as we start to comp it and the impact of the embedded tariffs works their way through our weighted average cost. Operator: Our final question will come from the line of Zach Fadem with Wells Fargo. Please go ahead. Zach Fadem: Hey, good morning. So just a couple more on the gross margin line. First of all, Jeff, what is the weighted average tariff rate today, and how has that changed over the last two quarters? And second, can you remind us how your freight contracts renew—how should we think about the impact of higher freight and oil today? Jeff Howie: I will take the second one first. In the way higher oil costs are impacting our transportation costs, I would just simply say it is very early, and it is a little difficult to tell how this plays out. I think we would all agree there is a lot of uncertainty about what is happening geopolitically in the world and what that means for price of oil and how it trickles through transportation. We are seeing some noise out there of higher prices. But overall, it is—all what we know today is embedded in our guidance. And it is such an area of uncertainty that our estimates we are providing today are just what we understand is going to happen. In terms of gross margin, remind me what your question was. Zach Fadem: Tariff rate today and how that has changed over the last two quarters? Jeff Howie: You know, we are not going to provide the specific tariff rate. As everyone has heard me say, we are not going to go up and down on the basis points or specific tariff rates every single quarter simply because it has been changing so much that every time there is a change, every time there is a tweak, it is going to be virtually impossible to get on the phone with everyone explaining the latest permutation. Our guidance assumes that the higher tariff rates that we paid in fiscal 2025 that are remaining in our balance sheet flow through our weighted average cost. So from that standpoint, it is still pretty high because those costs are still embedded in our inventory. But they will work their way through our weighted average cost of goods, primarily in the front half of the year. And then, as we said, the impact on our operating margin will moderate as we get through the back half of the year. Laura Alber: And I would like to just comment a little bit on the cost of the war. Again, you know, as Jeff said, there has been no huge cost increase that we have seen as of yet. We have seen some transportation costs increase, you know, on air, for example, and we have seen some domestic rates increase as well. But that is not material yet. We have not put in our guidance a material cost increase over the year that would come from cost of goods going up substantially or transportation going up substantially. So remember that, you know, we are not sailing in the Suez support routes. Thank God. And we have not actually seen our shipping times affected yet. So we have not seen either supply chain delays as of yet. But as we all know, we cannot predict this. So we suggest what we think—we have done the best job we can putting into our guidance a reasonable estimate, and we do not have a crystal ball on what this could mean longer term. What we are focused on, as you guys know, in wrapping this up, is really how do we deliver in any environment. And you have seen us do this with the same experienced management team, you know, through COVID, post-COVID giveback, and now through all this geopolitical uncertainty and tariff chaos. And, you know, it is noisy out there, but we tend to be able to handle it better than most and be ahead of it. And so we will take it as it comes, and we will continue to update you. Operator: This concludes the question and answer session. I will hand the call back over to Laura for any closing comments. Laura Alber: Thank you all. Hope it is getting warmer across the country. All of you—and some sunshine is out—and please go visit our stores and see what we are doing. We appreciate your support, and we cannot wait to update you throughout the year. Thank you. Operator: This concludes today’s call. Thank you all for joining. You may now disconnect.
Operator: Good day, and welcome to the One Stop Systems, Inc. fourth quarter 2025 earnings conference call. Later, we will have the opportunity to ask questions during the question-and-answer session. As a reminder, this call is being recorded. As part of the discussion today, the representatives from One Stop Systems, Inc. will be making certain forward-looking statements regarding the company’s future financial and operating results, including those relating to revenue growth, as well as business plans, bookings, the company’s multiyear strategy, business objectives, and expectations. These statements are based on the company’s current beliefs and expectations and should not be regarded as a representation by One Stop Systems, Inc. that any of its plans or expectations will be achieved. Please be advised that these forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and that One Stop Systems, Inc. desires to avail itself of the protections of the safe harbor for these statements. Please also be advised that actual results could differ materially from those stated or implied by the forward-looking statements due to certain risks and uncertainties, including those described in the company’s recent Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and recent press releases. Please read these reports and other future filings that One Stop Systems, Inc. will make with the SEC. One Stop Systems, Inc. disclaims any duty to update or revise its forward-looking statements except as required by applicable law. It is now my pleasure to turn the conference over to One Stop Systems, Inc. President and CEO, Michael Knowles. Please go ahead, sir. Michael Knowles: Thank you, Sylvie. Good morning, everyone, and thank you for joining today’s call. 2025 was a defining year for One Stop Systems, Inc. and reflects the successful execution of a multiyear strategy to reposition the company around high-performance, ruggedized compute platforms that enable artificial intelligence, machine learning, and sensor processing at the edge. During the year, we saw that strategy translate into meaningful financial and operational progress. The strength of our performance throughout 2025 also created an opportunity to take an important strategic step for the company. In December, we completed the opportunistic sale of our wholly owned subsidiary Bressner and received proceeds of $22.4 million, subject to final closing working capital balances. One Stop Systems, Inc. acquired Bressner on October 31, 2018 for approximately $5.6 million, and we believe this transaction unlocks significant value for One Stop Systems, Inc.’s shareholders. While Bressner had been an important part of our history, the progress we made across One Stop Systems, Inc.’s core business positioned us to evaluate this asset from a position of strength. When we received an attractive offer for the business, we viewed it as a compelling opportunity to unlock that value, simplify our operating structure, strengthen our balance sheet, and concentrate our resources on the higher-margin, higher-growth, rugged enterprise-class compute opportunities that are driving the next phase of One Stop Systems, Inc.’s growth. As a reminder, following the transaction, Bressner’s historical financial results are now reported as discontinued operations, and the results we are discussing today reflect the performance of the core One Stop Systems, Inc. business. This transition effectively positions One Stop Systems, Inc. today as a pure-play provider of ruggedized AI compute platforms for edge applications. As a result, One Stop Systems, Inc. enters 2026 as a more focused company centered entirely on delivering high-performance compute solutions for both defense and commercial markets. With that strategic foundation in place, we exited 2025 with a strong fourth quarter performance, including revenue growth of more than 70% year-over-year, record quarterly gross margins of 58.5%, and positive net income from continuing operations of $2 million. These results reflect growing demand for our technology across both defense and commercial markets, as well as the benefits of operational improvements and product focus we have implemented over the past several years. So with that context, I would like to walk through several of the key developments that drove our performance in 2025 and discuss why we are excited about the opportunities ahead in 2026 and beyond. Turning to the operational progress we made during the year, we continue to see strong momentum as customers increasingly adopt our rugged enterprise-class compute platforms. As a result of our strong fourth quarter performance, full year 2025 revenue came in above the high end of our previously communicated guidance range of $30 million to $32 million. The quarter benefited from favorable customer demand and strong operational execution, which allowed us to complete several shipments earlier than originally anticipated, contributing to a stronger-than-expected finish to the year. Overall, demand for high-performance computing at the edge continues to expand as AI, ML, autonomy, and sensor fusion become central to next-generation defense and commercial systems. One Stop Systems, Inc. is uniquely positioned at the intersection of these trends, where customers require powerful compute solutions that can operate reliably in demanding environments outside of traditional data centers. One example of this is the continued development of our solutions on the P-8 Poseidon aircraft, a long-range, multi-mission maritime patrol aircraft used for anti-submarine warfare, surveillance, and reconnaissance operations. To date, One Stop Systems, Inc. has secured more than $65 million in total contracted revenue associated with the P-8 program, including over $23 million awarded since the beginning of 2025. These awards reflect the continued expansion of the platform and the growing role our rugged storage solutions play in enabling the aircraft’s critical mission systems. Most recently, we announced $10.5 million in new awards from the U.S. Navy and a leading U.S. defense prime, which represent the largest aggregate orders we have received to date tied to the P-8 program. Importantly, these awards are expected to contribute to revenue in 2026 and continue into 2027, providing continued visibility into future program revenue. The P-8 remains one of several multiyear programs that demonstrate the durability of One Stop Systems, Inc.’s platform strategy and the increasing demand for rugged, high-performance compute infrastructure supporting next-generation defense systems. Another example of our expanding defense presence is our growing partnership with Safran Federal Systems, one of the world’s leading high-technology defense contractors. During the fourth quarter, we received a $1.2 million follow-on production order from Safran for rugged 4U short-depth servers supporting naval and aircraft military applications. This order followed an earlier award in 2025 and brought the current aggregate order value to approximately $1.9 million. Based on the early success of the program and expanding platform requirements, we now expect this relationship to generate more than $7 million in cumulative production orders over the next five years, highlighting the potential for continued growth as the program scales. More importantly, we believe there are additional opportunities to deploy our solutions within Safran as the requirement for compute power grows across their defense systems. The last defense program I want to highlight today involves next-generation enhanced vision and sensor processing systems for U.S. Army combat vehicles. In January 2026, we announced a new agreement with a leading U.S. defense prime contractor to design and develop ruggedized integrated compute and visualization systems to deliver an enhanced vision system to augment vehicle driving and maneuverability. This program involves GPU-accelerated sensor processing systems designed to ingest and process real-time video and sensor data, enabling improved situational awareness and object recognition for vehicle crews operating and maneuvering in complex environments. Importantly, this engagement deepens our relationship not only with the U.S. Army’s research and development labs but also with the defense prime contractor, which we believe further validates our capabilities. Our existing 360-degree situational awareness program remains under testing and evaluation with the U.S. Army, while this enhanced vision system represents a separate development initiative expected to undergo initial testing at the Army Ground Vehicle Systems Center in late 2026. While both programs are in the early stages, we believe they represent two potentially transformative opportunities as the Army continues to modernize its vehicle fleet with AI-enabled sensor fusion and autonomous capabilities. We believe our work supporting both the U.S. Army’s innovation lab and a leading defense prime to support next-generation vision and sensor processing systems showcases our best-in-class technologies and strong position on this emerging platform. These programs highlight the company’s growing role at the intersection of several key trends shaping next-generation defense systems. Modern military platforms are rapidly integrating artificial intelligence, sensor fusion, and real-time data processing to accelerate decision-making on the battlefield. Enabling these capabilities requires powerful, rugged computing infrastructure designed to operate at the tactical edge, often in highly constrained, mission-critical environments. As global defense opportunities continue to emphasize situational awareness, autonomy, and data-driven operations, we believe One Stop Systems, Inc. is well positioned to support these evolving requirements. Our rugged and scalable enterprise-class compute platforms are designed specifically for demanding environments, and we believe the growing adoption of AI-enabled systems across defense platforms creates a significant opportunity for One Stop Systems, Inc. in the years ahead. Beyond defense, we are also seeing increasing adoption of our rugged enterprise-class compute platforms across a growing number of commercial applications that require the types of powerful capabilities that we provide. In February 2026, we announced a new engagement with a commercial robotics customer manufacturing autonomous construction and mining equipment. For this application, One Stop Systems, Inc. was selected to support advanced robotic systems designed to operate in complex real-world environments. Importantly, we were able to win this program by displacing an incumbent solution, highlighting the strength of our technology and the value customers place in our ability to deliver high-performance compute capabilities in demanding edge environments. Robotics platforms increasingly rely on powerful compute infrastructure to process large volumes of sensor data, enable real-time decision-making, and support autonomous operation. These systems require reliable, high-bandwidth, and low-latency compute solutions capable of operating outside of traditional data center environments. We believe this engagement highlights a broader trend we are seeing across the commercial market where emerging autonomous use cases are creating real and growing demand for rugged, high-performance compute infrastructure at the edge. Another example of our expanding commercial opportunities is our engagement with a Canada-based integrator of passenger cabin systems for the commercial aerospace industry. During the year, we announced an initial $1.5 million order to supply lighting control units and column integration controller units designed for deployment across commercial aircraft platforms. These systems are DO-160 qualified, meeting the stringent environmental and reliability standards required for aviation applications, and are expected to support passenger cabin control systems across multiple aircraft deployments. We expect this program to generate approximately $6 million in revenue over the next three years, with recurring production orders as the platform continues to scale. Programs like this demonstrate how One Stop Systems, Inc. technologies are increasingly being adopted across regulated commercial platforms where reliability, performance, and long product life cycles are critical. Finally, we continue to expand our relationship with a leading medical imaging OEM where our compute platforms support advanced breast imaging systems designed to enable noninvasive cancer detection. During the year, we received a $2 million follow-on production order for our next-generation liquid-cooled compute systems, which have become the standard platform supporting this customer’s breast scanning devices. This award represents the transition of the program from a successful development phase into volume production. Based on the current production ramp, we expect this engagement to generate more than $25 million of cumulative revenue over the next five years, highlighting the potential for One Stop Systems, Inc. technologies to support next-generation medical devices. Programs like this demonstrate how the same high-performance compute capabilities we have developed for demanding defense applications are increasingly enabling innovation across commercial sectors such as healthcare. New and expanding relationships supported the strong demand we experienced throughout 2025 and set the stage for continued growth in 2026. Despite the year-long continuing resolution, delays in defense awards, and extended lead times for certain components, One Stop Systems, Inc. generated a book-to-bill ratio of approximately 1.2x, reflecting continued growth in defense and commercial customer orders. This level of demand provides an important indicator of the momentum we are seeing across our pipeline and supports our expectations for continued revenue growth in 2026 and beyond. Importantly, as we expand our presence across multiyear platform programs, we believe we have greater visibility into future revenue opportunities than we have historically had as a company. Alongside this momentum, we continue to invest in advancing our technology platform to support the next generation of AI-enabled systems operating at the edge. As a result, research and development remains a critical component of our strategy, and we continue to work closely with customers on customer-funded development programs that allow us to design and deploy new compute architectures tailored to emerging applications. These engagements not only strengthen our relationships with key customers but also create opportunities for future production programs as those technologies move from development into deployment. Many of the programs we discussed earlier today began as development efforts where we worked with customers to design highly specialized compute solutions for demanding applications. As those systems mature and transition into production platforms, they can create multiyear revenue opportunities for One Stop Systems, Inc. We expect higher levels of customer-funded development to occur in 2026, supported by new defense and commercial development efforts. At the same time, we continue to advance our core technology roadmap. During the fourth quarter, we led the way in our market with the introduction of our next-generation PCIe Gen 6, increasing the compute required for AI applications at the edge. We believe these technology investments position One Stop Systems, Inc. well to support the growing demand for high-performance compute infrastructures as AI-enabled systems continue to expand across both defense and commercial platforms. As we look ahead to 2026, we believe One Stop Systems, Inc. is entering the year with strong momentum. Demand for high-performance compute at the edge continues to expand as AI, ML, autonomy, and sensor-driven applications become increasingly central to next-generation systems. These trends are creating growing demand for rugged, high-performance compute infrastructure capable of operating in challenging environments outside of traditional data centers. Across our defense markets, we are seeing increased interest from government organizations and defense primes as military platforms continue to incorporate AI-enabled sensor processing, autonomy, and real-time decision-making capabilities. At the same time, we are beginning to see similar requirements emerge across commercial industries such as robotics, aerospace, and healthcare. The platform programs and customer engagements we have discussed today give us confidence that One Stop Systems, Inc. is well positioned to benefit from these trends as we continue to expand our presence across both defense and commercial markets. As we plan for 2026, we are also closely managing several operational factors, including supply chain dynamics, in particular where we are seeing longer lead times for certain components, including memory, which may impact the timing of certain shipments throughout the year. For 2026, we expect continued revenue growth in the range of 20% to 25%, supported by our growing pipeline of platform opportunities, increasing customer engagements, higher customer-funded development activities, and a continued transition of development programs into production deployment. We expect gross margins of approximately 40%, reflecting product mix and an increasing contribution from customer-funded development programs, which is an important component of our strategy to advance new technologies alongside our customers. At the same time, we expect to generate positive EBITDA and adjusted EBITDA, while continuing to invest in key areas of the business, including sales expansion and customer support resources that support our growing pipeline and deepen relationships with strategic customers. In closing, 2025 represented an important milestone in the evolution of One Stop Systems, Inc. We delivered strong financial performance, executed on our strategic plan to sharpen our focus on the One Stop Systems, Inc. platform, and continued to expand our presence across a growing number of defense and commercial platforms that rely on high-performance computing at the edge. With a strong balance sheet, expanding customer relationships, and a growing pipeline of opportunities driven by the adoption of AI-enabled systems, we believe One Stop Systems, Inc. is well positioned to continue building momentum and delivering long-term value for our shareholders. We also believe our strengthened balance sheet provides the flexibility to pursue selective strategic acquisitions that could complement our technology platform, expand our customer base, and enhance our capabilities over time. Finally, I want to thank our entire team for their dedication, innovation, and relentless focus on delivering results for our customers and shareholders. So with this overview, I would like to now turn the call over to Daniel Gabel. Daniel Gabel: Thank you, Mike, and good morning to everyone on today’s call. As a reminder, on 12/30/2025, the company closed a definitive agreement to sell our Bressner business. All operations, assets, and liabilities associated with Bressner, including the gain recognized on the sale, have been classified as discontinued operations. Our Q4 results reflect a number of important financial milestones and records. First, we achieved robust top-line growth of 70.2%, which drove revenue to the second-highest quarter in our history. Second, we achieved record gross margins of 58.5%. This reflects favorable mix and pricing, and it showcases the strong value that we provide to our customers. Third, higher sales, record gross margin, and disciplined expense management produced record quarterly net income from continuing operations. And finally, with the December sale of Bressner and the October registered direct offering of common stock, we ended the year with the strongest balance sheet in our history, which included only $6.8 million in total liabilities, no debt, and $33.4 million in cash, cash equivalents, and restricted cash. We believe the company is in a strong position, and with a solid backlog and a robust pipeline, we are on track to achieve our 2026 guidance and to execute on our growth and profitability objectives. Now for a quick overview of Q4 2025 financial performance. For the fourth quarter, we reported total revenue of $12.0 million compared to $7.0 million last year and $9.3 million for the 2025 third quarter. The 70.2% year-over-year increase in total revenue was primarily the result of higher revenue for the development and production custom server products for defense customers, higher shipments of data storage products for a defense prime customer, shipments of server products to a medical device customer, and shipments of compute and server products for an autonomous maritime application. Gross margin in the fourth quarter was a quarterly record of 58.5% compared to 9.4% in the prior-year quarter. As a reminder, gross margin in the prior-year quarter was impacted by a $1.2 million contract loss. Excluding this charge, gross margin for the 2024 fourth quarter was 26.8%. The 31.7 percentage point increase from the prior year was primarily due to a more profitable mix of products shipped this year. In 2025, gross margin benefited from both operational efficiency and a favorable product mix. We continue to expect variability in gross margins quarter to quarter based on absorption, product mix, and program life cycle. On a sustaining basis, we continue to target One Stop Systems, Inc. segment margins in the mid-30s to mid-40s. Total fourth quarter operating expenses increased 21.8% to $5.1 million. This increase was predominantly attributable to higher R&D expenditures, reflecting targeted investment in new product development. We expect R&D expenses for 2026 of approximately 10% to 12% of annual sales. For the fourth quarter, the company reported record GAAP net income from continuing operations of $2.0 million, or $0.08 per diluted share, compared to a net loss from continuing operations of $3.4 million, or $0.06 per share, in the prior-year quarter. The company reported non-GAAP net income from continuing operations of $2.4 million, or $0.09 per diluted share, compared to a non-GAAP net loss from continuing operations of $2.9 million, or $0.14 per share, in the prior-year quarter. Adjusted EBITDA from continuing operations, a non-GAAP metric, was $2.5 million compared to an adjusted EBITDA loss from continuing operations of $2.8 million in the prior-year fourth quarter. Turning to the balance sheet, as of 12/31/2025, One Stop Systems, Inc. had total cash and cash equivalents of $31.2 million, restricted cash of $2.2 million, and no debt outstanding. Working capital increased to $45.3 million at 12/31/2025 compared to $24.0 million last year, reflecting a significantly higher cash balance and a 176% increase in our AR balance, reflecting revenue growth in 2025. As Mike mentioned, for the 2026 full year, we expect revenue growth in the range of 20% to 25%, gross margin of approximately 40%, and positive EBITDA and adjusted EBITDA. As in prior years, we expect some seasonality in our revenue, with second-half revenue higher than first half. However, we expect this ramp to be less pronounced in 2026 as compared to 2025. For 2026, we expect approximately 40% of our full-year revenue to be recognized in the first half of the year and 60% in the second half. We also expect negative EBITDA in the first half of the year to be offset by positive EBITDA in the second half of the year. As we enter 2026, we remain focused on disciplined execution, including managing our supply chain to convert customer demand into revenue, profit, and cash. We also remain focused on continuing to drive growth by investing in our technology, pursuing M&A opportunities, and securing new platforms that may provide sustained multiyear revenue streams. As always, we look forward to updating you on our success. This completes our prepared remarks. I will now turn the call back to the operator. Operator, please open the call to questions. Operator: We will now open for questions. To ask a question, please press star followed by one on your touchtone phone. You will then hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, we ask that you please lift your handset before pressing any keys. Please go ahead and press star 1 now if you have any questions. First, we will hear from Scott Searle at Roth Capital. Please go ahead, Scott. Scott Searle: Hey, good morning. Thanks for taking the questions. Hey, Mike, hey, Dan, congrats on the quarter and congrats on getting the Bressner deal done. Maybe for starters, looking at 2026, nice guide. I am wondering if you could talk a little bit about the visibility that you have got into that number. Maybe as well kind of the unfactored opportunity pipeline that you have talked about. And you hinted at this as well a little bit just in terms of some of the timelines. Obviously, with the current military actions ongoing, is that delaying the ability for decisions to get made in the near term? Obviously, it is good in the longer term when you think about autonomy and edge AI being adopted in these types of conflicts, but wondering what that is doing to the near-term decision-making process. Michael Knowles: Yeah. Just as a top level on that, Scott, I think our visibility in our pipeline is still as strong as we start 2026 as we were in 2025. We continue to expand opportunities commercial and defense. As I noted, there is still a strong pipeline supporting our growth objectives organically. So we feel good about that and where we are progressing and the momentum we have been building in that area. We are encouraged this year that there is actually a defense budget. As I noted in my remarks, we had the full-year continuing resolution and the new administration coming on board. So contracting of awards last year in terms of timing was a little bit challenging at times. But this year, with a budget in place, we have seen a little bit better movement in that respect. However, as in the past with conflicts like we are seeing today, and the quick movement and reestablishment of operational funds to support that, sometimes that will cause a little bit of delay in the contracting system as there are other higher priorities in certain areas. So we will continue to monitor that as it goes throughout the year, but as of right now, we do not anticipate that will be an impact on the full year. It just could be, again, impacted on timing from month to month or quarter to quarter. Daniel Gabel: And yeah, Scott, I might just add a little bit on the timing. As we put together our guide, we feel very strong about the demand environment. I think that some of the bookings that we have already released press on for Q1 support that—so really strong demand environment. What we have taken into account in our guidance is some of the supply chain and production lead times. We are seeing extended supply chain lead times, and so that does guide the conversion of those opportunities into revenue. Scott Searle: Gotcha. So just to clarify, you are already accounting for memory and other component issues within that 20% to 25% outlook. And then wondering as well kind of how you are thinking about military government applications versus the commercial mix for the year? Michael Knowles: Yeah. I will start on it. Yes. Our guide takes into account our expectations for longer lead times in the supply chain. As we are looking at the mix, I will just reiterate as we are seeing that market that the memory impact has been fairly noticeable. We have projected that into guidance and continue to monitor that. We have a fairly diverse supply chain and partners we work with. And our designs are somewhat flexible. So we have levers to pull to help to address that moving forward. And then as for defense commercial, they still remain well aligned in our ratios. They can change quite a decent amount from quarter to quarter based on opportunities and timings and awards. As we have noted before, we have generally been around the 50/50 area. However, in any given quarter or period, we could go 10%, 15%, 20% in either direction. No real impact on the strategy. Both markets need our componentry. Our hardware is generally agnostic to market. We use similar servers in defense as we use in commercial. So we are able to move and adjust quickly to where demand is in either market. Scott Searle: Got you. And if I could, two last ones. On the OpEx front, Dan, I am wondering, can you calibrate us in terms of the first quarter looking at the fourth quarter? I would imagine somewhat normalized for seasonality. But just to give us an idea about how we go into the first quarter and that progresses throughout the year. And then, Mike, now with the balance sheet, now with the opportunity set with you guys getting to sustained positive EBITDA, and the balance sheet, M&A starts to come into play, becomes more realistic. How active are you guys on that front? What is the pipeline looking like? And if you could put some parameters around how you are thinking about it in terms of size and timeline to accretion. Daniel Gabel: Yeah. I will start on the operating expenses. So we do expect somewhat lower operating expenses in 2026, most of that being driven by R&D. We made some one-time investments in R&D in 2025 that we do not expect to recur. So I think we mentioned our guidance for R&D expenditures in 2026 will be about 10% to 12% of revenue, so a bit of a step down from 2025. In terms of the time phasing of that throughout the year, I would expect R&D to be somewhat higher in the first half of the year compared to the second half of the year. You could think of about 60% of our R&D expenditures in the first half of the year, about 40% in the second half of the year. And that is really driven by the timing of customer-funded R&D efforts, which we deploy our engineering resources towards and away from internal investment. Michael Knowles: And, Scott, on the M&A part of the question. So, yeah, we have ramped up efforts on our strategy in that area. We had been working a funnel of opportunities since I joined the company just for the point in time we knew when we would have the levers to be able to be engaged in that kind of activity. And as we have noted in the financial performance, we believe we have some of those levers now to do that. So we have increased our activity on that front. I would say we have a decent funnel of opportunities that we are evaluating across both hardware-adjacent capabilities and potential for software capabilities that we could add to the company that would allow us to provide more integrated solutions and gather larger footprints and capabilities on edge platforms. In terms of timeline, I would just say that we look at this like we want to do the right deal that aligns to the strategy of the company, moves it forward, and makes sense to what we are doing. And so we will not be rushed into doing a deal. But we are actively engaged, and if we find the right deal, the right value that advances the company along with our strategy and performance, then we will do so. Scott Searle: Great. Thanks so much. I will get back in the queue. Michael Knowles: Alright. Thanks, Scott. Operator: Next question will be from Eric Martinuzzi at Lake Street. Please go ahead, Eric. Eric Martinuzzi: Yes. My congrats as well on the quarter and the guide for the upcoming year. You talked a little bit about the R&D investment. Curious to know on the sales front, are we adding folks in our sales and distribution, sales or marketing, at least as far as 2026? What is the plan for headcount there? Michael Knowles: Yeah. With the performance we have had, we are always evaluating our overall staff and sales and where we are going. So we are always making adjustments in capability access, whether it is through hiring people onto staff or utilizing distributors or consultants in certain areas. So we continue to be active across all those fronts. And so as we continue to grow, we will always look at what is the best method or approach for us to continue to accelerate pipeline identification and conversion to bookings so we can stay on the growth rate organically that we have indicated our pipeline could support and potentially grow that. So we treat those as opportunistic based on people, markets, etc. But our intent is we keep focused on that all the time and are always looking to expand where we can move and continue to grow the company or accelerate its growth. Eric Martinuzzi: So I guess, let me ask it a different way. So to support the sales growth of 20% to 25%, does that require additional hiring? If so, are we talking 10% to 15% increase in sales heads? Michael Knowles: Yeah. We think with the investments now in our sales team and Salesforce, we can support the growth rate that we have noted. Eric Martinuzzi: Okay. Alright. And you highlighted in the press release regarding the outlook that the higher customer-funded development sales as compared to 2025. Curious to know, is this coming from the same customers? Is this coming from additional customers? In other words, is there a potential for new logos? What is the mix kind of between new logos and existing customers in that customer-funded development? Daniel Gabel: Yeah, Eric, I think it will be a combination. So even some of the awards that we have already announced, including on the ground combat vehicle opportunity with a defense prime, that does involve some customer-funded development. So we will see that converting to revenue throughout the year. And then we also have some additional opportunities that are in the pipeline now that would represent new customers. Eric Martinuzzi: Okay. Thanks for taking my questions. Daniel Gabel: Thanks, sir. Operator: Next question will be from Brian Kinstlinger at Alliance Global Partners. Please go ahead, Brian. Brian Kinstlinger: Great. Thanks, guys. Been a great transformation. My first question is with the partnership with the defense prime you announced, I think it was January, to develop the enhanced vision system for Army vehicles. What is the addressable market opportunity for a product like this in a production environment? How many vehicles might this be integrated with? And then is there already an RFP that the prime is bidding on with this technology, or is it just in development phase so that they can bid on RFPs in the future? Michael Knowles: Yes, Brian. Thanks for the question and for joining in. So it is an early-stage development program that will, as we mentioned, complete this year and transition into testing. So there is not a formal RFP for deployment or production of this capability. It will roll through testing and evaluation. The system is somewhat agnostic to combat vehicle type. So there would be opportunities for multiple combat vehicle acquisition offices to evaluate the technology versus their requirements, their funding lines, and any deployment requirements or needs for that. And so as the system moves through testing, we will, of course, engage with those customer sets and follow that as it moves through. You know, the benefits could be in a wide range of scale depending on how the Army might move that forward in terms of one or multiple combat vehicle classes. The exciting part for us is that the U.S. Army generally, if they decide to form a program of record and deploy a system across vehicles, is known to buy things in tens and hundreds. Usually, it can end up in the thousands. And those would represent the kind of larger-end, more transformative type program awards for the company. Brian Kinstlinger: Great. And then as it relates to the low end of revenue guidance, I think one of the analysts asked about visibility. How much of the low end of revenue guidance, using the growth rate, comes from what is already in backlog or orders in contract? I am not sure if you answered that. And then do you expect traditional revenue seasonality or even more pronounced with the long lead time? Just curious how you think about that. Daniel Gabel: Yeah. I will jump in on the seasonality. So we do expect—we always kind of see this kind of an increase as we go throughout the year. We do expect that in 2026, and you are correct. That is driven largely by supply chain lead times as well as some production lead times in converting some of the orders that we have in backlog, as well as some of the orders secured in Q1, into revenue. Roughly, though, we expect about 40% of our revenue in the first half of the year, about 60% of our revenue in the second half of the year. So that is somewhat less pronounced than we saw in 2025. Brian Kinstlinger: Great. Thank you so much. Michael Knowles: Alright. Thanks, Brian. Operator: Ladies and gentlemen, this does conclude our question-and-answer session for today as well as the conference call. We would like to thank you for attending, and at this time, ask that you please disconnect your lines. Enjoy the rest of your day.
Operator: Greetings, and welcome to the Tecogen Inc. Fiscal Year 2025 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Jack Whiting, General Counsel and Secretary. Please go ahead, Jack. Jack Whiting: Good morning. This is Jack Whiting, General Counsel and Secretary of Tecogen Inc. This call is being recorded and will be archived on our website at tecogen.com. The press release regarding our fourth quarter and year-end 2025 earnings and the presentation provided this morning are available in the Investors section of our website. I would like to direct your attention to our Safe Harbor statement included in our earnings press release and presentation. Various remarks that we may make about the company's expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by forward-looking statements as a result of various factors, including those discussed in the company's most recent annual and quarterly reports on Forms 10-K and 10-Q, under the caption Risk Factors, filed with the Securities and Exchange Commission and available in the Investors section of our website under the heading SEC Filings. We may elect to update forward-looking statements; we specifically disclaim any obligation to do so, so you should not rely on any forward-looking statements as representing our views as of any future date. During this call, we will refer to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles, or GAAP, to the most directly comparable GAAP measures. A reconciliation of non-GAAP financial measures is provided in the press release regarding our Q4 and year-end 2025 earnings and on our website. I will now turn the call over to Abinand Rangesh, Tecogen Inc.'s CEO, who will provide an overview of fourth quarter and year-end 2025 activity and results, and Roger Deschenes, Tecogen Inc.'s CFO, who will provide additional information regarding Q4 and year-end 2025 financial results. Abinand Rangesh: Thank you, Jack. Welcome to Tecogen Inc.'s fiscal year 2025 call. I know many of you would like an update on how the data center cooling strategy is progressing, so today, I am going to start with an update on the Vertiv partnership. There have been some key positive developments that I will share, including their opportunities for our chillers. Then I am going to walk you through Tecogen Inc.'s data center opportunity pipeline outside the Vertiv partnership. After that, I will provide an update on the other avenues we are working on, including expanding our manufacturing throughput, increasing service revenue and margin, and the non-data center pipeline. We have seen significant forward momentum with the Vertiv relationship. First, Vertiv has designed, is in the process of designing, between 25 and 50 megawatts of our chillers into various projects. This is equivalent to 50 to 100 of our 150-ton dual power source air-cooled chillers. Second, we have been negotiating our master partnership agreement that expands the marketing relations agreement that we signed last year. Third, we have discussed bringing Tecogen Inc.'s hybrid drive technology to Vertiv's chillers. As the sales grow, this may allow Tecogen Inc. to scale manufacturing very quickly because we would focus on the dual power source and mate this to the refrigeration system that is already built in volume in Vertiv's factories. Last, and most exciting of all, we have secured a demonstration project with Vertiv. This is expected to ship sometime toward the end of Q2 for 1 megawatt of cooling, or two times our 150-ton dual power source chillers. Our chiller will go to the Vertiv controlled environment test chamber where it will operate under simulated AI data center conditions and various outside ambient temperatures. This technology demonstration project gives prospective customers data on how the chiller will operate under real-world data center conditions across a range of ambient temperatures. While we have been furthering the Vertiv partnership, we have also been expanding our own data center pipeline. In this list, we have only included opportunities where the end customer has told us they plan to use Tecogen Inc. chillers and have made significant progress on signing data center tenants. This list is sorted based on our current project confidence. Developers that have existing data center experience and financing are higher on the list. Based on past experience, customers typically want chiller equipment delivered six to nine months before the site needs to be operational. For sites that are expected to be operational in early 2027, this will suggest equipment orders no later than Q2 or Q3 this year. Timing is always difficult to predict because there are multiple moving pieces on the customer side, but the timeline we have seen to date is completely consistent with our historic sales cycle. Projects can also go through stop-start cycles before closing. For example, in the past five months alone, we have had two instances where potential customers have told us they were ready to place the purchase order but then hit unforeseen delays on their end. However, as you can see, we have multiple opportunities of various sizes, thereby increasing the odds in our favor. One project is an expansion of an existing data center. They plan to use our dual power source chiller to handle new tenants. Another is in the final stages of tenant negotiations and expects to use our DTX chillers to maximize IT capacity. The same developer also has a second project of a similar size and another of a larger scale. Next, there is an opportunity for a demonstration project with an established data center owner for up to 40 chillers. This developer evaluated the cost of power from our chillers against the alternatives and found the value highly compelling. However, they were also looking for some independent validation of our chillers. We believe that the Vertiv demonstration project will be instrumental in unlocking this opportunity. The remaining projects have filed for environmental permits and are in active discussions with tenants. They represent 100 to 200 chillers collectively. We expect more clarity on construction timing as permits are granted and tenant negotiations progress. In our previous call, we had mentioned an opportunity where we have an LOI for six STX chillers. Although this opportunity is progressing, we have moved this further down the list because we believe the others outlined above are moving faster and have more near-term potential. In addition to this list, we also have ongoing discussions with multiple hyperscalers and multiple other data center developers. The current timeline on these projects is completely in line with projects in other industries. We also believe that closing the first few opportunities will unlock significant demand. Based on conversations with prospects, even if we have chillers in other critical cooling applications, many data center owners would still like to see our chillers in other data centers or cooling AI loads. We believe this concern will be addressed with the Vertiv demonstration project and some of the near-term opportunities. Aside from data center projects, we are expecting chiller orders from other segments such as cannabis, hospitals, and comfort cooling. These represent at least another six DTX chillers. Expected delivery is the fall and winter of this year. We are also seeing a gradual resurgence in cogeneration leads as utility rates rise across the United States. Given the significant amount of interest in our dual power source chiller, we wanted to make sure we could handle a step change in order volume. We have now qualified a vendor for the sheet metal and refrigeration assembly. This vendor already built hundreds of similar refrigeration and sheet metal assemblies for a large chiller company. We have also qualified an electrical assembly vendor for the power electronics and are in the process of qualifying a second vendor. We are also presently building some inventory of both the dual power source chillers and DTX chillers. Our engineering team has been iteratively improving our design for manufacturability and to reduce build time. Given the cash usage over the last six months, I would like to provide some context and then the plan for the next nine months. Given the size of the pipeline, one of the concerns we had was being able to handle aggressive delivery schedules. As a result, we expended cash on several fronts simultaneously to get everything we needed to do done. Some of these uses of cash included manufacturing capacity expansion, performing the testing and improvements needed for our dual power source chiller to operate under data center conditions. We also hired a marketing firm that specializes in data centers. In addition to the above, in Q3, we invested significantly in the service group, especially in the Greater Manhattan area. We have found over the last two years, despite increasing our service contract rates greater than inflation, we have found that margin on the cogeneration products has reduced in the Greater Manhattan and Toronto service centers. The chiller product continues to maintain solid margins. The cost of labor and increased travel times between sites is one of the biggest contributors to this decline in margin. To counteract this, we invested in new engines in this territory with the latest performance improvements. This allows us to increase service intervals by at least 50%. We expect this to lower labor costs per hour of operation. In Q4, we saw an increase in both run hours and margin compared to Q3 in these. We will continue to monitor and, if needed, institute aggressive price increases or cost reductions where needed. Our current cash position is $10,000,000. By Q2, we plan to cut the cash burn down substantially. From 2023 to mid-2025, we managed with $2,000,000 of cash, including a factory move. Roger will discuss the results and the financial plan going forward. Roger Deschenes: Thank you, Abinand, and good morning, everybody. I will start with the fourth quarter results. Our revenues for the quarter decreased by $800,000 in the fourth quarter to $5,300,000 compared to $6,100,000 in 2024, and this is due to the decrease in product shipments and a reduction in energy production revenue. Our gross profit also decreased by 28% in the fourth quarter compared to the comparable period in the prior period, and this is due to the decrease in our products revenue and an increase in our service cost. The gross margin decreased 8.2% to 36.8% in the fourth quarter, from 45% in the comparable period in 2024. As Aminad touched upon earlier, our services margin was low compared to the same period last year but has increased compared to the third quarter of this year. The quarter-over-quarter changes in revenues and gross margin will be discussed further in our segment performance slide. Our operating expenses increased 57% in 2025 to $6,100,000 from $3,900,000 in 2024. This is due in part to a $900,000 increase in the asset impairment charge in our Energy Production segment, the increased operating costs in our Services segment, and increased costs in our Products segment, which we incurred for the manufacturing expansion that we are working towards. We also saw increases in our R&D costs, which were incurred to continue the development and refinement of our dual source chiller, which is focused on our entry into the data center market. Our net loss increased in the fourth quarter to $4,000,000 from $1,100,000 in the similar period in 2024, and this is due to the reduction in sales and gross margin, the asset impairment charge, and an overall increase in operating expenses. We will discuss expenses in more detail in our full-year 2025 numbers. Moving to adjusted EBITDA, the adjusted EBITDA loss for the fourth quarter was $2,400,000, which compares to about $700,000 in the same period last year, and again, this is due to lower sales and gross margin and the increase in operating expenses that we experienced. Moving to performance by segment, our products revenue decreased 68% to about $500,000 in the current period from $1,400,000 in 2024. This is due to a delay, as Avadar suggested earlier, of a couple of projects which we expected to ship in 2025, but we now expect to close these orders in the next few months. As we have discussed in the past, our product revenue has significant variability quarter to quarter, and it is borne out this past quarter. Our products gross margin decreased to negative 6.9% from 30.9% in 2024. This is increased unabsorbed labor, and this is labor that we are using to work towards increasing our throughput, an increase in our inventory reserve, a slight increase in warranty costs, and all of these costs, which have a disproportionate impact on margin due to the revenue decrease. Our services revenue increased 9% quarter over quarter to $4,500,000 in the fourth quarter compared to $4,100,000 in the comparable period in 2024, and this is due to higher billable activity and higher operating hours of the equipment from our existing service contracts. Our service margin decreased 7.4% to 43.4% in 2025, from 50.8% in 2024. This is due to increased labor and material cost in the Greater New York City area. Our energy production revenue decreased 28% in the fourth quarter 2025 to just under $4,000,000 compared to about $5,555,000 in the fourth quarter 2024, and this is due to contracts that expired early in 2024 and some of which expired late in 2023 and the temporary site closures during the year. Our energy production gross margin decreased to 13.7% in 2025 from 39% in 2024, and this is due to an increase in cost with our energy production business. Moving to the full-year 2025 results, our revenue increased 19.7%, or $4,500,000, in 2025 to $27,100,000 compared to $22,600,000 in fiscal 2024, and this is due to a significant increase in our products revenue and an increase in our services revenue. Our gross profit decreased about 05/2025 compared to 2024, and the decrease in the gross margin was 7.3%, which decreased from 43.6% in 2024 to 36.3% in fiscal 2025. We will review year-over-year changes in revenues and gross profit further in the segment performance slide. Our operating expenses increased 25% in 2025 to $18,100,000 from $144,000,000 in 2024 due in part to the $900,000 increase in the asset impairment charge in our energy performance segment, increased operating costs in our Services segment, and an increase in cost in our Products segment, again, that is geared to the manufacturing expansion, and increased R&D costs, which we incurred to continue again the development and refinement of our dual source chiller, again, we are focused to utilize in the data center market. Our net loss increased in 2025 to $8,200,000 from $4,700,000 in 2024, and the loss is due to, again, lower services and energy production gross margin, the asset impairment charge, and an increase in operating cost. We would like to point out that we are working on a program to reduce our OpEx to levels that are consistent with levels from 2024 spend, I should say, and anticipate to see reductions to commence in the second quarter of this year and further expansion of those reductions in the third quarter and the fourth quarter. Our adjusted EBITDA loss was $5,600,000 in 2025, which compares to $3,600,000 in the same period last year, and this is due to lower services and energy production gross margin and the increase in operating costs. Reviewing our performance by segment, our products revenue increased 105% to $9,100,000 in the current period from $4,400,000 in 2024, and this increase is due to an increased chiller and cogeneration revenue that was recognized in 2025, and as we mentioned earlier, this increase was partially reduced by or offset by the decrease in production revenue we experienced in the fourth quarter due to project delays. The gross margin for products improved 1% in 2025 to 33.2% from 32.2% in 2024. Our services revenue increased 3% year over year to $16,600,000 in 2025 compared to $16,100,000 in 2024, and this is due primarily to higher billable activity and a slight increase in operating hours of the equipment that is being serviced. Our service gross margin decreased 8.9% to 38.6% in 2025 from 470.5% in 2024, and this is due to increased labor and material cost incurred as we invested in new engines and new performance upgrades to the sites in New York City. The intention of these investments is expected to reduce labor hours needed per system going forward. The decline in margin is presently only in cogeneration equipment. Our chillers continue to generate expected and very strong margins. Therefore, we plan to institute both price increases for cogeneration equipment in the Greater New York City area and make significant cost reductions in the territory to—sorry—significant cost reductions in the territory to restore this region to higher profitability. Energy production revenue decreased 37% in 2025 to $1,300,000 from $2,100,000 in 2024, and again, this is due to contract expirations in the latter part of 2023 and early 2024 and temporary site closures for repairs. Energy production gross margins decreased to 28.3% from 38% in 2024. That concludes the results review, and I will turn the call over to Abhinat for his closing remarks. Abinand Rangesh: Thank you, Roger. So I think the single biggest improvement that we have seen in the last five months is really the securing of the first demonstration project. I personally believe that this will be the catalyst for everything else that will come and will also unlock the much broader opportunity that we have been pursuing. In a world where AI tokens per unit of power is a new metric, we provide the simplest and most cost-effective way for a data center to obtain more power, which directly results in more compute and more revenue. We have a robust pipeline of opportunities, the demonstration project, and I think all the pieces are coming together to unlock the larger projects on the multibillion-dollar data center cooling opportunity. Thanks for listening, and I will open the floor for questions. Operator: Thank you. We will now be conducting a question-and-answer session. Our first question is coming from Chip Moore from ROTH Capital. Your line is now live. Chip Moore: Hey, good morning. Thanks for taking the question. Abinand Rangesh: Morning, Tim. Chip Moore: Hey, Evan. Maybe starting there where you finished on the Vertiv demonstration project. So I think you said expect this to ship later in Q2. Help us think about how quickly that should be up and running and, you know, real-world data, you know, when that should flow, and assume this plays a role in the 25 to 50 megawatts that you mentioned that they are in the process of designing. Just, you know, when could we conceivably see some of those move to orders, you know, once that demonstration project is up and running? So I think the two pieces will move concurrently. Abinand Rangesh: So, the unit for chips in Q2 is actually going to go and get tested almost immediately in their thing. Because what typically happens in a lot of these projects that we have is the end customer would like to see, you know, how is this chiller going to run in, let us say, a 110-degree ambient at a certain, you know, out chilled water output. So what this does, because with our conventional DTX chiller, our own test cell, we can run a lot of those conditions here, but we cannot control for a 110-degree ambient or a 120-degree ambient. So the Vertiv test chamber allows us to do this. But it also acts as a way for a potential customer to come and see it as well. Right? That is usually a very good way to close projects. So the designing of the projects in the background, that happens concurrently, and they are going to continue marketing, and they are getting opportunities. I cannot talk very specifically on timing on their projects because at this point, it is either confidential or we do not yet have enough clarity on it. What I think it is going to do, this demonstration project, the hope is to have it actually running no later than the end of Q2. What we think it will do is act as both providing the feedback for some of the bigger projects that we have and also for some of the potential customers where they may want to use our chillers in, you know, certain environments, like, let us say, Texas. They want to know that this chiller would—how, you know, what output it will put out at different ambient temperatures. So that is also what you will get out of this, and it is really, I would say, an independent validation as well of our chiller. Right? And a massive load of support from Vertiv that they are essentially putting this together. Chip Moore: Understood. That is helpful. Appreciate that. And maybe for your own internal pipeline, that slide your highest think you have stacked them in a order that one where you are in final stages of negotiation and you could see orders here. I think you said Q2, Q3, for a 2027 type of project. Just any more you can expand on that on, you know, where that stands, what they want to see, you know, when that could move forward. Abinand Rangesh: So I do not want to predict timing because I think it is extremely hard to predict the timing. What I will say is the smaller projects actually—firstly, the DTX is a—there is—we have already got the test data. A lot of these smaller ones, you know, they have seen our equipment in other places. The smaller projects also find it easier to get tenants. So the odds of it moving faster is much, much higher. And, also, things like financing and getting approvals for environmental permits tend to be much easier for the smaller projects. Because some of the, you know, greater than a 100 megawatt projects, you have got more hurdles to go through on the back end to make sure the local site approvals, all of that, that happens without an issue. And then also having the tenants. What we are seeing more broadly in the data center industry is, you know, you are getting a lot of the Neo Cloud on the, you know, as potential tenants. And there is quite a few of the smaller scale Neo Clouds that are interested in these kind of smaller scale projects, which makes it much more likely that these things will go through. But I do not want to predict timing. All I know is that in many of these cases, the customer expects to be operational by early next year. So to really be able to get equipment in order, get everything delivered in that time and actually constructed on-site, they need—they need to move quickly. Chip Moore: Helpful. Very helpful. And maybe a last one for me just on the manufacturing side. It sounds like you have made some good strides and you have got some potential with Vertiv as well. Just, you know, what is the highest priority? What, you know, what are you focused on? What do you need to do, you know, here to get prepared? Thanks. Abinand Rangesh: I think we have gotten most of the key pieces together now, because a lot of that was getting the subcontractors qualified and really get first articles from them and then get the first article checked internally to make sure that meets our quality standards and that if we can get the different pieces from them to arrive at our factory, we can just do the final assembly, test it, get it out the door. So getting the subcontractors qualified was really the key. I think we have now done that, and also, these subcontractors have significant scale-up capability already. So there is—I believe, those pieces are now together, especially for the dual power source chiller. The DTX, I think, our supply chain was reasonably robust to start with. So, I think we have the ability because a lot of the bigger components on the DTX are built by some very large companies already. So we can get scale-up from them without too much of a problem. It was the dual power source chiller, really, with both the size of the machine as well as making sure that we were not having a lot of time on the floor in our factory here. To get some of the bigger components built outside and brought in. That was really the key. And I think we have now done that. Chip Moore: Got it. So, you know, maybe the follow-on, you know, with a lot of that heavy lifting done, it sounds like maybe you do not need to sacrifice non-data center orders, you know, if you start to see demand pick up in some of those other areas. Abinand Rangesh: Correct. I think we are going to see quite a bit more in non-data center projects as well. We—on the sales efforts and the marketing efforts, we essentially split the sales team to have some people handling non-data center and some handling the data center. Part of the lumpiness on the product side is just what we have seen overall in the industry is we used to get a consistent amount of small multifamily, like one-unit, two-unit orders that were kind of steady flow. With the anti-gas sentiment in some of the bigger cities like New York and Boston, that portion had declined. It is starting to come back. But what we are—what we have a very good pipeline of is multi-unit larger projects that are going into bigger buildings. But the problem with those projects is that if one project gets even slightly delayed, you have basically moved out three or four units at a time. So there is a little bit of timing issues there, but I think the pipeline is very, very robust on that. Chip Moore: All right. Appreciate it. Thanks very much. Abinand Rangesh: Thanks, Chip. Operator: Thank you. Next question today is coming from Alexander Blanton from Clear Harbor Asset Management. Your line is now live. Alexander M. Blanton: Thank you. Good morning. I am interested in—yes. I am interested in your outsourcing strategy. Because, clearly, to get significant orders from data centers, you are going to have to be sure that you can deliver the quantities that you are talking about. So could you just go into a little more detail about how that is going to work, what things are going to be outsourced, and is—I take it, it is going to be these components will come to your factory and just be assembled. And so you have obviously changed your manufacturing process significantly in doing that. Little more detail. Abinand Rangesh: Yep. No. That is a great question. So let me start with the end portion, which is we did not actually change our manufacturing process necessarily. When we designed the dual power source chiller, we always designed it with the option of being able to either do all of it in-house or have large portions of it built in subassemblies that then came internally. The other thing that we always did on that product was to use a lot of components that are built in larger volume to start with so that we could, with volume, also see an increase in margin. So, in other words, when you think about the dual power source chiller, right, I think of it in sort of certain blocks. You have one big block, which is really the refrigeration assembly. So that handles the—it is similar to an electric chiller. It has your compressors, it has your fans, it has your sheet metal assembly. Then you have the power assembly, which has the engine and the generator, and then we have the power conversion or the electronics, which is really the dual power source technology. A combination of the engine and the inverter and power electronics technology is very similar to our InVerde. The biggest challenge we have in our manufacturing space is just in terms of physical footprint on floor space. And also, we historically have built numerous InVerde units. So we can build those in volume very, very easily as they show up preassembled. We can mate it with our engine system, our generator, and essentially build that power electronics and engine package very quickly. The refrigeration assembly, you are dealing with a lot of sheet metal. It is not necessarily, you know, something that is best done in our factory here if we can reduce time on the floor by having somebody that built similar assemblies for other electric chiller companies. Then we can essentially have that portion prebuilt, pretested. It can come to us and get mated with the power electronics assembly. The other big advantage of really focusing on a power electronics assembly, or power electronics and engine assembly, is it gives you other options as well, including, you know, beyond just pure chillers. It gives you the option of being able to power things like, you know, fans in a data center or other loads, where you can arbitrage the two power sources. So you not only get a volume boost, but you can also open up a broader market. But going back to your question of, you know, putting these two together, it is essentially a lot of that sheet metal assembly; it is better done by people that that is all they specialize in. And they have the volume throughputs, and, usually, they are vertically integrated starting from the sheet metal all the way to all of the different components, and they are already buying a lot of subcomponents in volume. So getting that as a single assembly, bringing it into our factory, mating it with the power system, and then shipping it out is one way to do it. Eventually, we could even ship that power assembly to the sheet metal manufacturer. They do the final assembly. Everything is pretested at each location, and then it is shipped. So there are different ways to significantly improve volume and also hit delivery times using that approach. Alexander M. Blanton: Well, given these constraints, what is your effective capacity then if you have your subcontractor do the assembly? It seems to me that it expands quite a bit. Abinand Rangesh: Yeah. I mean, I would still say today, would use what I said in our, I think, the last call or the call before, where I would say about 100 units is where we are targeting. I believe it can be increased further from there. But that seems like, with a little bit of a ramp up, that is fully achievable. And then from there, with some optimization, it is likely that you can increase further from there. Alexander M. Blanton: A 100 units over what time period? Abinand Rangesh: I would say per year. Alexander M. Blanton: I think it is possible to go higher than that, but I think this is something that we have looked at and looked at the details on what it takes to get there. And, you know, it is possible to scale up substantially from there. It is just this, I think, is a good starting point. It will allow us to get many of the opportunities that we have on that pipeline, and then from there, there are different ways to figure out how you would scale from there. And what is the dollar volume of 100 units? Abinand Rangesh: I do not want to comment on exact dollar numbers since we do not put pricing out. But I would say it is three to four times what we have done in our highest year. So I would say, you know, at least $30,000,000 to $40,000,000 of product, likely more. Alexander M. Blanton: And that would be just for the data centers? Abinand Rangesh: Correct. Alexander M. Blanton: It does not include the cogeneration and other products for other markets. Right? Abinand Rangesh: That is correct. Alexander M. Blanton: Okay. Thank you. Operator: Thank you. Next question today is coming from Barry Hymes from Sage Asset Management. Your line is now live. Barry Hymes: Hi, thanks so much for taking my question. My question relates to the master agreement negotiation or renegotiation you are doing with Vertiv. Could you talk a little bit about what are your goals in doing that and what are their goals given that you already had an agreement? Thanks so much. Abinand Rangesh: Yes. So if you look at the marketing agreement we have with Vertiv, right, the way it is structured, it says that this is kind of the placeholder while we go through the full master agreement. So if you look at the marketing agreement, it has various terms that are to do with supply and, you know, delivery, things like that, that currently are not binding terms within that agreement. And all it does is it takes that marketing agreement and expands it. So it has all those different portions. It was always designed from day one to go into that broader agreement so that we could actually supply as an approved supplier and have this marketing portion rolled in as part of this broader agreement. Barry Hymes: Okay. Great. And what is the timing on when you expect that to get finalized and signed? Abinand Rangesh: At this point, I cannot really comment on timing because it is ongoing. Barry Hymes: Okay. Thanks. Appreciate it. Operator: Thank you. Next question is coming from Chris Tuttle from Blue Caterpillar. Your line is now live. Chris Tuttle: Great. Thanks for taking a couple of questions from me. First of all, I know it is not the sexy part of the business, but I wanted to go back to what you were talking about in terms of some of the investments you have had to make on lowering your service cost. I mean, these are mechanical units, which, I guess, in most cases have a nonlinear graph of support and maintenance costs over time, and so I am a little—I wanted to understand more about how, you know, you are situated in terms of, you know, if you have older inventory out there, you know, how much are you still sort of on the hook for in terms of, you know, what would normally be kind of a customer cost? Seems like you guys, you know, had to, you know, spend some of your own money on that in Q4. Abinand Rangesh: Yeah. So that is a great question. So it is—so the way the service contracts work, on the cogeneration units, we charge per run hour. You know? So for every unit that machine runs, we charge per run hour on those. And the service contract includes components, you know, everything inside the cogeneration path. So—and most contracts are either, you know, three year, five year, but they auto—in many cases, you know, the customers renew it. The reason the contracts were structured that way was so that the customer has some—it is actually predictable expenses, and it would allow the business to have a recurring stream of cash flow. But as the costs in places like New York have gone up, like the labor costs have gone up substantially, and the time to get from sites has gone up, the labor efficiency has gone way down. We have also seen material cost increases, but in the other territories, the material cost increases have been absorbed by any increases in service contract rates. So we had two choices. We could either turn around and say, you know what? These service contracts are no longer profitable. We either get out of that service contract or figure out a way to make those service contracts profitable. The concern we had with essentially walking away from some of these contracts was that over time, like, just as you are starting to get your data center side of things ramped up, the risk of a reputational hit, right, if you walk away from a number of service contracts, is high. So we felt, when we looked at the numbers, that with putting in new engines, we could substantially increase the service intervals. I mean, in our test cases, we got almost a 2x increase in service intervals. I commented about, you know, 50% increase on average. If you can do that and you do not have to go to the machine as often, the numbers suggested that we should get back up to, you know, our previous margins, which were somewhere around the 50% gross profit margin. That is kind of why—yes, it was very expensive in the short term, right? And it took us—I mean, it pulled our loss down. But at some stage, if the units—if we can increase that service interval, the numbers should play out. If for some reason that they are not happening, then we will go back and just raise our prices. In some cases, we will, you know, get rid of service contracts that are not profitable anymore. You know, that is—but in the short term, we felt that this was a better way to go, especially because you have got ongoing cash flow that comes from this. So it is much better to figure out a way to make them profitable than walk away from them. Chris Tuttle: Yeah. That makes a lot more sense now. Were those the territories where you feel like you had the problem to address? Abinand Rangesh: Yeah. It is really been the urban environments, like, just actually, just predominantly Greater New York, and to a certain extent up in Toronto. Those are the two territories that really pulled it down. The chiller services in those territories continue to make good money. And part of that is just because, you know, the chiller product is billed a little differently. It tends to be a flat rate contract. And it also tends to have already very long—like, one of the reasons, actually, we did this was because the chiller service intervals are much longer to start with. And that is why we took some of those improvements from the chiller product, applied it to the power generation thing, and said, if the chiller can make money, we should be able to make the same things with the same kind of structures and same improvements to the cogeneration and get the cogeneration units making the same margins. Chris Tuttle: Okay. Two other quick ones for me. Just one of them, could you remind us in terms of when you—like, your pipeline of business with the data centers and all that, and we understand they have been delayed. They have been delayed for lots of other companies. It has been very topical. What are the terms in terms of the revenue recognition and payment terms? Are there any upfront payments involved, like deposits? Do you recognize revenue on deliveries or customer acceptance period? And then what are the typical payment terms where you would be getting that cash? Roger Deschenes: This is Roger. Typically, we require a down payment from customers. It can go from 25% to as much as 40%. And then revenue is recognized when title transfers. In most cases, it is ex-factory. Sometimes it is destination, but for the most part, we recognize revenue when the products ship. So, obviously, you know, there are some holdback on the revenue rec for startups and, you know, minor things like that. But for the most part, when we ship a unit, we will recognize the revenue at that point. Chris Tuttle: Okay. And payment terms, 30, 60, 90 of the balance? Roger Deschenes: Payment terms are generally 30 days upon, you know, customer acceptance. Chris Tuttle: Okay. So, usually, that would add another 30 days to it, but, you know, it— Roger Deschenes: Yeah. Generally between 30 and 60 days, I would say. Chris Tuttle: Okay. And then last question. You know, really helpful update on the pipeline. It sounds like, you know, things that got delayed from Q4, like, they got delayed, you know, a bit into, you know, like, not just slipping into March—in the March, I mean, we are now almost done, you know, with the March. It sounds like expectation should be, you know, we are going to see more deliveries really starting more in Q2. Am I—sort of—did I not hear that right? Or, you know, I know it is a little bit awkward in terms of timing, but, you know, it seems like more of these things are going to be flowing, starting in Q2, Q3. Abinand Rangesh: There is two portions of it. So some of the projects there, that is non-data center related projects. Right? Those—there was some cannabis, some non-cannabis, like hospitals and comfort cooling and things. Those are the ones that pushed out a little bit. The data center pipeline, it has been, I think, within the range. Like, your typical sales cycle is longer than what we have seen already on the data center stuff. So I would say the two are likely to come together around the same time. With data center projects, it is very much—something could suddenly start moving equipment, like, close the projects as soon as they get a tenant, or a lot of pieces start to move very quickly after that. With the non-data center projects, usually, the timing is contingent on—if they are doing, let us say, air conditioning load, then they would usually do that off-season. So they would plan to take equipment deliveries in the fall and winter so that they could do the construction of the chiller plant in the off-season. So that typically moves that timing. Then with cannabis, a lot of it is just tied to their financing timing. You know, if they can get financing, the project moves. Chris Tuttle: Okay. So, therefore, you know, you can have some reasonable volume in Q1. Reasonable. But I think a lot of this, right now, right, I think some of the bigger projects will close. I think we have got enough over there. Abinand Rangesh: The timing is very hard to predict. Chris Tuttle: Yeah. Understood. Understood. Alright. I have got some other technical questions, but those are best left for another time. Thanks a lot, fellas, for the answers. Abinand Rangesh: Thanks, Chris. Operator: Thank you. Our next question today is coming from Matt Swadden, GeoInvesting.com. Your line is now live. Matt Swadden: Hi, good morning, I am Evinad. Quick question. I guess, just recall, I think, previous conversations with you, at least maybe during earnings calls, that you do not really see hyperscalers as an opportunity. But in the last few calls, you have kind of mentioned them. So I am trying to understand what has changed there. Is that from the cooling side or power side? And maybe you could touch on that a little bit for a few seconds. Abinand Rangesh: Yeah. Hey. So that is a great question, Naj. So, originally, we felt that the hyperscalers—the validation process, and a lot of this thing might just be out of what we would be able to do. But as we have started to go after many of these projects on the colocation side of things, we found that we have gotten—you know, we have either met hyperscalers at trade shows or direct outreach has resulted in actually very positive engagement. And the—I think with a lot of this, I cannot really comment on specifics on any of them. But it does seem like there is significant interest from the hyperscale side of things. So we are kind of letting the hyperscale conversations continue, and we will see whether that leads into projects or pilot projects or what that leads to. We do not yet know. It is just they appear to be happening concurrently. So we are just—you know, we are going to pursue it. We have presented to a number of them, and there has been, you know, clear interest on the technology for, you know, for the chiller side. So—and I think the power side, at this point, we are not leading with it. But there may be interest on some of the ancillary loads. But that is something that, you know, the chiller seems to have significant interest. Matt Swadden: Sure. Great. I have two more additional questions, real short. I will start with the service contracts. That business and the things you have done to decrease maintenance needs on-site, or increase in service intervals. Does it make sense to do that in other jurisdictions other than where you are at now to increase margins there too? Abinand Rangesh: Yes. But we are—in other jurisdictions, we are doing those because one of the biggest costs on the service side of things is your oil change intervals and your, you know, engine component intervals. It is better to do that when you are replacing the whole engine rather than do it on an engine with higher time. So we typically, in other service territories, we are doing those changes, but we are doing them as we get rather than do it, you know, proactively on units. Because at some point, right, there is an expense associated with that. So it is better to do it where you are going to have the biggest return on that expense. In other territories, we are doing it on a much more gradual basis. Matt Swadden: So at some point, you could see the overall gross margin on that business go up as places like New York catch up to being where they used to be, and other areas maybe even getting an improved gross margin profile? Am I understanding that correctly? Abinand Rangesh: Correct. I mean, the target is across the whole service territory. We would like to have at least a 50% gross profit margin. Matt Swadden: Okay. And finally, I just have a question on the modular data center space. I do not know—you have mentioned it in the past, like in fleeting comments, about that market kind of heating up a little bit. I was wondering if you could give us a little bit of color on what you are seeing there and if you are—if you can. And do you see opportunity for Tecogen Inc. to play in that growth potential there. Abinand Rangesh: Yeah. So we have seen quite a few leads in that space. As yet, nothing has got far enough that they made it into that opportunity list that I presented. We believe, just looking at the broader picture, that there is going to be a lot more modular data centers being built, but also there is going to be a lot more smaller-scale data centers being built because we are seeing some of the really large data center campuses run into other hurdles such as, you know, local opposition from, you know, people that live in the area or permit problems on the really large data center. So I think there is going to be a push for these modular as well as the smaller-scale data centers being built in urban environments. And in that sense, our product is like a perfect fit for that market. That would—where we are ready. Cool and the cooling side. Right? Matt Swadden: Sorry. Correct. Abinand Rangesh: Okay. Matt Swadden: That is all the questions I have. Thanks. Operator: Thanks, Maj. Thank you. We have reached the end of our question-and-answer session. I would turn the floor back over for any further or closing comments. Abinand Rangesh: Thank you very much for listening. And if anybody wants a further conversation on any of this, you know, management is available to have more in-depth discussions. Thank you. Operator: Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
Operator: Good morning and welcome to General Mills, Inc.'s third quarter 2026 earnings conference call. All participants are in a listen-only mode. After the speakers' remarks, we will conduct a question and answer session. To ask a question at this time, you will need to press star, followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Jeff Siemon, Vice President of Investor Relations and Corporate Finance. Please go ahead. Jeff Siemon: Thank you, Julianne, and hello, everyone. Thank you for joining us today for a live Q&A session on our third quarter fiscal 2026 results. I hope everyone had time to review our press release, listen to the prepared remarks, and view our presentation materials, which we made available this morning on our Investor Relations website. It is important to note that in our Q&A session, we may make forward-looking statements that are based on management's current views and assumptions. Please refer to this morning's press release for factors that could impact forward-looking statements and for reconciliations of non-GAAP information which may be discussed on today's call. I am here with Jeff Harmening, our Chairman and CEO, Kofi Bruce, our CFO, and Dana McNabb, Group President of North America Retail and North America Pet. Before we get to Q&A, I will turn it over to Jeff for some opening remarks. Jeffrey Harmening: Thanks, Jeff, and good morning, everybody. We will turn to Q&A here in a couple of minutes, but I thought I would just take a minute or two to provide some context of what we have been through through the first three quarters of this year, and then based on the progress we have been able to demonstrate, how we are positioned to deliver a significant step up in financial performance which will start in our fourth quarter, which is why we reaffirmed our guidance for fiscal 2026. As a reminder, as we entered this fiscal year, we made a proactive and strategic decision to reinvest to improve the remarkability of our brands, with full awareness that this would weigh on near-term results as we sharpened our competitiveness. Now three quarters into that plan, we are seeing strength and momentum on critical building blocks for sustainable growth, namely household penetration, improved baseline volume, distribution, and market shares. This progress only reinforces our conviction that this strategy is the right one for General Mills, Inc. In North America Retail, our investments in remarkability are resonating with consumers. We are rebuilding household penetration and baseline growth, which are the key indicators of future growth. In pet, we are adding households as well and fueling our fast-growing cat feeding portfolio and also taking steps to accelerate our growth through Love Made Fresh. We will continue to be competitive in North American Foodservice and International. We know there is still more work ahead. We know that. But with most of the reinvestment phase behind us, we expect to deliver meaningfully better top-line and bottom-line performance in Q4 and beyond. I also want to talk briefly about the other piece of news you may have seen yesterday, which was our agreement to sell our Brazil business. This builds on a strong track record we have in portfolio shaping both in acquisitions and divestitures—nearly a third of our portfolio once this is complete over the last number of years. Brazil includes our Yoki and Kitano brands. While it is not on the scale of pet or the yogurt transactions, it is the same disciplined approach we have consistently taken to reshape our portfolio, namely our desire to prioritize our resources and investments on brands and platforms where we have the strongest opportunity to generate profitable growth. This deal will enhance our margins and increases the International segment's focus on our key global platforms, including super premium ice cream, Mexican food, snack bars, and pet food, where we have stronger margin and excellent growth prospects. So with this transaction, as I said, we have turned over nearly a third of our net sales since fiscal 2018. As we look to fiscal 2027 as well, as we said in our press release, our number one goal is going to be to continue to improve our organic sales results while at the same time maintaining our industry leading—as well as the transformation initiative we have to make sure we are maintaining efficiency. In 2026, we are really pleased with the pound share competitiveness we have had in NAR as well as dollar share in the other segments. As we look at fiscal 2027, we will aim to improve our dollar share performance in NAR, as we have lapped a lot of these price investments and the rest of our Remarkability Framework elements take hold. We are confident in the strategy we have and we know that we are making progress. We will continue to do that in Q4 and into fiscal 2027. With that, let us open it up for Q&A. Operator: Our first question comes from Andrew Lazar from Barclays. Please go ahead. Your line is open. Andrew Lazar: Thanks so much for the question. Good morning, everybody. Good morning. So, Jeff, by the end of this fiscal year, General Mills, Inc. will have the bulk of the pricing investments behind it along with a lot of the remarkability work. You mentioned in your prepared remarks your expectation for more stable pricing next year as you lap the pricing. So I guess the key metric will be, right, can General Mills, Inc. return some level of volume growth in fiscal 2027, even in the context of category growth that remains, for now anyway, below the longer-term level? I was hoping for whatever you can share on expectations along these lines at this point, knowing you are not obviously going to get into specific 2027 guidance yet. Jeffrey Harmening: Andrew, you are on the right track in terms of our thinking. What I would say is that as we look at fiscal 2027, our goal really is going to be to increase our competitiveness in dollar terms. This year, we certainly did in pound terms as a result of all the pricing actions to be more competitive there, and in 2027, we will try to maintain the pounds as well as we can and, at the same time, let our innovation and the renovation on our core and our improved marketing and ROIs on our marketing campaigns do the job of increasing our dollar sales results. What we feel good about is that we have the building blocks in place, and we have taken a step up on new product innovation and renovation this year from where we were before. I would look for us to take another step forward as we look at next year, both on innovation and renovation, particularly in NAR and in Pet. So that will be our goal. It is a very volatile world, so what exactly that yields, we will talk about in June. We talked about at CAGNY, our category is growing about 1%. But as I said, volatile. We will come back with a revised view of what we think our categories will grow. But I can tell you definitively that our goal will be to increase our dollar share competitiveness across NAR, as we have done in the other three segments. Andrew Lazar: Got it. Okay. And then price mix, obviously, in categories, I think, continued to be positive despite some of your price investments. What have you seen competitively in your key categories following your own price investments? Thanks so much. Dana McNabb: Good morning, Andrew. Thanks for the question. From a price mix standpoint, we have seen price mix in our categories up a little bit. That is behind some small brand innovation. But predominantly, in terms of our price mix this year, as you know, in the front half, it was about investing to get our base shelf prices right. It was not about promotion activity, adding frequency or depth. It was about getting below key cliffs and gaps in competition, getting that right, which is why our price mix is down. As we start to lap that, we saw it a little bit in the back half of this fiscal year, but really the full lap will occur in the beginning of next fiscal year. We are starting and we expect to see that price gap close, starting first with our Pillsbury business and cereal, and then we will start to see some of our fruit snacks come along. We do expect to get back to price mix growth in fiscal 2027. Andrew Lazar: Thank you. Operator: Our next question comes from Leah Jordan from Goldman Sachs. Please go ahead. Your line is open. Leah Jordan: Hi. Thank you. Good morning. Building on some of that, you called out the step up in innovation this year. Can you talk about how that has been resonating so far? How is the growth tracking for new products versus the 25% goal that you had stated previously? And as we look ahead, I know you called out strong seasonal events for 4Q. What should we be looking for? Any early commentary on 2027 as well? Jeffrey Harmening: Overall, I would say we are really pleased with our innovation and we are tracking at about 25%, maybe a little higher in North America Retail, and between 20–25% for the portfolio in aggregate. I am really pleased with what we have seen out of NAR. Maybe I will have Dana give a little bit of color on what is resonating. Dana McNabb: From a NAR perspective, I think we will land a little bit higher than the 25% growth from new products. We have really leaned into mainstream premium benefits such as protein and fiber, and better tasting news on some of our snacks items, and that is resonating really well. I will use Cheerios Protein as an example. The biggest brand gaining a protein benefit—that is going to be $100 million by the end of this year. Some of the taste renovation that we have done on our salty snacks and our fruit snacks is resonating incredibly well. And then, of course, big businesses like Pillsbury and grain, where we have been able to bring great-tasting bake-up-bigger news or protein news, is resonating really well. So we are getting really good trial and repeat on our new product this year, which, of course, is encouraging for next year because it means year two on those items will be helpful to us next year. I think the plans next year are even better. We are going to see another step change in new products—again, better-for-you functional nutrition. We are bringing protein to the number one cereal, Honey Nut Cheerios. Our Ghost Protein Bars, which we have just started to launch, are turning very well. We are going to scale that nationally. We make fiber taste great. We have got Annie’s Fruit Snacks coming with fiber, Larabar Protein and Fiber, Ratio Granola and Fiber and Protein. As I look to some of the bold flavors we are launching, we are launching a new authentic Mexican brand called La Tiara. We have got hot honey coming on Pillsbury biscuits. We have got Tabasco Old El Paso kits and protein shells and chimichanga kits. We have really good innovation coming that is starting to ship this quarter, and we will support that with double-digit media investment, seasonal events, and really good in-store and online execution. I feel confident that now that we have got the shelf prices right and we have got pounds somewhat stabilized, when we lean into the rest of the Remarkable Experience Framework, we will be able to improve our performance next year. Leah Jordan: Okay. Great. Thank you. And then just a follow-up on Love Made Fresh. You called out an acceleration in recent weeks after some of the changes that you plan to make that you highlighted previously at CAGNY. Any more color on the magnitude of that acceleration, how we should think about further distribution growth from here, and then also an update on how your on-shelf availability is tracking? I know that has been an area of focus for you. Dana McNabb: Thank you for the question. I will just reiterate that we are pleased with where we see the Love Made Fresh launch so far. We have made really good progress in a lot of areas. We like our execution. We are above the 5,000 mark on coolers right now. We think our marketing execution has been strong, and we are getting great product reviews from retailers and from consumers. As we pointed out, the place that we needed to focus was strengthening our turns at shelf, and the number one place was our on-shelf availability. We realized we needed to have our store reps go to the stores every week to make sure that the coolers were full. We have had that happen now for about three weeks, and we have seen a step in turns in those stores. But again, it is only three weeks, so I would not want to lean into any specific number there, but we have seen a step up. The other two items that I think are going to be really important to improving our turns are that we did not have a stand-up resealable pack, and that pouch format is 55% of fresh sales. That is launching now, and we have that coming into the marketplace. It is two times the dollar ring of rolls, so that is going to really help us from a turns standpoint. From a building awareness standpoint, we are really pleased with how we have built broad awareness. We have to come down a little bit more in the marketing funnel and reach consumers and pet parents, tell them where they can find the product, and do more to convert to trial. Over the next month, we are definitely going to be adding more coolers. We are going to make sure shelf availability in those coolers is better with reps visiting the store once a week, and we are confident that we will see our turns improve. Leah Jordan: Very helpful. Thank you. Operator: Our next question comes from David Palmer from Evercore ISI. Please go ahead. Your line is open. David Palmer: Thank you. I wanted to ask you about the results you are getting from not just the Remarkability framework but the levels of spending, the kinds of spending that you are making, and maybe juxtapose it to what you did pre-COVID. A lot of, you know, 5% of sales in innovation is the activity rate that you had pre-COVID, and you have kind of gotten back there. Promotion spending has been restored, and you are leaning in on marketing as well. In that immediate pre-COVID period, you had stabilized your organic sales. What is different today versus then, just in terms of the responses you are getting from each of these growth spending activities? And I have a quick follow-up. Jeffrey Harmening: What has been different the last three quarters is that we have been investing a lot more in our base pricing, as Dana talked about, to maintain or improve our competitiveness. You are right, the level of new product innovation we have is approaching pre-COVID levels, which we feel good about. Our marketing is approaching pre-COVID levels, which we feel good about. Now our price gaps relative to competition will be approaching pre-COVID levels, which they have not been for the last couple of years, which is why we made this change in pricing. It is also why it gives us confidence as we look forward to Q4 and next year that our level of competitiveness in terms of dollars will improve because, as you said, we are getting back to the levels of activity—whether it is on the marketing side and innovation and media spending, or whether it is our price competitiveness—that we saw before. I would actually say Dana and her team have done a great job. Our level of renovation on our core is probably better than it was pre-COVID. That is what gives us confidence that, having gotten past the bulk of this pricing activity now on base price, the rest of the elements of our marketing framework will work a lot harder for us. You have hit on our thinking, which is that is what we see. The only other difference I would say externally is that the consumer is a little bit more stressed than in 2019. That is why we see our level of promotion activity up a little bit higher, even if the depth is not higher and frequency is not higher. Consumers are taking a little bit more away on promotion, which is why you see only a little bit of price mix in our categories. That is probably the one thing that has not bounced back all the way yet, but we believe that is a structural thing that is clearly cyclical, and as the economy improves, we would anticipate the consumers would improve with it. David Palmer: That is very helpful. Just one quick question. Maybe this one is for Kofi. In terms of the gross margin, this quarter was relatively low, maybe lower than what we typically see in a fiscal 3Q versus your overall fiscal year. If you can have stable organic sales in fiscal 2027, where do you think gross margins can live for this company? I am wondering about maybe something in the low thirties versus the mid-thirties—you know, the street is near 34% for fiscal 2027. If you do have stable organic sales, can you get back to mid-30s in terms of gross margins? Kofi Bruce: David, thanks for the question. I think you are starting with the right frame as we see it. We do see stable to growing volume as an enabler for returning and restoring our margins. We are not ready yet to go on record on where we expect them to be in 2027, but I think the path to improvement is certainly paved and aided by volume stability. What we find is when we have that, leverage improves obviously across the enterprise. We get more leverage out of our cost savings, which is always a significant contributor to stability and margin expansion in the middle of the P&L, as well as supporting reinvestment in the business. As a reminder, we are in the middle of a multiyear transformation initiative, which I would expect next year, on top of this year, will add meaningfully to productivity. As Jeff referenced, we would expect to see improvement in price mix and be able to leverage more of the full suite of our SRM levers as we step into next year. I think the combination of all those things will help us start moving back. In terms of where we would like to be for 2027, I will go on record as we get out of Q4 and into the first quarter of next year. Operator: Our next question comes from Michael Lavery from Piper Sandler. Please go ahead. Your line is open. Michael Lavery: Thank you. Good morning. Maybe following up on that and drilling in a little bit more to the inflation piece of it. You cited some inflation pressure this quarter already. Looking ahead, can you give a sense of what you see for fiscal 2027, maybe both with and without potentially elevated oil or diesel or oil derivative costs, and just an early sense of how it is shaping up? I know you have the savings you have given some color on, but how hard does that have to work to offset some of the inflation you might be looking at? Kofi Bruce: Appreciate the question. We are not prepared to give you the full suite of our assumptions for 2027 yet. Our best estimate right now on range of inflation is roughly in line with this year, inclusive of, maybe on margin at the far end of the range, some more modest pressure from the macro basket. Labor probably still remains one of the biggest inflationary components of our cost structure, whether embedded cost in logistics or manufacturing, or pass-through even in our transformed commodities. I would share that as a reminder. The other critical tent poles are we would expect another year of industry-leading HMM at at least 4%. As I referenced in my last answer, some significant contributions on top of this year’s significant contributions from our transformation initiatives to help round out the picture. It is important, before I leave this point on 2027, to make sure that I give you some of the other sides of the ledger. We will lap the 53rd week, which is a tailwind this year and will turn into a headwind next year. We have one month of U.S. yogurt results reflected in this year’s results; as a reminder, that closed at the end of June, so we will expect to see that as a headwind. Incentive comp we would expect to normalize next year. Those are three things on the other side of the ledger as we look at next year’s tent-pole assumptions. Michael Lavery: That is really helpful. As you look at finishing fiscal 2026, early in the year, you indicated you expected positive organic revenue growth in fiscal 4Q. Now the language is just “improved trends.” Could you be specific if the positive organic revenue growth is off the table, or is that still something that you think is in reach? If so, would that be total company or NAR, maybe both? What is the right way to think about how the rest of the year unfolds? Kofi Bruce: If you track from the midpoint of our guidance, implied in the annual guidance is probably about 75–80 basis points at the midpoint of organic sales growth. While we are expecting continued competitiveness—so pound share and dollar share in the rest of our business to hold—we are not banking, in this guidance, on a dramatic turn in market performance in Q4. Instead, we are expecting a lot of this to come from some mechanical factors. We referenced in our remarks a significant retailer inventory headwind in Q3 that we would expect to flip to a tailwind in Q4. That is on its own probably worth about 200 points of benefit to organic growth in Q4. We would expect the rest of the improvement to come from the reversal of trade expense timing, which was a headwind in Q3 and will become a pretty healthy tailwind as we lap last year’s Q4. Michael Lavery: Okay. Great. Thanks so much. Kofi Bruce: You bet. Operator: Our next question comes from Alexia Howard from AllianceBernstein. Please go ahead. Your line is open. Alexia Howard: Good morning, everyone. Can I ask about the Foodservice weakness this time around? You mentioned bakery flour volumes. Is that something that is likely to persist? What does it tell us about some of those category or channel dynamics in that segment? Jeffrey Harmening: Alexia, for Foodservice overall, let me take a step back, and then we will get to flour. As we think about Foodservice, the eating occasions at home are about 86%, and that has been pretty stable over the last few months or so. Commercial traffic is down about a half a point, and noncommercial traffic is up about a point. As a reminder, we over-index in the noncommercial space. As we looked at the third quarter, you see our volume decline a little bit and you see profitability decline. I will remind you on the profit side, about half of the decline is the yogurt divestiture. So when you see that big number for that decline, know that about half of it is yogurt and about another 30–35% is flour. Those are the two biggest items. As I think about the fourth quarter, we are thinking that our flour business will come back in the fourth quarter of this year. We will see what happens. Because of the complex nature of distribution through Foodservice, the movement is a little bit slower one way or the other. I am really proud of our competitiveness in K–12 schools and the fact that we have changed to natural colors ahead of when we said we were going to do, and we are competing quite effectively outside of flour. So outside of that one piece of our Foodservice business, I am pretty pleased with our performance and our level of competitiveness. This forecast we have for the rest of this year would not contemplate becoming more competitive on flour for the next three months. Alexia Howard: Got it. And then can I follow up on Love Made Fresh? You had the 5,000 cooler goal for January, which I think you hit, and it is probably a little bit above that now. Is there another milestone in terms of additional distribution that you can share, or at the moment is the focus on getting the turns up before you have another big move forward on the distribution side? Jeffrey Harmening: On the distribution side, there are the number of coolers and then the distribution within those coolers. To the extent we just launched a stand-up resealable pouch, that will add distribution, but it may not add the number of stores. It will add the number of SKUs we have in the store that we are currently in, and we think that is going to be the most productive. Our focus really is on enhancing the turns where we are. To the extent we get a little more distribution, that is okay too. But as Dana talked about, making sure that availability is increased significantly and that our marketing is taking place at the lower end of the funnel, closer to the point of purchase, that is going to be our focus. We know we have a great product. Now we have good distribution. The job to do now is to make sure we keep improving the turns where we are. As Dana said, three weeks into having more people at the shelf more often, we are seeing positive benefits of that. We will look to see that continue as well as redoing our marketing mix so that we have more at the point of attack, if you will. Operator: Next question comes from Robert Moskow from TD Cowen. Please go ahead. Your line is open. Robert Moskow: Dana and Jeff, I was hoping to dive into the high single-digit decline in Snacks. The salty snacks segment of the market has become much more competitive with price cuts and innovation. I wanted to know if some of that is just adjacent to you, or do you think that is carving into your brands at all? What gets us back to growth in that segment? Dana McNabb: Thanks for the question, Rob. Good morning. Starting first with salty, in the categories we compete in we are not seeing the same trends as some of the other salty competitors. In salty, this is a business where we have had three consecutive quarters of pound and dollar share growth. We are seeing consumers respond to our price investments. We have had really good price pack architecture, and the product renovation that we did to improve the flavor is resonating really well. Our salty business has performed incredibly well, and we think that will continue into next year. The challenge we have seen is really on our hot snack business. That is what has driven the deceleration that you are seeing in Snacks. As I have talked about before on hot snacks, one of the main drivers of that with Totino’s is that we did a price pack architecture conversion. We moved from a bag to a box, and in today’s economic times when the consumer is stressed, they did not see any value in that box, and we saw sales decline significantly. We are in the process of converting that back now. The retailers have been really supportive. We think we have got the price right, and we have really got to up the product quality and how we are talking about the product to consumers, which you will see going to marketplace this year. That is our main focus for Snacks going forward. On our grain snacks and our fruit snacks, it is about making sure we taste great and we have enough better-for-you innovation with protein and fiber, which we really do. We are leaning into the Annie’s business in our snacking categories, which we also think will work incredibly well for us. Robert Moskow: So ex-Totino’s, are Snacks stable, or can you tease it out for us? Dana McNabb: Ex-Totino’s, Snacks overall for us would still be down slightly. That is driven by our grain business. Our Nature Valley business is performing pretty well. Our proteins are doing really well, our wafers business is doing really well, and actually Fiber One is on the comeback with GLP-1 users, but it is still down. In Grain, consumers are moving towards more performance nutrition. That is why you have seen us ramp up this Ghostar innovation that is performing really well—high protein, low sugar. We are going to scale that nationally right now. We will continue to lean into everything that is working well on Nature Valley, and we will double down with GLP-1 users on our Fiber One and Protein One business. Jeffrey Harmening: As Dana said, the biggest challenge really is Totino’s, and a little bit in bars as well. Bars is about innovation; we think we have a good story there. Unlike what you might have heard from others on salty snacks, our salty snacks business was up double digits in the third quarter. I am really pleased with what Dana and her team have done in salty snacks. We have really good price pack architecture, Chex Mix is flying, and our fruit retail sales are flat. If you decomp the whole thing, we are really strong in salty snacks and home meal and fruit. The job to do really is primarily on Totino’s, with a little bit of bars as well. Robert Moskow: Got it. Thank you. Operator: Next question comes from Scott Marks from Jefferies. Please go ahead. Your line is open. Scott Marks: Thanks for taking our questions. First thing I wanted to ask about is some of the retailer inventory adjustments that you called out. Could you help us understand what parts of the NAR and Pet business were impacted, and how we should be thinking about the reversal in each of those segments for fiscal Q4? Dana McNabb: Thank you for the question. We have definitely seen some quarter-to-quarter fluctuations as it relates to retailer inventories. From a NAR perspective, we typically see our net sales and our retail sales trends track relatively consistently. They were a little bit off in Q3, and we think that will revert back in Q4. It is Pet where we see the more significant gap. That is about three points. As we look to Q4, our current guidance does not really contemplate a headwind or a tailwind from Pet in Q4. Historically, it has been really hard for us to predict shipment timing and retailer inventory in Pet, so we think the best planning assumption is to assume that it is going to be neutral in Q4. Scott Marks: Understood. Then I wanted to ask a little bit about the guide. Holding the guide implies maybe a fairly wide range for Q4. Can you help us understand the swing factors that could push results towards one end or the other? Kofi Bruce: Sure. The guide on profit is maybe even appreciably wider than on the top line. On the top line, as I referenced earlier, we are expecting the mechanical factors of the retailer inventory reset, which we expect to improve our organic growth rate about 200 basis points over Q3—so about 50 basis points in the quarter—and then our trade expense timing to carry the rest on the top line. On the bottom line, as Dana referenced in her remarks, we saw some additional pressure on top of things we had already anticipated going in. Specifically, going into Q3 we would have expected remarkability investments, divestiture headwinds, and trade expense timing comparisons to be a drag. Those accounted for about two-thirds of the decline in Q3. The other remaining factor that was frankly still variable and wide as we came into CAGNY and reset guidance was around shipment timing and the weather-related factors that impacted shipment timing and supply chain disruptions for us. Those added additional pressure to the results and largely account for the width of the range on profit. Our ability to recover fully from some of the cost overhang from the supply chain disruptions—we are making progress, but at the low end of our guidance, we might not be able to fully recover. At the more positive end of our guidance, we would see a more full recovery in those costs, as well as the factors around trade, supply chain, and retailer inventory flipping to tailwinds in the quarter. The last thing I would leave you with is a reminder that we do expect to see a significant contribution from the 53rd week in Q4, and that is baked into our guidance as a mechanical factor. But really the variability around supply chain and retail inventory recovery would account for the width of the range on profit. Scott Marks: Understood. Thanks very much. Operator: Our next question comes from Peter Galbo from Bank of America. Please go ahead. Your line is open. Peter Galbo: Kofi, back to the question around inflation for next year. I know it is probably still a little too early to know fully, but a couple of your peers have called out freight as a potential headwind, and I think freight even outside of what has happened in diesel. Can you comment on what you are seeing in terms of driver tightness or anything that might be a potential hiccup on that side? Kofi Bruce: Broadly, I do not know that we would call out different factors. We are tracking those. We are not done with our fiscal year, so we do not expect those to be material in this year given we are largely hitting at our contracted rates. It is a variable that we are factoring into the range that I gave you earlier in the call on our expected inflation for next year. We will be prepared to give you a more full picture in two more months as we close the quarter and the year. Peter Galbo: Okay. Fair enough. And Jeff, maybe this did not get a lot of air time, but the decision on Brazil—I do not think it comes as a huge surprise. Can you provide a few more details into the thinking to exit the market and what drove the decision this time? Jeffrey Harmening: It stems from our strategy to really focus on our core global brands outside the U.S. There we have a great right to win with our core global brands. They are fast-growing and quite profitable. As we looked at our Brazilian business, our Brazilian team has done a really nice job, but the challenge for us in Brazil is that not only are we under scale, but also our portfolio there is not really our global brands. It is some good local brands. The combination of having these local brands as well as not having the scale means that our Brazilian business has not been very profitable for quite some time. The idea to divest our Brazilian business is really a factor of our focusing on our core global brands, which will enable us in our International segment to improve our margin profile—which we have done a really nice job of this year, but there is another step change to go—and the divestiture of this business will help us do that while maintaining our growth and increasing our margin profile. In doing that, we will be able to shift our resources to places where we think we have a longer-term right to win that will be more profitable for us. Peter Galbo: Okay. Jeff Siemon: Thank you very much. Julianne, I think that is all the time we have this morning, so we should wrap there. Thanks, everyone, for the good questions and discussion, and we look forward to speaking with you over the course of the coming quarter. Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.
Operator: Good day. Thank you for standing by. Welcome to the dLocal Fourth Quarter 2025 Results. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand it over to the company for opening remarks. Mirele de Aragao: Good afternoon, everyone, and thank you for joining the fourth quarter 2025 earnings call. If you have not seen the earnings release, as always, a copy is posted in the financial section of the Investor Relations website. On the call today, we have Pedro Arnt, Chief Executive Officer; Guillermo Lopez Perez, Chief Financial Officer; Christopher Stromeyer, SVP of Corporate Development; and Mirele de Aragao, Head of Investor Relations. A slide presentation has been provided to accompany the prepared remarks. This event is being broadcast live via webcast, and both the webcast and presentation may be accessed through dLocal's website at investor.dlocal.com. The recording will be available shortly after the event concluded. Before proceeding, let me mention that any forward-looking statements included in the presentation or mentioned in this conference call are based on currently available information and dLocal's current assumptions, expectations and projections about future events. While the company believes that our assumptions, expectations and projections are reasonable given currently available information, you are cautioned not to place undue reliance on those forward-looking statements. Actual results may differ materially from those included in dLocal's presentation or discussed in the conference call. Forever reasons, including those described in the forward-looking statements and Risk Factors sections of dLocal's filings with the Securities and Exchange Commission, which are available on dLocal's Investor Relations website. Now I will turn the conference over to dLocal. Thank you. Pedro Arnt: Good afternoon, everyone, and thank you for joining us today. 2025 was a year of exceptional execution, one that proved the strength of our business as we continue to build a world-leading financial infrastructure platform for emerging markets. Our business flywheel is accelerating. High growth in a massive and expanding TAM, strong customer loyalty and retention, a growing capacity to innovate and an asset-light high cash conversion financial model. We demonstrated the scale of the emerging market opportunity. Our TPV reached $41 billion, up 60% year-over-year and accelerating as the year progressed. Revenue crossed the important milestone of $1 billion for the first time. We continue to deepen our merchant relationships. TPV retention reached 158% and net revenue retention, 145%, both strong testaments to the value of the service we offer and our ability to ride the secular waves of emerging market growth alongside our merchants. We also continue to advance our developing innovation engine. Buy Now Pay Later fused products are now live across 6 countries with solid merch adoption. We've completed the launch of our full-service stablecoin suite, enabling merchants to on- and off-ramp fiat to stablecoins, settle and be settled in stablecoins and collect at checkout in stablecoins. And we continue to add an ever-growing portfolio of APMs, a SmartAPM platform. We also delivered strong cash generation in the year that ended adjusted free cash flow was $191 million, up 110% year-over-year with a 97% conversion ratio, all this strength in our P&L was driven primarily from our sustained TPV growth with merchants in 2025. Flowing on from TPV growth, gross profit grew 37% year-on-year. And despite a still active investment year, we expanded adjusted EBITDA as a percentage of gross profit by 5 percentage points, underscoring the operating leverage inherent in our financial model. As a consequence, net income reached $197 million, up 63% year-over-year. Taking a step back, it's important to acknowledge the consistency of our TPV growth over our entire history. From 2020 to 2025, TPV has grown at an 82% compound annual growth rate. It hasn't really decelerated that much when we see 60%-plus growth in 2025. At the size we have today, these high levels of growth drive significant incremental dollar volumes. Case in point, in Q4 2025 alone, we added more TPV quarter-over-quarter than in the prior 3 quarters combined. The scale of this is worth pausing to reflect on. In 2025, we processed in a single day what we processed in all of 2016. Over the year, we handled approximately 3.5 billion pay-in transactions which is equivalent to around 6,700 payments every minute, every hour of every day. On the payout side, more than 100 million individuals received a payment through dLocal. And so despite it still being the early days for our company, this kind of scale sets us up well for competitive advantage in costs, operating leverage data accumulation and organizational knowledge. We now process payments in 44 markets across the Global South, nearly doubling our footprint over the last 5 years. With an increasing number of markets becoming meaningful contributors to overall volume, 2025 also represented acceleration in financial metrics. When we compare our 2021 to 2024 gross profit, adjusted EBITDA and net income against our 2025 growth rates, the sustainability of high levels of growth at much larger size is clear across every line. The business continues compounding solid growth even as it scales, and there's a reason for this. Merchants are increasingly global, but financial infrastructure remains local and ever more complex and locally regulated. Emerging markets continue to be defined by fragmented payment infrastructure, regulatory complexity and rapidly evolving localized consumer behaviors. The structural challenges are exactly why our platform exists and has such wide adoption among the world's most successful digital companies. We address complex financial infrastructure challenges that our merchants lack expertise in and prefer not to focus on. And there is still room to continue doing this for a very long time. I'd like to share a few examples of such complexity. We now hold 37 licenses across 26 markets, adding 4 in 2025 alone, including Argentina, Chile, the UAE and the Philippines, with 16 additional applications in process including for the United States. Without these, serving customers with the local financial infrastructure that their consumers expect would not be possible. Alternative payment methods already account for the majority of e-commerce volumes across EM markets. And our APM volumes continue to grow as we deepen capabilities around tokenization, biometrics, improved regulatory compliance and increasingly offer instant rails being built across the Global South. On stablecoins, we've offered a full suite of stablecoin solutions for merchants. And on AI agents, a possible new frontier for commerce, we are collaborating with Google on the AP2 open standard for interoperable AI engine payments to ensure local payment methods across emerging markets are part of that infrastructure for the ground up. Most importantly, we simplify and abstract away all this complexity through a single, unified, world-class platform. Our ability to offer one integration covering the widest and deepest footprint across the Global South, the most markets, the most payment methods per market is our durable differentiator. That is the One dLocal proposition. And the more complex the environment becomes the more valuable it gets. I think it's worth highlighting a few examples from this last quarter alone that exemplify what I've been talking about. On stablecoins, we now offer merchants a complete infrastructure suite for digital assets from treasury and effects through on and off ramps all the way to stablecoin acceptance at checkout and settlements in stable with leading partners, including Circle, BVNK, Fireblocks and Felix. On Buy Now Pay Later, our Fuse product grew 88% quarter-on-quarter during the fourth quarter. a clear signal that merchant and consumer appetite for installment-based payments is real and rapidly accelerating. And on alternative local payment methods, we continue expanding depth and intelligence across markets and use cases to deliver improved performance; from biometric authentication and tokenized card on file to instant payment rails, DHL Express and Open English are among the latest merchants to go live with these capabilities. APMs currently account for a significant portion of our quarterly TPV. The value to our existing merchants of the product and service model we offer becomes clear when looking on our retention metrics. As merchant rides the secular trends in our markets, scale into new geographies and adopt new payment methods or expand them into new use cases, dLocal grows with them. This is the compounding nature of our model reflected in our TPV retention rate and net revenue retention. Equally important to our growth algorithm is the size of the market we are pursuing. Estimates place the total addressable market for digital payments across the urging markets at over $2 trillion and expect it to double by 2030. And we currently hold the less than 2% of that market, while our share of wallet with existing merchants is only approximately 10%. We're scaling fast and yet the runway ahead remains enormous. This dynamic is also visible in the breadth and depth of our merchant base. Total merchant count reached more than 760 in 2025 and the diversity of that base continues to increase. Revenue concentration in our top 3 markets has declined. And our top 10 merchants account for a lower share of total revenue than in the prior year, reflecting broader platform adoption across geographies and verticals. And while admittedly, concentration remains, the business has become not only increasingly diversified, but also stickier. Today, we serve our top 50 merchants across an average of 12 countries and 50 payment methods. That multi-country multi-payment method engagement is the clearest expression of the resilience and compounding nature of what dLocal has to offer. All along, these results have been delivered with best-in-class efficiency. Our gross profit per employee has improved despite continued investment levels, with AI and automation as growing key enablers. In 2025, AI-driven automation delivered the productivity equivalent of roughly 7% of total headcount, allowing us to scale without proportional cost increases. More importantly, we expect further progress throughout this year. We have a clear self-reinforcing logic to our business model. high growth drive scale, scale drives efficiency and efficiency generates the cash we reinvest to extend our lead or generate greater shareholder returns. This continued our track record of strong cash generation, which positions us to reinvest in technology product and commercial capabilities, while maintaining sufficient liquidity and returning capital to shareholders. As previously announced, I'm very pleased to have Guillermo Lopez Perez, on board as our new Chief Financial Officer. This will be Guillermo's first earnings call in the role and we're all very excited to have him leading our finance organization. And so with that intro, let me hand the call over to him. Guillermo Perez: Thank you, Pedro. I am thrilled to have joined dLocal and report of this team's next chapter, and good afternoon, everyone. As I shared with some of you in London a few weeks ago, the opportunity ahead of dLocal is enormous. And the business this team has built over the past 10 years is exceptional. I look forward to having more conversations with you in the coming months about how we are strengthening and scaling dLocal. So Pedro walked us through some full year results. Let me focus on our performance in the fourth quarter. TPV surpassed $13 billion for the quarter, growing 70% year-on-year and 26% quarter-on-quarter. This is our highest quarterly volume in dLocal's history and our fifth consecutive quarter of above 50% year-over-year TPV growth, a sustained trend that reflects the strength and consistency of our business. As you can see as well, we are exiting 2025 with very strong momentum in TPV growth. This growth was broad-based across our key markets and verticals. It was particularly strong in Brazil, in Mexico, South Africa and Colombia. On the vertical side, on-demand delivery stood out in the quarter, driven by existing merchants ramping up expansion deals across Argentina, South Africa, Mexico and Colombia. E-commerce continued its positive trajectory, delivering a seasonally strong quarter, particularly in Mexico, Brazil and South Africa. And advertising recovered quarter-on-quarter, supported by the partial return of volumes in Egypt. Q4 was a strong quarter to finish the year as well from both a revenue and gross profit perspective. Revenue reached an all-time high of $338 million, up 65% year-on-year and 20% quarter-on-quarter, demonstrating that our TPV momentum is translated into very strong top line performance. Gross profit reached $116 million, up 38% year-on-year and 12% over Q3. It reflects the natural margin pressure dynamic of scaling volume with established merchants and into new payment methods, products and countries. But even with that natural margin pressure, we added $32 million of gross profit year-over-year in the quarter, nearly a 40% growth. On a sequential basis, besides higher local-to-local volumes and the typical Q4 enrollment seasonality, the gross profit story was driven by 5 main contributors. Brazil led the growth where we saw very strong seasonal e-commerce growth, supported by solid trends across streaming, advertising, financial services and remittances. Egypt partially recovered versus Q3, reflecting the return of a large merchant and the ramp-up of new e-commerce streaming and ride-hailing metals. Mexico contributed thanks to a strong volume growth in e-commerce, on-demand delivery and ride hailing and Other Africa and Asia contributed with broad-based growth, with a notable contribution from South Africa, where we are increasingly operating with more global merchants. Argentina, on the other hand, was the primary drag to growth. While underlying volume growth was very strong, gross profit was held back by higher cost amid election-related FX and rate volatility. Q4 continued to demonstrate the operating leverage inherent in our business. Total operating expenses were $53 million for the quarter, up 28% year-on-year, driven primarily by our investment cycle related head count growth and higher average salaries following our merit cycle. Adjusted EBITDA reached $78 million, up 38% year-on-year and 9% quarter-on-quarter. Starting 2026, we are introducing operating profit to provide investors with greater transparency into our operating performance. As the business scales, adjustments represent a declining share of revenue and we believe this metric offers a more standardized basis for comparison with industry peers. Net income totaled $56 million for the quarter, up 87% year-on-year. and 7% quarter-on-quarter. Year-over-year growth reflects a lower effective tax rate in the quarter, driven by a more favorable jurisdictional mix and the nonrecurrence of a onetime tax settlement recorded in Q4 of last year. Return on equity reached 35% on a last 12-month basis, up 10% points year-over-year and continued on to increase every quarter. The improvement in ROE reflects both a stronger profitability and the effects of our capital return policy, mostly the inaugural dividend payment in 2025. Finally, adjusted free cash flow for the quarter was $65 million, doubling year-over-year with an adjusted free cash flow to net income conversion ratio of 117%. The quarterly conversion can fluctuate with items like tax payment timing. But on a full year basis, we converted close to 100% of net income into free cash flow. This is a business that converts growth into cash at an exceptional rate. With that, I'll pass it back to Pedro, who will speak to how we are deploying this strength. Pedro Arnt: Thank you, Guillermo. 2025 confirmed what we've long believed. The opportunity in emerging markets is massive our model is the right one to capture it, and our team executes consistently across a complex and dynamic environment. We enter 2026 with a clear strategy, a strong platform and a proven track record. This year also marks 2 milestones, 5 years as a listed company and 10 years since our finding, a reminder of how far we've come in so little time and how much of the opportunity still lies ahead. Let me turn to our outlook for 2026. We expect continued strong growth in the key market share and product market fit measurement that is total payment volume. We currently see TPV growth in the range of 50% to 60% year-over-year. Greater volume drives pricing leverage with downstream providers, improves FX liquidity and generates better data that feeds conversion rates. This is the compounding logic that excites me the most about our long-term trajectory in this business. We're guiding for gross profit growth of 22.5% to 27.5% year-over-year. As existing merchants grow and large clients continue to scale, we expect more volume-based discounting that is embedded in our long-term customer relationships. At the midpoint, this implies gross profit dollars, what we managed to of $0.5 billion in the year. On profitability, we are guiding for operating profit growth of 27.5% to 32.5% year-over-year. Following a 2025 investment cycle, which has overhang into early 2026 as salaries and wages spend from '25 hirings gets annualized, we expect operating leverage acceleration to become evident more towards the second half of the year and then flow into the following year. As a reminder, emerging markets remain inherently volatile, and our projections reflect those uncertainties. These conditions are not new to us. We've built this business to navigate exactly this kind of complexity, and we remain confident in our guidance. We believe we are only scratching the surface of the opportunity ahead when I take a longer-term view. So I wanted to leave you with a way of thinking of that opportunity further into the future. First, the growth of our existing merchants in markets where we serve them today. The world-class companies we serve are riding some of the strongest secular trends: digitization, middle-class income growth and e-commerce penetration. In many cases, there are entire lines of businesses for which they have not yet localized their payments infrastructure. Second, geographic expansion with existing merchants. We serve merchants across an average of 12 countries today, but we operate in over 44. Further expansion into Asia, the Middle East and Africa where we see increasing merchant interest will be an even greater growth vector going forward. These 2 elements are what will drive increases in our consolidated share of wallet of our existing merchants. And they also explain why we expect continued high TPV retention rates with these merchants. On top of that, our growth will be powered by new merchants. Our last 2 years have been predominantly driven by the strength of our existing base. However, we're seeing strong commercial traction with new merchants across priority verticals such as travel, crypto, gaming and AI as they move further along the emerging market payment adoption curve. We expect new merchant contributions, therefore, to increase over the medium term. And fourth is our innovation engine. While near-term P&L impact is still expected to be modest we see multibillion TPV opportunities in our wider financial infrastructure bets such as Buy Now Pay Later, enhanced merchant of record solutions, virtual accounts and our soon-to-launch card-present offerings. Finally, and before I close, I'd like to cover capital allocation. We continue to have enormous confidence in the cash generation capacity of dLocal. The asset-light nature of the business, negative working capital requirements and potential for operating leverage ahead of us gives us a growing free cash flow profile even under conservative projection scenarios. In addition, we currently operate with minimal debt. And while we remain disciplined do not rule out using it in the future as a way to secure additional cash or enhance the efficiency of our capital structure. Our allocation framework is structured around 4 priorities: first, invest to sustain high levels of growth that we aspire to; second, ensure the appropriate liquidity buffers given the volatility of the markets where we operate; third, selectively be prepared for M&A if it accelerates our strategy; and fourth, return excess capital to shareholders. On this last point, through the end of 2025, we have returned 64% of adjusted free cash flow generated since 2022 to our shareholders. We intend to maintain this disciplined approach to capital returns going forward. Consequently, we're confirming our dividend policy of 30% of the prior year's free cash flow, which this year translates to $57 million. Additionally and upon thorough analysis and consultation, we believe that our business will generate sufficient cash in the medium term beyond our minimum liquidity requirements and dividend policy commitments. This allows us to increase returns to shareholders. As a result, the Board has approved a new share repurchase program of up to $300 million of our Class A common shares. The policy is a first step in what should become a multiyear capital allocation model that combines the predictable discipline of our diligent policy with add-on allocations for share buybacks that will prove accretive to EPS. The precise quantum of these plans will be determined by multiple factors. Among them, trading volumes to ensure the adequate liquidity for our shares, continued confidence in excess free cash flow generation and analysis of the potential for other areas of investment that can generate even higher total shareholder returns. We trust that these corporate finance decisions and programs highlight our commitment to be prudent allocators and custodians of your capital as shareholders in dLocal. And now finally, these are turbulent times. So to close, I want to highlight what makes our story special and more importantly, durable. We have a business that is growing rapidly highly profitable on a cash basis with low leverage and high and increasing return on equity. That combination of growth, profitability and financial strength is where as a team, we remain fully focused on the lung game, disciplined growth, continued product innovation and sustainable value creation for our merchants and our shareholders. The opportunity across the emerging market landscape is vast. Our platform is uniquely positioned to capture it. and our track record gives us confidence in our ability to continue to execute against this strategic vision. Thanks, everyone, for your continued support, and we can now open the call to take your questions. Operator: [Operator Instructions] Our first question will come from the line of Tito Labarta from Goldman Sachs. Daer Labarta: A couple of questions, I guess, to start. First on the TPV growth guidance, as you mentioned, Pedro, you have continued strong opportunity for growth there. Just if you can give a little bit more color on where you're seeing the growth come from this year? Is it a continuation of like Brazil, which has been growing quite a bit more in Africa. Just any color that you can give on where you think the PPV growth will come from by country, by vertical, like e-commerce has been strong. Any color on that, I think, would be helpful. And then my second question, specifically on the quarter, in Argentina, we saw actually very good revenues. Gross profit were lower. I mean, I think you mentioned FX and some other things impacting costs. But how do you think about the gross margin in Argentina? Should we think of this as a one-off this quarter given everything going on there? And should that gross margin sort of recover to levels that we saw before? Just to think about the growth that we can expect, not just on revenues, but also gross profit for Argentina. Pedro Arnt: Great. Thanks, Tito. I'll take the first one. I'll leave the second one to Guillermo. So the strength of our business continues to be broad-based in terms of the guidance. Latin America will continue to deliver strong growth. We consolidate our position further in Africa with some critical markets there, sustaining growth. We've seen Egypt pick back up in the fourth quarter, and we assume that, that rolls into the '26 guidance. And we're also becoming increasingly ambitious in the Middle East and in Asia, where, despite being a late entrant we do see significant opportunity and will lean into that market as a long-term growth vector. The other part that we indicate, if you look at Page 27 of the slides is we also begin to see increasingly a better distributed set of growth vectors in the guidance, whereas our '25 results were extremely concentrated on share of wallet gains and organic growth of our existing merchants in existing countries. When we take our bottoms-up approach and probability adjust our pipeline to get to the 26% guidance numbers, we begin to see more participation coming from taking those merchants into new countries, which shows the depth of the relationships we're building and also the growing importance of frontier markets and smaller markets within the emerging world footprint as well as our expanding footprint into more parts of the globe, for example, Asia, as I just mentioned. And then also, we expect a pickup in new merchant impact in year 1. So a very strong cohort. And finally, still small, but I think if we take a midterm view, a very, very important part of what we're building are our new products. which allow us to further monetize and gain traction with our merchants. And more importantly, many of these ideally also become take rate accretive because they are higher monetization products. Guillermo Perez: Okay. So, let me take a start to your question on Argentina and feel free, Pedro, to chime in. So Argentina had a significant rate in FX volatility leading into the elections in Q3. I think this macro volatility was already mentioned in the previous earnings. Unfortunately, we show it remained elevated throughout Q4. which affected the cost of the funding sources that we use for our attachment business. But I think on a positive note, we continue to see very strong volume growth and Argentina remains a highly attractive market for us. It is one of our fastest growing countries. And when we calculate the returns on capital deployed really well above our cost of capital. So our thinking on Argentina, it is high growth, high return market despite this increasing volatility that we have seen. Daer Labarta: Okay. Very helpful, Pedro and Guillermo. If I can, just a quick follow-up on each. So we should expect that gross margin, which kind of suffered from the FX volatility as the FX normalizes, that should recover maybe closer to what we were seeing in the past. Is that correct for Argentina? And then Pedro, just curious on the stablecoin by now, I'll say later, I mean you mentioned those as opportunities. When do you expect those to become a sort of like significant contributors you expect already in '26? Is it more a '27, '28 story? just to think about the potential there? And what can -- how much that can contribute? Pedro Arnt: So '26 is more about the confirmation of product market fit and solid growth we gave an idea of quarter-on-quarter growth and Buy Now Pay Later above 80%. Now obviously, coming from a small base, so it still doesn't move the needle, unlikely that it moves the needle in 2026 but compounding at those levels of growth sequentially by 2027, ideally, that does become material in our P&L. And then on Argentina, we'll comment on how the market evolves when we get into it. As you know, Argentina is a particularly volatile country. I'd rather not be making forward-looking statements. I think Guillermo's point was, if we abstract ourselves from the short term, we look at TPV growth, we look at merchant interest in the country. We look in general at a country that seems to be on the right track. We expect a lot out of Argentina over the long term. Operator: Our next question will come from line of Guilherme Grespan from JPMorgan. Guilherme Grespan: Congrats on the quarter, very strong print. Two questions on my side. The number one is just on stablecoins. You mentioned a little bit on stablecoins by an operator APMs, but specifically on stablecoins. If you're seeing any pickup, Pedro or not in the volumes of table point, I think on the treasury of dLocal makes more sense, maybe it's picking up. But my interest is more on the pains and kind of adoption in if we're seeing any signal that stablecoins technologies already picking up in some way? And then my second question is just to check the box on United States license, should we read this as a U.K. license similar to that movement? Or it's specific to any service or product here? Pedro Arnt: On stablecoins, we are not seeing significant volumes or pick up in stablecoin at checkout. We do begin to see growing interest in merchants and understanding the product that we've come to market with, understanding regulatory requirements and how each market works but I would not say we've seen volume. Where we're seeing the most volume within that vertical is serving digital asset marketplaces exchanges with the legs on the way in and the way out, so what we call pay-ins and payouts. And then increasing and growing conversations with corporate treasuries and our clients' treasuries on the usage of stablecoins in particular markets where they may have a cost benefit or a speed benefit or a 24/7 settlement benefit, which I think over the next few years, will probably be the largest of those 3 segments that we offer products around, which is stablecoins as a payment means or settlement means, stablecoin on and off ramps to fiat and corporate treasury adoption. Guillermo Perez: That's clear. Pedro Arnt: There's a second part to this question or a second question, which was on U.S. licenses. We continue to be solely focused on the emerging market global footprint. As I said, we're very excited in our forays into the Middle East and Asia. So there's not an ambition here to offer developed market solutions. We see our strength and our differentiation and our ability to leverage over 10 years of building infrastructure, and pipelines across the emerging world. Those licenses just facilitate settlements to merchants and simply allows us to operate on our own licenses in an increasing compliant way rather than have to rely on licensed partners. Operator: Now for our next question will come from line of Pedro Leduc from IBBA. Pedro Leduc: Congratulations on the strong close of the year. First question on Brazil revenues and gross profits. Gross profits growing much faster than revenues here this quarter. I was wondering if you could detail to us a little bit, if it's product mix, client mix? Second, if you want to develop a little more on what dragged up the G&A expenses this quarter. And there's a comment in the prepared remarks that operating leverage should kick in, in the second half of the year you see it protrude within the profit and gross profit guidance. But if it's something that we should also expect the 4Q level to be still upon us here in this first half of the year? And if I may squeeze on the third. Just to clarify, I think there was a comment about present card operations going forward, if you want to detail a little bit more about that. Pedro Arnt: Okay. On Brazil, I would say, in general, Brazil really has begun to rebound. If we look at the TPV growth, it shows this tremendous strength in that market. And then Brazil also benefited from very strong monetization A portion of that is it's one of our largest markets. It's where we have a lot of TPV from mid-tiered merchants, which typically have slightly higher take rates. The vertical mix there with advertising performing well, that usually tends to be a slightly higher take rate. But it was a particularly strong quarter. I don't think that level of dispersion between TPV growth and gross profit growth is something that you should necessarily project into the future. So very strong in general, structurally strong really glad to see Brazil turnaround after a difficult '24. There's also an easy comp to a certain extent, but I think mission accomplished by the team there. We always said that we were confident that '24 was more about volatility and that there was still significant growth for us ahead in Brazil. It was particularly strong. I don't think that kind of strength necessarily should be extrapolated into the future. On G&A, very quickly because I think we tried to explain this, but important to understand the cadence into the quarter. If you look at our year, A lot of the growth in head count within our investment cycle was more backloaded to the second half of the year than the first half, not necessarily by design, but the way it played out. So what you're seeing there is very much driven by increased investment in engineers, in commercial teams and in operational teams. And that does have a spillover into 2026. I'll let us Guillermo cover that, but I think it's relevant. Guillermo Perez: Yes. I think you asked specifically about G&A, I mean, there were some one-off items, but actually you normalize for them. These nonrecurring at the underlying time on G&A is consistent with what we see in rest of OpEx. And the story of OpEx is on our Q4. It reflects the last leg of the hiring coming out of the investment cycle that Pedro started 2 years ago. We invested mostly in headcount, and there's also a component of our annual merit cycle increases. Now to help you understand how this is going to pan out in 2026, we are not planning to add any significant head count at this point in 2016, beyond a few hirings already mentioned at the end of '25. But given this '25 hiring is back loaded in the year, you should see higher levels of OpEx year-over-year growth in the first few months of and this cost as discussed are advertised. This growth should produce in the later months of 2026. But overall, we expect OpEx growth for the full year to be below gross profit growth, and the operating leverage imparted in our guidance is probably going to be a story for the second half of the year. It is worth noting as well that when you compare us to our peers, as we show in the presentation, we believe we are our own best-in-class in terms of the resources required to run a business of this scale and growth rate. And I think that's a reflection as well of the operating model that we built and very comfortable with the levels we are maintaining. Pedro Arnt: You had a third part to your question, I didn't jot it down. Pedro Leduc: There's some mention about card-present transactions that you're going to upgrade? Maybe I misunderstood it, but there's something in the call that mentioned that. Pedro Arnt: Yes. That's part of our innovation pipeline. I think there are select verticals where we have inbound interest from merchants who would like to use dLocal technology stack embedded in smart hardware and smart POS. So that would be our first foray in being able to capture some share of wallet in card-present processing, which is by far the largest market. If you look at dLocal until today, 100% of the merchants we process are digital merchants, so not card-present transactions. And through this new card-present platform, we'd be launching it would allow us to start having some share of wallet of the card-present market. Still focused a lot on global international merchants, where the advantage of one integration and then being able to deploy that across multiple markets remains unchanged. We're not changing our go-to-market strategy, but it does open a very large addressable market for us. Operator: Our next question will come from the line of Matt Coad from Truist. Matthew Coad: Pedro, I just wanted to do one more on the card present offering there. Could you kind of like touch on -- I assume that's more of like a 2027, 2028, even maybe 2029 story. But could you talk about if there's any kind of like upfront OpEx investment in 2026 to drive some of that growth? And then just second question. It seems like the large merchant coming back on board in Egypt is a pretty unique situation, bodes pretty well for dLocal. Could you guys kind of provide a little bit of color there? Like why did you lose share of wallet? And why ultimately did the merger come back to dLocal? Pedro Arnt: Great. Let's see. I don't want to get too dragged into this card present thing to not make too much out of an embryonic product launch. Everything we build is actually typically very determined by a specific merchant contract that's existing. And therefore, rarely ever do we invest significant OpEx ahead of having concomitant revenues backing it up. And I think this is yet another case where we will build alongside our client. And that allows us to gradually see if there's product market fit and how much more interest there is for what we're building and how much we can grow with that initial merchant. In general, that's one of the reasons we're so encouraged by the cash generation of our financial model is that we don't really make big investments ahead of existing real enterprise merchant demand to fund the build-out of the products. Egypt. I think Egypt, we've walked through this. I think regaining share of wallet is phenomenal. It doesn't surprise us, but losing it in the first place, we explained this was a merchant that we had a 100% share of wallet in. The merchant started rolling out redundancy. And in the initial phases of that redundancy, we lost a significant amount of that share. And through performance, we've gradually been recovering it. We will never return to 100% because the merchant understandably will always have redundancy. But certainly, at least over the last quarter, it's been 1 of recovering a lot of the market share that was initially lost when we moved to 100% to sub-50%. Guillermo Perez: I think the other thing to add on it is we're diversifying our business with the ramp-up of e-commerce is trimming and right-headed merchants, it's good to have and see that diversification. Operator: Next question will come from the line of Jamie Friedman from Susquehanna. James Friedman: I appreciate the new disclosures especially Slides 12, 13 and 27. So I want to ask about those. So in terms of the -- so if you don't have it in front of you, the share of wallet analysis on Slide 12, I think, is important. So if I'm reading this right, you're getting 300 basis points of share of wallet increase year-over-year is your estimate from your installed base, if that's right. I'm just trying to reconcile that, Slide 12 with Slide 27. How do we think about the share of wallet contribute to growth going forward and the contribution from new merchants, which you're articulating is expanding next year? Pedro Arnt: Jamie, so I think you've understood correctly. Slide 12 is an actual breakout of what was driving growth, which then informs the left-hand column of the slide further down. And if you look at '25, our TPV retention was phenomenal. And within that retention, it was very much driven by the growth of our merchants in the markets where we already serve them and share of wallet gains within those merchants in those markets. So think of that almost as the enormous expansion of the existing market we're in, and that's one of the great things about emerging markets is just riding the growth of our business partners as emerging market consumers become more and more digital and consume more and more of these global digital products gives us significant growth. On top of that, as we gain share of wallet in some of these merchants, things play out as they did in '25. What we see in our pipeline for '26 is that we see a pickup in growing into new markets with those merchants, better impact coming from new merchants. So we're beginning to see increasing pickup in new merchants globally looking to localize payments, and so we expect a lot out of the '26 cohort. And then finally, beginning to see, as I said before, product market fit and new products coming to market, whether that is buy now pay later, card-present, virtual accounts, and a few other things we've indicated. If you take a longer-term look, what we'd like is to see new products and new merchants increasingly becoming a bigger and bigger part of the story. James Friedman: And then if I could just follow up, Pedro. With the new merchant contribution contemplate for '26, Slide 27, 10%, I would have thought that those would be accretive to the gross profit take rate because they probably don't have the volume discounts because they're new. Is that a fair assumption? And because that is a bigger number next year than this year, so why is it that we're landing at like an 80 basis gross profit take rate at the midpoint next year if new merchants are ramping the way that they are? Pedro Arnt: So I think that's a generalization. And it depends very much on the new merchant and the new merchant potential and the size of their projected volume as well. So if you have the possibility to engage in a conversation with some of these new gen companies that are growing 11x Q-on-Q and convince them to adopt localized payments think you're going to focus on volume there and give them an attractive take rate. So it's not that easy to generalize. And I think more importantly and again, sorry for being so reiterative on this but the more we look at the size of the emerging market opportunity, the more convinced we are that the single most important thing for us is to continue to grow total payment volume to continue to drive to max scale and to not lose merchants or lose accounts on trying to maximize for take rate. at the end of the day at high TPV growth, which drives incremental gross profit dollars and solid gross profit growth with operating leverage, which drives even more solid operating income growth, we get the best of both worlds. Long term, we guarantee that we continue to be one of the scale leaders across emerging markets. And we feel fairly confident that if you have the merchant relationship and you're processing for them, we will figure out ways to monetize those relationships and all that TPV. So focused on TPV growth, focused on gross profit dollar growth and being scale leaders across emerging markets is what's implied in the guidance. not all new merchants that come in necessarily come in at higher take rates. It depends on the vertical, and it depends on the size and the potential of the new merchants. The new products do all tend to be accretive to take rate, but those are still quite small in terms of their impacts in the '26 guidance. Operator: Our next question will come from the line of Neha Agarwala from HSBC. Neha Agarwala: Congratulations on the results. Just a quick clarification on the OpEx on what I understand you're done with all the hirings that you needed, most of the investments. The reason why the operational efficiency will be visible more in the second half of this year is mostly because of base effect because some of those expenses will be on the first half. right? But most of the investments, the changes that needed to be done, those are already done. We don't have significant investments per se in 2026? And my second question is where do you see upside or downside risk to your guidance? What are the main factors that we should work out for during this year that could bring in volatility or diversion from the guidance that you have provided? Guillermo Perez: Let me take the first one and hand the second one to Pedro. So you're right, you're thinking about OpEx. We see a lot of the hiring in the second half of this year. There were just a few handles of positions that were open at the time that come in 2026. But from an OpEx perspective, what you're going to see is the annualization of those late in the year hirings budding out in '26. And so you will see that high year-over-year growth in the first few months, and that should normalize and come down in the latter part of the year in which we are predicting a reduction in the level of growth, that's correct. Pedro Arnt: Great. Let's say, I don't want to give you a trite answer. Clearly, as an emerging market operator, global macro, geopolitical and primarily how that flows through to FX are the clear -- we don't control, we don't know, but they can have an impact on our results. I'd say if we take a more micro approach within the things we do control, probably the largest risk. And this somewhat also answers Jamie question on the take rate implied is there have been some very strong global wins with some of our large merchants. I think the way we like to say it is we feel like we've moved into a new category of partnership with many of the world's leading digital companies where we now are one of the largest global payment processors, operating for them across multiple markets across the emerging world. And the expectation of the delivery on those contracts is a big part of the growth in 2026. So it is guidance that remains concentrated in a merchant perspective, less and less so in a country perspective because we're serving these merchants across many, many more markets and payment methods. But that's probably the biggest risk is that we do have to deliver on these net new adds in terms of markets and payment methods so that we continue to roll out everything that has been jointly agreed to in these large global contracts where we become one of their most important and trusted global financial infrastructure providers. Neha Agarwala: So I mean, if I put it differently, you said it probably goes upside risk to the volume growth with more of these big wins coming through but your ratio, which is the take rate ratio might get diluted because of that, but because you are very focused on volume growth. as that's the right strategy for the long term? Pedro Arnt: Gross profit growth, operating profit growth, obviously, earnings above all else and convinced that this is a race to scale as payments and financial infrastructure always are. And that, as I said before, if we have the TPV, we have the merchant relationships as our product portfolio widens, we have that TPV and those relationships to cross-sell new products and also to figure out different ways that we can help our merchants across the markets where we operate with them. So we continue to see take rate as an output metric. The metrics we manage to our TPV growth which reflect market share, share of wallet and how our merchants choose. Remember that TPV for us is revenue for our merchants and then be able to drive gross profit growth operating profit growth and earnings growth as a consequence of that sustained high level of compounding TPV growth. Operator: And with that, this concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Sera Prognostics, Inc. Fourth Quarter 2025 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press 0 for the operator. This call is being recorded on Wednesday, 03/18/2026. I would now like to turn the conference over to Jennifer Zebuda. Please go ahead. Jennifer Zebuda: Thank you, operator. Welcome to Sera Prognostics, Inc.'s Fourth Quarter and Full Fiscal Year 2025 earnings conference call. At the close of market today, Sera Prognostics, Inc. released its financial results for the quarter ended 12/31/2025. Presenting for the company today will be Zhenya Lindgardt, President and CEO; Lee Anderson, Chief Commercial Officer; Doctor Tiffany Inglis, Chief Medical Officer; and Austin Aerts, our CFO. During the call, we will review the financial results we released today, after which we will host a question-and-answer session. If you have not had a chance to review our quarterly earnings release, it can be found on our website at seraprognostics.com. This call can be heard live via webcast at seraprognostics.com; a recording will be archived in the Investors section of our website. Please note that some of the information presented today may contain forward-looking statements about events and circumstances that have not yet occurred, including plans and projections for our business, future financial results, and market trends and opportunities. These statements are based on management's current expectations, and actual events or results may differ materially and adversely from these expectations for a variety of reasons. We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the company's Annual Report on Form 10-Ks, its Quarterly Reports on Form 10-Q, and its Current Reports on Form 8-Ks. These documents identify important risk factors that could cause actual results to differ materially from those contained in our projections and other forward-looking statements. I will now turn the call over to Zhenya. Zhenya Lindgardt: Thank you, Jennifer, and good afternoon, everyone. I will start with an overview of our 2025 progress, and Lee and Tiffany will speak about our commercial and medical affairs efforts, and Austin will provide a recap of our financial results. As we shared last year, to support Sera Prognostics, Inc.'s next phase of commercialization, we strengthened our leadership team with Lee Anderson joining us as Chief Commercial Officer and Doctor Tiffany Inglis as our Chief Medical Officer, enhancing our commercial and clinical depth, and I wanted to use this opportunity to introduce them to all of you in today's call and have them discuss our progress with you. 2025 was a critical year for Sera Prognostics, Inc., finalizing our PRIME publication to advance our evidence portfolio, setting up for commercial push in 2026, building our organization, ensuring we have capital to deploy in our commercialization efforts, and laying groundwork for potential international expansion. Our goal was simple: to build the evidence, access, and commercial infrastructure required to drive PreTRM adoption at scale. Across all of these dimensions, we made meaningful progress. We began 2025 focused on strengthening the clinical and scientific foundation supporting our commercialization strategy. The presentation of PRIME study at Society for Maternal-Fetal Medicine meeting in Q1 was a major milestone, followed as expected late in the year when our pivotal PRIME study was accepted for publication in December, with a full manuscript published in January 2026. The publication reported important new data showing that the PRIME study resulted in an amazing 56% and 32% fewer babies born before 32 and 35 weeks of gestation, respectively. The full peer-reviewed publication of PRIME in the Pregnancy Journal of Society for Maternal-Fetal Medicine, like studies before it—namely AVERT—reinforces what we have long believed: that biomarker-based identification of women at higher risk of preterm birth paired with a preventive treatment protocol can deliver meaningful reductions in preterm birth rates and drive improved health outcomes for babies. As we move into 2026, we plan to extend this momentum through a thoughtful further analyses, publication, and real-world evidence generation strategy designed to communicate and replicate PRIME outcomes across diverse populations, geographies, and care models. These data will be essential as we engage payers and broaden awareness across the clinical community. I will ask Doctor Inglis to speak more about our scientific and guideline engagement shortly. Post-publication, we are making meaningful strides in advancing coverage and access as our top priority. A central part of the strategy has been launching targeted programs, particularly in Medicaid in high preterm birth burden states, to generate outcomes data that support both clinical adoption and reimbursement expansion. Historically, we referred to these efforts as Medicaid pilot programs. However, with additional real-world experience, it is clear that these programs take many forms, and our discussions involve both Medicaid and commercial payers. As a result, we believe partner programs more accurately reflect the breadth of our commercialization efforts, so we will speak about those. Last year, we set out to engage with our first wave of six target states and to launch partner programs. We exceeded our state engagement goals in 2025, expanding discussions to 13 states, and met our goal of engaging in now two live partner programs. We expect these partner programs to play a critical role in shaping policy, validating economics, and informing future contracting discussion. We are maintaining our disciplined geographic-focused approach, targeting expansion of up to 15 to 17 states by year end, representing 58% to 60% of U.S. births. This strategy allows us to deepen our traction in our existing target states while thoughtfully adding new ones. With this focused growth plan, we are on track to be running five to seven partner programs by the end of 2026. Lee will detail our execution 2026 KPIs for states in active discussion and partner programs, as well as how we expect to convert engagements into coverage pathways. In Europe, we continue to make steady progress towards unlocking a significant, largely unaddressed obstetric care opportunity. Over the last two years, we have advanced our regulatory pathway for the PreTRM Global test and are working towards CE marking approval. We remain on track to submit our European dossiers in the coming months. Importantly, recent European experts' commentary published in the Journal of Maternal-Fetal and Neonatal Medicine reinforces that current prevention strategies miss most women who deliver preterm and highlights our PRIME study approach as well aligned with European health care systems. Alongside ongoing engagement with regulators, clinical leaders, and patient advocacy groups, we are building the foundation needed for successful market entry following regulatory clearance. We continue to expect revenue growth to build gradually as partner programs mature and real-world evidence results are generated and disseminated. We remain disciplined, investing in market access, commercial infrastructure, and state expansion in a measured way. With that, I will hand it over to Lee to discuss our commercial execution. Lee Anderson: Thank you, Zhenya, and hello, everyone. In 2025, we refined a region-first approach pairing payer engagement with OB/GYN and maternal-fetal medicine education, health system outreach, and patient awareness to build local market density. That integrated model now guides our early commercialization across all target states. Following PRIME's publication, we saw strong interest across the payer landscape. Our team engaged broadly with Medicaid agencies, commercial plans, and related organizations nationwide, leading to a meaningful cohort of payers reengaging to begin or advance internal reviews. These interactions reinforce the value of our partner program approach, a flexible model that adapts to each state, payer, and population. As Zhenya mentioned, in 2025, we were in active discussions with 10 payers across 13 states. Looking towards 2026, we expect to expand our efforts to be in active discussions with 15 to 17 states, and we will double the number of payers we are engaged with. As these discussions mature, our goal is to convert these engagements into positive coverage decisions or formal partner programs that support broader access and utilization. For partner programs, we expect to be running five to seven active programs by the end of the year. We expanded provider education and awareness via peer-to-peer programs, medical center in-service sessions, and digital education through leading clinical platforms. Building clinical champions and strengthening relationships across OB/GYN and MFM practices while supporting early health systems conversations. Operationally, we refined the ordering experience, expanded field education, enhanced onboarding, and are progressing integrations and collaborations so that PreTRM can be incorporated more seamlessly into everyday clinical workflows. To illustrate how the model comes together, consider a representative region: we align with a payer on a partner program to evaluate outcomes and economics. We brief the leading hospital system and its OB/MFM department on PRIME and the care pathway. We also provide targeted onboarding and practice-level tools so ordering is simple, and we activate a localized awareness effort so that patients and providers understand the why and the how. Over time, we focus on repeat ordering within early adopters, then widen access as results occur and the payer's review process advances. While each region is different, this playbook helps us drive consistent execution without overextending resources. Our near-term commercial priorities are to convert payer discussions and partner programs into contracted coverage pathways using outcomes and economic data; scale repeat ordering within our current early-adopter providers and health systems by driving workflow reliability and clinical habit formation; and to expand provider awareness and educational efforts. Before I turn the call over to Tiffany, please join me in welcoming Ms. Adrian Lugo as the new Head of Sales and Strategic Accounts for Sera Prognostics, Inc. Adrian brings more than 20 years of leadership experience in women's health and molecular diagnostics along with a strong track record of building high-performing teams, expanding market access, and partnering with health systems to drive adoption of innovative testing solutions. Her strategic expertise will be instrumental as we scale commercial execution and accelerate adoption of our technology to advance improved outcomes in maternal health. With that, Tiffany will provide a clinical and evidence update. Tiffany Inglis: Thank you, Lee, and good afternoon. Our medical affairs work in 2026 is focused on ensuring PRIME as a catalyst for consistent evidence-based practice. We are emphasizing three themes. One is identify risk early in the second trimester before symptoms are present. Second, we deploy a standardized test-and-treat pathway consistent with PRIME. And lastly, we support improved neonatal outcomes with the potential to reduce avoidable neonatal hospital utilization. We are partnering closely with clinicians on patient selection, timing, and care pathway deployment while expanding our clinical champion network and peer partnerships. In practical terms, PreTRM is designed to provide early, individualized risk information from a routine blood draw—information that clinicians can act on through a standardized care pathway. The goal is straightforward. Know who is at elevated risk early, before symptoms begin; intervene with measures that are already familiar to providers and safe for patients; and do so in a consistent way that has been proven to support both quality and affordability across populations. To complement PRIME, we are generating real-world evidence results across diverse populations, care settings, and payer environments. This includes outcomes tracking within partner programs, health economic and outcomes research, assessment of budget impact, population-level analyses for state and payer decision-making, and collaborations with academic centers to broaden the evidence base beyond the PRIME cohort. These efforts are foundational to guideline inclusion, payer policy updates, and thoughtful adoption. We continue to partner with Society for Maternal-Fetal Medicine and ACOG and other payer guideline committees, providing evidence-based packages that include clinical outcomes, safety considerations, implementation data, and economic modeling aligned to each group's evaluation framework. Our goal is to demonstrate how incorporating PreTRM into care pathways supports early, proactive identification of need, complements existing risk tools, improves episode-of-care quality metrics, and addresses affordability by leveraging a major driver of maternity cost. In addition to these education initiatives, we have also launched a campaign to assist providers in requesting coverage for the PreTRM test. This campaign is available broadly, with multiple providers confirming submission of requests in four states, and an additional 10-plus providers across all of our states in the process of submitting additional requests. Beyond our efforts, several state Medicaid agencies and state legislatures have begun exploring policy approaches to address the significant clinical and economic burden of preterm birth. This could come in the form of a bill, budget appropriation, or coverage from the Medicaid department mandating that payers cover the PreTRM test. While we have been engaged when asked to provide education and perspective, these discussions have largely been driven by the state's recognition of the unmet need, their focus on health equity, the impact preterm birth has on their communities, and the financial burden it places on Medicaid budgets. I will now hand it to Austin for the financials and our capital allocation approach. Austin Aerts: Thanks, Tiffany, and good afternoon, everyone. I will start with our financial results and then discuss our cash runway and capital allocation. Starting with the fourth quarter, revenue for the quarter was $10,000 compared to $24,000 in 2024. As a reminder, revenue remains modest and can fluctuate from period to period in this early commercial stage. We continue to expect revenue expansion as we move towards broader commercialization following the PRIME publication. Operating expenses for the quarter were $9,000,000, down from $9,400,000 for the prior-year period, reflecting our continued disciplined expense management. Research and development expenses were $3,200,000 compared to $3,100,000 in 2024. With the completion of the PRIME study, R&D expenses will likely decrease as we focus resources on activities that support commercialization and awareness building. Selling, general, and administrative expenses were $5,700,000 versus $6,300,000 in the prior year, reflecting our prudent allocation to targeted commercial initiatives and strategic headcount. Net loss for the quarter was $7,900,000 compared to a net loss of $8,600,000 in 2024. Turning to the full year, total revenue for 2025 was $81,000, up slightly from $77,000 in 2024. Total expenses were $36,600,000 compared to $36,700,000 last year as we began our strategy of capital reallocation from R&D to commercial activities and advanced PRIME publication. Research and development expenses for the full year were $13,200,000, down from $14,700,000 in 2024 and driven by lower clinical study costs following PRIME completion. Selling, general, and administrative expenses were $23,300,000 compared to $21,900,000 last year due to targeted commercial readiness investment. Net loss for the year was $31,900,000 compared to $32,900,000 in 2024, again demonstrating our disciplined approach to capital deployment. We ended 12/31/2025 with $95,800,000 in cash, cash equivalents, and available-for-sale securities. Based on our current operating plan and commercialization strategy, we believe this capital will fund the company across significant adoption and commercial milestones through 2028. In summary, 2025 was a year of important financial and operational progress. We maintained tight expense controls, strengthened the balance sheet, and positioned the company to execute effectively as we move into a transformative year with the publication of PRIME and our expected commercial extension. Before we open the call for questions, I will provide a brief overview of our capital allocation philosophy for the near term. Our approach is anchored in disciplined deployment toward milestones that derisk the commercial model while maintaining the strength of our balance sheet. One, we will prioritize market access, making investments that accelerate coverage decisions, such as partner programs that include quality-of-care and health economic outcomes research. Two, focus on commercial scale-up, concentrating resources where we see the greatest adoption potential, like regions with payer engagement, clinical champions, and health system readiness. Three, fund additional evidence-generating programs, such as RWE and targeted clinical collaboration that could support guideline inclusion and payer policy updates. And four, maintain financial discipline and flexibility, pacing spending in line with key milestones and emerging adoption or reimbursement tailwinds. As sales volumes build following payer decisions and broader access, we will sequence certain commercial and infrastructure investments when appropriate. This ensures our ability to preserve runway while supporting a healthy, sustainable ramp from early adoption to repeat ordering. Regarding this last point, concurrent with today's 10-K filing, we reestablished our at-the-market, or ATM, facility. While we have no immediate plans to issue shares, maintaining an ATM is the best practice in corporate hygiene for companies at our stage. It provides the optionality of an efficient and low-cost tool to maintain financial flexibility and provide sustainable ramp as we advance payer coverage, commercial adoption, and key milestones for PreTRM. With our current cash position providing runway through 2028, this does not reflect any change in the capital allocation priorities I discussed or any near-term funding needs. It simply renews our access to our existing shelf registration and maintains financial preparedness. With that, let's open the line for questions. Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. You will hear a prompt that your hand has been raised. Should you wish to cancel your request, please press the star followed by the two. I would like to advise everyone to have a limit of one question and one follow-up. If you are using a speakerphone, please lift up the handset before pressing any keys. Your first question comes from the line of Andrew Brockman with William Blair. Please go ahead. Andrew Brockman: Hi. Afternoon. Thanks for taking the questions. I want to go back to something Lee said in his remarks, sort of converting payer discussions and partner programs by using outcomes and some economic data. Can you maybe just expand on that a little bit, just in practical terms? How does that work with each of these partners? And then, typically, what do you expect that these partners will look for in those results to move forward with some of those contracts that you might have sketched out? Lee Anderson: Thank you for the question. I am also going to enlist Tiffany on this as well. But by this partner program approach, you take an entity that is interested, and they look at the clinical outcomes. They are also going to look at their books and their numbers and their patient population and equate that to the fact that if they adopted PreTRM and the treatment regimen as standard of care, what could that do for their patient base, so to speak? So as we have these discussions, we are not only highlighting the clinical outcome improvement, but also the health economic outcome improvement. And that is, as you can imagine, very important for state Medicaid agencies or providers throughout the country. Tiffany Inglis: Yes, I will make that add—agree completely. As we look at the results of 20% reduction in NICU admissions, NICU utilization is a huge driver of spend and trend for those who are paying the bill on the backside, whether that is our government, or whether that is employer groups, or whether that is payers. So as we think about our partnerships with each of those entities, they have really struggled with how to control that spend and trend, and this is really an avenue for them to have a significant impact on something that drives a cost driver for many of them, as well as something that drives things like high-cost claimants and things like that on their books. So as we continue to do sub-analyses and evidence generation post-PRIME, the health economic model and the impact to what that looks like will be something that we will be able to speak even more deeply about from a publication perspective, but we are able to share with our partners now what that 20% NICU reduction really looks like. Andrew Brockman: Perfect. That is really, really helpful. And then I want to go back to the comment made around SMFM was earlier in the year. It has been a couple months now. Can you maybe just talk about some of the feedback that you received at the conference? And then since then, how the conversations may be changed now that PRIME is published? You have gone through that conference, and sort of where we are at today. Thank you. Tiffany Inglis: Yes. No, it is a great question. So, the SMFM conference, the national conference, was in February, and it was shortly after we obviously had our publication go live in the Pregnancy Journal, which is the SMFM journal. And it was a great conference, a ton of engagement with providers, but also with the leadership at SMFM and really understanding next steps and how we work together and how we make this test more accessible to women. And so we are continuing on those next steps with our partners there, many of whom are investigators on our study and have been integrally working tightly with SMFM from day one, including the company itself as well. So really looking at all the steps—what does that look like—and then opportunities for rapid response or other things like that with those partners so that we can understand what those guidelines and what the changes would look like and how we get to that endpoint, which, again, is just about access for patients for this test and for providers for this test to be able to change those outcomes for moms and babies. Zhenya Lindgardt: And I will add, Andrew, that the team has seen a marked improvement in engagement across providers, payers, state legislators, key opinion leaders, societies, employers. The study really proved and gave us credibility. We have long believed PreTRM can be supported by an RCT level evidence and, indeed, it is coming to fruition. It has been only about 10 weeks since the publication took place, but we are incredibly excited about the signal we are seeing from all of these audiences. And we will keep reporting on engagement specifically with the guideline-setting bodies and the signals that we can send to the market about where the standards of care are evolving to. Operator: Again, if you would like to ask a question. Your next question comes from the line of Tycho Peterson with Jefferies. Please go ahead. Lauren: This is Lauren on for Tycho. My first question, I guess, is around the cash runway into 2028. How are you guys planning to balance investments in successful U.S. states versus the capital requirements of the global EU launch? And do you expect to accelerate SG&A spend into this year? Thanks. Austin Aerts: Yes. Hi, Lauren. Thanks for the question. Yes, I think we said this in the last quarter, but I will reiterate some of the basics, and then I will get into the question. So last year, OpEx—cash OpEx—was in the low thirties. We have budgeted roughly the same cash OpEx this year, and that is with reallocating a significant amount of our spending from our clinical and R&D activities more towards our commercial activities, which does include the work we are doing in the EU, a pretty significant spend that we are doing in the EU to explore the opportunities there as well. Certainly, as the commercial opportunities—domestic or EU—continue to develop, we will continue to shift, reallocate more capital from other areas to the commercial side of the business. Lauren: Great. Thank you. And I guess one more going back to the second active partnership program. Could you elaborate a bit more on the profile of this new partner, whether it is a regional health system, national commercial carrier? And whether or not and how their model differs from your first partnership? Thanks. Lee Anderson: Great question. Multiple partners, multiple partnerships. All of them a little similar, but all of them different. You hit the nail on the head. Yes. We have large health systems, IDNs that we are negotiating with. We have provider-payers we are negotiating with. We have large, large group practices. And then we cannot forget the PRIME sites themselves. You know, how do you take the study site from a great study site with PRIME and now input this into their clinical workflow for their entire organization so that it is truly standard of care for any woman that comes in and appears to be low risk preterm birth—they get a PreTRM test. So there are very similar aspects of the model, but each payer partner or each partner is going to be a bit different. Our goal is to fill the needs of that partner: what works best for them, and what are they looking to achieve? Zhenya Lindgardt: And I will just add that the second partner is an example of an employer collaborative that is multistate, and we are entering with them in the first state, and there is a great path for expansion. As Lee said, there are a lot of flavors here. We are partnering far and wide from the legislative bodies at the state level to midwife associations to innovative providers of telehealth services in pregnancy. We want to make sure that we capture all of those adopters that are ready to go. Operator: There are no further questions. I will hand the call back over to Zhenya for closing remarks. Zhenya Lindgardt: Sounds great. Thanks, Vincent. Before we close, I wanted to leave you with how we see the year ahead. With PRIME now published, a growing base of peer and state-level engagement, and an expanded leadership team in place, we are entering 2026 with strong momentum. This year is about disciplined execution, advancing all of the partner programs we have talked about, expanding real-world data, and supporting clinicians as they integrate PreTRM into their workflows. While adoption will be gradual, the foundation we have built gives us confidence in the path forward. We believe the combination of compelling clinical evidence, increasing payer engagement, and thoughtful commercial scale-up positions us to unlock meaningful value in a large underserved market. Thank all of you so much for your continued support as we work to improve outcomes for mothers and babies and deliver long-term value for our shareholders. Over to you, operator, to close the call. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the Red Cat quarterly earnings. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ankit Hira, Investor Relations. Thank you, Ankit. You may begin. Ankit Hira: Good afternoon, and welcome to Red Cat's Fourth Quarter and Full Year 2025 Earnings Call. Joining us are Red Cat's CEO, Jeff Thompson; COO, Chris Ericson; and CFO, Christian Morrison. Please note that certain information discussed on the call today will include forward-looking statements for our future events and Red Cat's business strategy and future financial and operating performance. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict and may cause actual results to differ materially from those stated or implied by those statements. Certain risks, uncertainties and assumptions are discussed in Red Cat's SEC filings, including its most recent annual report on Form 10-K and other SEC filings. These forward-looking statements reflect management's beliefs, estimates and predictions as of the date of this live broadcast, March 18, 2026, and Red Cat undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. In addition, our comments on the call today will contain references to non-GAAP financial measures such as adjusted EBITDA and key business metrics. Non-GAAP measures should be viewed in addition to and not as an alternative for the company's reported GAAP results. A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures as well as definitions of the key business metrics referenced and management's reasons for including the non-GAAP measures and key business metrics referenced may be found in the press release. Finally, I would like to remind everyone that this call will be recorded and made available for replay via link available on the Investor Relations section of the company's website at ir.redcatholdings.com. With that, I'll now turn the call over to Jeff. Jeffrey Thompson: Thanks, Ankit. Good afternoon, and thank you for joining Red Cat's Q4 2025 Earnings Call. I'm going to let Chris Ericson, our COO; and Chris Morrison, our CFO, discuss last year's extraordinary Q4 results, which annualized would be over $100 million. I am going to cover Blue Ops, Black Widow work in Ukraine, drone dominance and guidance. A year ago on the same call, we announced our new mission, Maritime USVs. We found a management dream team in the early summer to build this division. The new team spent many weeks in Europe to learn how these boats were so successful against the Russian Navy. By August, we had preliminary designs. And by December, we had a boat in the water driving autonomously and out-of-the-box ATAC capable. We found a boat factory in Georgia, signed a lease for 155,000 square feet. That factory just went operational approximately 1 month ago, and we'll have full rate production tooling later this month. We believe and are confident that they can build over 100-plus USVs in 2026 as we ramp up production capability to thousands. Blue Ops is a strategic and important part of Red Cat's family of systems. It opens the rest of the globe for Red Cat. Our family of systems was limited to 30% of earth. With our new Variant 7 and other hulls, we can now launch from 100% of the globe. We believe that our Blue Ops USVs can keep our war fighters out of harm's way and make them more lethal. We believe Blue Ops could be very helpful in Venezuela, in the USVIs, the Gulf of America, Cuba and urgently in the Strait of Hormuz. Blue Ops demonstrated partners on Innovation Day that was timely. We demonstrated short-range and long-range counter drone capability. For short range, we have the ACS Bullfrog on the front of the Variant 7 that can shoot down FPV drones up to 1,500 yards and can do the same to a Shahed-136. For long range, we have the Aeon's Zeus that can travel 20 kilometers and take out Shahed-136 at a very low cost. The 2 weapon systems combined on the Variant 7 controlled miles away can deliver a potent deadly deterrent for short-range and long-range counter drone operations. Let's move on to recent work in Ukraine with the Black Widow. Last fall, we deployed a team to Ukraine in hopes to get them a drone to replace the Chinese ISR drones and to verify the drones we are delivering to soldiers would work in an actual battlefield. The team received an MOU and an LOC and recently LOR, a letter of request. I'm going to have Chris Ericson, who just got back from Ukraine last night, give more details on this mission. I also want to thank the Red Cat ICC team for this hard and dangerous work. Drone dominance. As you know, we do not make the cut at drone dominance Gauntlet I. I have a ton of excuses, but I'm not going to go there. We are preparing for Gauntlet II and hope to have better results. But we believe even if we lose every stage of the Gauntlet, we will still be one of the larger beneficiaries of the program. There's going to be a total award of 350,000 FPV drones. Going by the Ukrainian ratio of 20:1, that requires 17,500 ISR drones or 8,750 SRR systems. Sensor shooter requires a sensor, and that's what the Black Widow is. We will support the Drone Dominance program in any way we can. Guidance. We are not currently ready to offer official guidance. We want to have our government contracts in hand before we give guidance. We do not want a replay of last year during the continuing resolution. Fortunately, we have a budget for 2026, which also just received an additional $150 billion, and it looks like we'll be getting another $50 billion for Iran. We don't have to wait until the next quarterly to give an update on guidance. And as soon as we have the contracts in hand, we will update the market. And with that, I will hand this to Chris Ericson. Christian Ericson: Thank you, Jeff, and good afternoon, everyone. With that intro, I'll skip ahead a little bit and talk about the most interesting part of my script. Yes, I just returned from Ukraine yesterday. My first overarching impression is that I was in awe of the spirit of resiliency of the Ukrainian people. They continue to show how David could stand up to Goliath, and my favorite retort to that comment was only comparable if David wasn't given a sling and rocks. We have now established an office in Kyiv and have a fabulous team. We are building the business and relationships to most effectively, one, test our equipment at the front and obtain true feedback; two, identify new product and integration partners with battle-proven technology; and three, use this knowledge to increase the efficacy of our unmanned systems. I'm happy to report that we have tested multiple systems at the front and proven that our tech works and works really well. This has now resulted with Red Cat receiving a letter of request from Ukrainian forces to provide our systems to begin replacing the use of Chinese-made ISR drones. Black Widow's compact rugged design and secure communications architecture has proven invaluable in real-world deployments, which will contribute directly to mission success for our defense customers. And finally, this past week, we entered into a joint development agreement with a Ukrainian state-owned partner to bring new battle-proven technology to our USVs. This agreement is a huge step forward as we are the first nongovernmental entity to successfully enter into this type of deal, which will enable the future transfer of battle-proven technology to us and our allies. So let's change directions a little bit and talk about how the factory is the weapon. We have quickly learned through current global conflicts how important -- how important factories and capacity are critical infrastructures in supporting a country's defense. Over the past year, we focused on acquiring talent, improving processes and tools, transforming from a fast-moving start-up to a repeatable, high-reliability production enterprise that can deliver quantity and quality and stability to our customers. Our operational performance in Q4 2025 reflects the successful execution of our multi-domain strategy and our ability to adapt rapidly to the evolving defense technology landscape. We achieved remarkable production scalability while maintaining the quality and security standards our defense customers demand. This represents our ability to search production capacity, demonstrating the operational agility that sets Red Cat apart in the defense contractor community. We remain on track to scale Black Widow Drones output to 1,000 units a month in the first half of 2026, and our USV boat manufacturing will have first deliveries expected in Q2 of 2026. The regulatory landscape shift following NDAA Section 1709 implementation has fundamentally changed how we operate, creating unprecedented opportunities while requiring enhanced focus on supply chain security and domestic sourcing. We responded by strengthening our American manufacturing capabilities and expanding our network of trusted domestic suppliers. Our NDAA-comliant supply chain has become a significant competitive differentiator, allowing us to capture market share from foreign competitors who can no longer serve defense and government customers. Our manufacturing expansion has been transformational with overall facility square footage increasing from 36,000 square feet last year or 2 years ago to 254,000 square feet in Utah and across new locations in Florida, Georgia and California. Our Salt Lake facility now operates at an impressive capacity, having produced 50 Black Widow drones per day, proving the ability of producing 1,000 drones per month on a single shift. The facility has room to triple the manufacturing lines and add additional shifts. Our FlightWave facility in Torrance can produce 125 Edge 130 drones per month using only 1/3 of its available space. Additionally, our Valdosta, Georgia facility provides 155,000 square feet dedicated to our expanding Blue Ops maritime production capabilities and room to produce more than 100 boats per month. This strategic expansion positions us to meet accelerating customer demand while maintaining our commitment to quality and security standards. During the quarter, we triumphed when faced with the challenge of rapidly scaling production to meet accelerating customer demand and still maintained our rigorous quality standards. This record quarter. We also expanded our manufacturing partnerships, most notably with Hodgdon Shipbuilding to ensure ability to quickly pivot for growing demands across all operational domains. Our expansion into maritime operations through Blue Ops represents perhaps our most significant operational advancement, extending our family of systems approach beyond the air and land domains to uncrewed surface vessels. These USVs leverage the same autonomous technologies and secure communications that have made our aerial platform successful while addressing the growing demand for maritime domain awareness and operations. The partnership with Hodgdon Shipbuilding brings proven shipbuilding expertise to our advanced autonomous capabilities, creating a unique value proposition in the maritime defense market. This operational growth has truly placed us in prime position for the future where the factory is the weapon. I'm sure you may have some follow-on questions, but first, I'll turn the call over to Christian to discuss our financial results, after which we'll take questions. Christian? Christian Morrison: Thank you, Chris. I'm pleased to present Red Cat's financial performance for the fourth quarter and full year 2025, which represents a transformational period in our company's growth trajectory. For the fourth quarter of 2025, revenue was $26.2 million, up $25.0 million year-over-year and up $16.6 million (sic) [ $15.6 million ] sequentially as deliveries accelerated. This growth was driven by robust defense and government customer demand, our expanded program wins and our ability to rapidly scale production for mission-critical requirements. Gross margin was 4.2%, up 85% year-over-year and down 2.4% sequentially, reflecting mix and ramp dynamics typical of our growth phase. For the full year 2025, revenue was $40.7 million, up $25.1 million year-over-year. Gross margin was 3.1%, up 332 basis points year-over-year, partially driven by scale benefits and manufacturing improvements. Gross margin can be volatile on a quarter-to-quarter basis due to revenue levels that include fixed costs reflected in our cost of goods sold and investments in productions that are not yet at scale. We are continuously implementing more efficient processes and procedures that will enable us to capitalize on the expected increased demand and growth. Our ability to deliver and perform has remained strong alongside our focus on rapidly scaling operations, reflecting our disciplined approach to cost management and the premium value of our American-made secure drone platforms. Operating expenses in 2025 were $67.8 million compared to $32.9 million in the prior year. This increase in operation -- in operating expenses were focused, planned and deliberate to enable us for the accelerated growth we experienced in 2025 and more importantly, for further growth expansion going forward. We increased our headcount by 85%, which primarily included increased engineers and corporate headquarter functional positions. Research and development expenses were $17.9 million compared to $8.1 million in the prior year. This increase in R&D investments is focused on advancing our core platforms, developing new capabilities in artificial intelligence and machine learning and enhancing the interoperability of our family systems across air, land and maritime domains. Our investments in the business demonstrate the inherent value of positioning and the pricing power that comes with being a trusted domestic supplier in the defense market. Regarding our investment priorities, we've made strategic investments across multiple areas to support our growth trajectory and maintain our competitive advantages. We remain focused on deploying capital across 3 key areas. The first area of focus is our USV division build-out, which is estimated to be a $30 million to $40 million investment to fully operationalize the division. Second, we remain focused on strategic acquisitions; and thirdly, increasing inventory and managing our supply chain to meet customer demand. One of the most notable improvements in our financial profile has been our improved cash position and working capital management. Our cash increased from $9.2 million at the end of 2024 to $167.9 million at the end of 2025, providing us with substantial financial flexibility to pursue strategic initiatives and capitalize on market opportunities. These results demonstrate Red Cat's evolution into a premier defense technology company with the financial strength and operational capabilities to capitalize on the tremendous market opportunities ahead of us. Our working capital position has strengthened considerably, driven by our enhanced cash position, healthy AR and strategic inventory investments. We increased our inventory from $13.6 million to $30.4 million during 2025, reflecting our proactive approach to supply chain management and our commitment to meeting accelerating customer demand. The strategic nature of this inventory build becomes especially important when considering the supply chain requirements and the extended lead times for specialized components in the current regulatory environment. Looking ahead to 2026, we're positioned for continued strong performance driven by several key factors that reinforce our confidence in Red Cat's growth trajectory. While we are not providing annual guidance at this time, we expect to maintain revenue momentum throughout the year. Our revenues are supported by our expanding and increasingly diversified customer base and growing international presence. When we gain additional visibility as we progress throughout the year, we look forward to updating the market. We are also being mindful of the ongoing geopolitical developments that are currently in the headlines. We are also influencing our international expansion plans, particularly in the Middle East and Asia Pacific region. While current allied relationships remain strong, changes in defense priorities or procurement policies could affect the timing or scale of international opportunities. We're also monitoring potential changes in defense spending priorities as new administrations and congressional leadership evaluate budget allocations across different military capabilities. And with that, we're now happy to answer your questions. Operator, will you please open up the line for Q&A? Operator: [Operator Instructions] Our first question comes from the line of Austin Bohlig with Needham. Austin Bohlig: Congrats on the solid Q4 execution, guys, and it seems like the pipeline is really strong. Understanding you guys aren't giving kind of formal guidance, which I think is prudent, there seems to be a ton of tailwinds, everything from SRR to this bold opportunity, drone dominance now with this really unique opportunity in Ukraine. Any way you can give us some kind of different scenarios on what 2026 could look like? Jeffrey Thompson: Yes. And we don't want to get ahead of our skis again. But I mean, there's a range from all of you out there between $100 million and $170 million, very wild -- crazy goalposts right now. We're fine. We're very comfortable in the top half of that, but we're not ready to commit to it until we get contracts in hand to give our official guidance. Austin Bohlig: Okay. No, that's fair. And then just wanted to dive into this new Ukraine opportunity. This seems pretty incremental. Do you guys have any idea of like how many you could be potentially replacing? Jeffrey Thompson: Yes. Well, let me -- I'm going to have Chris Ericson answer that because he just got back last night, and he was in the room when they notified us. Christian Ericson: Yes. So we were there with the war fighters and the guys who are collecting all the data there, and they came back and I asked them the question, they said 350,000 ISR drones a year, Chinese ISR drones is what they're going through a year on the Ukraine front, a massive number. Austin Bohlig: Wow, wow. So a big opportunity there. I guess kind of lastly for me and more just kind of want to touch on all businesses, the boat segment. Obviously, what's going on in Hormuz. Have you guys noticed any sort of increase in maybe RFP or interest just given the heightened conflict in the waterways or anything you could talk about there? Jeffrey Thompson: Yes. So Austin, you were at Innovation Day and 2 days later, the war started. And our biz dev team, all of our different teams have been getting stuff coming at us in every which way and direction some people calling, asking panic questions, what can we get here and now? As things calm down a little bit, it looks like there's going to be some pretty massive RFPs coming out of the Gulf states. They won't take as long as traditional RFPs. We're seeing an uptick in some Navy inquiries that were at Innovation Day. We are hearing a lot about counter. People want counter. As I explained in my prepared comments, the Variant 7 has a great counter configuration with the ACS Bullfrog, which can take down FPVs and also can take down Shahed's at close range. And that combined with the Aeon's Zeus is something we're going very quickly at, and they're ramping very rapidly to be able to be a great solution, a counter solution for the Shahed's. And they also don't require a pilot like a lot of the Ukrainian solutions to take down a Shahed. So a lot of great tech coming out of Ukraine for counter Shahed's, but we think that we can also help dramatically in the Strait of Hormuz. And you got to remember, this is -- everyone is talking about how this is so urgent right now in the Strait, but we believe that the Strait is going to need to be protected for not years, forever from now on. No longer is it going to be acceptable for the world to be held hostage by that one gap in small area there between the Persian Gulf and the Gulf of Oman. So we think this is a very long-term solution is to not have billion ships escorting tankers. We prefer to do it -- we prefer to do it with 30 or 40 USVs, 10, 20 on each side and/or doing port protection being close to the shore of Iran to make sure that nothing is coming out with our counter capabilities. Austin Bohlig: Well guys, keep up the great work. Operator: Our next question comes from the line of Mike Latimore with Northland. Mike Latimore: Sorry, I'm in an airport, so it might be a little bit noisy. I apologize. So I guess -- yes, congrats on the strong year. That was great. As you think about the full rate production contract, is that something that you would anticipate getting sort of one main order? Or would there be separate tranches over there? Jeffrey Thompson: Are you talking for the Black Widow with the SRR program? Mike Latimore: Yes, sorry. Yes, exactly. Jeffrey Thompson: Yes. Okay. Because there's a -- we're going into full rate production, hopefully very soon with the boats also. So yes, great question. So as Austin alluded to earlier, there's an influx of orders related to Epic Fury. We're expecting, and again, not going to give dates to have our new OTA full rate production contract any day. We -- there is some possibilities of getting some immediate orders for Epic Fury, which might delay a week or 2 the other contract. But we're progressing the ship every month still for SRR and things are looking fantastic with the SRR program with their funding and now with Epic Fury and a lot of other needs that we're hearing out of the Department of War for Black Widows. Mike Latimore: Excellent. And I think you -- in your prepared remarks, you talked about anticipating an order for the USV in the second quarter, I believe. I guess can you give a little more color there in terms of type of customer region, that sort of thing? Jeffrey Thompson: I'm sorry, I don't know which order in the second quarter you heard. Mike Latimore: I thought you said something about a USV -- or anticipating a USV order in the second quarter. No? Jeffrey Thompson: No, we did not say that, but we are hoping -- people are very interested in our USVs. There's a lot of urgency around our USVs right now. We were previously going to use our first 15 for demos only. And now we're going to -- hull # 6, which is just coming out now today. Hull #6 from 15 are now going to be hopefully shipped to customers as quickly as we can make them. Mike Latimore: Excellent. And last thing on -- you talked about getting to 1,000 drones a month. Would you sort of start building to that rate even before having the contracts? Jeffrey Thompson: We're there. We're doing that now. Operator: Our next question comes from Ashok Kumar with ThinkEquity. Looks like we lost Ashok there. I don't see any more questions. And with that, I'll pass it back to management. Jeffrey Thompson: Great. Well, thanks, everybody, for coming on. We had about 400 people on this call today. A lot of exciting stuff happening across the globe. Chris Ericson's great news that we'll be working very hard on quickly and scaling to help fulfill all the things that are going on. Again, we will not be waiting for an official quarterly call to update people on guidance. As soon as we have our contracts in hand, we will get that information out to the market. We're very excited. We still believe that every quarter is going to be a record going forward, and we're excited to get back to work. Thanks again. Christian Ericson: Thank you, everyone. Operator: This concludes today's webinar. You may disconnect at this time. Thank you, everyone, for your participation.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to Micron Technology, Inc.'s fiscal second quarter 2026 financial conference call. After today's prepared remarks, we will host a question and answer session. I will now hand the conference over to Satya Kumar, Investor Relations. Satya, please go ahead. Satya Kumar: Thank you, and welcome to Micron Technology, Inc.'s fiscal second quarter 2026 financial conference call. On the call with me today are Sanjay Mehrotra, our Chairman, President and CEO, and Mark Murphy, our CFO. Today's call is being webcast from our Investor Relations site at investors.micron.com, including audio and slides. In addition, the press release detailing our quarterly results has been posted on the website along with the prepared remarks for this call. Today's discussion contains forward-looking statements that are subject to risks and uncertainties. These forward-looking statements include statements regarding our future financial and operating performance, as well as trends and expectations in our business, customers, market, industry, products, and regulatory and other matters. These statements are based on our current assumptions, and we assume no obligation to update these statements. Please refer to our most recent financial report on Forms 10-K, Forms 10-Q, and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. Today's discussion of financial results is presented on a non-GAAP financial basis unless otherwise specified. A reconciliation of GAAP to non-GAAP financial measures can be found on our website. I will now turn the call over to Sanjay. Thank you, Satya. Sanjay Mehrotra: With stellar records in revenue, gross margin, EPS, and free cash flow. Micron Technology, Inc. delivered an exceptional fiscal Q2. Quarterly revenue nearly tripled versus one year ago, and revenue for DRAM, NAND, HBM, and each business unit reached new highs. Our fiscal Q3 single-quarter revenue guidance exceeds the full-year revenue for every year in our company's history through fiscal 2024. For fiscal Q3, we anticipate exceptional growth across revenue, gross margin, EPS, and free cash flow. Reflecting confidence in the sustained strength of our business, I am pleased to announce that our Board has approved a 30% increase in our quarterly dividend. The step-up in our results and outlook are the outcome of an increase in memory demand driven by AI, structural supply constraints, and Micron Technology, Inc.'s strong execution across the board. Our memory and storage solutions are at the heart of this AI revolution. Memory makes AI smarter and more capable, enabling longer context windows, deeper reasoning chains, and multi-agent orchestration. As AI evolves, we expect compute architectures to become more memory intensive. This is why we strongly believe that Micron Technology, Inc. is one of the biggest beneficiaries and enablers of AI. AI has not just increased demand for memory; it has fundamentally recast memory as a defining strategic asset in the AI era. We continue to work with customers on strategic customer agreements, or SCAs, that are different from prior LTAs and have specific commitments over a multiyear time horizon for improved visibility and stability in our business model. These SCAs also provide customers greater certainty to plan their businesses while reinforcing long-term engagement across our broad product portfolio. We are excited to have signed our first five-year SCA. We are making excellent progress ramping our industry-leading 1γ DRAM and G9 NAND technology nodes. We expect 1γ to become the highest-volume node in Micron Technology, Inc.'s history. Our 1γ node was already the fastest ramp to mature yields, is ramping volumes faster than all prior nodes in our history, and is on track to become a majority of our DRAM bit mix by mid-calendar 2026. We plan to increase EUV adoption at the 1δ DRAM node, utilizing the latest-generation EUV tools. These more advanced EUV tools will help us optimize both cleanroom space efficiency and patterning when scaling to 1δ and beyond. In NAND, our G9 node also remains on track to constitute a majority of bits by mid-calendar 2026. We also achieved a record mix of QLC bits in the quarter. Looking ahead, we expect colocation of R&D and high-volume manufacturing at our Boise and our Singapore sites to speed up time to market for our leading-edge products. We see an unprecedented set of opportunities in memory and storage to enable the AI era across market segments and expect to meaningfully increase our R&D investments in fiscal 2027. Micron Technology, Inc.'s technology leadership, product excellence, and manufacturing execution is being recognized in quality scores from our customers. I am pleased to report that a clear majority of our customers rank Micron Technology, Inc. number one in quality. Turning to our end markets. AI demand is driving DRAM and NAND data center bits TAM to exceed 50% of the industry TAM for the first time in calendar 2026. Traditional server demand is robust, driven by a combination of demand from workloads initiated by agentic AI as well as broad-based server refresh. AI server demand continues to be strong. Both AI and traditional server demand are constrained by lack of adequate DRAM and NAND supply. We expect server units to grow in the low-teens percentage range in calendar 2026, driven by growth in both AI and traditional servers. We expect server DRAM content to continue to grow in calendar 2026 with the introduction of new platforms. At NVIDIA's GTC, we announced that Micron Technology, Inc. has begun volume shipment of its HBM4 36GB 12-Hi in 2026 and is designed for NVIDIA Vera Rubin. With our HBM4 production ramp and volume shipments underway, we expect to reach mature yields faster than HBM3E. We have also sampled our HBM4 16-Hi product, which provides 48GB of HBM capacity in each HBM, a 33% increase in the HBM capacity compared to HBM4 12-Hi. Development of HBM4E, our next-generation HBM product, is well underway and we expect to ramp volume in calendar 2027. Our HBM4E will leverage Micron Technology, Inc.'s production-proven industry-leading 1γ DRAM technology node and is set to deliver another step-function improvement in performance, enabling a whole new generation of AI compute platforms across the industry. Additionally, HBM4D customization options offer us further differentiation opportunities and even deeper R&D engagement with customers. Micron Technology, Inc. pioneered the development of LPDRAM for the data center, which consumes one-third the power of DDR DRAM server modules. Building on this leadership, we sampled the industry's first 256GB LP SoC-M2 product, which is built using our 1γ node and enables a massive 2TB of capacity per CPU, quadrupling the content from just a year ago. We see expanding use of LPDRAM in the data center in the years ahead, and we are excited to maintain an industry-leading innovative product roadmap in this market. Rapid growth in AI is driving the emergence of new architectures optimized for the token economics of specific workloads. Micron Technology, Inc.'s broad portfolio of HBM, LP, DDR, and SSD is a critical enabler across these architectures. At GTC, the recent announcement of NVIDIA Grok 3 LPX implements up to 12TB of DDR5 in a rack-scale architecture. We are seeing an acceleration in NAND-based demand in the data center due to AI use cases such as vector database and KV cache offload, and due to growing share of SSDs in capacity storage tiers. Micron Technology, Inc.'s data center SSD product portfolio, enabled by our technology leadership and vertical integration, covers the spectrum from highest performance to highest capacity. We are now in high-volume production of our G9 NAND-based PCIe Gen6 high-performance data center SSDs. Our 122TB high-capacity SSD is seeing strong adoption, and delivers 16 times the sequential read throughput per watt of a capacity-matched HDD configuration. Our strategy and execution are delivering results. Our data center SSD market share increased for the fourth consecutive calendar year in 2025 to a new record. In fiscal Q2, data center NAND revenues more than doubled sequentially, reaching a substantial new record, and we expect further growth in the quarter ahead. Micron Technology, Inc.'s data center SSD portfolio is industry-leading, and we have secured a robust set of design wins across our customer base. We are now seeing NAND demand significantly in excess of our available supply for the foreseeable future. In calendar 2026, a number of factors including DRAM and NAND supply constraints could cause PC and smartphone units to decline in the low double-digit percentage range. Over time, we expect the value of on-device AI to drive strong memory content growth in PCs and smartphones. In PCs, there has been exciting innovation recently with agentic AI applications, such as OpenClaw, where AI agents can perform tasks independently on the host PC and also initiate workloads in the cloud. PCs with on-device agentic AI capabilities have recommended memory configurations of at least 32GB, twice as much as the average PC. Additionally, the fast-growing new category of personal AI workstation, such as NVIDIA DGX Spark and AMD Ryzen AI Halo, come in 128GB configurations, ideal for using large language models on device. Likewise, in smartphones, OEMs have recently announced new flagship devices such as Samsung Galaxy S26 and Google Pixel 10 with agentic AI integrated into their mobile operating systems. The mix of flagship smartphones shipping with 12GB or more of DRAM increased to nearly 80% in calendar Q4, up from under 20% a year ago. Micron Technology, Inc. is well positioned to accelerate the opportunities in these markets with our industry-leading portfolio of products. In PC, Micron Technology, Inc. completed qualifications for LPCAM2 at a major OEM. In SSDs, we launched the industry's first Gen5 QLC client SSD, based on G9 NAND. Micron Technology, Inc.'s LPDDR5X is now designed into leading personal AI workstations, expanding our addressable market, with high volumes shipped to key customers. In smartphones, Micron Technology, Inc. continues to receive strong interest and feedback from OEM and ecosystem partners on our 1γ-based LPDDR6 samples. We built momentum with additional qualifications and mass production of our 10.7 Gbps 1γ LPDDR5X 16Gb product. We saw continued pricing improvement across automotive, industrial, and embedded markets. Total AEBU’s revenue reached a record, with automotive and industrial revenue together exceeding $2,000,000,000 in the quarter. In automotive, OEMs are deploying Level 2+ ADAS across their fleets at an accelerating pace. The average car today has less than L2 ADAS capability, containing approximately 16GB of DRAM, while vehicles with L4 autonomy require over 300GB. As more advanced ADAS and smart cabin adoption scales, we expect robust long-term growth in automotive memory demand. We have shared samples of the industry's first automotive-grade 1γ LPDDR5 DRAM, and in NAND, we were first in the industry with a G9-based UFS 4.1 automotive solution, further reinforcing our technology leadership in this market. Rapid improvements in AI are supercharging the capabilities of robots. We believe we are on the cusp of a 20-year growth vector in robotics and expect robotics to become one of the largest product categories in the technology world. Humanoid robots will be AI-enabled and will be powered by a compute platform that rivals that of a high-end L4-capable automobile, thus requiring significant memory and storage capacity. We expect this exciting new category of growth to further underpin the long-term favorable dynamics that shape our industry environment. Micron Technology, Inc. is very well positioned to leverage this opportunity in close partnership with our customers, enabled by our industry-leading technology, product solutions, and operational capabilities. Now turning to our market outlook. We expect both DRAM and NAND industry bit demand in calendar 2026 to be constrained by supply. We continue to expect supply and demand for both DRAM and NAND to remain tight beyond calendar 2026. We expect industry DRAM bit shipments in calendar 2026 to grow in the low-twenties percentage range, slightly above our prior outlook. In DRAM, cleanroom constraints and long construction lead times, higher HBM trade ratio, higher HBM growth rates, and declining bits-per-wafer growth from node migration constrain bit supply growth. We expect industry NAND bit shipments in calendar 2026 to grow approximately 20%. In NAND, some industry suppliers redirect cleanroom space for DRAM, and overall limited cleanroom space constrains bit supply growth. We expect Micron Technology, Inc. DRAM and NAND supply to grow approximately in line with the industry in calendar 2026. Micron Technology, Inc. is working to address the unprecedented gap between supply and demand, and we achieved several important milestones in expanding our global manufacturing footprint this past quarter. In DRAM, earlier this week, we announced the successful closing of the acquisition of the Tongluo site from Powerchip Semiconductor, completing the transaction ahead of schedule. We expect this site to support meaningful product shipments from the existing fab beginning in fiscal 2028. Adding to the existing fab, we plan to begin construction of a similar-sized second cleanroom at this site by 2026. We continue to expect initial wafer output at our first Idaho fab in mid-calendar 2027, and ground preparation has begun for our second Idaho fab. We broke ground on our first fab at the New York site, and initial ground preparation activities are ahead of plan. In Japan, we are making good progress on ground preparation for our cleanroom expansion to enable future technology transitions at our Hiroshima site. In NAND, the combination of a higher demand outlook and our decision to colocate R&D cleanroom in our manufacturing fab underpins our decision to break ground for a new NAND fab at our Singapore site. We expect initial wafer output from this fab in 2028. In assembly and test, we commenced commercial shipments from our new facility in India. The state-of-the-art facility will be among the largest single-floor assembly and test cleanrooms in the world. Our Singapore advanced packaging facility for HBM is on track to contribute meaningfully to Micron Technology, Inc.'s HBM supply in calendar year 2027. We expect fiscal 2026 CapEx to be above $25,000,000,000. From our last earnings call estimate, the majority of the increase is driven by cleanroom facility-related CapEx, of which the largest factor is Tongluo, followed by construction spend increase in our U.S. fab projects. We project our fiscal 2027 CapEx to step up meaningfully to support HBM and DRAM-related investments. We expect construction-related CapEx to increase by over $10,000,000,000 year over year in fiscal 2027 as we build out our global manufacturing sites to address long-term demand opportunities. In addition, we expect higher equipment spend year over year in fiscal 2027. As we make these investments, we will continue to be responsive to the market environment and our customer demand to appropriately align our supply plans. I will now turn it over to Mark for our fiscal Q2 financial results and outlook. Mark Murphy: Thank you, Sanjay. Good afternoon, everyone. Micron Technology, Inc. delivered strong financial results for the fiscal second quarter, with revenue, gross margin, and EPS all exceeding the high end of our guidance. In fiscal Q2, we generated record free cash flow, reduced our debt, and closed the quarter with the highest net cash position in our history. Total fiscal Q2 revenue was $23,900,000,000, up 75% sequentially and up 196% year over year, representing our fourth consecutive quarterly revenue record. The $10,200,000,000 sequential increase is the largest in our history. Fiscal Q2 DRAM revenue was a record $18,800,000,000, up 207% year over year, and represented 79% of total revenue. Sequentially, DRAM revenue increased 74%. Bit shipments were up mid-single digits. Prices increased in the mid-sixties percentage range, driven by tight industry conditions, and included favorable mix. Fiscal Q2 NAND revenue was a record $5,000,000,000, up 169% year over year, and represented 21% of Micron Technology, Inc.'s total revenue. Sequentially, NAND revenue increased 82%. NAND bit shipments increased in the low-single-digit percentage range. Prices increased in the high-seventies percentage range, driven by tight NAND industry conditions, and included favorable mix. The consolidated gross margin for fiscal Q2 was 75%, up 18 percentage points sequentially. This improvement was driven primarily by higher pricing and also included favorable mix and cost performance. Fiscal Q2 gross margin nearly doubled from a year ago and was a company record. Now turning to quarterly financial performance by business unit. Cloud Memory Business Unit revenue was a record $7,700,000,000 and represented 32% of total company revenue. CMBU revenue was up 47% sequentially, driven by an increase in prices and favorable mix. CMBU gross margins were 74%, higher by nine percentage points sequentially, driven by higher pricing and cost execution. Core Data Center Business Unit revenue was a record $5,700,000,000 and represented 24% of total company revenue. CDBU gross margins were 74%, up 23 percentage points sequentially, driven by higher pricing and favorable mix. Mobile and Client Business Unit revenue was a record $7,700,000,000 and represented 32% of total company revenue. MCBU revenue was up 81% sequentially, driven by higher pricing, partially offset by lower bit shipments. MCBU gross margins were 79%, up 25 percentage points sequentially, driven primarily by higher pricing and favorable mix. Automotive and Embedded Business Unit revenue was a record $2,700,000,000 and represented 11% of total company revenue. AEBU revenue was up 57% sequentially, driven by higher pricing, partially offset by lower bit shipments. AEBU gross margins were 68%, up 23 percentage points sequentially, driven primarily by higher pricing. Operating expenses in fiscal Q2 were $1,400,000,000, up $87,000,000 quarter over quarter. The sequential increase was driven by higher R&D expenses. We generated operating income of $16,500,000,000 in fiscal Q2, resulting in an operating margin of 69%, up 22 percentage points sequentially and 44 percentage points year over year. Fiscal Q2 taxes were $2,500,000,000 on an effective tax rate of 15.1%. Non-GAAP diluted earnings per share in fiscal Q2 was $12.20, with 155% sequential growth and 682% growth versus the year-ago quarter. Turning to cash flow and capital expenditures. In fiscal Q2, operating cash flows were $11,900,000,000, capital expenditures were $5,000,000,000, resulting in free cash flow of $6,900,000,000. Fiscal Q2 free cash flow was a quarterly record for the company, exceeding our prior record in fiscal Q1 2026 by 77%. Ending inventory for fiscal Q2 was $8,300,000,000, up $62,000,000 sequentially, with days of inventory at 123. DRAM inventory days remain especially tight and below 120 days. We reached record levels of cash and investments of $16,700,000,000 at quarter end and had liquidity over $20,000,000,000 when including our untapped credit facility. In fiscal Q2, we repurchased $350,000,000 of shares as permitted by the terms of the CHIPS agreement. During the quarter, we also reduced debt by $1,600,000,000, including redemption of senior notes maturing in 2029 and 2030. The weighted average maturity on our outstanding debt is August 2034. We closed the quarter with $10,100,000,000 of debt and a net cash balance of $6,500,000,000. Reinvesting in the profitable growth of our business across R&D, CapEx, and other strategic investments remains our top priority for capital allocation. We are committed to maintaining a strong balance sheet, have reduced our total debt by over $5,000,000,000 in the last three quarters, and are at our strongest net cash position ever. Reflecting the sustained strength of our technology leadership and cash generation, as Sanjay mentioned, the Board has approved a 30% increase in our quarterly dividend to $0.15 per share. Now turning to our guidance. We expect fiscal Q3 revenue to be a record $33,500,000,000, plus or minus $750,000,000, gross margin to be approximately 81%, and operating expenses to be approximately $1,400,000,000. Based on a share count of 1,150,000,000 shares, we expect EPS to be a record $19.15 per share, plus or minus $0.40. We expect higher price, lower cost, and favorable mix to all contribute to gross margin expansion in Q3. As mentioned last quarter, Micron Technology, Inc.'s fiscal Q4 2026 OpEx will also reflect the effect of an additional work week in this 53-week fiscal year. We expect to increase our fiscal 2027 OpEx as we ramp R&D investments in support of an unprecedented set of long-term opportunities in memory and storage. We expect the fiscal Q3 and fiscal year 2026 tax rate of around 15.1%. Micron Technology, Inc. continues to invest in a disciplined manner across our global footprint to address customer demand. As mentioned earlier, we now project our capital spending in fiscal 2026 to be above $25,000,000,000. In fiscal Q3, we project CapEx of approximately $7,000,000,000 while delivering significantly higher free cash flow and stronger operating cash flow. Due to the need for cleanroom capacity, we expect our construction spend growth rate to outpace equipment spend growth in both fiscal 2026 and fiscal 2027. Any impact that may occur due to trade or geopolitical developments are not included in our guidance. I will now turn it over to Sanjay to close. Sanjay Mehrotra: Thank you, Mark. Decades of investment, innovation, and execution have established Micron Technology, Inc. as a technology leader in memory and storage and as one of the semiconductor industry's biggest beneficiaries and enablers of AI. As the only U.S.-based manufacturer of advanced memory products, Micron Technology, Inc. is uniquely positioned to capitalize on the unprecedented opportunities ahead. I want to thank our team members worldwide whose execution made this outstanding quarter possible. As strong as these results are, I am even more excited about what is ahead for Micron Technology, Inc. We will now open for questions. Operator: Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star-1 to raise your hand and star-6 to unmute. Your first question comes from the line of Krish Sankar from TD Cowen. Please go ahead. Krish Sankar: The 81% gross margin guide is very impressive. Just kind of curious how to think about the sustainability of gross margins, especially as you bring more HBM4 into the mix. If you can give some thought on how to think about gross margins in the August quarter and beyond, that will be very helpful. Then I have a follow-up for Sanjay. Mark Murphy: So, Krish, this is Mark. We provide a strong guide up, up 600 basis points sequentially into the third quarter. We are not going to provide the fourth quarter gross margin guidance. However, we have indicated that we expect the market conditions to remain tight beyond 2026. So clearly beyond the fourth quarter, what you are seeing reflected in our gross margin is the benefits of AI driving a multiyear investment cycle, most of which is ahead of us. AI requires more memory and more high-performance memory, and that is reflected in the margins. Also, we have talked about supply factors, and those are going to continue beyond 2026. The 81% contemplates a growth in HBM4, but we expect, as I mentioned, market conditions to be strong. Now keep in mind that at these gross margin levels, incremental increases in price are going to have less of an effect on gross margin. But beyond that, we are not providing a fourth quarter gross margin. Krish Sankar: Got it. And then a quick question for Sanjay on the SCA. Congrats on your first five-year SCA. How different is it from an LTA? Is this a multiyear volume and price commitment, or does the price get negotiated every year? And also how to think about cancellation terms in the SCA in case the cycle slows down during the time frame. Sanjay Mehrotra: Thanks, Sanjay. So thank you for recognizing us for the first SCA that we have completed here. And, as you noted, SCA is a multiyear agreement, and we noted that in our remarks as well. LTAs have tended to be typically one-year agreements. And, of course, in this environment of extremely tight supply outlook in the foreseeable time frame as well, our customers are very motivated, for their own planning purposes and for their better predictability, to have these structural strategic agreements with us. These agreements are really meant to bring stability and greater visibility into our business model as well. We have completed one SCA, so we are not going to be getting into the specifics here of these agreements. I am sure you can appreciate that these SCAs are confidential in nature. But these SCAs are meant to achieve the objectives for the customers in terms of their ability to plan and be able to count on supply commitments that are in the agreements, but also for us to be able to count on specific commitments that are there from the customers. These are meant to go across periods when the industry is very tight versus other parts of the industry environment as well. That is why they are long-term agreements, and they have robust terms in them. So the terms have robust provisions in them for us as well as for our customers. Krish Sankar: Got it. Thank you very much. Operator: Your next question comes from the line of Joseph Moore from Morgan Stanley. Your line is open. Please go ahead. Joseph Moore: Allocation questions by end market. Obviously, AI is the area that has the most urgency. But do you worry about demand destruction for things like PCs and smartphones? Are you trying to balance big customer, small customer? Just how are you thinking about that allocation process? Sanjay Mehrotra: I mean, clearly, supply is extremely tight across all end markets. Demand trends are strong across the end markets, while price-sensitive markets such as the consumer example that you gave may have some demand that is getting impacted due to the higher prices. But overall demand in those markets as well stays pretty strong. Our goal and strategy always is to be a diversified supplier to our various end markets. I think that is very important for us. Of course, data center is becoming a bigger and bigger part of the industry TAM. So a bigger portion of the supply goes there. That is the main driver of growth for the industry as well as for Micron Technology, Inc. But other parts of the markets are important to us, such as PCs, smartphones, automotive, industrial, and we want to maintain that well-diversified mix for our end markets. I would just like to point out that overall, whether in data center or in the consumer parts of the markets, such as smartphones or PCs, the AI trend is continuing to drive greater and greater requirements for memory content. Customers are working in this tight supply environment to manage the mix of their products. But overall, we are very much working with customers across our end markets. Joseph Moore: Great. Thank you. And I think in the past, you have said that some customers are getting 70% of what they are asking for. Is that still kind of the ballpark of what you are dealing with? Are there customers higher or lower than that than they were three months ago? Sanjay Mehrotra: What we have said in the last earnings call is that some of our key customers, we are able to fulfill only 50% to two-thirds of their demand in the medium term. And yes, that still remains the case. Joseph Moore: Great. Thank you. Great quarter. Thank you. Operator: Your next question comes from the line of Timothy Michael Arcuri. Your line is open. Please go ahead. Timothy Michael Arcuri: Thanks a lot. Sanjay, I also wanted to ask about the SCAs. I think we are all trying to think to the other side of the cycle and hope that these SCAs provide some mechanism that will kind of limit your gross margin on the downside to a certain number. So I know you do not want to give too many details, but is it fair to say that there is a mechanism in these SCAs that would limit your gross margin on the downside when things do finally roll back over? Sanjay Mehrotra: We are certainly not getting into the specifics of these SCAs for the obvious reasons of confidentiality of these agreements. We have successfully completed one SCA. We are in discussions with multiple other customers. If and when we complete these agreements and as appropriate, we will, of course, share further details with you. What I want to highlight is that these SCAs are multiyear and they have specific commitments in them. These are robust agreements, and these are meant to give us the visibility and stability toward our business model. Beyond that, I cannot get into any specifics at this point. Timothy Michael Arcuri: Okay. Thanks. And then, Mark, I just had a question about cash. You are going to generate, I do not know, $35,000,000,000 to $40,000,000,000 in free cash flow this fiscal year. You are going to probably have more than $50,000,000,000 in cash by the end of the calendar year. So what do you do with this? Are you planning to set aside a bunch of it to buy back a bunch of stock on the other side? And I guess, with respect to that, you do have restrictions on the repo from the money you took from the CHIPS Act. Is there any way to get that reworked? Thanks. Mark Murphy: Yeah, Tim. We are thrilled with the performance of the business and the improvement in the balance sheet. In the second quarter, it was record net cash and record free cash flow, beating the previous quarter's record by 77%. Our third quarter guide, when you take those numbers and consider the CapEx we gave, we could see cash flow roughly double sequentially. We are going to continue to build on the balance sheet strength and improve our net cash position. We are continuing to delever and pay down debt. Noteworthy that we received two credit upgrades in the quarter, so we are now a solid triple-B. We are getting stronger, while, as you can see, we have talked about increasing our CapEx investment and increasing our R&D investment. Now to your specific question on balance sheet priority or capital allocation, balance sheet is always going to be a priority along with organic investment in our business to advance technology and to put in capacity for value-add bits, which we certainly see now. We are generating return on capital at this point over 30%, headed towards 50%. We are going to remain disciplined there, though. And then you saw today we are pleased to announce a dividend increase of 30%. It reflects the confidence we have in our business outlook, stability of the business, and cash returns in the future. And then, as you said, we believe we will have significant capacity for returning cash to shareholders through repurchase, a combination of offsetting dilution from stock comp and then opportunistically repurchasing. Timothy Michael Arcuri: Thanks, Mark. Operator: Your next question comes from the line of Christopher James Muse from Cantor Fitzgerald. Your line is open. Please go ahead. Christopher James Muse: Yeah, good afternoon. Thanks for taking the question. One follow-up, again the SCA question. So you have had an evolution here—LTAs, binding, now SCAs. I am curious if you could discuss the breadth of the different customers that you are speaking with. Is it only hyperscale, or are there others that are interested? And I know you do not want to go into specific details on the contract. But just to follow up on the last question, is there any CapEx-forward requirements tied to these agreements? Are there pricing tied to an ROIC on those investments? Any help there would be helpful. Thank you. Sanjay Mehrotra: We shared with you that the SCA that we have just signed is with a large customer. These agreements are very much focused on allowing us to invest with confidence in our future supply plans and also having specific terms that enable us to have overall better visibility into future demand and, as I said earlier, enable stability around the business model as well. Beyond that, we are not commenting on the SCAs other than to say that, as I mentioned earlier, these SCA discussions are proceeding with multiple customers. And yes, these are across multiple markets as well. Christopher James Muse: Very helpful. And then I guess as a quick follow-up for HBM. I think you guided last quarter 40% growth CAGR, which would suggest roughly $50,000,000,000 in revenues for the market this year. Has that number changed? And are you seeing any sort of preference for perhaps moving bits to DDR5 over HBM by any industry players given, today, the higher margins that we see there? Thanks so much. Sanjay Mehrotra: Yes, it is correct that the margins for non-HBM today are higher than HBM margins. Demand for HBM, of course, continues to be strong. We have not updated the numbers that we had provided last in terms of the outlook for the HBM TAM. The demand for DDR5, LP, and HBM all continue to be strong in the data centers. We, of course, continue to manage the mix of the business as the data center AI demand continues to grow. As I said earlier, outside of data center, we are very much focused on making sure that we are maintaining relevant share in our other key market segments as well. Overall, in this environment of strong AI demand trends across data center to the edge, we are very much focused on continuing to manage our portfolio, and we see strong growth opportunity for the full portfolio of Micron Technology, Inc. in the data center. I will just point out there that this portfolio is about HBM, it is about LP, it is about SoC-M, it is about DDR5, as well as our data center SSDs. We have made tremendous strides in terms of our market share in data center SSDs over the course of the last few years. Operator: Your next question comes from the line of Harlan L. Sur from JPMorgan. Your line is open. Please go ahead. Harlan L. Sur: Good afternoon, and congratulations on the solid results and strong quarterly execution. Maybe, Sanjay, to carry on from where you left off on your commentary on SSD. In November of last year, I estimated that your enterprise SSD business was almost half of your total flash business. I think it was up 60% sequentially. Obviously, a very favorable mix shift from a margin perspective for the Micron Technology, Inc. team. And as you mentioned, you remain a strong top-three global supplier of the ESSD. Off of that strong number, it looks like your ESSD business doubled sequentially in February, still 50% of the NAND mix. Looking forward, with the G9 node continuing to ramp—your next-generation ESSDs, performance-optimized, capacity-optimized, mainstream, all on G9—does this give the team a runway to continue to drive sequential growth in ESSD through the remainder of this calendar year and into next year? And then I just wanted to get your thoughts on this new proposed memory tier of high-bandwidth flash. Is this an area where the Micron Technology, Inc. team might start to focus on R&D resources? Sanjay Mehrotra: Regarding your question on data center SSDs, this is an area of strong growth ahead. NAND supply is very tight, demand for NAND stays strong, and data center SSDs are a big driver of NAND growth as well. Micron Technology, Inc. is well positioned with our portfolio of SSDs going across the requirements in terms of capacity as well as performance across various customers using TLC as well as QLC with respect to our data center mix. We are very well positioned with this, and as part of our strategy of continuing to shift our portfolio—our revenue mix—toward higher profit pools of the industry and high-value parts of the market, we will continue to address opportunities for growing our SSD business. We feel really good about the trajectory that we have been on with data center SSD and the trajectory that is planned ahead for us as well. Regarding your question on HBF, high-bandwidth flash, high-bandwidth flash has some positive attributes, such as capacity, but it has the limitations that NAND has, such as write speed as well as power and retention. Therefore, there will be potentially some workloads where this may be a possible solution, but it is really early, and what is needed is engagement with the customers in terms of really understanding the business value proposition of HBF. We, of course, continue to study this. Harlan L. Sur: I appreciate that. And then how much of these multiyear SCA agreements is due to the inherent requirements for earlier and longer-term engagement with your GPU/XPU chip customers, just due to the customization of their next-generation HBM architectures—especially around the base die? Given the 12- to 18-month design cycle times for these custom base dies, the sharing of IP between you and your chip customers, and optimizing the base die to your process flow, it does imply that they have to engage with you much earlier in the design phase for their GPUs and XPUs. Is this another factor driving these multiyear SCAs? Sanjay Mehrotra: Again, we are not getting into the specifics, not getting into the specific type of customers here as well. But what I will definitely tell you is that yes, these SCAs really bring us closer to the customer in terms of partnership. That partnership extends into bringing us closer in terms of R&D collaboration and roadmap planning, both ours as well as for customers. That is definitely one of the benefits of these SCAs as well. Harlan L. Sur: Yep. Thank you. Operator: Your next question comes from the line of Thomas James O'Malley from Barclays. Your line is open. Please go ahead. Thomas James O'Malley: Hey, guys. Thanks for taking the questions and really nice results. So at GTC and at OCP this week, I think there is a lot of conversation around the LPU architecture and the increased use of SRAM. Could you talk about your view on the memory market longer term as you see more workloads rely on other types of memory outside of the HBM that you are already using? And then, as a broader question, with so much of the demand coming in these longer-term agreements, being associated with data center and just a few number of customers that can actually acquire and build these products, how are you benchmarking when you are adding capacity? Do you have an internal forecast for accelerators? Are you talking customer by customer and building bottoms-up forecasts, just so that you know in year three, year four, year five, that you are offering enough supply to the industry and not getting into a situation in which we are in an oversupply? Thank you very much. Sanjay Mehrotra: First of all, on your question on the SRAM and LPU-based architectures, I would just like to point out that these kinds of architectures make the AI infrastructure more efficient. Any architecture that makes AI infrastructure more efficient is good for AI; they help the pie grow faster. Keep in mind that this LPU architecture works in conjunction with Vera Rubin, which utilizes a tremendous amount of HBM as well as DRAM. The NVIDIA Grok LPX, this LPU-based architecture, actually, per rack, uses 12TB of DRAM as well. All of this is addressing the workloads in a more efficient manner. This helps with the token economics, the token speed, and the scale-up of AI across inference, and helps with the power. Every bit that helps overall is good for further scaling up and acceleration of AI demand as well. We look at this as complementing what already exists with respect to HBM and DRAM and continuing to grow the TAM and accelerate the deployment of AI. Just keep in mind that today, the enterprises' AI deployment as a percentage is still very, very low, and across all verticals, across all industries, across the economies, there is a lot of opportunity ahead. We are excited about all of these opportunities for our full portfolio of HBM, LP, DRAM, SoC-M, and SSD in addressing these future market requirements. Ultimately, all of this just points to how strategic of an asset memory is for AI. Without more memory, without faster memory, AI just cannot scale up. AI just cannot deliver the capabilities, whether it is in training or in inference. Just look at from last year to this year: the DRAM requirement in the advanced AI accelerators has now doubled. These are some of the factors that are contributing to the supply shortage. These trends of AI deployment apply on the edge devices, smartphones, and PCs as well. We are excited about the opportunities ahead, and we absolutely continue to see strong opportunities for our full portfolio ahead. Operator: Your next question comes from the line of Vivek Arya from Bank of America Securities. Please go ahead. Vivek Arya: Thanks for taking my questions. Sanjay, on HBM share, do you think you can be in the 20–25% range right off the bat? Or do you think you will build towards it over time? Just conceptually, how do you see the puts and takes in terms of whether you can actually expand your HBM share in this upcoming Vera Rubin generation? Sanjay Mehrotra: We have shared before that in CQ3 of last year, we reached our HBM target which we had targeted for calendar 2025, to bring our HBM share in line with DRAM share. We had also said that going forward, we are going to manage our HBM as part of the mix of our total portfolio and are not going to break out the share quarter by quarter. What I can tell you is that we feel very good about our HBM product positioning and feel very good about overall HBM product. The market is there for both HBM4 as well as HBM3E in calendar 2026, and we will be supplying both of these products and feel good about our overall position here and our ability to fully manage the mix of the business. Vivek Arya: And for my follow-up, Mark, I wanted to revisit this 81% gross margin guidance. I appreciate you are not giving a specific forward view, but in prior historical peaks where Micron Technology, Inc.'s margins, I think, peaked in the low sixties, what is the difference between the prior situations versus now? What do those historical precedents indicate to you about how the trajectory of gross margins can be over the next several quarters? How do customers start to react when they see these levels of gross margins in what is a very important input into their AI silicon? Thank you. Sanjay Mehrotra: Before Mark answers that question, I want to point out that I accidentally said that we targeted to reach our HBM share in Q3 2026. Of course, I said it wrong by mistake. I meant that we had targeted to get to our HBM share in 2025, and we achieved our HBM share in line with our DRAM share in 2025. Beyond that, in Q3 2025, we had said we are not going to be providing any further mix of HBM share. I just wanted to correct that I accidentally said 2026 instead of 2025. Mark Murphy: Vivek, I would say that keep in mind that the industry is supply constrained, and conditions will remain very tight beyond 2026. That certainly supports the near-term and medium-term pricing. We have discussed how we are working with customers to allocate best we can to their businesses and work with them on adding capacity, on supply assurance, on working with them with new products, and so forth. Your question about reverting to some historical mean is the thing that should be revisited. We have a situation where AI is a transformational secular driver. As Sanjay mentioned, AI requires more and higher-performance memory, and this memory helps with driving the token cost down. It helps lower the energy cost per token. It increases the number of tokens. It increases intelligence overall of AI, which drives harder problem sets and agent use, which drives more tokens and needs more memory. The margins are reflecting recognition that memory is a lot more valuable and an efficient way to monetize AI. That is from data center to the edge. On top of that, we have been clear for a year or more that there are supply constraints that exist on a number of fronts that will take time. There are low inventory levels. There is declining bits-per-wafer on node advances. HBM trade ratio is increasing. Any new capacity really needs to be greenfield, which is a physical constraint that takes a lot of time. These are both durable factors: both the value of memory and the structural challenge of bringing on supply. We are working both those issues. We are investing in capacity, and we are also increasing R&D to continue to advance the technology and improve the value of memory. We believe that these will help with margins over time. I think customers are recognizing that and entering into these agreements. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Hello, and welcome to the Hyperfine Q4 '25 Earnings Call. [Operator Instructions] Now I would like to turn the call over to Webb Campbell. Webb, you may begin. Webb Campbell: Thank you for joining today's call. Earlier today, Hyperfine Inc. released financial results for the quarter ending December 31, 2025. A copy of the press release is available on the company's website as well as sec.gov. Before we begin, I'd like to remind that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. All forward-looking statements, including, without limitation, those relating to our operating trends and future financial performance, expense management, expectations for hiring, training and adoption, growth in our organization, market opportunity, commercial and international expansion, regulatory approvals and product development are based upon current expectations and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of these risks and uncertainties associated with our business, please refer to the Risk Factors section of our latest periodic filing with the Securities and Exchange Commission. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 18, 2026. Hyperfine Inc. disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. With that, I will turn the call over to Maria Sainz, President and Chief Executive Officer. Maria Sainz: Good afternoon, and thank you for joining us. On the call with me today is our Chief Administrative Officer and Chief Financial Officer, Brett Hale. Fourth quarter revenue of over $5 million demonstrated our very strong performance with the next-generation Swoop system for the second straight quarter. The mid-2025 introduction of our second-generation Swoop scanner, the Optive AI software and the addition of a new market with our launch into the neurology office setting mark a turning point in the adoption of portable brain MRI, the potential of ultra-low field MRI and the future of our company. We have now demonstrated that we hold a highly proprietary and differentiated technological position in our ability to produce diagnostic quality images with an ultra-low field magnet, making Hyperfine's technology, safe, acceptable and deployable across the continuum of preventatives, acute and chronic brain health settings. In 2025, we validated that the Swoop system offers unequivocal clinical and economic value to clinicians and providers ready for mainstream adoption and scale across a growing number of sites of care inside and outside the hospital. I want to start by summarizing some of the key highlights from the last several months to illustrate why I feel very optimistic about the future of the Swoop system for brain health and Hyperfine's unique position with ultra-low field MRI long term. From a market perspective, the feedback on Swoop's image quality with Optive AI software continues to be outstanding from the neurology, neurosurgery and radiology communities, leading to deal activation, reactivation, larger deals and interest from IDNs and health systems. The FDA clearance in December 2025 of our first update after the release of Optive AI software represents the 11th generation of soft -- Swoop software releases and confirms our commitment to continuous image quality advances with ultra-low field MRI. This latest Swoop software incorporates features in our diffusion-weighted imaging to further refine the value of the Swoop system in stroke workflows. The recently published [ SVIN ] stroke publication and the new PMR presentation validate the clinical diagnostic utility of the Swoop system for stroke triage and for patient care in neurology offices, respectively. The publication of the health economic impact data has an incredibly important element to our selling approach. We now have published evidence to support the cost savings in medical supplies, staff usage and the significant improvement in patient progress when using the Swoop system. Finally, the approval of the first generation Swoop system in India opens a new large geographic expansion opportunity for Hyperfine. Throughout 2025, we executed on our operational milestones across innovation, clinical and economic evidence generation and site of care and geographic expansion. We delivered strong revenue growth in the second half of the year. And importantly, we see market activation momentum continuing as we progress through 2026. This transformation was achieved in the context of a continued reduction in cash burn and gross margin expansion, demonstrating the scalability and leverage of our business model. We ended the year with a healthy balance sheet, and with the growth capital added from our recent financings, we're well positioned for sustained growth and investment in our technology, current market and potential future expansion opportunities into 2028. Over the past 6 years, we have maintained an unwavering commitment to continuous innovation and market development, transforming our original concept for an ultra-low field portable brain MRI system into a highly differentiated and clinically relevant platform, ready for broad adoption to help address the real limitations related to brain imaging. The next-generation Swoop system with Optive AI software represents the culmination of phenomenal innovations in electronics, physics and AI to make image quality at 64 millitesla approach that of high-field MRI. Looking ahead, these advancements represent a new beginning and a stronger platform to further increase clinical capabilities and expand into additional use cases across sites of care. We received FDA clearance for the next upgrade to the Optive AI software last December. Its latest software focuses on advanced multidirectional diffusion-weighted imaging to enhance stroke detection. Going forward, you can continue to expect a cadence of 1 to 2 software releases per year as we expand upon our leadership in the AI-enabled ultra-low field MR imaging space. We have now sold over a dozen next-generation systems since June and have launched incredibly busy and successful Swoop programs across critical care emergency departments and neurology offices. Exiting 2025, our primary call points are adult and pediatric critical care, emergency departments and neurology clinics and offices. More recently, we have actively begun pilot efforts in the neurosurgical and neurointerventional settings as well as in mobile units for dementia screening research. We will continue to lean on our strength, not only in continuous innovation, but also in clinical data generation to support a growing number of use cases and wide spread prevention. A good example of this is our contrast PMR study, a prospective multicenter clinical study to evaluate the feasibility and visualization benefit of contrast-enhanced ultra-low field portable MRI. I'm pleased to share that we are approximately 20% towards our enrollment goal. The study is designed to support a future FDA submission late 2026 to expand the Swoop systems intended use to include gadolinium-based contrast agents potentially unlocking new applications as we focus broadly on neurodegenerative diseases and surgical use. Brain scans with contrast will potentially broaden the use of the Swoop system across office and hospital settings. In outpatient care, scans with contracts are reimbursed using a dedicated CPT code 70553. Turning to our clinical work in the ED. We are seeing significant traction with accounts interesting -- interested in deploying the Swoop system in the ED for faster stroke triage using MRI. The excessive wait time for MRI in the ED is a costly and widespread patient care issue across hospitals of all sizes. Beyond the recently published SVIN paper, the PRIME study being led by the Yale School of Medicine, it's an additional project to validate the Swoop system utility, enabling faster triage of all comer patients in the ED. As a reminder, this study evaluates the potential of AI-powered portable MRI for broad patient triage in ED. I'm happy to share Yale's have completed enrollment ahead of schedule and expect to share an update on the findings later this year. The compelling image quality of the next-generation Swoop system with Optive AI software is activating our hospital pipeline to levels we have not experienced before, driven by interest from both clinical and administrative stakeholders and evolving deal discussions to multiple placements as well as first and subsequent deals at IDNs across the U.S. These larger, more strategic deals are very encouraging for the future growth of our business. Although larger deals have increased administrative processes are now more dependent on budget cycles, creating some potential for quarterly lumpiness and variability. With the recently published health economic impact data analysis as a reference, hospitals evaluating the Swoop system are now modeling 1- to 1.5-year return on investment time lines, substantially better than the 3- to 4 years typical for capital equipment. The recent publication summarizes the data compiled at Jefferson Abington across 143 scans related to their savings in cost of care, driven by reduction in supplies, faster clinical decision making, accelerated patient discharge and freed-up capacity on conventional scanners for elective procedures. These real world peer reviewed health economic data have become powerful catalysts for deals and elevating conversations to C-suite decision makers. With our device MSRP of $590,000 for our next-generation system, we can capture significant value while delivering strong ROI for our customers. The neurology office represents an additional growth vector for our business. Neurologists prescribe a high volumes of MRIs, yet only approximately 10% of private neurology practices have MRI imaging on-site, which creates an enormous addressable market opportunity with minimal incumbent competition. Our full commercial in to this market in Q3 has progressed rapidly through Q4. Our pilot program in the first half of 2025 come from the process through accreditation, training and reimbursement to scale portable brain MRI as an ancillary business in the office setting. We have proven that physicians can obtain diagnostic quality, MR brain images within their offices, providing patients with timely and convenient access at the point of care. In January 2026, data from our office study, NEURO-PMR, was presented at the American Society of Neuroimaging. In this study, patients receive brain imaging on both the portable Swoop system and conventional high-field MRI. In the study, portable MRI demonstrated 92% concordance with a standard MRI in identifying the presence or absence of intracranial pathology during a blinded review by independent neuroradiologist. In unblinded paired initial reviews incorporating clinical history, concordance increased to 98% as assessed by a neurologist and neuro imager. Furthermore, patients expressed a strong preference for portable MRI, reporting that they were 4x more likely to see portable MRI over standard MRI. Across all experience measures, including comfort, anxiety, claustrophobia, noise and overall satisfaction, portable MRI was rated superior to standard MRI. Trained clinical staff successfully operated the system within neurology offices without the need for MR technologies, highlighting its safe and straightforward operation. In Q4, we accelerated our selling efforts across both single and multi-clinician practices, building robust pipelines of both our first and next-generation Swoop systems. We deployed a segmentation pricing strategy, offering different configurations to serve practices of varying sizes and profiles. We're also leveraging our NeuroNet partnership to promote adoption across their network of neurology practices. The Optive market is still in its early days, yet reception has been robust and has been further fueled by the presentation of data from NEURO PMR. Turning to our international business, where we have made significant progress in the quarter. We have launched Optive AI software in 10 different European languages, with the software now available in the international markets we serve. We're going through the European regulatory process to bring the next-generation Swoop scanner to the U.K. and CE markets before the end of this year. Additionally, in late 2025, we also received regulatory approval in India, unlocking a key new market. With our local partner, we are planning to launch, engaging top KOLs in the country to help drive awareness and adoption. In accordance, we expect placements in India to scale at a measured pace throughout the year. Market feedback on the Swoop system with Optive AI software remains consistently very positive. I firmly believe the Swoop system today is ready for broad adoption our image quality positions us well to continue to broaden and deepen use cases. We have 3 diverse and differentiated business opportunities to drive growth in the near future through placements across the hospital, neurology offices and international markets. I will now turn the call over to Brett to review our financial performance and 2026 guidance. Brett Hale: Thank you, Maria. Before I recap our financial results for the fourth quarter and full year of 2025 and our expectations for 2026, I want to touch on our recently strengthened capital position. Last October, on the heels of our first full quarter of our next-generation Swoop system launch, we strengthened our balance sheet by raising over $20 million in equity, welcoming multiple quality investors to the story. More recently, building on our business momentum and to complement this equity, we raised $15 million as an initial tranche under and up to $40 million long-term debt facility. The initial tranche extends our cash runway into 2028, and the broader ability provides growth capital and significant financing flexibility for the commercial phase of our company. We are adding this nondilutive capital on attractive terms and have sized the upfront tranche to extend our cash runway while continuing to responsibly reduce our cash burn. For purposes of modeling, we expect quarterly interest payments to be approximately $400,000, and these payments are contemplated in our cash burn guidance. Now turning to our Q4 and full year 2025 results. Revenue for the quarter ended December 31, 2025, was $5.3 million, up 128% compared to $2.3 million in the quarter of 2024. We sold 16 units net in the fourth quarter of 2025 versus 9 units in the fourth quarter of 2024. We saw demand across all businesses with placements in hospitals, neurology offices and in international markets. This quarter, some hospitals elected to grow with our technology through a [ forecharge ] technology upgrade comprised of multiple unit placements. For the full year 2025, we generated $13.6 million in revenue, up 5% compared to $12.9 million in 2024. As anticipated, 2025 was a tale of 2 halves, with significant growth in the second half due to multiple midyear product launches, generating $8.7 million in revenue in the second half compared to $4.8 million in the first half of 2025. Gross profit for the fourth quarter of 2025 was $2.7 million, up 226% compared to the fourth quarter of 2024. Gross margin was 50.9%, our second straight sequential quarter above 50% and representing 1,530 basis points of gross margin expansion over the fourth quarter of 2024. For the full year 2025, we generated $6.8 million in gross profit, up 15% compared to the full year 2024. And our full year gross margin was 49.8%, representing 410 basis points of gross margin expansion over 2024. We continue to drive healthy margins for our stage and believe we are well positioned for meaningful margin expansion as we scale. R&D expenses for the fourth quarter of 2025 were $3.8 million compared to $5.1 million in the fourth quarter of 2024, a decline of 25%. For the full year 2025, R&D expenses were $17.5 million compared to $22.5 million for the full year 2024, a decline of 22%. We continue to realize the reorganization -- the benefits of the reorganization we completed in the first quarter of 2025 as we transition to a commercial growth stage organization. Sales, general and administrative expenses for the fourth quarter of 2025 were $6.5 million, flat compared to the fourth quarter of 2024. For the year 2025, sales, general and administrative expenses were $26.4 million as compared to $26.6 million for the full year 2024. We continue to exercise spending discipline and realized sales productivity and operating leverage in the business. Net loss for the fourth quarter of 2025 was $5.9 million, equating to a net loss of $0.06 per share as compared to a net loss of $10.4 million or a net loss of $0.14 per share for the same period of the prior year. For the full year 2025, net loss was $35.6 million, equating to a net loss of $0.43 per share as compared to a loss of $40.7 million or a net loss of $0.56 per share for the same period of the prior year. The fourth quarter of 2025 and the full year of 2025 net losses includes a noncash change in fair value of warrant liabilities, recorded as a gain of $1.5 million and $800,000, respectively. Our net cash burn, excluding financing in the fourth quarter of 2025 was $5.7 million, down 30% from $8.2 million in the fourth quarter of 2024. For the full year 2025, our net cash burn, excluding financing, was $29.9 million, down 22% from $38.4 million in 2024. Reducing our cash burn was a significant focus of ours in 2025, and we are pleased with the execution on this front. We will continue to prioritize spending discipline and optimize our operating leverage in 2026, which I'll discuss in the context of our guidance framework shortly. As of December 31, 2025, we have $35.1 million in cash and cash equivalents on our balance sheet. This is inclusive of the $18.4 million in net proceeds raised from our October equity financing and subsequent green [indiscernible] but it is not inclusive of the $15 million initial change from our new long-term debt facility. In addition to the $15 million of initial funding, we have the option through the end of 2027 to access additional tranches totaling up to $25 million upon achievement of prescribed commercial targets. This additional $25 million of growth capital is not included in our cash runway expectations. Now turning to our financial guidance. Beginning with our revenue outlook. For the full year 2026, we expect revenue between $20 million to $22 million, representing year-over-year growth at the midpoint of 55%. Given the strength of our fourth quarter finish, which includes a multiunit system-wide upgrade, we expect a typical step down in capital revenue from year-end levels. Our pipeline remains strong across our 3 business verticals, including several multi hospital and IDN opportunities. While these deals will serve as meaningful drivers of our long-term growth and sales product, they typically progress over multiple quarters. We also anticipate commencing the launch of next-generation Swoop scanner in international markets in the second half of the year. As a result, we expect revenue to progressively strengthen through the quarters in 2026. Looking at gross margin. We are initiating a range of 50% to 55% for the year. We expect the progression of gross margin percentage increase to closely follow our sales growth, and we expect second half gross margin percentages to exceed the first half. We remain optimistic that we will continue the trend of surpassing 50% gross margin comfortably and sustainably as we realize higher volumes driven by our growth catalyst. Lastly, we are initiating total cash burn expectations in the range of $26 million to $28 million for the full year 2026, representing a 10% year-over-year decline in cash burn at the midpoint. This cash burn expectation includes debt servicing mentioned previously. From a spending perspective, we will continue to be disciplined with our spending while investing in commercially oriented projects, and will continue to operate with 1 U.S. sales team, covering both the hospital and office market opportunities and through distributors internationally. As mentioned earlier, with the initial incremental growth capital raised in March, we now see a cash runway for the business extending into 2028. We believe we are entering an important phase of growth, having strengthened our financial profile and position the business as a high-growth, derisked medical imaging platform with multiple durable catalysts across large, underserved sites of care. We have successfully transitioned to a commercial-stage business, supported by a compelling value proposition, robust pricing, attractive gross margins and increasing sales productivity and operating leverage. I would now like to turn the call back to Maria for closing comments. Maria Sainz: Thank you, Brett. Before we open the call to your questions, I want to briefly share a call I just had with 1 of our customer sites. This is 1 of our first programs that launched with our next-generation Swoop scanner. They purchased 2 units in the third quarter of 2025 and have been using the Swoop system since late Q3 across typical care, emergency department and most recently, in a hub and spoke model with a satellite there -- site. To date, they have performed over 200 Swoop system scans, reporting a high degree of satisfaction and great clinical and economic impact for the patients they care for and their workflow. On that very positive note, we can now turn to your questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Frank Takkinen with Lake Street Capital Markets. Frank Takkinen: Congratulations on all the progress. I was hoping to start with 1 on the key assumptions surrounding 2026 guidance. What can you tell us you're assuming in that guide as it relates to U.S., OUS, anything, any color around multisystem unit ordering? I'm assuming there's a price component in there given the MSRP you quoted throughout the call? And then anything else we should consider as we're thinking about how you built the guide for 2026? Brett Hale: Thanks, Frank. This is Brett. I'll take that one. So yes, the way we built 2026 is really tied to the growth catalyst of the business. I think you commented on a couple of them. We have 3 business verticals that comprise the revenue stream that we've modeled out and are predicated in our guidance. So in the hospital side of the business, you're right, the multiunit systems and the IDNs will play out over time. I think as we mentioned, those take several quarters. So as the year progresses, we'll see more and more of those in our financial numbers. The office business, which we launched in the middle of last year, we'll continue to see traction on that in regards to the neuron meds -- excuse me, NEURO-PMR data as well as the penetration into that space. And then international, we commented in there that we've got a second-generation scanner that we expect in the second half of the year. So really taking all those pieces together, we see a progressive strengthening of the top line throughout the balance of 2026. Bigger deals, obviously, are tied to budgetary processes. And so those will probably play out more in the second half of the year, but we will see a progression of the top line starting in the beginning of the year and then continue to strengthen throughout the year. Maria Sainz: And maybe on pricing -- and Frank, we did comment on the MSRP at $590,000, so that is something that changed. So we increased it from $550,000, which was the pricing at the launch of our Model 2 and moved it to $590,000 at the beginning of the year. That is primarily in our U.S. hospital business. We also commented on the fact that we are doing price segmentation in using both Model 1 and Model 2 in the office because not all offices are made equal, some are single practitioner, relatively small, and the volume doesn't support the Model 2. So we're using Model 1 at a different price point in the office setting. And last but not least, of course, internationally, since we operate and transact through distributors, we're doing that at distributor pricing. So not different than -- previously, we do have the blended combination of all of those that ends up being our ASP. But we can receive the health and the improvement just because there is 1 of the business verticals, which is a U.S. hospital, that is predominantly Model 2, and is enjoying sort of the advantages of the price increase. The reason for mentioning also $590,000 in the prepared remarks was that when you run really the ROI calculation, given the quick impact data that was recently published with any hospital, even at a $590,000 pricing, you do get to that 1- to 1.5 year ROI, which makes it incredibly compelling from an administrative standpoint. Frank Takkinen: Very helpful color. I was hoping on the second one, I could ask a little bit more about the pipeline. I think in the Q3 call, you've referenced the Hyperfine time being at its strongest and most diversified following a really strong Q4, would you say that, that comment still holds true? Or are you still in the camp of building up the funnel in the front half of the year? Maria Sainz: So the comment around the pipeline continuing to be the strongest we have ever seen is very true. It is also very true that it is comprised of more multiple deals and more IDN deals. We have several deals with big IDNs in progress. It is also true that those deals are a little bit more now mainstream procurement, and in some cases, dependent on budget year. So remember, we were really stealth with the -- before the introduction of Model 2. So when it launched in June of last year, truly the very first budget year that we are able to take advantage of is the 1 that kicks in July 1 for more -- for a lot of the hospitals. So I think we've commented that some of these bigger, more strategic multiple deals are actually a little heavier in process and may create some variability. There is something also that happened in Q4, which is a -- for revenue upgrade of an institution where we have multiple systems and they wanted to standardize and move their installed base to Model 2. That is probably a onetime event as it relates to Q4, that I'm not seening in sort of the forecast for every quarter going forward. So hopefully, that gives you color around how we're looking at the pipeline, incredibly robust and totally full with very big IDN names, multi-deals, but those come with a little bit more process and the budget year being more naturally that July to the end of the year is something that may create this sort of progressive strengthening of our revenue line over the course of the year. Frank Takkinen: Very helpful. If I could sneak 1 in. When you speak about the multiunit orders, my assumption for Q4 is maybe that was single-digit but multiunit. Is there -- one is maybe that's accurate, if you care to comment on that? And then two, as you look at some of the multiunit deals in the pipeline, is there a potential for double-digit multi-unit deals? Maria Sainz: Double-digit number of deals or numbers number of units? Frank Takkinen: Number of units. Brett Hale: I think I understand your question, Frank. When you talk about multiunit, you can think about things 2 ways. One is an individual hospital where there is multiple placement opportunities. So for example, someone might want to have it for both critical care and the emergency department and maybe pediatric and adult in the case for critical care. So you might have 3 or 4 placement opportunities in an individual hospital. And then when you talk about an IDN, IDNs obviously are multiple hospitals. The deals will likely not be all the hospitals at once, but it will probably start at 1 of the hospitals, but then we'll go across the IDN network where they will want to standardize care. So over time, that could be, but really in an individual quarter, we're talking about single digits at an individual transaction level. Operator: And your next question comes from the line of Yuan Zhi with B. Riley Securities. Yuan Zhi: Congrats on a strong 2026 guidance. Maria, the business had its up and down over the past couple of years. I think it will be very helpful to investors if you can provide a quick review, especially what we have learned that can be used for the current business momentum. Maria Sainz: Sure. Thank you, Yuan. So I think we have defined our technology as portable brain MRI, but the real product that we offer is high-quality imaging that is accessible, affordable and easy to get. And I don't believe in the last few years, we were there until the introduction of both the Model 2 as well as the Optive AI software. So I have personally witness an increasingly sharp change towards endorsement and approval of our technology and interest in on our technology as we have brought up substantially the image quality, all the way to what we have now said, which is very, very close to high-field MRI. So the clinical value has now been totally transformed into something that is a very useful tool. I know I commented on a small anecdote on one important new account with Model 2, but the reality is they're using it all the time as a go-to tool for the triage of their patients with suspected stroke symptoms, and they're doing it as a [indiscernible] institution as well as they're doing it in their ED. And they are able to make clinical decisions every day. Our technology wasn't there when we started. We were portable, we were low field, but our imaging was not at the level of clinical decision-making. So I have a totally different appreciation for the opportunity now that we have established that base of clinical utility. And I have also witnessed because of this high level of image quality now and interest to take our unit, to take our technology into even more use cases and sites of care than we have planned thus far. I know I've mentioned mobile. I know I've mentioned surgical, but those are places where we are being pushed, where we are being asked to play because the technology now offers that great combination of high clinical value with that access, affordability, ease-of-use component, safety component pretty much anywhere. Does that make sense? I really think we're leaving behind a development phase of getting to that level of clinical utility as we have refined and improve really the image quality. Yuan Zhi: Got it. Yes, that's very helpful. And maybe 1 question for Brett. I noticed the service revenue is lower in fourth quarter. As we imagine you have more devices in store, the service revenue should grow year-over-year. So can you please provide some additional color on that? Brett Hale: Yes. Thank you, Yuan. Yes. So you would expect service revenue to progress over time, and that is the term trajectory of that line item. In Q4, we mentioned we had done some [ forecharge ] technology upgrades. And as part of that, we had to go through an accounting contract assessment and that -- there's some adjustments in the service line item related to that. But going forward, you would expect that trajectory to be what you had articulated. Operator: There's no further questions at this time. I will now turn the call back over to Maria Sainz for closing remarks. Maria? Maria Sainz: Sure. Thanks, everyone, for joining us today. We look forward to keeping you updated in the next several weeks. Thanks, everyone, and have a great rest of your day. Operator: That concludes today's call. You may now disconnect.
Here are five takeaways from the Federal Reserve meeting.
Federal Reserve Chair Jerome Powell explains what factors in the economy are contributing to the higher inflation projection for 2026.
Firms' year-ahead inflation expectations increased by 0.2 percentage points to 2.1% in March, according to the Federal Reserve Bank of Atlanta's March Business Inflation Expectations (BIE) Survey. That figure is up from the 1.9% recorded in the February BIE Survey but down from the 2.5% recorded in the March 2025 survey.
US equities held steady on Wednesday after the Federal Reserve left interest rates unchanged, signaling caution amid persistent inflation and growing geopolitical risks in the Middle East. The Fed maintained its target range for the federal funds rate at 3.50%–3.75%, in line with market expectations.
Surging oil prices due to the Iran war are expected to increase inflation in the near term, Federal Reserve Chair Powell said. “Near-term measures of inflation expectations have risen in recent weeks, likely reflecting the substantial rise in oil prices caused by the supply disruptions in the Middle East,” the Fed chair said.
Oil price volatility surges as bombs fall in the Middle East Be ready for more wild swings in oil and gas prices. The Cboe Crude Oil ETF Volatility Index (OVX), which measures implied volatility in oil ETF options, estimates the expected volatility of crude oil prices over the next 30 days.
Federal Reserve chair Jerome Powell said on Wednesday that he will stay on as “chair pro tem” if his successor Kevin Warsh is not confirmed by mid-May when Powell's term expires.
Federal Reserve Chair Jerome Powell says he plans to stay at the Fed until after the Justice Department's investigation is complete during a news conference after the central bank's policy-setting Federal Open Market Committee to leave interest rates unchanged.
Federal Reserve chair Jerome Powell answers questions following the FOMC's decision to leave the Federal Funds rate unchanged.
Federal Reserve Chair Jerome Powell says the Fed is in a "difficult situation" and needs to balance current risks during a news conference after the central bank's policy-setting Federal Open Market Committee to leave interest rates unchanged.